OIL PRICES FORECAST: $53 - $56
Crude oil prices traded above $50 per barrel (b) through most of December, reaching their highest levels since mid-2015. The Brent and West Texas Intermediate (WTI) front-month futures prices closed at $56.89/b and $53.76/b, respectively, on January 5, increases of $2.95/b and $2.70/b, respectively, since December 1 (Figure 1). Brent and WTI average spot prices in December were $8.56/b and $6.26/b higher, respectively, compared with November averages.
On November 30, members of the Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce oil production in the first half of 2017. This agreement was a contributor to rising oil prices in early December. On December 10, 11 non-OPEC countries, including Russia, also agreed to reduce output in early 2017 as part of an effort with OPEC countries to accelerate rebalancing in the oil market.
Some countries within the agreements have confirmed with customers that they will reduce oil deliveries in the coming months, providing more credibility to the stated production targets. These confirmations likely provided additional support for higher oil prices. However, some countries not subject to the terms of the agreement could increase production in the coming months, which is expected to result in an increase in global oil supplies and could delay consistent global inventory withdrawals until the second half of 2018. Uncertainty in the production response from Libya, Nigeria, and the United States in the coming months presents some of the largest risks to the timeline of oil market rebalancing.
The monthly average spot price of Brent crude oil increased by $9/b in December to $53/b. Market reactions to the November 30 OPEC agreement to cut production by 1.2 million b/d starting in January 2017 were a major contributor to rising oil prices in December.
Brent crude oil spot prices are expected to remain fairly flat in the coming months. Despite the recent OPEC agreement, EIA expects global oil inventory builds to continue but at a generally slower rate in 2017 and 2018 than the 2016 average build of 0.9 million b/d. Inventory builds are forecast to average 0.4 million b/d in the first half of 2017 before falling to an average of 0.2 million b/d in the second half of 2017, with a draw expected during the third quarter. The expected persistence of excess global oil supply in the near term, along with the responsiveness of U.S. tight oil production to rising oil prices in late 2016, is expected to limit significant upward oil price pressures in 2017. Brent crude oil prices are forecast to average $53/b in the first half of 2017 and $54/b in the second half of 2017.
Some upward price pressures are expected to emerge in 2018. Global oil markets are expected to be more balanced by mid-2018, with global oil inventories transitioning from moderate builds of 0.4 million b/d in the first half of the year to an average draw of 0.1 million b/d in the second half, resulting in a build of about 0.1 million b/d build for all of 2018. EIA forecasts Brent prices to average $55/b during the first half of 2018 and $57/b in the second half of 2018.
Average West Texas Intermediate (WTI) crude oil prices are forecast to be $1/b lower than Brent prices in 2017 and 2018. The slight price discount of WTI to Brent in the forecast is based on the assumption of competition between the two crude oils in the U.S. Gulf Coast refinery market.
Global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. Uncertainty remains as to the effectiveness and duration of the concurrent OPEC and non-OPEC production cuts, which could influence prices in either direction. Also, the potential for continued efficiency gains and cost reductions from non-OPEC producers in the new higher price environment could result in additional volumes of supply that could put downward pressure on prices.
The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook. WTI futures contracts for April 2017 delivery that were traded during the five-day period ending January 5 averaged $55/b, and implied volatility averaged 29%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in April 2017 at $43/b and $71/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $35/b and $93/b for prices in December 2017. In January 2016, WTI for April 2016 delivery averaged $38/b, and implied volatility averaged 46%, with the corresponding lower and upper limits of the 95% confidence interval at $25/b and $56/b.
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