U.S. OIL DOWN 120,000
EIA estimates that total U.S. crude oil production declined by 120,000 barrels per day (b/d) in September compared with August. Crude oil production is forecast to decrease through mid-2016 before growth resumes late in 2016. Projected U.S. crude oil production averages 9.2 million b/d in 2015 and 8.9 million b/d in 2016.
Natural gas working inventories were 3,538 billion cubic feet (Bcf) on September 25. This level was 15% higher than a year ago and 4% higher than the previous five-year average (2010-14) for this week. EIA projects inventories will close the injection season at the end of October at 3,956 Bcf, which would be the highest end-of-October level on record.
North Sea Brent crude oil prices averaged $48/barrel (b) in September, a $1/b increase from August. However, volatility remained high during September. EIA forecasts that Brent crude oil prices will average $54/b in 2015 and $59/b in 2016, unchanged from last month's STEO. Forecast West Texas Intermediate (WTI) crude oil prices average $4/b lower than the Brent price in 2015 and $5/b lower in 2016. The current values of futures and options contracts for January 2016 delivery (Market Prices and Uncertainty Report) suggest the market expects WTI prices to range from $32/b to $67/b (at the 95% confidence interval) in January 2016.
Global Crude Oil Prices
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 (Market Prices and Uncertainty Report). 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.
Global Petroleum and Other Liquids
Global liquids production continues to outpace consumption, leading to strong inventory builds throughout the forecast period. Global oil inventory builds in the second quarter of 2015 averaged 2.3 million b/d, compared with 1.8 million b/d in the first quarter of the year. The pace of inventory builds is expected to slow in the second half of the year, to roughly 1.5 million b/d. In 2016, inventory builds are expected to slow to an average of 0.8 million b/d.
Global Petroleum and Other Liquids Consumption
EIA estimates global consumption of petroleum and other liquids grew by 1.2 million b/d in 2014, averaging 92.4 million b/d for the year. EIA expects global consumption of petroleum and other liquids to grow by 1.3 million b/d in 2015 and by 1.4 million b/d in 2016. Projected real gross domestic product (GDP) weighted for oil consumption, which increased by 2.8% in 2014, is projected to grow by 2.4% in 2015 and by 2.8% in 2016.
Consumption of petroleum and other liquids in countries outside of the Organization for Economic Cooperation and Development (OECD) grew by 1.4 million b/d in 2014 and is projected to grow by 0.9 million b/d in 2015 and by 1.2 million b/d in 2016. China continues to be the main driver of non-OECD oil consumption growth, despite the slowdown in the country's economic growth beginning in the second half of 2014 and with continuing signs of weakening in its economy. China's consumption growth is expected to average 0.3 million b/d in 2015 and in 2016, below the 0.4 million b/d growth in 2014. Iran is expected to experience an uptick in economic activity and petroleum consumption in 2016, assuming implementation of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the five permanent members of the United Nations Security Council plus Germany (P5+1) announced on July 14.
After falling by 0.3 million b/d in 2014, OECD petroleum and other liquids consumption is expected to rise by 0.5 million b/d in 2015 and by 0.2 million b/d in 2016, reaching an average of 46.4 million b/d, the highest annual average level of OECD consumption since 2010. The increase in 2015 stems from both economic and weather factors, with the United States contributing most of the annual consumption growth. U.S. consumption is expected to grow by an average of 0.3 million b/d in 2015 and by 0.1 million b/d in 2016. Several other OECD countries saw economic conditions improve as they emerged from recessions, particularly countries in Asia and, to a lesser extent, in Europe. In addition, colder-than-normal weather early in 2015 across OECD Europe contributed to a projected 0.1 million b/d increase in consumption in 2015.
Non-OPEC Petroleum and Other Liquids Supply
EIA estimates that petroleum and other liquids production in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) grew by 2.3 million b/d in 2014, which mainly reflects production growth in the United States. EIA expects non-OPEC production to grow by 1.3 million b/d in 2015, but to remain roughly flat in 2016. Non-OPEC production growth in 2015 is largely attributable to investments made when oil prices were higher. For example, the decisions to invest in the Golden Eagle, Peregrine, and Kinnoull fields in the United Kingdom's (U.K.) sector of the North Sea were made in the second half of 2011 when Brent crude prices were more than $100/b. The three fields started producing at the end of 2014 and the beginning of 2015, contributing about 90,000 b/d to U.K. production in May 2015. Redirection of investment is also helping to maintain or grow production levels in non-OPEC producing countries. Companies have reduced exploration investment, and are directing a greater share of investment toward currently producing fields. This redirection of investment helps maintain production levels in the short term, but could result in lower future production.
Production growth in Canada is expected to average 0.1 million b/d in 2015 and 0.3 million in 2016. Canadian production growth in 2015 is about 0.2 million b/d lower than forecast last month, which reflects significant revisions to historical data from the second quarter of 2015, along with delays in some previously announced oil sands projects. Although some oil sands projects have been put on hold, most continue as planned, including Imperial Oil and Cenovus oil sands projects scheduled to come online by the end of 2016.
Unplanned supply disruptions among non-OPEC producers averaged 0.9 million b/d in September, an increase of almost 0.2 million b/d from the previous month.
OPEC Petroleum and Other Liquids Supply
EIA estimates that OPEC crude oil production averaged 30.1 million b/d in 2014, relatively unchanged from the previous year. Crude oil production declines in Libya, Angola, Algeria, and Kuwait offset production growth in Iraq and Iran. EIA forecasts OPEC crude oil production to increase by 0.8 million b/d in 2015 and to remain relatively flat in 2016. Iraq is expected to be the largest contributor to OPEC production growth in 2015. In 2016, additional OPEC crude oil supply is expected to come from Iran, which is forecast to increase production if international sanctions targeting its oil sector are suspended.
Under the JCPOA between the P5+1 and Iran that was announced on July 14, sanctions relief is contingent on verification by the International Atomic Energy Agency (IAEA) that Iran has complied with key nuclear-related steps.
While much uncertainty remains as to the timing of sanctions relief, EIA assumes implementation occurs in the second quarter of 2016, clearing the way to easing the sanctions at that time. As a result, EIA forecasts Iranian crude oil supplies will increase by more than 0.2 million b/d on average in 2016, reaching roughly 0.5 million b/d by the end of the year.
Saudi Arabia and other OPEC member countries are not expected to reduce production to accommodate additional Iranian volumes, although some producers will see production declines in the near term. For example, Saudi Arabia's production is expected to respond to lower direct crude burn for electric power generation as seasonal power demand abates. However, there is considerable uncertainty regarding Iraq's ability to sustain its higher production and export levels, particularly in light of budgetary constraints that has prompted the Iraqi government to request international oil companies operating in the south to reduce spending plans next year.
OPEC noncrude liquids production, which averaged 6.3 million b/d in 2014, is expected to increase by 0.2 million b/d in 2015 and by 0.3 million b/d in 2016, led by production increases in Iran, Qatar, and Kuwait.
In September, unplanned crude oil supply disruptions among OPEC producers averaged 2.9 million b/d, 0.1 million b/d less than the previous month because of fewer outages in Iraq and Nigeria. Kuwait and Saudi Arabia continue to have a total of 0.5 million b/d disrupted at the Wafra and Khafji fields in the Neutral Zone that straddles the two countries.
EIA revised higher its historical estimates of unplanned OPEC crude oil supply disruptions in 2015. Iran's crude oil supply disruption increased from 0.6 million b/d to 0.8 million b/d. The revision to Iran's disruption reflects an increase to Iran's crude oil production capacity (the level of supply that could be available within one year under a normal operating environment) based on information that Iran's oil fields have gone through workovers in anticipation of a deal with the P5+1 on oil sanctions relief.
EIA expects OPEC surplus crude oil production capacity to average 1.5 million b/d in 2015 and 2.2 million b/d in 2016, after averaging 2.0 million b/d in 2014. Forecast surplus capacity in 2016 was revised upward by 0.2 million b/d from last month's STEO. EIA estimates that Iran's crude oil production capacity is 3.6 million b/d, which is 0.8 million b/d higher than its current estimated production level. EIA currently categorizes that 0.8 million b/d as a disruption because Iran's production is restricted by sanctions that affect the country's ability to sell its oil. However, if sanctions are lifted next year, any difference between its crude oil production capacity and its crude oil production level would henceforth be considered surplus capacity.
Surplus capacity is typically an indicator of market conditions, and surplus capacity below 2.5 million b/d indicates a relatively tight oil market, but the current and forecast levels of global inventory builds make the projected low surplus capacity level in 2015 less significant.
OECD Petroleum Inventories
EIA estimates that OECD commercial crude oil and other liquids inventories totaled 2.70 billion barrels at the end of 2014, equivalent to roughly 59 days of consumption. Forecast OECD inventories rise to 2.95 billion barrels at the end of 2015 and then to 3.04 billion barrels at the end of 2016.
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