Minister of Finance, Colm Imbert MP.

Amidst the expected economic challenges facing T&T and the Government in 2021, comes a prediction from the US Energy Information Agency (EIA) that crude prices this year will average US$53 a barrel for Brent and US$50 a barrel for West Texas Intermediate, significantly higher than was budgeted by Finance Minister Colm Imbert.

Also importantly, the US EIA is also expecting higher natural gas prices with the average price per million British thermal unit averaging over US$3.01. This is almost a 50 per cent hike in prices compared to the average price for natural gas in the US in 2020.

In his 2021 budget presentation Imbert told the Parliament: “We have evaluated the prices being projected by the International Energy Agency, the International Monetary Fund and the World Bank and we have decided that our oil assumption for our Budget 2021 is US$45.00 a barrel.

“We have done a similar exercise for gas prices and our fiscal 2021 Budget utilises a gas price of US$3.00 per MMBtu.”

In looking at crude prices one must remember that T&T sells essentially two kinds of crude. Sweet light crude from off the East coast which fetches a price that is at least US$3 more than Brent. This means that if the Brent price is US$53 a barrel, the East coast crude is selling for US$56 a barrel. Similarly Heritage crude which is fairly heavy is selling for US$5 above WTI so for Heritage if WTI is US$50 it will get US$55 a barrel.

The challenge for T&T continues to be production for crude oil which remains down and natural gas. Also there is no SPT on small operators although SPT remains for larger players in the sector.

There is also some hope that methanol prices will recover slightly to assist the struggling downstream petrochemical sector and the national gas company.

In its short-term economic outlook the organisation said: “EIA expects Brent crude oil prices to average $53/b in both 2021 and 2022. Saudi Arabia’s unilateral cut means global oil market balances will be tighter in early 2021 than EIA had previously expected.

“EIA expects global oil inventories will fall by 2.3 million b/d in the first quarter of 2021, which EIA expects will contribute to Brent prices averaging $56/b.”

It noted that Brent crude oil prices traded within a wide range during 2020. After averaging $64/b in January 2020, Brent prices fell to an average of $18/b in April. According to the EIA the low prices were the result of significant declines in oil consumption that caused a sharp rise in global oil inventories. However, Brent prices increased through much of the rest of 2020 because rising oil demand and reduced production caused global oil inventories to fall.

“Brent prices rose to a monthly average of $50/b in December in part because of expectations of future economic recovery based on continued news about the viability of multiple COVID-19 vaccines. Brent prices in early January reached their highest levels in 10 months after Saudi Arabia announced a one-month unilateral cut to its crude oil production for February that is in addition to its OPEC+ commitments,” the report read.

It noted that despite rising forecast for oil prices in early 2021, EIA still expects upward price pressures to be limited because of high global oil inventory levels and surplus crude oil production capacity. In fact it expects moderate downward oil price pressures to emerge beginning the second quarter of 2021, when global oil production is forecast to rise and cause inventories to draw at a slower pace.

As a result during the second half of this year there is the prediction that Brent spot prices will average US$51/b.

The EIA expects that oil inventory draws at the end of 2021 to put upward price pressures during 2022 compared with the second half of 2021.

With respect to the American marker WTI, it is expected to average about US$3/b less than Brent prices in 2021 and $4/b less than Brent prices in 2022.

“This price discount is based on EIA’s assumption that the current reduced discount of WTI to Brent of $2/b on average in the second half of 2020 reflects significant declines in US crude oil production and reduced available volumes of US crude oil for export to distant markets relative to other global benchmarks. As the global market adjusts to reduced demand and production levels, EIA expects the spread to US Energy Information Administration Short-Term Energy Outlook January 2021 return to $4/b by the second half of 2022 based on the relative cost of exporting US crude oil from the Cushing distribution hub to Asia, compared with the cost of exporting Brent crude oil from the North Sea to Asia,” the report read.

The overall improvement in crude prices when compared to 2020 is based on EIA’s forecast that global oil consumption and production will rise during 2021 and 2022, and global oil inventories will continue to decline during much of that period.

Preliminary data it said indicate that global liquid fuels consumption declined by 9.0 million barrels per day (b/d) in 2020, the largest annual decline in EIA data going back to 1980. EIA forecasts that consumption will rise by 5.6 million b/d in 2021 and by 3.3 million b/d in 2022. The expected rise in the consumption of liquid fuels results from rising global gross domestic product (GDP) as well as a move toward pre-pandemic patterns of travel, particularly in late 2021 and in 2022.

Accepting that there has been a second wave of Covid-19 globally, leading to the re-imposition of some restrictions, and ongoing changes to consumer behaviours because of the pandemic in the first half of 2020, economic activity in the forecast returns to pre-pandemic levels in 2021 partly because of vaccine rollouts.

Natural Gas Prices at the Henry Hub averaged $2.03/MMBtu in 2020 revealed the EIA. It noted that Natural gas prices fell through much of 2020 because of sharp declines in LNG exports and industrial-sector natural gas consumption outpaced declines in production and contributed to inventories building at a faster rate than the five-year average.

“Although Henry Hub spot prices rose late in 2020 to average $2.59/MMBtu in December, a warm early winter moderated price increases. EIA expects the average spot price of natural gas to increase to $3.01/MMBtu in the first quarter of 2021.” the report read.

The price forecast it said is based on expectations of slightly cooler-than-normal weather in the first quarter. It added that the fourth quarter of 2020 was warmer than average.

“If warmer-than-average weather persists in the second half of winter, it could contribute to downward pressure on natural gas spot prices in the January–March period. In 2021, EIA expects general upward price pressures amid relatively low natural gas production, meaning higher prices will be needed in order to increase production and balance the supply and demand of natural gas. EIA forecasts the spot prices to average $3.01/MMBtu in 2021, up 98 cents/MMBtu from 2020, and increase further to an average of $3.27/MMBtu in 2022.”