Analysis & Projections
The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran
Release date: April 27, 2012
Summary
This is the second in a series of reports prepared in fulfillment of Section 1245(d)(4)(A) of the National Defense Authorization Act (NDAA) for Fiscal Year 2012, which requires that, not later than 60 days from enactment and every 60 days thereafter, the U.S. Energy Information Administration (EIA) "submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60-day period preceding the submission of the report." As specified by the NDAA, EIA consulted with the Department of Treasury, the Department of State, and the intelligence community in the process of developing this report.
The statutory language in the NDAA clearly envisions a report that is primarily, if not exclusively, backward-looking in nature. In contrast to data on petroleum and petroleum product volumes, price data is available on a real-time or near-real-time basis. Over the five days ending April 25, the price of the front-month futures contract for Brent crude, a proxy for the global price of light sweet crude grades not subject to transportation bottlenecks, averaged $118.55 per barrel, a $7 per barrel decline from its average over the March 9 - 14 period when prices were at their highest level for 2012. Although lower than their peak in mid-March, prices are still well above their level at the start of the year. Also, the market remains backwardated, with front month prices over the five days ending April 25 about $5 per barrel above those for delivery 12 months in the future. Although backwardation has eased since the end of February, when the price difference between the front month and 12-month contracts was $7.69 for the five days ending February 27, the continuing premium on contracts for near-term delivery is still indicative of tightness in world oil markets.
It is important to recognize that due to time lags in the collection of production and consumption data, nearly all of the petroleum and petroleum product volumes presented in this report for the 60-day period preceding its publication are estimates rather than actual data. As discussed in the remainder of this summary section and in the body of this report, EIA estimates that global liquid fuels consumption is at a historically high level. While the global economic outlook remains uncertain, continued growth is expected. EIA estimates that global liquid fuels production exceeded consumption by an average of 0.5 million barrels per day (bbl/d) in March and April. Inventories in the United States were estimated to have risen by an average of 0.2 million bbl/d in March and April 2012, while commercial inventories in other member states of the Organization for Economic Cooperation and Development (OECD) built by an estimated 0.1 million bbl/d over the same timeframe. Though data on non-OECD inventories are very limited, the implied build in non-OECD stocks averaged 0.2 million bbl/d in March and April. During these two months, there were numerous press reports that Iranian oil exports to other countries were lower than Iranian volumes available for export, causing Iran to accumulate, perhaps involuntarily, additional crude oil inventories (Wall Street Journal, Reuters).
With respect to supply, there has been a changing pattern of unplanned oil production disruptions. Total global unplanned production outages generally declined over the last quarter of 2011 and in January 2012 as Libyan output rose steadily following the defeat of the Gaddafi regime. However, despite a continued rise in Libyan output, total global unplanned production outages rose above their January 2012 level in February, March, and April. Technical issues affecting production in Canada and political issues affecting output in South Sudan, Sudan, Syria, and Yemen were key contributors to this outcome.
In addition, both the United States and the European Union (EU) have acted to tighten sanctions against Iran, including measures with both immediate and future effective dates. Press reports indicate that these measures may already be causing some of Iran's existing oil customers to make arrangements to switch to non-Iranian crudes. Sanction-related difficulties in insuring Iranian shipments, both to European and Asian countries, have likely contributed to further declines in purchases of Iranian crude. EIA believes that Iran's total liquids production capability has been declining due to its inability to carry out investment projects that are necessary to offset the natural decline in its production from existing wells. Actual Iranian production over the last two months is approximately 0.4 million bbl/d lower than its year-ago average, while Iran's consumption is estimated to have increased by 0.1 million bbl/d over the same period, which indicates a decline in oil export capacity of 0.5 million bbl/d. However, media reports (Wall Street Journal, Reuters) indicate the decrease in actual oil exports has been larger that the decline in export capacity, which has resulted in Iran accumulating increasing levels of stocks in onshore and "on the water" storage.
Partially offsetting these supply disruptions, there have been significant production increases from two non-OPEC producers. Notably, due to increasing production from tight oil plays, U.S. liquids production in March 2012 was between 0.1 and 0.2 million bbl/d above its average level during the fourth quarter of 2011. Likewise, Kazakhstan increased its oil production almost 0.2 million bbl/d over the same period.
Finally, current spare crude oil production capacity, while estimated to be higher than during the 2003 to 2008 period, is quite modest by historical standards, especially when measured as a percentage of global oil production and considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran. With the rise in total global unplanned production outages over the last three months and the likely increase in non-discretionary inventories controlled by Iran, global spare capacity in March and April was estimated to average 2.5 million bbl/d, roughly equal to the average level in January and February.
Market Indicators Considered in this Report
In addition to estimated volumes of production and consumption and spot market and futures prices, this report focuses on a variety of other indicators of volumes, spare production capacity, and price spreads relevant to the "availability and price of petroleum and petroleum products."
Spare capacity, which EIA defines as the amount of additional production that can be brought onstream within 30 days and sustained for at least 90 days, consistent with sound business and reservoir management practices, is an indicator of the world oil market's ability to respond to potential disruptions that reduce oil supply. Oil prices tend to rise when spare capacity reaches very low levels, as occurred in the 2003 to 2008 period.
Crude oil and petroleum product inventories, also referred to as stocks, act as the balancing point between supply and demand. Given the uncertainty of supply and demand, inventories are often seen as a precautionary measure and, along with spare capacity, serve to cushion the market in addressing negative supply shocks and/or positive demand shocks. The term structure of prices for future delivery, discussed below, is one factor that signals the market to build or reduce stocks.
Petroleum and petroleum product prices are indicators of the relative balance of supply and demand. Rising prices suggest that demand is growing more rapidly (or declining at a slower rate) than supply, while falling prices imply that demand is growing less quickly (or falling more rapidly) than supply. Prices also reflect expectations regarding future changes in the balance between supply and demand, which can be influenced by a variety of supply and demand drivers. This report reflects price data through April 25, 2012.
Differences in prices, commonly referred to as price spreads, also convey important information about the current state of the market and market expectations. The term structure of prices for future delivery is one key indicator of market participants' expectations regarding changes in market tightness over time. For example, the difference between the price of the front month and twelfth month futures contracts provides insight into current market tightness relative to expectations for the coming year. A positive difference, referred to as backwardation, indicates tightness in the current market, while a negative difference, called contango, indicates a relatively looser near-term supply-demand balance and encourages stock building.
There are a variety of other spreads that also provide important market insights. These include the price spread across different crude streams which can arise due to differences in physical characteristics (for example, American Petroleum Institute [API] gravity and sulfur content) or their location. With respect to location, transportation bottlenecks can result in significant price differences between physically similar crudes in markets with different balances between crude supply and demand.
The price spread between crude oil and refined products, often referred to as a crack spread, provides an indication of the relative tightness in the supply-demand balance for different petroleum products. In recent years, the crack spread for distillate fuels (a category that includes diesel fuel and heating oil) has generally been greater than the crack spread for gasoline. Crack spreads also provide insight into the profitability of refining operations, which is often a reflection of the availability of refinery capacity relative to the demand for refined products.
The value of options on futures contracts is another current indicator of forward-looking market sentiment. Call options provide the holder with the right to buy a commodity at a specified price up to a specified future date, while put options provide the right to sell at a specified price up to a specified future date. Given strike prices and the time to expiration, the value of options contracts can be used to calculate the market's current assessment of the uncertainty range for future prices and/or the market's view that prices for future delivery at specified dates will exceed or fall below any particular level.
Estimates of Production, Consumption, Spare Capacity and Inventories
Because Iran participates in the global oil market and because biofuels are a close substitute for petroleum products, this report examines "availability and price" in the global liquid fuels market. The term "liquid fuels" encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains.
Once the availability of global liquid fuels is established, EIA estimates the volume of "petroleum and petroleum products produced in countries other than Iran" by subtracting global biofuels and liquid fuels produced and consumed in Iran from the global liquid fuels totals.
Looking at the total global market during March and April, EIA estimates that world liquid fuels production averaged 88.7 million bbl/d, which is 2.4 million bbl/d higher than the comparable year-ago average of 86.2 million bbl/d and 2.6 million bbl/d higher than the three-year annual average of 86.1 million bbl/d (Table 1). During this same period, EIA estimates that global liquid fuels consumption averaged 88.2 million bbl/d, 0.9 million bbl/d higher than the comparable year-ago period and 1.6 million bbl/d higher than its previous three-year annual average.
During the last two months, EIA estimates that liquid fuels production and consumption in Iran were 3.9 million bbl/d and 1.7 million bbl/d, respectively. Iran is the world's fifth-largest producer of liquid fuels – accounting for between 4 and 5 percent of global supply – and the third-largest exporter of crude oil. Iran's crude oil production capacity has eroded in recent years, due to its inability to carry out investment projects that are necessary to offset the natural decline in production from existing wells. Although its output of lease condensate and natural gas liquids has increased somewhat, these increases have not been enough to offset the decline in crude oil production, and EIA estimates that Iran's total liquids production capability has fallen. In addition, Iran has historically been a net importer of petroleum products, particularly gasoline, since its consumption levels exceed its own refining capacity.
In March and April 2012, EIA estimates consumption of petroleum and petroleum products in countries other than Iran averaged 84.7 million bbl/d. During the same period, EIA estimates that production of petroleum and petroleum products in countries other than Iran averaged 82.9 million barrels bbl/d, which is 2.8 million bbl/d or 3 percent higher than the three-year annual average from 2009 through 2011 (Table 1).
As a result, EIA estimates global oil inventories grew by an average of 0.5 million bbl/d during the past two months. As mentioned above, the growth in global oil inventories includes growth in Iranian oil inventories, as sanctions have caused some disruption in Iranian oil sales.
Currently, all of the world's spare crude oil production capacity is held by the member countries of the Organization of the Petroleum Exporting Countries (OPEC), and largely by Saudi Arabia. EIA estimates that spare OPEC oil production capacity averaged 2.5 million bbl/d during March and April, roughly equal to the average level of spare capacity in January and February. Spare oil production capacity is currently quite modest relative to historical levels, including an average of 3.6 million bbl/d in the comparable year-ago period and a 2009-2011 average of 3.5 million bbl/d. Spare capacity must also be considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran.
Crude Oil and Petroleum Product Prices
Crude oil prices have declined slightly after increasing from February through mid-March. These changes are reflected in price movements on the most commonly traded oil futures contracts. Comparing the 5-day periods ending February 27, 2012 and April 25, 2012, the price of the front month of the New York Mercantile Exchange (NYMEX) light sweet crude oil contract (WTI) declined from $107.66 per barrel to $103.22 per barrel. The Brent front month price, which is widely viewed as being more representative of global prices for light sweet crude oil, declined from $123.56 to $118.55 per barrel over the same period. WTI and Brent prices have declined by $4.94 and $7.04 per barrel, respectively, from their 2012 peaks of $108.16 per barrel on March 1 and $125.59 per barrel on March 14.
During March and April 2012, petroleum and petroleum product prices were higher than they had been on average over the last three years. The average of the monthly price for March and April of the front month WTI contract was $104.87 per barrel and the two-month average for the Brent front month contract was $122.80 per barrel. These prices were $25.93 and $38.16 per barrel higher than the three-year averages and $3.58 and $7.55 per barrel higher than their January and February 2012 averages, respectively.
The 1st – 12th month spread for Brent had a March and April average of $6.58 per barrel, indicating a relative current tightness in the world waterborne crude market. The Brent curve has been in backwardation since summer of 2011, in contrast to the three-year average of -$3.08 per barrel. The WTI spread, on the other hand, is in contango, averaging -$1.36 per barrel between March and April, but this is a much smaller spread than the three-year average of -$5.39 per barrel. The contango for WTI likely reflects transportation bottlenecks in the midcontinent region and future plans to ameliorate them by reconfiguring existing pipelines and building new ones.
For the five days ending April 25, the average price of the September 2012 WTI crude oil futures contract was $104.53 per barrel and the average price of the September 2012 Brent contract was $117.46 per barrel. The WTI and Brent prices for the 5-day average ending April 25 for the September 2012 contract have decreased by about $4 per barrel and $2.50 per barrel, respectively, since the end of February. Based on implied volatilities calculated from options and futures prices over the 5 days ending April 25, the probability of the September 2012 WTI futures contract expiring above $120 per barrel is 15 percent, a 13-percentage-point decrease relative to the same calculation made using price data from the 5-day period ending February 27. Since Brent prices are currently higher relative to WTI prices, the probability that the September Brent contract will exceed specified dollar thresholds is higher for Brent.
Reformulated blendstock for oxygenate blending (RBOB) is an unfinished gasoline that requires blending with an oxygenate, such as ethanol, before being sold. RBOB (or Eurobob in Europe) is often traded instead of finished motor gasoline that already has been blended with ethanol since oxygenate blending typically takes place at terminals along the distribution chain.
RBOB prices have been generally rising over the past two months, although they began to decrease in recent weeks. Comparing the 5-day periods ending February 27, 2012 and April 25, 2012, the price of the front month of the NYMEX RBOB contract, which calls for delivery in New York Harbor, rose from $3.11 per gallon to $3.16 per gallon. During March and April, the average price for the front month of the RBOB futures contract was $3.31 per gallon, $1.09 per gallon higher than the average front month price over the three-year period from 2009-2011, and $0.17 per gallon higher than the March and April 2011 average. It should be noted that some of the increase in RBOB futures prices over the last 60 days is due to the switch from winter grade gasoline to more expensive summer grade gasoline.
The average price of the September 2012 RBOB futures contract for the 5-day period ending April 25 was $3.00 per gallon, a decrease of 11 cents per gallon from the average of $3.11 for the 5-day period ending February 27. Based on implied volatilities calculated from options and futures prices over the 5 days ending April 25, the probability of the September 2012 RBOB futures contract expiring above $3.35 per gallon (comparable to a $4.00 per gallon national average retail price for regular grade gasoline) is 21 percent, an 11-percentage-point decrease from the result of the same calculation made using data for the 5-day period ending February 27.