Global Crude Oil and Liquid Fuels

Global Crude Oil and Liquid Fuels Overview

EIA expects that global oil markets will continue to remain tight in 2012, although markets have eased somewhat since mid-March. Year-over-year supply growth in 2012 should significantly exceed the projected 1.0 million bbl/d rise in consumption, and we expect global commercial stocks to build following the significant draws during 2011. The oil production gains contributed to a counter-seasonal stock build during the 1st quarter of 2012 and a moderate reduction in backwardation in crude oil prices. However, EIA does not expect these large counter-seasonal stock builds to continue throughout the year, and both global oil inventory and spare production capacity levels are projected to be tight enough to support higher average crude oil prices in 2012 than in the previous year. The projected oil market balance reflects the impacts from previous sanctions against Iran, but the potential impacts of the more recent sanctions set to take effect this year are not accounted for in the current Outlook.

Crude oil prices have declined after increasing through mid-March, as global liquids supply outpaced consumption by 0.6 million bbl/d in first quarter 2012, which led to global inventory builds. The easing in the backwardation of waterborne light crude prices noted in EIA’s April 27th report, The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran, has also continued in recent days. While price trends and reduced backwardation signal some market easing, the continuing premium on contracts for near-term delivery and a price level that remains elevated relative to the fourth quarter of 2011 is still indicative of tightness in world oil markets.

There are several uncertainties that could push oil prices higher or lower than projected. A number of countries outside of the Organization of the Petroleum Exporting Countries (OPEC) are currently undergoing supply disruptions, as discussed in EIA’s April 27th report The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran and the April 18 edition of This Week in Petroleum. Oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, although the effects of the impending European Union embargo and other sanctions targeting exports of Iranian crude oil and their associated payments are still uncertain, heightened market anxiety surrounding a potentially significant supply disruption could bolster oil prices. On the demand side, economic growth below current expectations could result in reduced oil demand and lower prices.

Global Crude Oil and Liquid Fuels Consumption

World liquid fuels consumption grew by an estimated 0.8 million bbl/d in 2011. EIA expects consumption growth of 1.0 million bbl/d in 2012 and 1.2 million bbl/d in 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth (World Liquid Fuels Consumption Chart). OECD liquid fuels consumption is projected to decline by 0.4 million bbl/d in 2012, with Europe and, to a lesser extent, the United States accounting for almost all of the decline. In 2013, forecast OECD liquid fuels consumption is expected to remain essentially flat.

Non-OPEC Supply

EIA expects non-OPEC crude oil and liquid fuels production to rise by 0.7 million bbl/d in 2012 and by a further 1.1 million bbl/d in 2013. The largest area of non-OPEC growth will be North America, where production increases by 680 thousand bbl/d and 260 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. In Brazil, output is projected to rise annually by an average of 130 thousand bbl/d over the next two years, with increased output from its offshore, pre-salt oil fields. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field next year, will increase its total production by 160 thousand bbl/d in 2013. Production also rises in China and Colombia over the next two years, while production declines in Mexico and the North Sea.

Several notable disruptions to non-OPEC production commenced or intensified since the beginning of this year, as discussed in both the April 27th report The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran and in the April 18 edition of This Week in Petroleum. Unplanned outages to non-OPEC production totaled over 1.2 million bbl/d in March and are estimated to remain at an elevated level.

OPEC Supply

EIA expects that OPEC members will continue to produce slightly over 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil demand and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and then falls by 0.3 million bbl/d in 2013 as non-OPEC supply growth increases and stocks remain flat. OPEC non-crude petroleum liquids (condensates, natural gas liquids, coal-to-liquids, and gas-to-liquids), which are not covered by OPEC’s production quotas, are forecast to increase by 0.2 million bbl/d in 2012, and by 0.1 million bbl/d in 2013.

EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012 and by an additional 200 thousand bbl/d in 2013, from its previous output level of 3.55 million bbl/d at the end of 2011. Iran’s output decline began to accelerate during the last quarter of 2011 and has continued. EIA believes that this acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran’s upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA expects that the forecast decline in Iran’s output will be offset by increased production in other OPEC member countries.

EIA’s forecast of market balances does not factor in any potential effects of the more recent sanctions targeting Iran’s central bank and the impending European Union embargo on Iran’s crude oil production, or their possibile impact on the production, spare capacity, or inventories of Iran and other OPEC member countries. As noted in EIA’s April 27th report, there are indications that the U.S. and EU sanctions are already affecting sales of Iranian crude oil. Current and continuing difficulties in placing export volumes from Iran could result in a buildup of Iranian oil in storage, whether onshore or offshore. An increase in Iranian crude oil storage would drive an increase in global oil inventories. However, insofar as inventories held by Iran are building due to the effect of sanctions on its ability to sell oil, those volumes would not be available to consumers in the same way as traditional inventories.

Moreover, if Iran’s difficulties in finding markets for its oil persist or intensify, or outstrip available storage capacity, Iran may have to shut in production. EIA expects that any volumes that are shut-in could be replaced by increased production from spare capacity held by other OPEC member countries. In such a scenario, the shut-in production capacity in Iran may technically be counted as new spare capacity, but—like inventories that accumulate for similar reasons—would not be readily available to alleviate market tightness in the same manner that regular spare capacity not forced by sanctions typically would be.

OPEC members serve as the swing producers in the world market because only OPEC producers possess surplus or spare oil production capacity. EIA projects that OPEC surplus production capacity will average 2.8 million bbl/d in 2012 and rise to an average 3.5 million bbl/d in 2013 (OPEC Surplus Crude Oil Production Capacity Chart). However, as discussed above, markets may be closely watching the composition of OPEC spare capacity, as well as its aggregate level, as the situation with respect to Iran evolves. Under plausible circumstances, the market may discount a portion of OPEC members’ aggregate spare capacity.

OECD Petroleum Inventories

EIA estimates that OECD commercial oil inventories ended 2011 at 2.59 billion barrels, equivalent to 56.1 days of forward-cover (Days of Supply of OECD Commercial Stocks Chart). Projected OECD oil inventories increase to 2.64 billion barrels and 57.3 days of forward-cover by the end of 2012. Although the forecast December 2012 inventory is slightly lower than the 2.66-billion-barrel level at the end of December 2010, the days of forward-cover are still among the highest end-of-year levels since 1991 because of the decline in OECD consumption.

Crude Oil Prices

EIA has lowered the forecast 2012 average U.S. refiner acquisition cost of crude oil by $2.50 per barrel from last month’s Outlook to $110 per barrel, still about $8 per barrel higher than last year’s average price. EIA expects the price of WTI crude oil to average about $104 per barrel in 2012, about $2 per barrel lower than last month’s Outlook, but $9 per barrel higher than the 2011 average price. EIA expects crude oil prices to remain relatively flat in 2013, with WTI and the U.S. refiner acquisition cost of crude oil averaging about $104 per barrel and $108 per barrel, respectively (West Texas Intermediate Crude Oil Price Chart). The projected WTI price discount to the average U.S. refiner acquisition cost of crude oil narrows over the forecast from about $6 per barrel in the second quarter of 2012 to $4 per barrel by the fourth quarter of 2013, as transportation bottlenecks diminish.

Energy price forecasts are highly uncertain (Market Prices and Uncertainty Report). WTI futures for July 2012 delivery during the 5-day period ending May 3, 2012 averaged $105 per barrel. Implied volatility averaged 23 percent, establishing the lower and upper limits of the 95-percent confidence interval for the market's expectations of monthly average WTI prices in July 2012 at $90 per barrel and $123 per barrel, respectively. Last year at this time, WTI for July 2011 delivery averaged $110 per barrel and implied volatility averaged 29 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $91 per barrel and $133 per barrel.