OIL PRICES 2015: UNANTICIPATED
Short-Term Energy Outlook (STEO)
North Sea Brent crude oil spot prices fell from $95/barrel (bbl) on October 1 to $84/bbl at the end of the month. The causes included weakening outlooks for global economic and oil demand growth, the return to the market of previously disrupted Libyan crude oil production, and continued growth in U.S. tight oil production. Brent crude oil spot prices averaged $87/bbl in October, the first month Brent prices have averaged below $90/bbl since November 2010. EIA projects that Brent crude oil prices will average $83/bbl in 2015, $18/bbl lower than forecast in last month's STEO. There is significant uncertainty over the crude oil price forecast because of the range of potential supply responses from the Organization of the Petroleum Exporting Countries (OPEC), particularly Saudi Arabia, and U.S. tight oil producers to the new lower oil price environment.
Driven largely by falling crude oil prices, U.S. weekly regular gasoline retail prices averaged $2.99/gallon (gal) on November 3, the lowest level since December 20, 2010. U.S. regular gasoline retail prices are projected to continue to decline for the remainder of the year to an average of $2.80/gal in December, $0.33/gal lower than in last month's STEO. EIA expects U.S. regular gasoline retail prices, which averaged $3.51/gal in 2013, to average $3.39/gal in 2014 and $2.94/gal in 2015.
Total U.S. crude oil production averaged an estimated 8.9 million barrels per day (bbl/d) in October, and monthly average production is forecast to surpass 9.0 million bbl/d in December 2014. Projected total crude oil production averages 9.4 million bbl/d in 2015, a reduction of 0.1 million bbl/d from last month's STEO. If realized, the 2015 forecast would be the highest annual average crude oil production since 1972. Natural gas plant liquids production is expected to increase from an average of 2.6 million bbl/d in 2013 to 3.2 million bbl/d in 2015.
Natural gas working inventories on October 31 totaled 3.57 trillion cubic feet (Tcf), 0.24 Tcf (6%) below the level at the same time a year ago and 0.26 Tcf (7%) below the previous fiveyear average (2009-13). Despite the lower stocks at the start of this winter's heating season, EIA expects the Henry Hub natural gas spot price to average $3.97/million British thermal units (MMBtu) this winter compared with $4.53/MMBtu last winter. This price forecast reflects both lower expected heating demand and significantly higher natural gas production this winter.
Global Petroleum and Other Liquids
EIA made significant changes to its forecast global oil balance for this month's STEO. EIA expects that global oil markets will be looser than projected in last month's STEO, as global oil supply outpaces consumption by a larger amount, resulting in a global stock build of 0.4 million bbl/d in the fourth quarter of 2014 and a build of 0.4 million bbl/d in 2015. EIA's global supply forecast was revised upward by 0.2 million bbl/d to average 92.9 million bbl/d in 2015, mostly reflecting a smaller decline in Saudi Arabia's production compared with last month's forecast. The global demand forecast was revised downward by 0.2 million bbl/d to average 92.5 million bbl/d in 2015, based on weaker global economic growth prospects for next year.
Saudi Arabia's role in the oil market going forward is highly uncertain. Saudi Arabia has stated that it would rather maintain its export market share than cut production to keep prices higher. In the past, Saudi Arabia often played the role of the swing producer, cutting its production to accommodate supply growth elsewhere or increasing its output level to make up for a supply shortfall. EIA assumes that Saudi Arabia will continue to play some role as a swing producer, but perhaps to a lesser extent, as the country is sensitive to significant losses in market share. Saudi Arabia's production is still projected to decline in 2015 compared with this year, but by a smaller amount than previously expected. EIA projects that Saudi Arabia will cut production below its current level of 9.5 million bbl/d to avoid further downward pressure on oil prices amid high non-OPEC supply growth, but will maintain output above 9.0 million bbl/d through 2015.
EIA's projected global oil balance may be looser or tighter than expected depending on changes to Saudi Arabia's production level, Libya's supply outages, and global demand. Libya's crude oil production reached 1.0 million bbl/d in October 2014, its highest production level since early July 2013. However, Libya's production has since fallen because of new production outages.
Intermittent supply outages in Libya will most likely persist as the country faces political instability and a deteriorated security environment in parts of the country.
Global Petroleum and Other Liquids Consumption. EIA estimates that global consumption grew by 1.3 million bbl/d in 2013, averaging 90.5 million bbl/d for the year. EIA expects global consumption to grow by 0.9 million bbl/d in 2014 and 1.1 million bbl/d in 2015. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2013, grows by 2.7% and 3.2% in 2014 and 2015, respectively. Global consumption was revised downward by 0.2 million bbl/d in 2015, based on a 0.1% reduction to forecast global oilconsumption- weighted real GDP growth. Short-term elasticities of demand with respect to income are more powerful (negatively) than the positive effects on demand from lower prices.
Consumption outside of the Organization for Economic Cooperation and Development (OECD) is projected to grow by 1.2 million bbl/d in 2014 and 1.0 million bbl/d in 2015, accounting for nearly all forecast global consumption growth during that period. China is the leading contributor to projected global consumption growth, with consumption increasing by an annual average of 0.36 million bbl/d in 2014 and 2015.
EIA expects a 0.3-million-bbl/d decline in OECD consumption in 2014. Japan and Europe are expected to account for much of the projected OECD consumption decline. EIA expects Japan's consumption, which fell by 0.16 million bbl/d in 2013, to continue to decline by 0.14 million bbl/d in 2014 and 0.12 million bbl/d in 2015. Japan's oil consumption is expected to fall with less oil used in the electricity sector as the country returns some nuclear power plants to service in 2015 and increases the use of natural gas and coal to generate electricity. EIA projects that OECD Europe's consumption, which fell by 0.15 million bbl/d in 2013, will decline by 0.14 million bbl/d in 2014 and by a further 0.07 million bbl/d in 2015. U.S. consumption, which increased by 0.47 million bbl/d in 2013, is expected to decline by 0.06 million bbl/d in 2014 and then increase by 0.16 million bbl/d in 2015.
Non‐OPEC Petroleum and Other Liquids Supply. EIA estimates that non-OPEC production grew by 1.4 million bbl/d in 2013, averaging 54.2 million bbl/d for the year. EIA expects non-OPEC production to grow by 1.9 million bbl/d in 2014 and 0.9 million bbl/d in 2015. The United States is the leading contributor to forecast non-OPEC supply growth, increasing by 1.5 million bbl/d in 2014 and 1.1 million bbl/d in 2015. EIA revised downward its U.S. total supply growth forecast by 0.1 million bbl/d in 2015 because of the recent decline in crude oil prices and the expectation that West Texas Intermediate crude oil spot prices will remain near $80/bbl through 2015. EIA estimates that Eurasia's production will rise by an annual average of 0.06 million bbl/d in 2014 and decline by 0.09 million bbl/d in 2015, reflecting declines in Russia and Azerbaijan. In Russia, inadequate investment to offset natural decline rates at mature oil fields causes forecast production to decline by 0.05 million bbl/d in 2015.
Unplanned supply disruptions among non-OPEC producers averaged slightly lower than 0.6 million bbl/d in October, virtually unchanged from the previous month. South Sudan, Syria, and Yemen accounted for more than 90% of total non-OPEC supply disruptions.
OPEC Petroleum and Other Liquids Supply. EIA estimates that OPEC crude oil production averaged 29.9 million bbl/d in 2013, a decline of almost 1.0 million bbl/d from the previous year, primarily reflecting increased outages in Libya, Nigeria, Iran, and Iraq, along with strong non-OPEC supply growth. EIA expects OPEC crude oil production to fall by 0.10 million bbl/d in 2014 and by 0.15 million bbl/d in 2015. In last month's STEO, OPEC crude oil production was projected to decline by more than 0.4 million bbl/d in 2015, but the projected decline was reduced based on a reassessment of Saudi Arabia's willingness to cut production.
Unplanned crude oil supply disruptions among OPEC producers averaged 2.0 million bbl/d in October 2014, slightly lower than the previous month, as fewer outages in Libya offset new outages in the Neutral Zone shared by Kuwait and Saudi Arabia. Libya's production increased to 1.0 million bbl/d in October, its highest production level since early July 2013, but Libya's production has since fallen because of new production outages. Intermittent supply outages in Libya will most likely persist as the country faces political instability and a deteriorated security environment. As a result, EIA does not expect Libya's oil production to recover to its preblockade level of 1.4 million bbl/d over the forecast period. EIA expects OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, to average 2.1 million bbl/d in 2014 and 2.7 million bbl/d in 2015. These estimates do not include additional capacity that may be available in Iran but is offline because of the effects of U.S. and European Union sanctions on Iran's ability to sell its oil.
OECD Petroleum Inventories. EIA estimates that OECD commercial oil inventories totaled 2.55 billion barrels at the end of 2013, equivalent to roughly 55 days of consumption. Projected OECD oil inventories rise to 2.65 billion barrels at the end of 2014 Crude Oil Prices. North Sea Brent crude oil spot prices averaged $87/bbl in October, a decrease of $10/bbl from September and the first month Brent crude oil prices have averaged below $90/bbl since November 2010. The combination of robust world crude oil supply and weak global demand contributed to rising global inventories and lower crude oil prices. The forecast Brent crude oil price averages $83/bbl in 2015, $18/bbl lower than projected in last month's STEO.
The monthly average WTI crude oil spot price fell from an average of $93/bbl in September to $84/bbl in October. High refinery runs contributed to the discount of WTI crude oil to Brent crude oil narrowing from an average of $8/bbl during the first half of this year to an average of $3/bbl in July. More recently, lower-than-expected demand in Europe and Asia combined with continued growth in global liquids supply depressed global crude oil benchmarks like Brent, contributed to the WTI discount to Brent again falling to $3/bbl in October. EIA now expects WTI crude oil prices to average $80/bbl in the fourth quarter of 2014 and $78/bbl in 2015, $11/bbl and $17/bbl lower than projected in last month's STEO, respectively. The discount of WTI to Brent crude oil is forecast to widen slightly from current levels, averaging $6/bbl in 2015. Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the forecast levels (Market Prices and Uncertainty Report). WTI futures contracts for February 2015 delivery, traded during the five-day period ending November 6, averaged $79/bbl. Implied volatility averaged 28%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in February 2015 at $63/bbl and $99/bbl, respectively. Last year at this time, WTI for February 2014 delivery averaged $95/bbl and implied volatility averaged 20%. The corresponding lower and upper limits of the 95% confidence interval were $80/bbl and $112/bbl.
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