OIL PRICES: $61 - $67

Highlights

North Sea Brent crude oil prices averaged $64/barrel (b) in May, a $5/b increase from April and the highest monthly average of 2015. Despite estimated global inventories increasing by more than 2 million barrels per day (b/d) for the third consecutive month, several factors contributed to higher prices in May, including continued signals of higher global oil demand growth, expectations for declining U.S. tight oil production in the coming months, and the growing risk of unplanned supply outages in the Middle East and North Africa.

EIA forecasts Brent crude oil prices will average $61/b in 2015 and $67/b in 2016. The 2016 price forecast is $3/b lower than in last month's STEO. West Texas Intermediate (WTI) prices in both 2015 and 2016 are expected to average $5/b less than the Brent price. The current values of futures and options contracts for December 2015 delivery suggest (Market Prices and Uncertainty Report) the market expects (at the 95% confidence interval) WTI prices in that month to range from $40/b to $92/b.

Total U.S. crude oil production averaged an estimated 9.6 million b/d in May, but it is expected to generally decline from June 2015 through early 2016 before growth resumes. Projected U.S. crude oil production averages 9.4 million b/d in 2015 and 9.3 million b/d in 2016. The forecast is 0.2 million b/d and 0.1 million b/d higher for 2015 and 2016, respectively, than in last month's STEO, primarily because of revisions to actual production data from the first quarter of 2015.

Global Crude Oil Prices

North Sea Brent crude oil spot prices increased by almost $5/b in May to a monthly average of $64/b, which was the highest monthly average for Brent so far this year. Several factors put upward pressure on crude oil prices in May. These factors included indications that global oil demand growth is accelerating, evidence that U.S. tight oil production could decline in the coming months, and the growing risk of unplanned supply outages in the Middle East and North Africa. As of May 29, according to Baker Hughes, the number of rigs drilling for crude oil in the United States had fallen for 25 consecutive weeks and was 60% below its peak in October 2014. Brent crude oil prices increased despite estimated increases in global oil inventories, which rose in May by more than 2.0 million b/d for the third consecutive month, compared with an average build of 1.0 million b/d in March through May of last year. Inventory builds are projected to moderate somewhat in the coming months, but are expected to remain high compared with previous years.

The monthly average WTI crude oil spot price increased to an average of $59/b in May, up $5/b from April. After increasing for 20 consecutive weeks to a record 62.2 million barrels on April 17, crude oil inventories at Cushing, Oklahoma, have since fallen for six consecutive weeks by a total of 3.2 million barrels. Along with falling Cushing inventories, increasing U.S. refinery runs and production outages in Canada have put upward pressure on the price of WTI crude oil.

EIA projects the Brent crude oil price will average $61/b in 2015, unchanged from last month's STEO. The Brent crude oil price is projected to average $67/b in 2016, $3/b lower than in last month's STEO, reflecting an increase in forecast non-OPEC crude oil production growth in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events. WTI prices in both 2015 and 2016 are expected to average $5/b less than Brent.

The current values of futures and options contracts continue to suggest high uncertainty in the price outlook. WTI futures contracts for September 2015 delivery traded during the five-day period ending June 4 averaged $60/b while implied volatility averaged 33%. 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 2015 at $45/b and $81/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $40/b and $92/b for prices in December 2015. Last year at this time, WTI for September 2014 delivery averaged $101/b, and implied volatility averaged 14%. The corresponding lower and upper limits of the 95% confidence interval were $89/b and $114/b.

Global Petroleum and Other Liquids

Global liquids production continues to exceed consumption, resulting in inventory builds. Global oil inventory builds are projected to average 2.2 million b/d through the first half of 2015 and average 1.6 million b/d during the second half of the year, with the reduction in builds reflecting rising demand and slowing production growth outside of the Organization of the Petroleum Exporting Countries (OPEC), particularly in the United States. The expected inventory builds in 2015 are on top of an estimated average 1.1 million b/d increase in 2014. By 2016, expected inventory builds moderate to 0.8 million b/d as non-OPEC supply growth slows and demand continues to rise.

Global Petroleum and Other Liquids Consumption

EIA estimates global consumption of petroleum and other liquids grew by 0.9 million b/d in 2014, averaging 92.0 million b/d for the year. EIA expects global consumption to grow by 1.3 million b/d in both 2015 and 2016. Forecast global consumption growth was revised modestly upward from last month's STEO, as lower oil prices stimulate global demand growth more than previously expected. Projected real gross domestic product (GDP) weighted for oil consumption, which increased by an estimated 2.8% in 2014, is projected to grow by 2.4% in 2015 and by 3.0% in 2016.\

Consumption of petroleum and other liquids outside of the Organization for Economic Cooperation and Development (OECD) countries grew by 1.2 million b/d in 2014 and is projected to grow by 0.8 million b/d in 2015 and by 1.2 million b/d in 2016. Lower forecast growth for non-OECD consumption in 2015 mostly reflects a 0.2 million b/d decline in Russia's consumption as a result of its economic downturn. Russia's oil consumption is expected to decline by a similar amount in 2016, although it is offset by growth elsewhere. China's economic growth slowed in the second half of 2014 and in the beginning of 2015. Nonetheless, China remains the main source of non-OECD oil consumption growth, with a projected annual average increase of 0.3 million b/d in both 2015 and 2016, down from growth of 0.4 million b/d in 2014. India's economic and manufacturing growth continued to rise in the first half of 2015, and projected petroleum and other liquids consumption growth is 0.2 million b/d in 2015 and 2016, compared with 0.1 million b/d in 2014.

OECD petroleum and other liquids consumption, which fell by 0.4 million b/d in 2014, is expected to grow by 0.4 million b/d in 2015 and by 0.2 million b/d in 2016. Japan and Europe accounted for nearly all of the 2014 decline in OECD oil consumption. Japan's consumption is expected to continue declining over the next two years, albeit at a slower rate than in 2014, while Europe's consumption is expected to grow slowly. The United States is the leading contributor to projected OECD consumption growth in 2015, with U.S. consumption increasing by 0.4 million b/d, while consumption in both the United States and Europe increases by about 0.1 million b/d in 2016. The degree to which global oil demand responds to lower oil prices is only beginning to become apparent in the data, and, if that response deviates from forecast values, it could affect market balances and prices.

Non-OPEC Petroleum and Other Liquids Supply

EIA estimates that non-OPEC production grew by 2.3 million b/d in 2014, mainly as a result of output growth in the United States. EIA expects non-OPEC production to grow by 1.3 million b/d in 2015 and by 0.2 million b/d in 2016. Forecast non-OPEC production growth was revised upward from last month's STEO by an average of 0.5 million b/d in 2015, to account for historical revisions to first quarter U.S. production and increases to forecast Canadian production. After remaining relatively flat in 2015, production in Eurasia is projected to decline by almost 0.2 million b/d in 2016. The projected decline reflects reduced investment in Russia's oil sector stemming from low oil prices and international sanctions.

Unplanned supply disruptions among non-OPEC producers averaged about 0.7 million b/d in May 2015, nearly 0.1 million b/d higher than the previous month because of outages in Canada and Brazil. Wildfires in western Canada that started in the second half of May led to oil sands production outages averaging about 0.1 million b/d for the month. An explosion at the P-56 floating production and storage offloading facility at Brazil's Marlim Sul field at the end of May also increased the non-OPEC outage level. Before the explosion, P-56 produced less than 0.1 million b/d of oil. Recent violence in Yemen continues to interrupt operations at an oil port and refinery. South Sudan, Syria, and Yemen accounted for more than 80% of total non-OPEC supply disruptions in May.

OPEC Petroleum and Other Liquids Supply

EIA estimates that OPEC crude oil production averaged 30.1 million b/d in 2014, unchanged from the previous year. Crude oil production declines in Libya, Angola, Algeria, and Kuwait offset production growth in Iraq and Iran. In EIA's forecast, OPEC crude oil production rises by 0.6 million b/d in 2015 and falls by 0.2 million b/d in 2016. Iraq is expected to be the largest contributor to OPEC production growth in 2015. At the June 5 OPEC meeting, the group did not change its 30 million b/d crude oil production target. EIA forecasts OPEC crude oil production will continue to exceed that target over the forecast period, contributing to the expected global inventory builds.

On April 2, Iran and the five permanent members of the United Nations Security Council plus Germany (P5+1) reached a framework agreement to guide negotiations targeting a comprehensive agreement by June 30. A comprehensive agreement could result in the lifting of oil-related sanctions against Iran and a subsequent increase in Iran's crude oil production and exports, although the timing and details of any suspension of sanctions are uncertain. EIA has not changed its short-term projection for Iranian crude oil production, which assumes that production will stay close to the current level.

Iran produced 3.6 million b/d of crude oil in late 2011, before the recent round of sanctions was enacted, forcing Iran to shut in a substantial portion of its production. Iran's ability to bring online previously shut-in volumes and increase exports depends on several factors, including the current condition of oil fields and infrastructure that were shut in, the pace of sanctions relief, and the ability of Iran to find buyers in the present market. If a comprehensive agreement is reached, EIA estimates that the re-entry of more Iranian barrels could result in a $5/b-$15/b lower baseline STEO price forecast for 2016 (see the analysis box on page 5 of the April 2015 STEO for further discussion).

OPEC noncrude liquids production, which averaged 6.3 million b/d in 2014, is expected to increase by 0.1 million b/d in 2015 and by 0.2 million b/d in 2016, led by production increases in Qatar, Iran, and Kuwait.

In May, unplanned crude oil supply disruptions among OPEC producers averaged 2.6 million b/d, almost 0.3 million b/d higher compared with the previous month, resulting from higher disruptions in Kuwait, Saudi Arabia, Libya, and Nigeria. Production at the Wafra field, located in the Neutral Zone that straddles Kuwait and Saudi Arabia, ceased in mid-May as the operators attempt to resolve a contract dispute. Suspension of Wafra's production increased disruptions in May by a total of 0.1 million b/d, split between Kuwait and Saudi Arabia. This suspension came on top of the previous shut-in production at the Khafji field. Protests and labor strikes at the El Feel field and at oil export facilities increased disruptions in Libya by more than 0.1 million b/d in May, while protests in Nigeria led to production disruptions in the Nembe oil field in the Niger Delta region in late May.

EIA expects OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, to decrease to an average of 1.8 million b/d in 2015 and increase to 2.1 million b/d in 2016, after averaging 2.0 million b/d in 2014. Surplus capacity is typically an indication of market conditions, and surplus capacity below 2.5 million b/d is an indicator of a relatively tight oil market. However, the current and forecast levels of global inventory builds make the projected low surplus capacity level in 2015 less significant. Nonetheless, low surplus capacity heightens uncertainty about the market's ability to counteract unforeseen supply outages, particularly in the current geopolitical climate with conflicts in or next to major oil-producing countries in the Middle East and North Africa.

OECD Petroleum Inventories

EIA estimates that OECD commercial oil inventories totaled 2.72 billion barrels at the end of 2014, the highest end-of-year level on record and equivalent to roughly 59 days of consumption. Projected OECD oil inventories rise to 3.00 billion barrels at the end of 2015 and then to 3.09 billion barrels at the end of 2016.

Crude Oil Prices

North Sea Brent crude oil spot prices increased by almost $5/b in May to a monthly average of $64/b, which was the highest monthly average for Brent so far this year. Several factors put upward pressure on crude oil prices in May. These factors included indications that global oil demand growth is accelerating, evidence that U.S. tight oil production could decline in the coming months, and the growing risk of unplanned supply outages in the Middle East and North Africa. As of May 29, according to Baker Hughes, the number of rigs drilling for crude oil in the United States had fallen for 25 consecutive weeks and was 60% below its peak in October 2014. Brent crude oil prices increased despite estimated increases in global oil inventories, which rose in May by more than 2.0 million b/d for the third consecutive month, compared with an average build of 1.0 million b/d in March through May of last year. Inventory builds are projected to moderate somewhat in the coming months, but are expected to remain high compared with previous years.

The monthly average WTI crude oil spot price increased to an average of $59/b in May, up $5/b from April. After increasing for 20 consecutive weeks to a record 62.2 million barrels on April 17, crude oil inventories at Cushing, Oklahoma, have since fallen for six consecutive weeks by a total of 3.2 million barrels. Along with falling Cushing inventories, increasing U.S. refinery runs and production outages in Canada have put upward pressure on the price of WTI crude oil.

EIA projects the Brent crude oil price will average $61/b in 2015, unchanged from last month's STEO. The Brent crude oil price is projected to average $67/b in 2016, $3/b lower than in last month's STEO, reflecting an increase in forecast non-OPEC crude oil production growth in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events. WTI prices in both 2015 and 2016 are expected to average $5/b less than Brent.

The current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for September 2015 delivery traded during the five-day period ending June 4 averaged $60/b while implied volatility averaged 33%. 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 2015 at $45/b and $81/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $40/b and $92/b for prices in December 2015. Last year at this time, WTI for September 2014 delivery averaged $101/b, and implied volatility averaged 14%. The corresponding lower and upper limits of the 95% confidence interval were $89/b and $114/b.

Natural Gas

The spot price of natural gas at Henry Hub averaged $2.85/ million British thermal units (MMBtu) in May, after averaging $2.61/MMBtu in April. EIA expects monthly average natural gas prices to rise somewhat through the summer as air-conditioning demand increases, but remain below $4/MMBtu throughout the forecast period. While freeze-offs hampered some production this past winter, preliminary data sources indicate natural gas production growth resumed in April and May. EIA forecasts July production will exceed the previous monthly record set in December 2014.

Working natural gas inventories increased by 132 Bcf for the week ending May 29. Following last week's build, natural gas inventories exceeded the previous five-year average for only the second time since late 2013.

Natural Gas Consumption

EIA's forecast of U.S. total natural gas consumption averages 76.7 Bcf per day (Bcf/d) in 2015 and 76.6 Bcf/d in 2016, compared with 73.5 Bcf/d in 2014. Consumption growth in 2015 is largely driven by demand in the industrial and electric power sectors. EIA projects natural gas consumption in the power sector to grow by 13.7% in 2015 and then fall by 2.7% in 2016. Low natural gas prices support increased use of natural gas for electricity generation in 2015. Industrial sector consumption increases by 3.6% in both 2015 and 2016, as new industrial projects come online, particularly in the fertilizer and chemicals sectors, and as industrial consumers continue to take advantage of low natural gas prices. Consumption of natural gas in the residential and commercial sectors is projected to decline in 2015 and 2016.

Natural Gas Production and Trade

EIA expects that marketed natural gas production will increase by 4.2 Bcf/d (5.7%) and by 1.6 Bcf/d (2.0%) in 2015 and 2016, respectively. This month's STEO lowers the 2015 production outlook by 0.3 Bcf/d to reflect revisions in historical data. However, production remains high and EIA expects continued growth through 2016, with increases in the Lower 48 states expected to more than offset the long-term declining production in the Gulf of Mexico. Increases in drilling efficiency will continue to support growing natural gas production in the forecast despite relatively low natural gas prices. Most growth is expected to come from the Marcellus Shale, as a backlog of drilled wells is completed and new pipelines come online to deliver Marcellus gas to markets in the Northeast. Preliminary data indicate significant production growth in April and the beginning of May.

Increases in domestic natural gas production are expected to reduce demand for natural gas imports from Canada and to support growth in exports to Mexico. EIA expects exports to Mexico, particularly from the Eagle Ford Shale in South Texas, to increase because of growing demand from Mexico's electric power sector, coupled with flat Mexican natural gas production.

EIA projects that LNG gross exports will increase to 0.79 Bcf/d in 2016, with the startup of a major LNG liquefaction plant in the Lower 48.

Natural Gas Inventories

On May 29, natural gas working inventories totaled 2,233 Bcf, which was 751 Bcf (51%) above the level at the same time in 2014 and 22 Bcf (1%) above the previous five-year (2010-14) average for that week. So far during the inventory refill season, injections have surpassed the five-year average injections by a wide margin. EIA projects end-of-October 2015 inventories will total 3,912 Bcf, 115 Bcf above the five-year average for that time.

Natural Gas Prices

The Henry Hub natural gas spot price averaged $2.85/MMBtu in May, an increase of 24¢/MMBtu from the April price. EIA expects monthly average spot prices to remain lower than $3/MMBtu through June, and lower than $4/MMBtu through the remainder of the forecast. The projected Henry Hub natural gas price averages $2.97/MMBtu in 2015 and $3.32/MMBtu in 2016.

Natural gas futures contracts for September 2015 delivery traded during the five-day period ending June 4 averaged $2.69/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for September 2015 contracts at $1.79/MMBtu and $4.03/MMBtu, respectively. At this time last year, the natural gas futures contract for September 2014 delivery averaged $4.58/MMBtu and the corresponding lower and upper limits of the 95% confidence interval were $3.54/MMBtu and $5.92/MMBtu.

eia.gov