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  • KPB & Co Research

The US Energy Information Administration (EIA) recently outlined their outlook for energy markets in the U.S. going in the second half (2H) of the year and 2020, and it reflects mostly bearish sentiments. Energy markets have been facing difficult conditions starting in the 2H of 2018, after market fears of a recession precipitated by U.S. Fed rate hikes led to a global sell off across multiple asset classes including commodities. After hitting at high of US$64/Bbls in April 2018, the West Texas Intermediate (WTI) Oil price declined to US$42.53/Bbls by December 2018, before recovering a fraction of the value lost. The EIA expects the energy related commodity price recovery to stretch into 2020, supported by the U.S. federal reserves more accommodative monetary policy stance, stable global growth, and moderate supply conditions.

Brent Crude

The EIA expects that spot Brent prices will average around US$64/Bbls going into the 2H of 2019, but then increase marginally to US$65/Bbls by 2020. The marginal increase in prices is expected to come on the back of relatively balanced global oil market demand and supply. Global growth is expected to remain steady within the context of a more accommodative monetary environment, cautious fiscal policy and stable business investment. The EIA expects global oil inventories to increase by 0.1 million barrels per day (b/d) in 2019 and 0.3 million b/d in 2020.

West Texas Intermediate

According to the EIA, the gap between the West Texas Intermediate (WTI) crude oil prices and Brent should stay at an average of US$5.50/Bbl as we head into Q4 of 2019 and extend well into 2020, coming from the US$6.60/Bbls spread experienced in July. The spread is expected to shrink on account of an ease in pipeline capacity constraints between the Permian Basin and refineries and export terminals on the U.S. Gulf Coast. In addition, the incremental cost of moving crude oil via pipeline from Cushing, Oklahoma to the Gulf Coast is expected to drop markedly.

At The Pumps

Regular gasoline price at the pumps is expected to go down gradually to about US$2.64/gal by September 2019. When the remainder of the year is taken into account, the EIA expects average regular gasoline prices of $2.62/gal in 2019. In 2020, the view is that price at the pumps will go up to about US$2.71/gal.

U.S. EIA Energy Forecasts

Natural Gas Prices

According to data from the EIA, the Henry Hub natural gas spot price fell below US$2.30/MMBtu by the end of July 2019. The agency expects the down trend in natural gas prices to continue into the 2H of 2019 with average expected price of US$2.36/MMBtu, as strong supply growth out weights demand. Going into 2020, the EIA expects natural gas prices to increase to an average of $2.75/MMBtu as a result of growing domestic and export demand. The EIA believes that U.S. dry natural gas production will average 91.0 billion cubic feet per day (Bcf/d) in 2019, coming from 7.6 Bcf/ in 2018. Natural gas production is expected to oscillate throughout 2020 with production slightly lower in Q1 of 2020 due to the lagged effect of low prices in late 2019 on natural gas-directed drilling. As the 2H of 2020 approaches, production is expected to rise to 92.5 Bcf/d.

The EIA's forecast is subject to downside risks particularly associated with less than anticipated global economic growth. If growth declines below expectations, the resulting reduction to demand could result in significantly lower prices. The risk of a slow down in growth is elevated given the slowdown that we have already seen in industrial activity, and the impact of ongoing trade disputes between the U.S. and China. On the other hand, geo-political tensions, particularly between the U.S. and Iran or Russia could lead to significant supply disruptions and cause prices to go up.

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