2016: VERY UNCERTAIN PRICES
Brent crude oil spot prices increased by $6/b in March to a monthly average of $38/b. Declines in the U.S. rig count and some improvement in global economic indicators contributed to higher oil prices in March. However, market expectations of ongoing growth in global oil inventories contributed to falling prices at the end of March, with Brent prices ending the month below $37/b.
With global oil inventory builds expected to average 1.4 million b/d in 2016, oil prices are forecast to remain near current levels. Forecast Brent prices average $35/b in 2016.
Global oil inventories are expected to grow by 0.4 million b/d in 2017. Lower forecast inventory builds contribute to a moderate price recovery in 2017, with Brent prices forecast to average $41/b. Forecast Brent prices reach an average of $46/b in the fourth quarter of 2017, as the global oil market is expected be relatively balanced late in 2017, with the potential for significant inventory draws beyond the forecast period.
Forecast West Texas Intermediate (WTI) crude oil prices average the same as Brent crude oil prices through the forecast period. The price parity of WTI with Brent in the forecast period is based on the assumption of competition between the two crudes in the U.S. Gulf Coast refinery market, as transportation differentials are similar to move the crudes from their respective pricing points to that market.
The expectation of continuing large inventory builds is a major source of uncertainty in the price forecast, as the capacity of global oil storage to absorb such builds is unknown. If global storage capacity becomes stressed, the cost of storage will rise to reflect more expensive marginal storage options such as floating inventories on crude oil tankers. The higher storage costs would lower near-month crude oil prices. Additional uncertainty stems from the pace of global economic growth and its contribution to oil demand growth and from the responsiveness of oil producers to sustained low oil prices.
The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the price outlook. WTI futures contracts for July 2016 delivery that were traded during the five-day period ending April 7 averaged $39/b, and implied volatility averaged 44%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in July 2016 at $27/b and $57/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $22/b and $78/b for prices in December 2016. At this time last year, WTI for July 2015 delivery averaged $52/b, and implied volatility averaged 46%, with the corresponding lower and upper limits of the 95% confidence interval at $35/b and $78/b.
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International Brent crude futures LCOc1 were at $57.75 per barrel at 0733 GMT, up 58 cents from the previous close, after trading as high as $58.13. U.S. WTI crude was at $51.95 per barrel, up 50 cents. Earlier in the day, it traded as high as $52.22.