Petroleum Supplies Increase but Demand Remains Strong Forcing Upward Pressure on Price

Crude oil and natural gas prices remain strong as market conditions indicate supply will be unable to meet rising demand.

Brent crude oil increased to $120 per barrel this week and West Texas Intermediate settled at $119 on the New York Mercantile Exchange on June 8. Natural gas spot price topped $9 per million British thermal units.

There are some signs that supply may be on the rise in the future. OPEC+ said it will increase production quotas by 648,000 barrels per day. Also, the U.S. drilling rig count continues to rise as do expectations of oil and natural gas production.

The Energy Information Administration at the U.S. Department of Energy releases its latest forecast this week that world production of petroleum and other liquids reached 99.5 million barrels per day (b/d) in May, which is within 1 percent of the pre-pandemic level of March 2020.

EIA also noted rising production in the U.S. as crude oil and other liquids averaged 19.9 million b/d in May, which is within 3 percent of the record high production level recorded in January 2020 of 20.5 million b/d.

Questions remain about OPEC’s ability to meet the new production targets. Recently, some OPEC members had trouble meeting previous production targets, and Saudi Arabia appears to be the only member able to increase production significantly.

Russia, which is a member of the OPEC+ group, produced some 11 million b/d and exported 7 million b/d before its invasion of Ukraine in February. The U.S. and the European Union have imposed sanctions on exports from Russia. EIA estimates oil production from Russia will decrease to 9.3 million b/d in the 2023 fourth quarter.

“Our forecast reflects the EU’s announcement that it will impose its crude oil import ban in 6 months,” EIA stated. “We assume that about 80 percent of the crude oil subject to the EU import ban will find alternative buyers, mainly in Asia. Our forecast does not reflect restrictions on shipping insurance, as details regarding such restrictions were not available when we finalized this forecast on June 2. The possibility that these sanctions or other potential future sanctions reduce Russia’s oil production by more than expected creates upward risks for crude oil prices during the forecast period.”

Low oil inventories amplify the potential for oil price volatility. EIA reported this week that U.S. oil inventories of 416 million barrels up 2 million barrels from last week but down 57 million barrels from last year. EIA said oil stock in the Organization for Economic Cooperation and Development (OECD) will stay below the five-year average levels until fourth-quarter 2023.

EIA forecasts US refinery utilization to average 94 percent in third-quarter 2022, up from 89.5 percent in first-quarter 2022 and 93 percent in the second quarter, as a result of high wholesale product margins.

“Despite our expectation that refinery utilization will be at or near the highest levels in the past 5 years, operable refinery capacity is about 900,000 b/d less than at the end of 2019, and as a result, we do not expect total refinery output of products to reach its highest level in the past 5 years. Although we expect high refinery utilization will help bring wholesale margins down from record levels,” EIA said.

Alex Mills is the former President of the Texas Alliance of Energy Producers

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