2016 OIL PRICES: $56
North Sea Brent crude oil prices averaged $44/barrel (b) in November, a $4/b decrease from October. Global oil inventories are estimated to have increased by 1.3 million barrels per day (b/d) in November, putting downward pressure on Brent prices.
EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. 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 March 2016 delivery (Market Prices and Uncertainty Report) suggest the market expects WTI prices to range from $30/b to $63/b (at the 95% confidence interval).
EIA estimates that total U.S. crude oil production declined by about 60,000 b/d in November compared with October. Crude oil production is forecast to decrease through the third quarter of 2016 before growth resumes late in 2016. Projected U.S. crude oil production averages 9.3 million b/d in 2015 and 8.8 million b/d in 2016.
Natural gas working inventories were a record 4,009 billion cubic feet (Bcf) on November 20. On November 27, inventories were 16% higher than during the same week last year and 7% higher than the previous five-year average (2010-14) for that week. EIA expects the Henry Hub natural gas spot price to average $2.47/million British thermal units (MMBtu) this winter (October 2015–March 2016) compared with $3.35/MMBtu last winter.
Global Petroleum and Other Liquids
Global petroleum and other liquids production continues to outpace consumption, leading to inventory builds throughout the forecast period. Global oil inventory builds in the third quarter of 2015 averaged 1.8 million b/d, down from 2.0 million b/d in the second quarter, which had the largest inventory builds since the fourth quarter of 2008. The pace of inventory builds is expected to slow in the fourth quarter to roughly 1.4 million b/d. In 2016, inventory builds are expected to slow further to an average of 0.6 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 1.4 million b/d in both 2015 and 2016. Forecast real gross domestic product (GDP) for the world weighted by oil consumption, which increased by 2.7% in 2014, rises by 2.3% in 2015 and by 2.6% in 2016.
Consumption of petroleum and other liquids in countries outside the Organization for Economic Cooperation and Development (OECD) increased by 1.4 million b/d in 2014 and is projected to grow by 0.8 million b/d in 2015 and by 1.1 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 that began in the second half of 2014. China's liquid fuels consumption growth is forecast to average 0.3 million b/d in 2015 and in 2016, below the 0.4 million b/d growth in 2014.
After falling by 0.3 million b/d in 2014, OECD petroleum and other liquids consumption is expected to rise by 0.6 million b/d in 2015 and by 0.3 million b/d in 2016, reaching an average of 46.7 million b/d, the highest annual average level of OECD consumption since 2010. U.S. consumption is expected to grow by an average of 0.3 million b/d in 2015 and by 0.2 million b/d in 2016. In 2015, economic conditions improved in several OECD countries in Europe and Asia as they emerged from recessions, contributing to oil demand growth. Also, colder-than-normal weather in OECD Europe in early 2015 contributed to a forecast 0.3 million b/d increase in 2015 oil consumption. Consumption in OECD Europe is forecast to increase by 0.1 million b/d in 2016.
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 2.5 million b/d in 2014, which mainly reflects production growth in the United States. EIA expects non-OPEC production to grow by 1.2 million b/d in 2015, and then to decline by 0.4 million b/d in 2016, which would be the first annual decline in non-OPEC production since 2008. Non-OPEC production growth in 2015 is largely attributable to investments committed to projects before the oil price decline that began in mid-2014. The declines in 2016 are mostly because of declines in U.S. onshore and North Sea production.
Production growth in Canada is expected to average 0.1 million b/d in both 2015 and 2016. Persistently low oil prices are leading to delays or cancellations of projects previously scheduled to come online during the forecast period, including Shell's October cancellation of the 80,000 b/d Carmon Creek project. However, some projects continue as planned, including the Imperial Oil and Cenovus oil sands projects scheduled to come online by the end of 2016.
Unplanned supply disruptions among non-OPEC producers averaged 0.7 million b/d in November, an increase of almost 0.1 million b/d from the previous month. In early November, Brazilian oil workers from several unions began a strike, which lasted for more than three weeks and shut in roughly 0.1 million b/d of oil production. On November 23, Petrobras announced an agreement with the majority of striking unions, and production has resumed.
OPEC Petroleum and Other Liquids Supply.
At its December 4 meeting, OPEC members announced they "should continue to closely monitor developments in the coming months." This indicates OPEC producers, led by Saudi Arabia, are continuing the policy of defending market share in a low oil price environment. EIA estimates OPEC production averaged 31.4 million b/d in November 2015, 1.3 million b/d higher than in November 2014. Increased crude oil production in Saudi Arabia and Iraq is the main driver of higher OPEC production.
Also, at the December 4 meeting, OPEC members voted unanimously to reactivate Indonesia's OPEC membership, despite its remaining a net importer of crude oil. Indonesia had suspended its membership in 2009 after it became a net importer of crude oil. Starting with the January 2016 STEO, EIA will include Indonesia's output in the OPEC total for both history and the forecast.
EIA estimates that OPEC crude oil production averaged 30.1 million b/d in 2014. EIA forecasts OPEC crude oil production to increase by 0.9 million b/d in 2015, led by production growth in Iraq. Forecast OPEC crude oil production increases by 0.3 million b/d in 2016, with Iran forecast to increase production once international sanctions targeting its oil sector are suspended. Under the Joint Comprehensive Plan of Action (JCPOA) between Iran and the five permanent members of the United Nations Security Council and Germany (P5+1) 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.
Although uncertainty remains as to the timing of sanctions relief, EIA assumes the implementation occurs in the second quarter of 2016, clearing the way to ease 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 3.3 million b/d by the end of the year.
Iraq is producing at record levels, with estimated crude oil production averaging 4.5 million b/d in November 2015, 0.7 million b/d higher than the 3.8 million b/d average during the first half of 2015. The expansion of onshore pumping and storage infrastructure in the south, improvements in crude quality as Basra Light and Basra Heavy were marketed separately, and an increase to the Kurdistan Regional Government's (KRG) pipeline capacity in the north have all contributed to production growth in Iraq. EIA expects Iraq's production growth to slow in 2016 because of budgetary constraints that have prompted the Iraqi government to request international oil companies (IOCs) operating in the south to reduce spending plans. The KRG is also experiencing budgetary constraints that contribute to payment delays to IOCs, which could also contribute to slowing production growth 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 increases in Iran and Qatar.
In November, unplanned crude oil supply disruptions among OPEC producers averaged 2.7 million b/d, 0.2 million b/d lower than the previous month. Iraq's production recovered in November after bad weather in the southern Basra Gulf caused a more than 0.2 million b/d disruption in October. In Libya, the Zueitina export terminal port was shut again in early November, after briefly reopening in October. This closure partially offset the reduction in Iraq's disruptions. Kuwait and Saudi Arabia continue to have a total disruption of 0.5 million b/d at the Wafra and Khafji fields in the Neutral Zone that straddles the two countries.
EIA expects OPEC surplus crude oil production capacity to average 1.5 million b/d in 2015 and 2.0 million b/d in 2016, after averaging 2.0 million b/d in 2014. 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. However, the high current and forecast levels of global inventory builds make the projected low surplus capacity level in 2016 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 2.98 billion barrels at the end of 2015 and then to 3.03 billion barrels at the end of 2016.
Crude Oil Prices.
Brent crude oil spot prices decreased by $4/b in November to a monthly average of $44/b, as global oil supply continued to outpace demand. Continuing increases in global liquids inventories have put significant downward pressure on oil prices. Inventories rose by an estimated 1.8 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. Global liquid fuels inventory builds are expected to slow to an average 1.4 million b/d in the fourth quarter of 2015, and then slow further to an average of 0.6 million b/d in 2016.
The monthly average WTI crude oil spot price averaged $42/b in November. WTI prices in November were down $4/b from the average in October, as crude oil inventories at the Cushing, Oklahoma, storage hub increased in November despite rising refinery inputs of crude oil following seasonal maintenance.
EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. The 2015 forecast is $1/b lower than last month's STEO, and the 2016 forecast is unchanged. Forecast 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.
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 March 2016 delivery, traded during the five-day period ending December 3, averaged $44/b, while implied volatility averaged 42%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in March 2016 at $30/b and $63/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $26/b and $90/b for prices in December 2016. Last year at this time, WTI for March 2015 delivery averaged $67/b, and implied volatility averaged 32%. The corresponding lower and upper limits of the 95% confidence interval were $51/b and $89/b.
U.S. Petroleum and Other Liquids
Monthly data show gasoline consumption in the United States increased by 3.0% during the first nine months of 2015 compared with same period in 2014. U.S. gasoline consumption growth reflects increases in employment and lower gasoline prices. Growing domestic consumption and strong gasoline consumption growth globally contributed to high refinery wholesale gasoline margins (the difference between the wholesale price of gasoline and the price of Brent crude oil) for most of 2015. Average wholesale gasoline margins reached 73 cents/gal in August, which was the highest monthly average since May 2007. Margins returned closer to typical seasonal levels in October but increased in November, a month in which they typically decline.
Despite the increasing wholesale gasoline margins, U.S. average regular gasoline retail prices fell from a monthly average of $2.29/gal in October to $2.16/gal in November because of lower crude oil prices. On November 23, the U.S. average regular gasoline retail price was $2.09/gal, the lowest price heading into the Thanksgiving holiday since 2008. Monthly average regional gasoline retail prices for November ranged from a low of $1.90/gal in PADD 3 (Gulf Coast) to a high of $2.62/gal in PADD 5 (West Coast). EIA expects gasoline prices to fall from current levels, with the U.S. regular gasoline price averaging $2.04/gal in December 2015.
Working natural gas inventories on November 20 reached their highest recorded level at 4,009 billion cubic feet (Bcf), according to EIA's Weekly Natural Gas Storage Report (WNGSR). Although the storage injection season is commonly considered to end on October 31, builds often continue into November. Looking to March 2016, EIA projects inventories will end the winter at 1,862 Bcf, which would be a smaller drawdown than typically seen during the winter.
On November 19, EIA updated the classification of natural gas storage regions in the WNGSR. Natural gas inventories are now reported for five new regions instead of the previous three regions. This STEO reflects those changes, and a more detailed discussion of the changes can be found in a supplemental analysis to this STEO.
Strong inventory builds, continuing production growth, and expectations for warmer-thannormal winter temperatures have all contributed to low natural gas prices. Forecast Henry Hub spot prices for 2016 average $2.88 per million British thermal units (MMBtu), 12 cents/MMBtu lower than last month's forecast.
Based on lower forecast residential natural gas prices than last winter and a forecast of warmer temperatures across much of the United States, EIA expects heating expenditures for households using natural gas as their primary space heating fuel to average 13% lower this winter compared with last winter.
Natural Gas Consumption.
EIA's forecast of U.S. total natural gas consumption averages 76.5 billion cubic feet/day (Bcf/d) in 2015 and 76.7 Bcf/d in 2016, compared with 73.1 Bcf/d in 2014. Increases in power sector consumption drive total consumption growth in 2015. EIA projects natural gas consumption in the power sector to increase by 18.6% in 2015 and then to decrease by 2.3% in 2016. Despite a projected decrease in 2016, EIA expects consumption of natural gas for power generation will remain more than 3 Bcf/d above 2014 levels. Natural gas spot prices, which are expected to remain below $3/MMBtu through August 2016, support high consumption of natural gas for electricity next year. Industrial sector consump on of natural gas remains flat in 2015 and increases by 3.9% in 2016, as new industrial projects, particularly in the fertilizer and chemicals sectors, come online. Natural gas consumption in the residential and commercial sectors is projected to decline in both 2015 and 2016, largely reflecting lower heating demand this winter compared with last winter.
Natural Gas Production and Trade.
In September, total marketed production hit a record high of 81.1 Bcf/d. EIA expects that marketed natural gas production will average 79.6 Bcf/d in 2015, an increase of 4.7 Bcf/d (6.3%) from 2014. Forecast marketed natural gas production increases by 1.5 Bcf/d (1.9%) in 2016. Increases in drilling efficiency will continue to support growing natural gas production in the forecast despite low natural gas prices and declining rig activity. Most of the growth is expected to come from the Marcellus Shale, as the backlog of uncompleted wells is reduced and as new pipelines come online to deliver Marcellus natural gas to markets in the Northeast. Several major projects have recently come online in the Marcellus, and a few others are set to begin service before the end of the year. In Pennsylvania, where most Marcellus drilling is located, production growth was flat earlier this year, but production reached a record level in September, according to EIA's most recent production data.
Continuing increases in domestic natural gas production are expected to reduce demand for natural gas imports from Canada and to support growth in exports to Mexico. EIA expects natural gas exports to Mexico, particularly from the Eagle Ford Shale in South Texas, to increase because of growing demand from Mexico's electric power sector coupled with flat natural gas production in Mexico. EIA projects LNG gross exports will increase to an average of 0.7 Bcf/d in 2016, with the startup of Cheniere's Sabine Pass LNG liquefaction plant planned for early 2016.
Natural Gas Inventories.
On November 20, natural gas working inventories reached a record high 4,009 Bcf. Inventories declined for the first time in this heating season during the week ending November 27, but remained 543 Bcf (16%) above year-ago levels and 247 Bcf (7%) above the five-year (2010-14) average. Forecast end-of-March 2016 inventories are 1,862 Bcf, which would be 240 Bcf above the five-year average.
Natural Gas Prices.
The Henry Hub natural gas spot price averaged $2.09/MMBtu in November, a decrease of 25 cents/MMBtu from the October price. Warmer-than-normal temperatures in November, record inventory levels, production growth, and forecasts for a warm winter contributed to spot prices remaining at low levels. Monthly average Henry Hub spot prices are forecast to remain less than $3/MMBtu through August 2016. The projected Henry Hub natural gas price averages $2.67/MMBtu in 2015 and $2.88/MMBtu in 2016.
Natural gas futures contracts for March 2016 delivery traded during the five-day period ending December 3 averaged $2.29/MMBtu. Current options and futures prices imply market participants place the lower and upper bounds for the 95% confidence interval for March 2016 contracts at $1.51/MMBtu and $3.45/MMBtu, respectively. At this time in 2014, the natural gas futures contract for March 2015 delivery averaged $3.84/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $2.40/MMBtu and $6.13/MMBtu.
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