Oil Weekly: EIA Signals Undersupply Later This Year
- By Viresh Kanabar
- 4 min read
Summary
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- Brent moves further into backwardation, signalling increased tightness in the physical market.
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- The EIA’s updated forecasts show that the market could be undersupplied in the second half of this year as US growth forecasts are revised higher.
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Summary
- Brent moves further into backwardation, signalling increased tightness in the physical market.
- The EIA’s updated forecasts show that the market could be undersupplied in the second half of this year as US growth forecasts are revised higher.
The Brent Futures Curve Signals Increasing Supply Tightness
Brent continues to rise back towards the top end of its recent range. The move follows the recent announcement from OPEC+ to voluntarily cut oil production from May to the end of the year (Chart 1).
WTI closed yesterday (12/04) at $83, up c. 10% since the announcement.
The Brent curve moved further into backwardation after the front month spread flirted with contango, signalling increased tightness in the physical market (Chart 2).
We have also seen managed money accounts increase their net long positions as per the CFTC and ICE Commitment of Traders report, following the record wash-out at the end of March. Managed money net long positions increased by 2.6% as a percentage of open interest and now sits at 7.6%, aligning with the average this year (Chart 3).
EIA’s STEO Update Signals Supply Concerns Later This Year
The US Energy Information Agency (EIA) updated its short-term energy market outlook last week, making a few notable changes. This is what stood out:
Global oil production was revised lower to 101.3mn b/d from 101.5mn b/d.
- The EIA reduced their forecast of OPEC 13’s energy production by 0.5mn b/d. Why is this number so low given the public announcements made by OPEC+ signalling a potential cut of 1.2mn b/d? The main reason is the EIA already accounted for below-quota production from OPEC in February, meaning their latest update did not need to be as large.
- The EIA also increased their forecast of Russian crude production (again) to 10.6mn b/d. This is the third increase in as many months following the original forecast of 9.5mn b/d in January. We think the EIA is likely too optimistic with its latest update and risks could be skewed to the downside.
Global oil consumption remained steady at 100.9mn b/d. This means the crude and liquids market is forecast to move into under-supply during the second half of this year.
- US economic growth was revised higher for 2023 to 1.1%, from 0.9% previously. However, US oil consumption estimates remain the same as manufacturing activity has been revised lower.
- US crude oil production was also revised up marginally by 0.1mn b/d to 12.54mn b/d. This broadly matches OPEC’s forecast of 12.6mn b/d for 2023, which we think could be optimistic.
EIA Estimates Impact of the Inflation Reduction Act
As part of the its annual energy outlook for 2023, the EIA reviewed the potential impact of the Inflation Reduction Act (IRA) adopted in August 2022.
Under the IRA, qualifying clean energy projects can receive additional credits on top of a base credit value if they satisfy certain requirements. For instance, clean energy technologies that meet minimal eligibility requirements receive a base-level production tax credit (PTC). Projects meeting labour requirements receive a tax credit five times higher than the base amount.
Additional increases to the base tax credit are available for projects that meet domestic content requirements or are located in energy communities. These are defined as former brownfield sites, areas with above-average unemployment rates, or areas that rely on fossil-fuel industries for employment or tax revenue.
Here are some of our key takeaways from the report:
- Solar and wind power are set to be the biggest winners from the IRA, with net electricity generation expected to be 60% and 70% higher respectively in 2030 albeit from a small base. The impact of this growth will mean share being taken away mostly from coal and natural gas (Chart 5).
- Battery storage capacity is another big beneficiary and is forecast to increase rapidly – almost 3x by 2030. Total battery storage is forecast to rise to 32 gigawatts from almost 0 in 2018.
- How does this impact oil prices? In its base case, the EIA forecasts the impact on oil production will be less than 1mn b/d by 2030. However, the IRA could result in US oil production peaking in 2026 rather than 2035 in the ‘No IRA’ scenario (Chart 6).
- Finally, the IRA is expected to boost EV sales and adoption materially. The EIA’s base case assumes that EV sales as a percentage of total light vehicle sales will total 15% by 2030, vs 12% in its ‘No IRA’ scenario (Chart 7).