SHORT-TERM OIL OUTLOOK
North Sea Brent crude oil prices averaged $61/barrel (b) in June, a $3/b decrease from May.
Crude oil prices fell by about $4/b on July 6 in the aftermath of the "no" vote in Greece on the economic program, as well as lingering concerns about lower economic growth in China, higher oil exports from Iran, and continuing growth in global petroleum and other liquids inventories. A percent price change of this extent on a single day is unusual, but despite daily price volatility, monthly Brent crude oil prices have averaged between $55/b and $65/b per month since falling to $48/b in January.
EIA forecasts that Brent crude oil prices will average $60/b in 2015 and $67/b in 2016.
Forecast West Texas Intermediate (WTI) crude oil prices in both 2015 and 2016 average $5/b less than the Brent price. The current values of futures and options contracts for December 2015 delivery (Market Prices and Uncertainty Report) suggest the market expects WTI prices in December 2015 to range from $41/b to $89/b (at the 95% confidence interval).
U.S. regular gasoline monthly average retail prices reached $2.80/gallon (gal) in June, an increase of 8 cents/gal from May but 89 cents/gal lower than in June 2014. The price rise between May and June reflects signals of strong gasoline demand in the United States and abroad. EIA expects monthly average gasoline prices to decline gradually from their June level to an average of $2.49/gal during the second half of 2015. EIA forecasts U.S. regular gasoline retail prices to average $2.48/gal for all of 2015.
EIA estimates total U.S. crude oil production declined by 50,000 barrels per day (b/d) in May compared with April. Production is expected to generally continue falling through early 2016 before growth resumes. Projected U.S. crude oil production averages 9.5 million b/d in 2015 and 9.3 million b/d in 2016.
Natural gas working inventories were 2,577 billion cubic feet (Bcf) on June 26, which was 35% higher than a year earlier and 1% higher than the previous five-year average (2010-14).
Although injections have been strong most weeks, hot temperatures and high demand from the electric power sector contributed to lower-than-average injections during late June. Nevertheless, working inventories are on pace to end the injection season above the previous five-year average. EIA projects end-of-October stocks will be 3,919 Bcf, 121 Bcf (3.2%) more than the five-year average.
Global Petroleum and Other Liquids
Global liquids production continues to exceed consumption, resulting in inventory builds. Global oil inventory builds are estimated to have averaged 2.2 million b/d through the first half of 2015 and are projected to average 1.5 million b/d during the second half of the year. The slowing increases in inventory reflect 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 0.9 million b/d increase in 2014. By 2016, inventory builds are expected to moderate to 0.6 million b/d.
Global Petroleum and Other Liquids Consumption. EIA estimates global consumption of petroleum and other liquids grew by 1.1 million b/d in 2014, averaging 92.4 million b/d for the year. EIA expects global consumption of petroleum and other liquids to grow by 1.3 million b/d in 2015 and by 1.4 million b/d in 2016. Projected real gross domestic product (GDP) weighted for oil consumption, which increased by an estimated 2.8% in 2014, is projected to grow by 2.5% in 2015 and by 3.1% in 2016.
Consumption of petroleum and other liquids outside Organization for Economic Cooperation and Development (OECD) countries grew by 1.4 million b/d in 2014 and is projected to grow by 0.8 million b/d in 2015 and by 1.1 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 the country's 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. However, 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 EIA projects India's petroleum and other liquids consumption will increase by 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 0.3 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 petroleum and other liquids production grew by 2.3 million b/d in 2014, which mainly reflects production growth in the United States. EIA expects non-OPEC production to grow by 1.4 million b/d in 2015 and by 0.2 million b/d in 2016. After remaining relatively flat in 2015, production in Eurasia is projected to decline by 0.1 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 0.8 million b/d in June 2015, unchanged compared with the previous month as May outages in Canada extended into June. 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 May and June. Oil sands projects that had been shut down because of the fires resumed production in the second week of June. Recent violence in Yemen continues to interrupt operations at an oil port and refinery. South Sudan, Syria, and Yemen accounted for more than 75% of total non-OPEC supply disruptions inJune.
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. EIA forecasts OPEC crude oil production to increase by 0.6 million b/d in 2015 and decrease by 0.2 million b/d in 2016. Iraq is expected to be the largest contributor to OPEC production growth in 2015. At the OPEC meeting on June 5, 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 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. Negotiations continued beyond the June 30 target, and July 7 was agreed as the new target date for a comprehensive agreement. However, no
agreement had been reached by the time of this writing. 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. The sanctions forced Iran to shut in a substantial portion of its production, lowering output to an estimated 2.9 million b/d in June 2015. Iran's ability to bring online previously shutin 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 oil 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 June, unplanned crude oil supply disruptions among OPEC producers averaged 2.5 million b/d, unchanged from May. Higher disruptions in May in Kuwait and Saudi Arabia extended into June. Production at the Wafra field, located in the Neutral Zone that straddles Kuwait and Saudi Arabia, ceased in mid-May as the operators attempted to resolve a contract dispute. The continued suspension of Wafra's production increased disruptions in June by a total of 0.1 million b/d, split between Kuwait and Saudi Arabia. This suspension came after the previous production shut-in at the Khafji field in the Neutral Zone.
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, but the current and forecast levels of global inventory builds make the projected low surplus capacity level in 2015 less significant.
OECD Petroleum Inventories. EIA estimates that OECD commercial oil inventories totaled 2.69 billion barrels at the end of 2014, equivalent to roughly 59 days of consumption. Projected OECD oil inventories rise to 2.95 billion barrels at the end of 2015 and then to 3.00 billion barrels at the end of 2016.
Crude Oil Prices.
North Sea Brent crude oil spot prices decreased by $3/b in June to a monthly average of $61/b. Oil prices have been relatively stable in recent months despite consistent growth in global petroleum and other liquids inventories, which grew by an estimated 1.9 million b/d in June and an average of almost 3.0 million b/d April and May, compared with an average build of 0.8 million b/d in the second quarter of 2014. Iventory 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 $60/b in June, up $1/b from May. After increasing for 20 consecutive weeks to a record 62.2 million barrels on April 17, crude oil inventories at Cushing, Oklahoma, have since decreased by 5.8 million barrels as of June 26. Along with falling Cushing inventories, strong 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 $60/b in 2015 and $67/b in 2016, both unchanged from last month's STEO. WTI prices in both 2015 and 2016 are expected to average $5/b less than the Brent crude oil price. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events.
In addition, there is potential downward price pressure in the second half 2015 once refinery runs moderate following the seasonal peaks in demand from the summer driving season. 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 October 2015 delivery traded during the five-day period ending July 1 averaged $59/b, while implied volatility averaged 31%. These levels established the lower and upper limits of the 95% confidence U.S.
interval for the market's expectations of monthly average WTI prices in October 2015 at $45/b and $79/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $41/b and $89/b for prices in December 2015. Last year at this time, WTI for October 2014 delivery averaged $104/b, and implied volatility averaged 14%. The corresponding lower and upper limits of the 95% confidence interval were $92/b and $118/b.
U.S. Petroleum and Other Liquids
U.S. weekly regular gasoline retail prices reached a 2015 year-to-date high of $2.84/gal on June 15, an increase of 43 cents/gal from early in the second quarter but 85 cents/gal below the same time last year. Strong demand for gasoline in both the United States and abroad has driven gasoline prices higher over the past two months despite relatively stable crude oil prices.
Data from the U.S. Federal Highway Administration show Americans drove a record 988 billion miles during the first four months of 2015, compared with the previous record of 966 billion miles driven in the first four months of 2007. As a result, refinery wholesale gasoline margins (the difference between the wholesale price of gasoline and the price of Brent crude oil) have been strong in recent months leading to record high levels of refinery runs. U.S. average wholesale gasoline margins averaged 62 cents/gal in June, 28 cents/gal higher than June of last year and 25 cents/gal higher than the five-year average (2010-14) for June.
Refinery outages on the West Coast have contributed to gasoline prices in that region rising by more than the U.S. average during May. As those outages have abated and imports have helped resupply the market, regular gasoline prices in Petroleum Administration for Defense District (PADD) 5 declined to an average of $3.31/gal on June 29, 20 cents/gal lower than their recent peak on May 18. In June, monthly average regional gasoline retail prices ranged from a low of $2.55/gal in PADD 3, the Gulf Coast region, to a high of $3.36/gal in PADD 5, the West Coast. EIA expects gasoline prices to fall from their current peaks, with the U.S. regular gasoline price averaging $2.49/gal over the second half of 2015, 6 cents/gal higher than forecast in last month's STEO.
Liquid Fuels Consumption.
Total U.S. liquid fuels consumption rose by an estimated 70,000 b/d (0.4%) in 2014. Total liquid fuels consumption is forecast to grow by 400,000 b/d (2.1%) in 2015 and by 120,000 b/d (0.6%) in 2016. The 2015 and 2016 consumption forecasts are about 20,000 b/d higher and 70,000 b/d higher, respectively, than forecast in last month's STEO.
Motor gasoline consumption, which rose by 80,000 b/d in 2014, will increase by a projected 170,000 b/d (1.9%) in 2015 as the effects of employment growth and lower gasoline prices outweigh increases in vehicle fleet efficiency. Gasoline consumption is forecast to fall by 20,000 b/d (0.2%) in 2016, driven by higher prices and a long-term trend toward more fuel-efficient vehicles.
Consumption of distillate fuel, which includes diesel fuel and heating oil, is forecast to rise by 90,000 b/d (2.3%) in 2015 and by 70,000 b/d (1.7%) in 2016. This growth is driven by increasing manufacturing output, foreign trade, and marine fuel use.
Hydrocarbon gas liquids (HGL) consumption, which decreased by 100,000 b/d (4.0%) in 2014, is projected to increase by 120,000 b/d in 2015 and by 60,000 b/d in 2016, as new petrochemical plant capacity increases the use of HGL as a feedstock. In addition, new HGL export terminal capacity contributes to an increase in HGL net exports from an average of 560,000 b/d in 2014 to 1.1 million b/d in 2016.
Liquid Fuels Supply.
U.S. crude oil production is projected to increase from an average of 8.7 million b/d in 2014 to 9.5 million b/d in 2015 and then decline to 9.3 million b/d in 2016. The forecast is about 40,000 b/d higher for both 2015 and 2016 than in last month's STEO. The increase in the crude oil production forecast reflects upward revisions to estimated Gulf of Mexico production in the second quarter of 2015.
EIA estimates that U.S. crude oil production averaged almost 9.6 million b/d in the first half of 2015. This level is 0.3 million b/d higher than the average production during the fourth quarter of 2014, despite a 60% decline in the total U.S. oil-directed rig count since October 2014.
The most recent production estimates, which include historical data through April 2015, indicate U.S. output was 9.7 million b/d in April. EIA estimates that total U.S. production began declining in May, falling 50,000 b/d from the April level. Although total U.S. production increased in April, the data indicate that onshore production began declining in April. While the production estimates are subject to revision as new data become available from the states, the preliminary evidence is supported by reported April production declines in major producing states such as North Dakota.
EIA expects U.S. crude oil production declines to continue into early 2016, when total production is forecast to average 9.2 million b/d in the first quarter. Production is forecast to begin rising in the second quarter of 2016, returning to an average of 9.6 million b/d in the fourth quarter. A total of 13 projects are scheduled to come online in the Gulf of Mexico in 2015 and 2016, pushing Gulf of Mexico production up from an average of 1.4 million b/d in the fourth quarter of 2014 to almost 1.7 million b/d in the same period of 2016, an increase of 17%.
Expected crude oil production declines from April 2015 through February 2016 are largely attributable to unattractive economic returns in some areas of both emerging and mature onshore oil production regions, as well as seasonal factors such as anticipated hurricane-related production disruptions in the Gulf of Mexico. Reductions in 2015 cash flows and capital expenditures have prompted companies to defer or redirect investment away from marginal exploration and research drilling to focus on core areas of major tight oil plays. Reduced investment has resulted in the lowest count of oil-directed rigs in nearly five years.
Projected 2015 oil prices remain high enough to support continued development drilling in the core areas of the Bakken, Eagle Ford, Niobrara, and Permian basins. Forecast WTI crude oil prices create conditions in which continued increases in rig and well productivity and falling drilling and completion costs make rig count increases and resumption of onshore production growth possible in 2016. The forecast remains sensitive to actual wellhead prices and rapidly changing drilling economics that vary across regions and operators. While projected oil production in the Gulf of Mexico rises during the forecast period, Alaska oil production falls.
Production in these areas is less sensitive to short-term price movements than onshore production in the Lower 48 states and reflects anticipated growth from new projects and declines from legacy fields.
HGL production at natural gas processing plants is estimated to have reached a record level of 3.3 million b/d in April 2015, and it is projected to average 3.3 million b/d in 2015 and 3.5 million b/d in 2016. EIA expects higher ethane recovery rates following planned increases in petrochemical plant feedstock demand. Export terminal expansions will allow higher quantities of domestically produced ethane, propane, and butanes to reach the international market.
The growth in domestic crude oil and other liquids production has contributed to a significant decline in imports. The share of total U.S. liquid fuels consumption met by net imports fell from 60% in 2005 to an estimated 26% in 2014. EIA expects the net import share to decline to 21% in 2016, which would be the lowest level since 1968.
Petroleum Product Prices.
Rising crude oil prices, strong demand for U.S. gasoline, and several refinery outages in the Midwest and West Coast contributed to an increase in U.S. regular gasoline retail prices from a monthly average of $2.47/gal in April to $2.80/gal in June. EIA expects monthly average prices to decline through the summer as refineries continue to produce high levels of gasoline and as demand begins to decrease following the peak in the summer driving season. EIA projects regular gasoline retail prices to average $2.63/gal during the third quarter of 2015, 11 cents/gal higher than in last month's STEO, and $2.34/gal in the fourth quarter.
The U.S. regular gasoline retail price, which averaged $3.36/gal in 2014, is projected to average $2.48/gal in 2015, 4 cents/gal higher than in last month's STEO, and $2.55/gal in 2016, which is unchanged from last month's STEO.
The diesel fuel retail price, which averaged $3.83/gal in 2014, is projected to fall to an average of $2.86/gal in 2015, 2 cents/gal lower than in last month's STEO, and then rise to $3.03/gal in 2016.
As with crude oil, the market's expectation of uncertainty in monthly average gasoline prices is reflected in the pricing and implied volatility of futures and options contracts. New York Harbor reformulated blendstock for oxygenate blending (RBOB) futures contracts for October 2015 delivery, traded over the five-day period ending July 1, averaged $1.80/gal. The probability that the RBOB futures price will exceed $2.35/gal (consistent with a U.S. average regular gasoline retail price above $3.00/gal) in October 2015 is about 5%.
Preliminary data indicate that natural gas production in the Northeast declined during May and June, contributing to total U.S. natural gas production in June averaging 78.2 Bcf per day (Bcf/d), down 1.2 Bcf/d from the April level. The decline largely reflects maintenance and construction in the Marcellus producing area. Transcontinental Pipeline restricted capacity on segments of its Leidy Line, which flows natural gas produced in the Marcellus Shale to market areas, beginning May 1 and lasting through late June. The capacity restrictions were related to construction on an expansion that will ultimately increase Marcellus takeaway capacity. EIA expects production growth will resume in July.
Natural Gas Consumption.
EIA's forecast of U.S. total natural gas consumption averages 76.5 Bcf/d in 2015 and 76.4 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 12.9% 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 3.3% in 2015 and by 3.9% in 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. Natural gas consumption 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 4.3 Bcf/d (5.7%) and by 1.6 Bcf/d (2.0%) in 2015 and 2016, respectively. Despite recent declines, natural gas production remains high, and EIA expects continued growth through 2016, with increases in the Lower 48 states expected to more than offset long-term production declines 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 of the growth is expected to come from the Marcellus Shale, as the backlog of uncompleted wells is reduced and new pipelines come online to deliver Marcellus natural gas to markets in the Northeast.
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 natural gas 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 LNG gross exports will increase to an average of 0.79 Bcf/d in 2016, with the startup of a major LNG liquefaction plant in the Lower 48 states. Natural Gas Inventories. On June 26, natural gas working inventories totaled 2,577 Bcf, which was 662 Bcf (35%) above the level at the same time in 2014 and 29 Bcf (1%) above the previous five-year average (2010-14) for that week. To this point in 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 3,919 Bcf, 121 Bcf (3.2%) above the five-year average for that time.
Natural Gas Prices.
The Henry Hub natural gas spot price averaged $2.78/million British thermal units (MMBtu) in June, a decrease of 7 cents/MMBtu from the May price. EIA expects monthly average spot prices to remain lower than $3/MMBtu in July, 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 $3.31/MMBtu in 2016.
Natural gas futures contracts for October 2015 delivery traded during the five-day period ending July 1 averaged $2.85/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for October 2015 contracts at $1.92/MMBtu and $4.24/MMBtu, respectively. At this time last year, the natural gas futures contract for October 2014 delivery averaged $4.40/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $3.37/MMBtu and $5.76/MMBtu, respectively.
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