Though global oil supply is beginning to climb, it is rising gradually off of depressed levels and is not expected to exceed the anticipated demand recovery this year. The supply/demand balance should support crude prices near their current levels through 2021, though fluctuations are all but certain, Moody’s Investors Service said in a report this week.

West Texas Intermediate crude prices have hovered near $60/bbl this week. The Moody’s analysts said average prices this year should be in the middle of their forecast range of $45-65/bbl.

“We expect that the recovery in oil production will lag increases in demand and will accelerate a rebalancing of the physical markets,” the analysts said. Prices, however, “will remain highly volatile, with periods outside the top or bottom ends of the range.”

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Geopolitical issues as well as attempts to manage supply by the Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus, “will also cause price fluctuations from time to time.”

The firm also said production, which is still lower than pre-pandemic levels, combined with strong demand for U.S. exports, should support Henry Hub natural gas prices at their current levels – with room to rise. The May New York Mercantile Exchange contract hung near $2.50/MMBtu in recent days. The Moody’s team said futures could reach $3.00 in 2021.

“Growth in U.S. natural gas production remains subdued, with limited growth even for associated natural gas, based on what we expect to be a slow recovery in oil production volumes in 2021,” the Moody’s analysts said. International gas prices and the liquefied natural gas (LNG) market continues to rebalance, and U.S. LNG exports will continue to recover and support demand.”

The latest U.S. Energy Information Administration (EIA) forecast, released this week, calls for average domestic natural gas production of 91.4 Bcf/d for 2021, roughly in line with the 2020 average. The agency estimated that Henry Hub prices would average $2.73/MMBtu this year – well above the 2020 average of $2.03.

LNG feed gas levels were strong throughout March, boosted by rising European demand in addition to continued Asian imports. A harsh winter in Europe depleted stockpiles, creating a need to bolster inventories with U.S. LNG ahead of the summer cooling season. LNG feed gas volumes have eclipsed 11.7 Bcf on several days over the past several weeks, hanging near record levels, according to NGI data.

On the oil front, EIA estimated that global petroleum and liquid fuels demand would average 97.7 million b/d for 2021, up 5.5 million b/d from 2020 levels. The agency expects most of the increase to come in the second half of the year.

The agency expects U.S. crude production will average 10.9 million b/d in the second quarter and increase to nearly 11.4 million b/d by the end of the year. Global crude production estimates remain uncertain, given OPEC-plus made cuts earlier this year but plans to gradually ease them from May-July, with its future output plans in limbo.

OPEC crude oil production averaged 25.1 million b/d in 1Q2021 and is set to rise to 25.8 million b/d in the second quarter, EIA said, following an announcement earlier this month from the cartel that it would begin raising production targets in May. 

“The very abrupt policy shift of OPEC-plus, which went from months of preaching caution and keeping oil production flat to agreeing to let more than 2 million b/d of oil on the market by July,” makes production outlooks difficult, said Rystad Energy analyst Louise Dickson.

That noted, Dickson added, the OPEC-plus action “is in line with the expected oil demand trajectory, which we see expanding by about 3.2 million b/d between now and July…So there are still some supply-side opportunities.”