Low global oil inventories, geopolitical tensions spur uptick in EIA oil price forecast

Consistent draws on global oil inventories coupled with heightened worries over possible oil supply disruptions due to political unrest in Ukraine and other areas prompted a significant uptick in the US Energy Information Administration's outlook for oil prices in 2022, the agency said Feb. 8 in its latest Short-Term Energy Outlook.

Commercial oil inventories in the Organization for Economic Cooperation and Development likely ended the month of January at 2.68 billion barrels, their lowest level since mid-2014, the EIA said. And draws on that inventory, averaging 1.8 million b/d at the end of 2021, are expected to continue and keep crude oil prices near their current levels around $90/b in the coming months, the agency said.

While market concerns about the omicron variant of the coronavirus have begun to recede, geopolitical tensions are fueling upward pressure on oil prices, which can be more sensitive to worries about supply disruptions during periods of low inventories, the EIA said.

A potential war between Russia and Ukraine, missile attacks on Abu Dhabi, a blockade in Libya and protests in Kazakhstan over high fuel prices have all contributed to growing uncertainties about future oil supplies. And market participants seem to be "paying higher prices to secure oil from available inventories amid the large imbalance between supply and demand," the EIA said.

As a result, the agency raised its WTI crude spot price estimate for 2022 by $8.03/b, to $79.35/b, and increased its 2022 estimate for Brent crude prices by $7.92/b to $82.87/b.

The higher crude oil prices also pushed up price expectations for gasoline and diesel in 2022. The agency now sees gasoline prices in 2022 averaging $3.24/gal, up 18 cents/gal from the prior estimate, and diesel prices at $3.54/gal, a 21-cent/gal rise over last month's estimate.

With the higher prices, the EIA also revised down its US gasoline consumption forecast, putting demand in 2022 at 8.9 million b/d and in 2023 at 9.0 million b/d.

Inventory growth coming

A major contributing factor to the current low global oil inventories, the EIA said, were operational difficulties associated with ramping up production that caused some OPEC+ countries to miss their targeted production amounts. Specifically, 10 OPEC countries in the last quarter of 2021 fell short of their targets by a combined average of more than 600,000 b/d.

Meanwhile, the EIA raised by 90,000 b/d to 100.61 million b/d its global oil demand estimate for 2022 and increased by 210,000 b/d to 102.48 million b/d its global demand estimate for 2023.

The agency said it expected oil inventories to begin rebuilding in March and continue to grow through the end of 2023, prompting lower crude oil prices as downward price pressure also emerges in mid-2022 from growth in oil production that is slated to outpace slowing growth in global oil demand.

The EIA increased its prior month forecasts for both WTI and Brent prices in 2023 by a more modest 98 cents/b, bringing its full-year 2023 estimate for WTI to $64.48/b and for Brent to $68.48/b.

Gasoline and diesel prices are also expected to come down in 2023, with gasoline at $2.84/gal and diesel at $3.31/gal, up 3 cents/gal and 4 cents/gal, respectively, from the prior month's estimate.

Record US oil output expected

"Our expectation of falling oil prices, particularly beyond [the first half of 2022], is contingent on our forecast of oil production and inventory growth," the EIA said. "However, oil production might not meet our expectations because of possible changes in production targets from OPEC+, continuing technical issues among some producers, and changes in the investment decisions of US tight oil operators, among other possible reasons."

For now, the EIA raised its 2022 outlook for US oil production by 170,000 b/d to 11.97 million b/d, and nudged up its outlook for 2023 as well by 190,000 b/d to 12.60 million b/d.

US oil output in November, the latest available data point, reached almost 11.8 million b/d, the highest output since April 2020, the EIA said. And the agency's forecast for full-year 2023 production would be a new annual-average record. The previous record was 12.3 million b/d set in 2019.

The agency attributes higher production to increases in well completions and rig counts in the Permian Basin, with rig count growth in that region accounting for more than half of the US total.