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Short-Term Energy Outlook

Release Date: February 7, 2017  |  Next Release Date: March 7, 2017  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices:Global crude oil prices traded within a relatively narrow range in January compared with recent history. Brent crude oil prices increased by $1.09 per barrel (b) from January 3 to settle at $56.56/b on February 2. U.S. benchmark crude oil West Texas Intermediate (WTI) increased $1.21/b over the same period, settling at $53.54/b (Figure 1). Brent and WTI average spot prices in January were both about $1/b higher compared with December averages.

Figure 1: Historical crude oil front month futures prices

The relatively stable prices in January came as oil market participants assessed news and data on the status of supply from countries participating in the production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries. The Joint Ministerial Monitoring Committee (JMMC), a body of three representatives from OPEC and two representatives from non-OPEC countries established to monitor compliance with the agreement to reduce crude oil production by 1.8 million barrels per day (b/d), met on January 22. At the meeting, the countries affirmed commitments to shoulder their share of the production cuts originally announced in November and December. The JMMC plans to provide monthly updates on each country's production data and to monitor adherence to the agreed-upon production levels. In addition to statements from OPEC and non-OPEC officials announcing that production targets were met, oil tanker traffic data also indicate a possible reduction in oil being exported from the Middle East to customers in Asia, although official data will not be available for several months. With petroleum product demand forecast to grow at a faster rate in 2017 than in 2016, global oil markets appear closer to balance than at any time in the recent past.

For this STEO, EIA incorporated significant revisions to historical liquid fuel consumption and supply. These revisions, from 2013–14, create a higher baseline from which 2015–16 STEO consumption is estimated. Notably, the revisions include an upward adjustment to 2016 Chinese oil consumption and supply of 0.7 million b/d and 0.4 million b/d, respectively, as well as other revisions to consumption outside the Organization for Economic Cooperation and Development (OECD).

These revisions were incorporated into the historical data in this month's STEO and are contributing to forecasts of tighter supply and demand balances. EIA now estimates that global liquid fuels inventories increased by an average of 0.8 million b/d in 2016, down from the previous estimate of 0.9 million b/d. More importantly, EIA now expects the global oil market to be largely in balance in 2017 and 2018 with implied global inventories forecast to draw by 0.1 million b/d and build by 0.2 million b/d in those years, respectively. Previously, EIA had forecast small annual average builds in both 2017 and 2018, notwithstanding draws during the third quarters of both years.

The historical revisions to consumption and the projection of a balanced market sooner compared with the previous STEO do not significantly change the crude oil price projection. This implies that current crude oil price levels are near the point where the market balances, allowing U.S. and OPEC production to increase to meet higher demand in 2017 and 2018. The current Brent crude oil price projections of $55/b and $57/b in 2017 and 2018, respectively, contribute to a roughly balanced market through the projection period.

Crude oil price volatility declined in December and continued declining in January. All front-month crude oil transactions traded in the mid-$50/b range in January, with Brent crude oil prices trading in the narrowest range since May 2014 and WTI prices trading in the narrowest range since December 2006 (Figure 2). The narrow trading range further suggests buyers and sellers increasingly agree that a mid-$50/b oil price is sufficient to balance the oil market, as global demand continues growing at a robust pace and producers begin to increase investments in new production. EIA forecasts a 0.2 million b/d decline in global inventories in the first quarter of 2017, in contrast to the estimated 1.5 million b/d stock build during the same period in 2016.

Figure 2: Crude oil front month - 13th month futures price spread

Crude oil supply and price spreads: Total OPEC supply is expected to increase by 0.2 million b/d in 2017 and by 0.5 million b/d in 2018. Recent estimates of production from Libya, which is not subject to any production target under the OPEC production cut agreement, average almost 0.7 million b/d in January, the country's highest production level since 2014. Saudi Arabia recently announced it is meeting its production target, and the country is estimated to have produced slightly less than 10.0 million b/d in January.

U.S. crude oil production is expected to increase by 0.1 million b/d in 2017 year-over-year and by 0.5 million b/d in 2018. The U.S. oil-directed rig count increased by 41 rigs in January, the eighth consecutive monthly increase and the first year-over-year increase since December 2014, according to Baker Hughes.

Prices for WTI Midland, a crude oil produced in West Texas, strengthened compared with similar light sweet crude oils at different delivery hubs, as represented by a decline in the WTI Cushing-WTI Midland differential and Light Louisiana Sweet (LLS)-WTI Midland differential (Figure 3). Recent movements in U.S. crude oil price differentials could be reflecting infrastructure developments and changes in oil market trade flows. Trade press reports that since a new export terminal opened at Ingleside, Texas (at the Port of Corpus Christi in the third quarter of 2016), producers in the Midland area of Texas have been able to ship crude oil directly to the export terminal via the Cactus pipeline, bypassing the Cushing storage and pipeline hub. Four-week average U.S. exports of crude oil increased 0.2 million b/d since the beginning of December, with trade press reporting an increase in exports to Europe and Latin America. Increased flexibility in exporting directly out of the Port of Corpus Christi could keep the low price difference of WTI Cushing compared with WTI Midland unless barrels are needed for Midcontinent refineries. WTI Midland prices reached parity with LLS crude oil prices in December and January, which suggests that buyers are increasingly able to purchase WTI Midland for delivery out of the new export terminal directly.

Figure 3: Brent and WTI Net Money Manager Positions

Liquid fuels consumption and economic leading indicators: In the February STEO, global liquid fuels consumption is expected to grow by 1.6 million b/d in 2017 and by 1.5 million b/d in 2018. The projection for real oil-weighted world GDP growth is 2.7% in 2017 and 3.0% in 2018. Many economic and financial data series point to improved future economic growth for both developed and emerging market economies, which supports the oil consumption growth outlook.

The OECD provides monthly composite leading indicators for the economic growth of every member OECD country and several emerging market economies. Each composite leading indicator is composed of data series unique to each respective country, with an index of 100 representing that country's long-term economic growth. These indicators are constructed so that peaks and troughs in the series could signal a change in the country's business cycle six to nine months ahead of time.

The composite leading indicator for OECD countries as a group has been rising since June 2016 (Figure 4), implying that economic activity for those countries collectively could strengthen in the near term. The composite leading indicators for emerging markets, with the exception of India, have been rising since late 2015 and early 2016. The leading indicators for Brazil and Russia are above 100, potentially signaling that economic activity could be above their long-term average this year as their economies begin to recover from recessions.

Figure 4: Brent and WTI Net Money Manager Positions

Price Summary
  2015 2016 2017 2018
a West Texas Intermediate.
WTI Crude Oila
(dollars per barrel)
48.67 43.33 53.46 56.18
Brent Crude Oil
(dollars per barrel)
52.32 43.74 54.54 57.18
Global Petroleum and Other Liquids
  2015 2016 2017 2018
a Weighted by oil consumption.
Supply & Consumption (million barrels per day)
Non-OPEC Production 58.80 58.20 58.48 59.55
OECD Consumption 46.33 46.63 47.03 47.26
Non-OECD Consumption 48.73 49.83 51.06 52.29
Total World Consumption 95.06 96.47 98.09 99.55
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.6 2.3 2.7 3.0
Real U.S. Dollar Exchange Rateb 10.7 6.3 5.3 0.9