U.S. crude supplies fall for third straight week: EIA

Jenna Delaney S&P Global Platts North America Oil Analysis Lead joins Yahoo Finance's Kristin Myers to break down the latest energy news, as OPEC cuts its 2020 oil demand growth forecast and U.S. crude supplies drop for a third straight week.

Video Transcript

KRISTIN MYERS: Also want to look at oil right now-- crude up over 2.5%. Now this is, of course, after OPEC announced it was leaving its 2021 forecast unchanged. So to talk more about this, we're joined now by Jenna Delaney, S&P Global Platts North America oil analysis lead.

Jenna, so I want to start with that forecast-- 2021 unchanged. But 2020 was going to be worse than had been previously feared. Do you think that the shock is only going to be deepening going forward? Because we do have some pretty good economic data that's been coming out, supporting the fact that we will be having-- you know, moving upwards in this recovery. We see economies reopening. We just talked TSA numbers the other day, so travel is restarting again. Do you think it's going to be-- the shock is going to be as bad as everyone is anticipating?

JENNA DELANEY: Hi, Kristin. So we do see some constructive factors that came out of the number-- the DOE numbers today. We saw crude, distillate, and gasoline inventories all move downward on the week. And that with that, we saw prices up a little bit on the crude oil side, still pretty much consistent with what we had seen throughout the month so far.

So moving into the second half of this year, there are still some risk factors and some things that we need to look out for. Demand is something that we expect to see starting to trend back upward but gradually. As we move upward through 2020, there's still going to be some resistance there, not quite getting back up to those levels we had seen previously. And so there will be that pressure on how much refined products we need to see coming into the market from demand.

And then also, that will mean that our refinery runs will recover more slowly. And then with that, we won't need as much supply in the market because of all of those factors. So those are all things that we're needing to look out right now, as well as the potential risk factors that could come with a second wave, which isn't currently our base case, but there's always the risk of that going forward as well.

KRISTIN MYERS: So to the point, obviously, US supply, as you mentioned, on the decline. That's easing that global glut. But you did say that those levels do remain still above normal. Do you at all see that decline to be a continuing trend going forward?

JENNA DELANEY: We do. So we've seen the rig count decline substantially since the beginning of the year. It's down about 75% since the beginning of the year. So since that March timeframe, we've seen about 500 rigs go off from the rig count, which is very substantial. And with less rigs drilling out there, we see that there won't be as much new production coming online. And shale drilling has a very steep decline curve for new drilling.

So those declines will be taking place. We'll have less new production coming online to replace it. And so when you combine those things, we expect to see US production declining through about the third quarter of next year. And that will actually translate to US production being about 1.3 million barrels per day lower in 2021 than during this year. So that's a lot of supply to be taken out of the market and is a big change from what we would have expected previously.

KRISTIN MYERS: I want to ask you about another risk that has been ongoing, an ongoing debate at least here for us, which is stimulus. Those negotiations have now stalled. And of course, they're going to be a critical part of that economic recovery. Do you see that weighing on prices more going forward?

JENNA DELANEY: Well, when we're looking at what would potentially happen with crude oil prices going forward, demand is definitely a major component of that. And a lot of that comes back to the containment of the virus, its spread not only in the US, but in other parts of the world as well. So we need to look at how that is trending over time.

There have been some countries where we've been seeing that trend looking constructive. We've seen some countries, like India, that are actually trending in the wrong direction right now. So we will need to continue to watch that to really understand what's going to happen with refined product demand. And then that will be a major component, again, of how much crude oil needs to be run over the next year and a half or so, which will really have a big impact on what happens with prices.

Then we also have that component of how much production OPEC brings back online, which you mentioned earlier. And OPEC has seemed pretty comfortable with crude oil prices ranging in about the $40 to $50 range. So there will be some flexibility there for how much production they choose to bring back online as this US production is trending downward.