GLOBAL OIL BALANCE 2015 - 16
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 2.7 million b/d, rising by 0.8 million b/d compared with the first quarter of the year. The pace of inventory builds is expected to slow in the second half of the year, to roughly 1.8 million b/d. In 2016, inventory builds are expected to slow to an average of 0.9 million b/d.
Global Petroleum and Other Liquids Consumption
EIA estimates global consumption of petroleum and other liquids grew by 1.1 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, unchanged from the previous month's STEO. Growth in 2016 global consumption was revised upward by 0.1 million b/d compared with last month to an average of 1.5 million b/d. Projected real gross domestic product (GDP) weighted for oil consumption, which increased by 2.8% in 2014, is projected to grow by 2.5% in 2015 and by 3.1% 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 0.8 million b/d in 2015 and by 1.2 million b/d in 2016. Iran is expected to experience an uptick in economic activity and petroleum consumption, assuming implementation of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the P5+1, which was announced on July 14.
Despite the slowdown in economic growth in the second half of 2014 and thus far in 2015, China continues to be the main driver of non-OECD consumption growth. China's consumption growth is expected to average 0.3 million b/d in 2015 and 2016, below the 0.4 million b/d growth in 2014.
After falling by 0.4 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 0.3 million b/d in 2016, reaching an average of 46.5 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 0.4 million b/d in 2015 and 0.2 million b/d in 2016. Several other OECD countries saw economic conditions improve as they emerged from recessions, particularly countries in Europe and to a lesser extent in Asia. In addition, colder-than-normal weather early in 2015 across Europe contributes to a projected 0.1 million b/d increase in consumption in OECD Europe 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 1.4 million b/d in 2015, but remain roughly flat in 2016. A number of producers will see output decrease amid lower prices, which have reduced investment. Furthermore, the ongoing corruption probe at state-owned Petrobras is expected to hurt Brazil's ability to expand production, limiting growth in 2016 to less than 0.1 million b/d, down from forecast growth of 0.2 million b/d in 2015. Brazil's relatively recent successes in bringing online a number of floating production, storage, and offloading (FPSO) facilities that had been delayed are driving the 2015 growth, with additional FPSOs slated to be delivered in 2016 at the Lula field.
Production growth in Canada is expected to average 0.3 million b/d in 2015 and increase to 0.4 million b/d in 2016, driven by continued expansion in oil sands projects. Although some previously announced oil sands projects have been put on hold, the vast majority continue as planned, including Imperial Oil and Cenovus oil sand projects scheduled to come online by the end of 2016.
Unplanned supply disruptions among non-OPEC producers averaged about 0.7 million b/d in July, about 0.1 million b/d lower compared with the previous month. In Canada, outages decreased and oil sands production returned to normal following the wildfires in western Canada. Additionally, output at Mexico's Abkatun Pol Chuc system continued to recover following an explosion at the offshore facility.
OPEC crude oil production averaged 30.1 million b/d in 2014, 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 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 boost production if international sanctions targeting its oil sector are suspended.
On July 14, the P5+1 and Iran announced an agreement that could result in relief from United States and European Union nuclear-related sanctions (which include some oil-related sanctions). Sanctions relief is contingent on verification by the International Atomic Energy Agency that Iran has complied with key nuclear-related steps. The sanctions relief would put additional Iranian oil supplies on a global market that has already seen oil inventories rise significantly over the past year.
The JCPOA is currently undergoing a congressional review. As of the time of writing, Congress had not voted on the agreement, but for the purposes of this STEO, EIA assumes sanctions relief could occur in mid-2016. If sanctions relief occurs, EIA forecasts Iranian crude oil supplies will increase by about 0.3 million b/d on average in 2016, with most of the growth occurring in the second half of the year. While much uncertainty remains as to the timing of sanctions relief, EIA's updated Iran projection assumes that adoption takes place by the end of October 2015, with implementation occurring in the second quarter of 2016, clearing the way to easing of the sanctions.
Iran produced 3.6 million b/d of crude oil in late 2011, before the recent round of sanctions was enacted. The sanctions forced Iran to shut in a substantial portion of its production, with production currently averaging about 2.8 million b/d. Iran's ability to bring online previously shut-in volumes and increase exports depends on several factors, including the current condition of oil fields and infrastructure that were shut in and the pace of sanctions relief.
Saudi Arabia and other OPEC member countries are not expected to cut 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 infrastructure constraints in the southern terminals.
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 July, unplanned crude oil supply disruptions among OPEC producers averaged 2.6 million b/d, remaining roughly unchanged compared with the previous month. 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 expects OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, to decrease to an average of 1.6 million b/d in 2015 and increase to 2.1 million b/d in 2016, after averaging 2.0 million b/d in 2014. 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. EIA does not expect any Iranian spare capacity to be available throughout the forecast period despite increases in effective capacity, as Iran is expected to produce crude oil at the maximum available level through the end of 2016 if and when sanctions are lifted.
OECD Petroleum Inventories
EIA estimates that OECD commercial crude oil and other liquids inventories totaled 2.69 billion barrels at the end of 2014, equivalent to roughly 59 days of consumption. Forecast OECD inventories rise to 2.99 billion barrels at the end of 2015 and then to 3.08 billion barrels at the end of 2016.
Crude Oil Prices
Brent crude oil spot prices decreased by $5/b in July to a monthly average of $57/b. Prices fell further at the end of July and into early August, with Brent spot prices settling at $48/b on August 7. Continuing increases in global liquids inventories put significant downward pressure on prices. Inventories rose by an estimated 2.3 million b/d through the first seven months of 2015, compared with an average build of 0.6 million b/d over the same period last year. Inventory builds are projected to moderate somewhat in the coming months, but are expected to remain high compared with previous years. Concerns over the pace of economic growth in emerging markets and the possibility of increasing volumes of Iranian crude oil on the market also contributed to the recent oil price decline.
The monthly average WTI crude oil spot price fell to an average of $51/b in July, down $9/b from June. Crude oil inventories at Cushing, Oklahoma, despite having decreased by 5.0 million barrels from their record high of 62.2 million barrels on April 17, remain about 40 million barrels higher than at the same time last year. U.S. crude oil inventories remain elevated compared with historical levels, despite strong U.S. refinery runs , which in recent weeks reached record highs over 17 million b/d.
EIA projects the Brent crude oil price will average $54/b in 2015 and $59/b in 2016, $6/b and $8/b lower than in July's STEO, respectively. WTI prices in both 2015 and 2016 are expected to average $5/b less than the Brent crude oil price. EIA's updated projection remains subject to significant uncertainties as the oil market moves toward balance. During this period of price discovery, oil prices could experience periods of heightened volatility. The oil market faces a host of 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 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 November 2015 delivery, traded during the five-day period ending August 6, averaged $47/b, while implied volatility averaged 37%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in November 2015 at $34/b and $64/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $27/b and $103/b for prices in December 2016. Last year at this time, WTI for November 2014 delivery averaged $96/b, and implied volatility averaged 16%. The corresponding lower and upper limits of the 95% confidence interval were $84/b and $111/b.
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