U.S. crude oil production rebounded in September, though researchers anticipate new declines in the coming months.

Oil production climbed to an estimated 11.2 million b/d in September from 10.8 million b/d in August, the Energy Information Administration (EIA) said in the latest Short-Term Energy Outlook (STEO). Production averaged 11.0 million b/d in July, up 0.5 million b/d from June.

In May, U.S. oil production reached a two-and-a-half-year low of 10.0 million b/d amid cratered oil prices after the pandemic crushed demand.

“Since then, U.S. production has increased mainly because tight oil operators have brought wells back online in response to rising prices,” researchers said. However, EIA expects oil production to taper in the coming months and “generally decline to an average of 11.0 million b/d in the 2Q2021 because new drilling activity will not generate enough production to offset declines from existing wells” amid new pressure on prices.

Brent crude oil spot prices averaged $41/bbl in September, down $4 from the average in August. The decrease coincided with slowing increases in global demand, EIA said. Month/month consumption rose by 1.0 million b/d on average during August and September, compared with an increase of 4.1 million b/d from May through July.

“Despite expected inventory draws in the coming months, EIA expects high inventory levels and surplus crude oil production capacity will limit upward pressure on oil prices,” researchers said. EIA forecasts monthly Brent spot prices will average $42 during the fourth quarter and will rise to an average of $47 in 2021.

Drilling activity is forecast to rise later in 2021, contributing to U.S. oil production returning to 11.2 million b/d in the final three months of 2021.

On an annual average basis, EIA expects U.S. oil production to fall from 12.2 million b/d in 2019 to 11.5 million b/d in 2020 and 11.1 million b/d in 2021.

Natural Gas Demand

For natural gas, meanwhile, increased domestic and international demand as winter weather settles in, combined with continued light production levels, will drive Henry Hub spot prices to a monthly average of $3.38/MMBtu in January, EIA said.

The agency said it expects monthly average spot prices will remain higher than $3.00 throughout 2021, averaging $3.13 for the year, up from a forecasted average of $2.07 for 2020.

Total U.S. working gas in storage ended September at more than 3.8 Tcf, 12% above the five-year average, EIA said. Inventories are expected to exceed 4.0 Tcf by the end of October, setting a record. However, researchers also said continued low crude prices would keep associated gas output from oil-directed rigs at levels lower than before the coronavirus pandemic.

“Because expected natural gas production will be lower this winter than last winter, EIA forecasts inventory draws will outpace the five-year average during the heating season and end March 2021 at 1.7 Tcf, which would be 6% lower than the 2016-20 average,” researchers said.

Morgan Stanley analysts said production declines coupled with winter demand could create the tightest market of the past decade. The analysts said Henry Hub prices could jump to $5.00/MMBtu if weather is colder than normal.

In September, EIA said spot prices averaged $1.92, down from an average of $2.30 in August. This “reflected declining demand for natural gas from the U.S. electric power sector as a result of cooler-than-normal temperatures during the second half of September and relatively low demand for U.S. liquefied natural gas (LNG) exports amid hurricane-related activity in the Gulf of Mexico.”

EIA estimated that U.S. LNG exports averaged 4.9 Bcf/d in September, an increase of 1.2 Bcf/d from August. However, August levels still reflected demand aftershocks from the pandemic.

“Higher global forward prices indicate improving netbacks for buyers of U.S. LNG in European and Asian markets for the upcoming fall and winter seasons,” EIA said. “The increased prices come amid expectations of natural gas demand recovery and potential LNG supply reductions because of maintenance at the Gorgon LNG plant in Australia.” 

EIA now is forecasting gas exports “will return to pre-Covid levels by November…and will average more than 9.0 Bcf/d” from December through February.

The latest forecast also calls for total domestic gas consumption to average 83.7 Bcf/d in 2020, down 1.8% from 2019. The expected decline reflects lower heating demand in early 2020, contributing to residential demand averaging 13.1 Bcf/d, down 0.7 Bcf/d from 2019. Commercial demand is expected to average 8.7 Bcf/d, off 0.9 Bcf/d.

Industrial consumption is seen averaging 22.3 Bcf/d this year, down 0.8 Bcf/d year/year. EIA said the loss should result from reduced manufacturing activity amid the restrictions that governments imposed in the spring to slow spread of the virus.

EIA projected total U.S. gas consumption will average 78.7 Bcf/d in 2021, a 5.9% decline from 2020. “The expected decline in 2021 is the result of rising natural gas prices that will reduce demand for natural gas in the electric power sector,” researchers said.

U.S. dry natural gas production is forecast to average 90.6 Bcf/d, down from an average of 93.1 Bcf/d in 2019. The monthly average production is expected to fall from a record 97.0 Bcf/d last December to 85.9 Bcf/d in May 2021, before increasing slightly.

Gas production declines are expected to be highest in the Permian Basin, “where EIA expects low crude oil prices will reduce associated natural gas output from oil-directed rigs” The dry gas production forecast in the United States is seen averaging 86.8 Bcf/d in 2021. Researchers anticipate production will “begin rising in the second quarter of 2021 in response to higher natural gas and crude oil prices.”

EIA said its latest STEO “remains subject to heightened levels of uncertainty” because mitigation efforts related to the pandemic continue to evolve. “Reduced economic activity related to the Covid-19 pandemic has caused changes in energy demand and supply patterns in 2020 and will continue to affect these patterns in the future.”

The latest outlook assumes U.S. gross domestic product (GDP) declined by 4.4% in the first half of 2020 from the same period in 2019. It also assumes that GDP began to rise in 3Q2020 and will grow 3.5% year-over-year in 2021.