OIL PRICES WILL UP TO $43 - $52
EIA rises oil & gas price forecasts:
Benchmark North Sea Brent crude oil spot prices averaged $47/barrel (b) in May, a $5/b increase from April and the fourth consecutive monthly increase since reaching a 12-year low of $31/b in January. Growing global oil supply disruptions, rising oil demand, and falling U.S. crude oil production contributed to the price increase.
Brent crude oil prices are forecast to average $43/b in 2016 and $52/b in 2017, $3/b and $1/b higher than forecast in last month's STEO, respectively. West Texas Intermediate (WTI) crude oil prices are forecast to be slightly lower 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 September 2016 of $46/b should be considered in the context of Nymex contract values for September 2016 delivery. These contracts traded during the five-day period ending June 2 suggest the market expects WTI prices could range from $36/b to $69/b (at the 95% confidence interval) in September 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, both unchanged from last month's STEO. EIA estimates that crude oil production for May 2016 averaged 8.7 million b/d, which is more than 0.2 million b/d below the April 2016 level, and approximately 1 million b/d below the 9.7 million b/d level reached in April 2015.
Crude Oil Prices
The monthly average spot price of Brent crude oil increased by $5/b in May to $47/b, which was the highest monthly average for Brent since October 2015. This was the fourth consecutive increase in the monthly average Brent price, the longest such stretch since May through September 2013. Increasing global oil supply outages were the main contributor to higher oil prices in May. Improving economic data and related indications that global oil demand growth is accelerating, plus ongoing declines in the U.S. rig count and in crude oil production, also contributed to rising prices.
Despite the recent increase in oil prices, EIA expects global oil inventory builds to average 0.8 million b/d during the second and third quarters of 2016, limiting upward price pressures in the coming months. Brent prices are forecast to average $46/b in the third quarter of 2016, before rising to $47/b in the fourth quarter as a result of expected slower growth in global oil inventories.
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 $52/b in 2017, $1/b higher than forecast in last month's STEO. Forecast Brent prices reach an average of $58/b in the fourth quarter of 2017, reflecting the potential for more significant inventory draws beyond the forecast period.
Forecast West Texas Intermediate (WTI) crude oil prices average slightly less than Brent crude oil prices 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 (Market Prices and Uncertainty Report). WTI futures contracts for September 2016 delivery that were traded during the five-day period ending June 2 averaged $50/b, and implied volatility averaged 35%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in September 2016 at $36/b and $69/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $31/b and $83/b for prices in December 2016. At this time in 2015, WTI for September 2015 delivery averaged $60/b, and implied volatility averaged 33%, with the corresponding lower and upper limits of the 95% confidence interval at $45/b and $81/b.
Natural Gas Prices
The Henry Hub natural gas spot price averaged $1.92/MMBtu in May, unchanged from the average price in April. 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 natural gas 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 the end of 2016. Forecast Henry Hub natural gas prices average $2.22/MMBtu in 2016 and $2.96/MMBtu in 2017.
Natural gas futures contracts for September 2016 delivery that were traded during the five-day period ending June 2 averaged $2.42/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for September 2016 contracts at $1.64/MMBtu and $3.58/MMBtu, respectively. In early June 2015, the natural gas futures contract for September 2015 delivery averaged $2.69/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $1.79/MMBtu and $4.03/MMBtu.
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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.