OIL PRICES: 2016: $41; 2017: $51
North Sea Brent crude oil prices averaged $42/barrel (b) in April, a $3/b increase from March. Improving economic data, growing supply disruptions, and falling U.S. crude oil production and rig counts contributed to the price increase.
Brent crude oil prices are forecast to average $41/b in 2016 and $51/b in 2017, $6/b and $10/b higher than forecast in last month's STEO, respectively. West Texas Intermediate (WTI) crude oil prices are forecast to average slightly less than Brent in 2016 and to be the same as Brent in 2017. However, the current values of futures and options contracts suggest high uncertainty in the price outlook. For example, EIA's forecast for the average WTI price in August 2016 of $42/b should be considered in the context of Nymex contract values for August 2016 delivery. These contracts traded during the five-day period ending May 5 suggest the market expects WTI prices to range from $32/b to $65/b (at the 95% confidence interval) in August 2016.
U.S. crude oil production averaged 9.4 million barrels per day (b/d) in 2015. Production is forecast to average 8.6 million b/d in 2016 and 8.2 million b/d in 2017. The 2017 forecast is about 0.1 million b/d higher than forecast in the April STEO. EIA estimates that crude oil production for the month of April 2016 averaged 9.0 million b/d, which is 0.1 million b/d below the March 2016 level, and 0.7 million b/d below the 9.7 million b/d level reached in April 2015.
Global Crude Oil Prices
Brent crude oil spot prices increased by $3/b in April to a monthly average of $42/b, which was the highest monthly average for Brent so far this year. This was the third consecutive increase in the monthly average Brent price, the longest such stretch since April-June 2014. Several factors put upward pressure on crude oil prices in April: improving economic data and related indications that global oil demand growth is accelerating; ongoing declines in the U.S. rig count and crude oil production; and growing oil supply outages.
Despite the recent increase in prices, EIA expects global oil inventory builds to average 0.9 million b/d in the second and third quarters of 2016, limiting upward price pressures in the coming months. Brent prices are expected to average $42/b in the second and third quarters of 2016, before rising to $44/b in the fourth quarter as a result of slowing global oil inventory growth.
EIA expects global oil inventory draws to begin in the third quarter of 2017. The expected inventory draws contribute to forecast rising prices in the first half of 2017, with price increases expected to accelerate later in 2017. Brent prices are forecast to average $51/b in 2017, $10/b higher than forecast in last month's STEO. Forecast Brent prices reach an average of $57/b in the fourth quarter of 2017, reflecting the potential for more significant inventory draws beyond the forecast period.
The higher oil price forecast in this month's STEO compared with the April STEO largely reflects tighter market balances, particularly for the second half of 2017, based on a stronger outlook for global oil consumption. Higher oil consumption data in non-OECD Asia, supported by economic data, contributed to upward revisions for global oil consumption growth of 0.3 million b/d and 0.2 million b/d in 2016 and 2017, respectively. Previously, the pace of economic growth and related oil demand growth had been considered one of the main downside risks to oil prices in the forecast period, and although economic risks remain, they are lower than previously assumed.
In addition, a recent increase in global oil supply outages has taken pressure off storage capacity in the near term. These supply reductions were reflected in a narrowing differential for oil prices for near-term delivery compared with prices for delivery further in the future. Increased outages have reduced the possibility that inventory growth will cause storage costs to quickly rise and put downward pressure on oil prices.
Forecast West Texas Intermediate (WTI) crude oil prices average slightly less than Brent crude oil in 2016 and the same as the Brent price in 2017. The relative 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 price differentials to move the crudes from their respective pricing points to that market are similar.
The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook . WTI futures contracts for August 2016 delivery that were traded during the five-day period ending May 5 averaged $46/b, and implied volatility averaged 41%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in August 2016 at $32/b and $65/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $26/b and $83/b for prices in December 2016. At this time last year, WTI for August 2015 delivery averaged $61/b, and implied volatility averaged 33%, with the corresponding lower and upper limits of the 95% confidence interval at $46/b and $81/b.
Natural Gas Prices
The Henry Hub natural gas spot price averaged $1.92/million British thermal units (MMBtu) in April, an increase of 19 cents/MMBtu from the March price. Through the 2015-16 winter, prices remained relatively low because of lower demand as a result of warmer-than-normal temperatures, record inventory levels, and production growth. EIA expects prices will gradually rise through the summer, as demand from the electric power sector increases, but forecast prices remain lower than they were last summer. Monthly average Henry Hub spot prices are forecast to remain lower than $3.00/MMBtu through December 2016. Forecast Henry Hub natural gas prices average $2.25/MMBtu in 2016 and $3.02/MMBtu in 2017.
Natural gas futures contracts for August 2016 delivery that were traded during the five-day period ending May 5 averaged $2.36/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for August 2016 contracts at $1.64/MMBtu and $3.39/MMBtu, respectively. In early May 2015, the natural gas futures contract for August 2015 delivery averaged $2.85/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $1.98/MMBtu and $4.11/MMBtu.
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