OIL PRICES: $42 - $52
According to EIA, benchmark North Sea Brent crude oil spot prices averaged $45/barrel (b) in July, a $3/b decrease from June. This was the first monthly decrease since the Brent price fell to a 12-year low of $31/b in January 2016.
Brent crude oil prices are forecast to average $42/b in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to be slightly less than Brent in 2016 and the same as Brent in 2017. The current values of futures and options contracts suggest high uncertainty in the price outlook.
The monthly average spot price of Brent crude oil decreased by $3/b in July to $45/b, which was the first monthly decrease since January 2016. Significant outages of global oil supply contributed to rising oil prices during the second quarter of 2016. However, concerns about future economic growth related to the United Kingdom's June 23 vote to exit the European Union and the easing of supply disruptions in Canada contributed to falling oil prices in late June. Prices continued to fall in July because of concerns about high levels of U.S. and global petroleum product inventories, despite relatively strong demand, and because of growing U.S. oil rig counts. The Baker Hughes U.S. active oil rig count increased for six consecutive weeks in July and early August, the longest stretch of weekly increases in almost a year.
EIA expects global oil inventory builds to average 0.5 million b/d in the second half of 2016, limiting upward price pressures in the coming months. Brent prices are forecast to average $43/b during the second half of 2016. However, daily and even monthly price variations could be significant as economic and geopolitical events affect market participants' expectations of oil market balances.
EIA expects consistent global oil inventory draws to begin in mid-2017. The expectation of inventory draws contributes to accelerating price increases in the second quarter of 2017, with price increases continuing later in 2017. Brent prices are forecast to average $52/b in 2017. Forecast Brent prices average $58/b in the fourth quarter of 2017, reflecting the potential for more significant inventory draws beyond the forecast period.
Average West Texas Intermediate (WTI) crude oil prices are forecast to be slightly less than Brent prices in 2016 and the same as Brent prices 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, because 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 November 2016 delivery that were traded during the five-day period ending August 4 averaged $42/b, and 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 November 2016 at $29/b and $61/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $22/b and $104/b for prices in December 2017. At this time in 2015, WTI for November 2015 delivery averaged $47/b, and implied volatility averaged 37%, with the corresponding lower and upper limits of the 95% confidence interval at $34/b and $64/b.
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