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Short-Term Energy and Summer Fuels Outlook

Release Date: April 7, 2015  |  Next Release Date: May 12, 2015  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Global Petroleum and Other Liquids

As in last month's STEO, global production continues to exceed demand, resulting in inventory builds. Global oil inventory builds are projected to average 1.7 million bbl/d through the first half of 2015. Inventory builds moderate during the second half of the year, as demand rises and non-Organization of the Petroleum Exporting Countries (OPEC) supply growth slows, particularly in the United States, because of lower oil prices. The expected inventory builds in 2015 are on top of an estimated average 1.0 million bbl/d increase in 2014.

If the new framework agreement between the P5+1 and Iran results in a comprehensive deal and a lifting of sanctions, it could significantly change the STEO forecast for oil supply, demand, and prices, which still assumes that Iran's production will stay close to the current level through 2016. An analysis box below discusses the implications of increased flows of oil from Iran.

Global Petroleum and Other Liquids Consumption

EIA estimates that global consumption grew by 0.9 million bbl/d in 2014, averaging 92.0 million bbl/d for the year. EIA expects global consumption will grow by 1.0 million bbl/d in 2015 and by 1.1 million bbl/d in 2016. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2014, is projected to grow by 2.6% in 2015 and by 3.1% in 2016. Consumption outside of the Organization for Economic Cooperation and Development (OECD), which grew by 1.2 million bbl/d in 2014, is projected to grow by 0.8 million bbl/d in 2015 and by 1.1 million bbl/d in 2016. Lower forecast non-OECD consumption growth in 2015 is mostly attributable to a 0.2 million bbl/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. China's economic growth slowed in the second half of 2014 and in the beginning of 2015, as key manufacturing indexes decreased. Nonetheless, China remains the main source of non-OECD oil consumption growth, with a projected annual average increase of 0.3 million bbl/d in both 2015 and 2016, down from growth of 0.4 million bbl/d in 2014. OECD consumption, which fell by 0.4 million bbl/d in 2014, is expected to grow by 0.2 million bbl/d in 2015 and then stay relatively flat in 2016. Japan and Europe accounted for almost the entire 2014 decline in OECD oil consumption. Consumption in these areas is expected to continue declining over the next two years, albeit at a slower rate than in 2014. The United States is the leading contributor to projected OECD consumption growth, with U.S. consumption increasing by 0.3 million bbl/d in 2015 and by 0.1 million bbl/d in 2016.

Figure 6: World Liquid Fuels Consumption Growth

Non-OPEC Petroleum and Other Liquids Supply

EIA estimates that non-OPEC production grew by 2.2 million bbl/d in 2014. EIA expects non-OPEC production to grow by 0.7 million bbl/d in 2015 and by 0.4 million bbl/d in 2016, in part because of lower projected oil prices. The slower growth in total non-OPEC supply is largely attributable to slower production growth in the United States and Canada and declining production in Europe and Eurasia. After remaining relatively flat in 2015, production in Eurasia is projected to decline by more than 0.1 million bbl/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 0.6 million bbl/d in March 2015, similar to the previous month. South Sudan, Syria, and Yemen accounted for nearly 90% of total non-OPEC supply disruptions in March. EIA estimates that unplanned non-OPEC supply disruptions averaged 0.6 million bbl/d in 2014. Yemen has maintained a crude oil output of more than 100,000 bbl/d despite the ongoing conflict in that country. However, sustained port closures could halt oil and liquefied natural gas (LNG) exports and force production shut-ins in the near future.

OPEC Petroleum and Other Liquids Supply

EIA estimates that OPEC crude oil production averaged 30.1 million bbl/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 0.1 million bbl/d in 2015 and falls by 0.5 million bbl/d in 2016. Iraq is the largest contributor to OPEC production growth over the forecast period, but its growth is expected to be offset by production declines from other OPEC producers.

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

In March 2015, unplanned crude oil supply disruptions among OPEC producers averaged 2.3 million bbl/d, a decrease of 0.2 million bbl/d compared with the previous month. This decrease was mainly attributable to fewer outages in Iraq and Libya. Unplanned OPEC crude supply disruptions averaged 2.4 million bbl/d in 2014, 0.5 million bbl/d higher than in the previous year. The high level of OPEC disruptions contributed to higher crude oil prices during the first half of 2014. Unplanned supply disruptions could still affect crude oil prices, but the threshold that the market can bear has risen in light of robust global production and increases in inventory levels.

Nigeria's newly elected president, Muhammadu Buhari, will be inaugurated on May 29. Buhari may face significant challenges from groups associated with oil theft in the oil-rich Niger Delta and those receiving payments through the amnesty program. Buhari's campaign focused on curtailing corruption, and if those groups feel threatened by potential changes to the status quo, they might retaliate by disrupting oil production. For now, Nigeria's oil production forecast remains unchanged.

EIA expects OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, to increase to an annual average of 2.1 million bbl/d in 2015 and 2.6 million bbl/d in 2016, after averaging about 2.0 million bbl/d in 2014. Surplus capacity is typically an indication of market conditions, and surplus capacity below 2.5 million bbl/d is an indicator of a relatively tight market. However, 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 2.72 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 2.88 billion barrels at the end of 2015 and fall slightly to 2.87 billion barrels at the end of 2016.

Crude Oil Prices

North Sea Brent crude oil spot prices decreased by $2/bbl in March to a monthly average of $56/bbl. This decrease followed a $10/bbl increase in February, the first increase in eight months. Several factors put upward pressure on Brent prices in February, including news of falling U.S. crude oil rig counts and announced reductions in capital expenditures by major oil companies. This upward price pressure abated in March, as the combination of robust world crude oil supply growth and weak global demand contributed to an increase in the rate of global inventory builds. Total global oil inventories are estimated to have increased by 2.1 million bbl/d in March, compared with a 0.9 million bbl/d increase in February. Strong global oil inventory builds are expected to continue in the coming months. Inventory builds are projected to moderate later in the year and provide support to crude oil prices.

The monthly average WTI crude oil spot price decreased to an average of $48/bbl in March, down $3/bbl from February. WTI prices fell in March in large part because of commercial crude oil inventories in Cushing, Oklahoma, which increased to a record 58.9 million barrels as of March 27. The record inventory levels have put downward pressure on the price of crude oil for prompt delivery compared with the price of crude oil for delivery in later months.

EIA projects the Brent crude oil price will average $59/bbl in 2015, unchanged from last month's STEO, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events (see analysis box below). WTI prices in 2015 and 2016 are expected to average $7/bbl and $5/bbl, respectively, below Brent. The Brent-WTI spread for 2015 reflects continued large builds in U.S. crude oil inventories, including at the Cushing, Oklahoma, storage hub.

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 July 2015 delivery traded during the five-day period ending April 2 averaged $52/bbl while implied volatility averaged 46%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in June 2015 at $35/bbl and $78/bbl, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $32/bbl and $97/bbl for prices in December 2015. Last year at this time, WTI for July 2014 delivery averaged $99/bbl, and implied volatility averaged 17%. The corresponding lower and upper limits of the 95% confidence interval were $85/bbl and $115/bbl.

Given the high level of uncertainty in oil markets, several factors could cause oil prices to deviate significantly from current projections. Among these factors is the potential lifting of sanctions against Iran if a comprehensive agreement is reached (see box below). The level of unplanned production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Nigeria, and Venezuela. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices.

Several OPEC and non-OPEC oil producers rely heavily on oil revenue to finance their national budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices fall further or are sustained at current levels, oil-dependent producing countries will face tough decisions. These decisions could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protesters target oil infrastructure. Potential new supply disruptions are a real possibility and present major uncertainty in the world oil supply forecast.

Assessing oil market impacts of a potential comprehensive agreement with Iran

On April 2, Iran and the P5+1 reached a framework agreement to guide the next three months of negotiations, which will target a comprehensive agreement by June 30. Under the framework, U.S. and European Union nuclear-related sanctions (which includes oil-related sanctions) will be suspended after the International Atomic Energy Agency verifies that Iran has complied with key nuclear-related steps. If a comprehensive agreement that results in the lifting of Iranian oil-related sanctions is reached, then this could significantly change the STEO forecast for oil supply, demand, and prices. However, the timing and order that sanctions could be suspended is uncertain. In addition, the pace and volume at which more Iranian oil can re-enter the market is uncertain and depends on how quickly Iran can move oil out of storage and ramp up production.

In this STEO, EIA's forecast of oil supply, demand, and price is mostly unchanged from last month. Given the preliminary nature of the recent developments, EIA has not changed its short-term projection for Iranian production, which assumes that production will stay close to the current level. However, if a comprehensive deal is reached, the re-entry of more Iranian barrels could result in a $5-$15/bbl lower baseline STEO price projection in 2016 compared with the current STEO.

Iran is believed to hold at least 30 million barrels in storage. It is possible that Iran will attempt to move oil out of storage more quickly sometime during the second half of 2015 in preparation to increase production if discussions on sanctions show progress. As a result, the global market may see incremental increases in Iran's crude oil exports before seeing a substantial increase to Iran's production, but the pace at which oil in storage could be withdrawn is uncertain.

EIA believes that Iran has the technical capability to ramp up crude oil production by at least 700,000 bbl/d by at least the end of 2016, of which 600,000 bbl/d represents capacity that was previously shut in and 100,000 bbl/d is new capacity. EIA's current STEO projects that growth in global inventories declines from 1 million bbl/d in 2015 to 100,000 bbl/d in 2016. If Iran ramps up production by 700,000 bbl/d by at least the end of 2016, then this could result in an annual average growth of about 500,000 bbl/d in global inventories in 2016, which would stress storage capacity limits and put downward pressure on prices. The potentially large inventory build in 2016 implies that production growth outside of Iran could be lower or that global consumption growth could be higher than projected in the current STEO.

Although the timing and volume of Iran's exports remain uncertain, the market perception surrounding increased future supplies will apply downward price pressure to near-term crude oil prices. Overall, North Sea Brent crude oil prices could be lower by about $1-$3/bbl in 2015, decreasing the 2015 annual Brent price from the current projection in the high $50/bbl range. If and when significantly increased volumes of Iranian barrels start entering the market, the price effect could be greater. The uncertainty of the impact lies in the secondary effects on production outside of Iran, including in the United States, as well as any increases in global consumption as a response to lower oil prices, among other factors.

Global Petroleum and Other Liquids
  2013 2014 2015 2016
a Weighted by oil consumption.
b Foreign currency per U.S. dollar.
Supply & Consumption (million barrels per day)
Non-OPEC Production 54.46 56.66 57.39 57.81
OPEC Production 36.50 36.43 36.77 36.45
OPEC Crude Oil Portion 30.12 30.08 30.20 29.75
Total World Production 90.95 93.09 94.16 94.26
OECD Commercial Inventory (end-of-year) 2550 2717 2880 2867
Total OPEC surplus crude oil production capacity 2.13 2.03 2.07 2.57
OECD Consumption 46.03 45.66 45.90 45.93
Non-OECD Consumption 45.16 46.38 47.19 48.28
Total World Consumption 91.19 92.05 93.09 94.20
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.7 2.7 2.6 3.1
Real U.S. Dollar Exchange Rateb 3.8 3.7 10.3 1.2

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