2016: TIGHTER OIL MARKET
Brent crude oil spot prices increased by $1/b in September to a monthly average of $48/b. Along with increasing volatility in global equity prices and exchange rates, crude oil price volatility increased significantly in August, reflecting uncertainty about potential lower economic and oil demand growth in emerging market countries. Volatility remained high in September, with Brent spot prices increasing from $42/b on August 24 to $50/b on September 3, before falling back into the range of $45/b to $50/b for the rest of the month.
Continuing increases in global liquids inventories have put significant downward pressure on prices. Inventories rose by an estimated 2.0 million b/d through the first three quarters of 2015, compared with an average build of 0.5 million b/d over the same period in 2014. However, global liquid fuels inventory builds fell to an estimated 1.2 million b/d in September. Inventory builds are projected to slow in the coming months, but they are expected to remain high compared with previous years.
The monthly average WTI crude oil spot price increased to an average of $46/b in September, up $3/b from August, driven by falling U.S. crude oil output and five consecutive weeks of oil inventory draws at the Cushing, Oklahoma, storage hub. Crude oil inventories at Cushing fell to 53 million barrels on September 25, the lowest level since March 6 of this year, but they remain 32 million barrels higher than at the same time last year. Total U.S. crude oil inventories were relatively flat in September, despite a decrease in U.S. refinery runs, as refinery maintenance season began.
EIA projects the Brent crude oil price will average $54/b in 2015 and $59/b in 2016, unchanged from September's STEO. WTI crude oil prices average $4/b lower than the Brent price in 2015 and $5/b lower in 2016. EIA's crude oil price forecast remains subject to significant uncertainties as the oil market moves toward balance. During this period of price discovery, oil prices could continue to experience periods of heightened volatility. The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices. In the more immediate future, there is potential downward price pressure heading into the fourth quarter of 2015 if refinery runs drop by more than expected during the fall maintenance season.
The current values of futures and options contracts continue to suggest high uncertainty in the price outlook. WTI futures contracts for January 2016 delivery, traded during the five-day period ending October 1, averaged $46/b, while implied volatility averaged 43%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in January 2016 at $32/b and $67/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $26/b and $98/b for prices in December 2016. Last year at this time, WTI for January 2015 delivery averaged $91/b, and implied volatility averaged 19%. The corresponding lower and upper limits of the 95% confidence interval were $76/b and $107/b.
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