WTI Crude Oil Price: Potential for Volatility Around Base Case

Sources: History: EIA; Projections: Short-Term Energy Outlook, March 2001.

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• Spot WTI crude oil prices broke $36 per barrel in November as anticipated boosts to world supply from OPEC and other sources did not show up in actual stocks data.

• The decline in prices at the end of 2000 seems to be more the result of an unraveling of speculative pressures than a change in underlying fundamentals.
  • Prices had been running higher than supply/demand fundamentals would have indicated throughout the fall months as a result of rising Mideast tensions, concern over the adequacy of distillate supplies, and expectations of Iraqi supply interruptions.
  • But Mideast tensions seemed to ease in December and the market appeared to perceive a quick return of Iraqi crude oil supplies at full capacity. Pledges by Saudi Arabia/OPEC to offset a longer term Iraqi disruption added to a market sense of oversupply.
  • Relatively mild weather in Europe allowed distillate stocks to normalize there and has kept crude demand relatively stable.
  • All these factors seemed to refocus speculators on the downside potential for price, at least through December.

• Although recent daily prices have occasionally dropped below our forecast, EIA expects prices to stay relatively high for the next several years as demand keeps pace with production.

• EIA does not forecast volatility. This relatively flat forecast could be correct on average, with wide swings around the base line, as illustrated with the red bands. The fundamentals behind our forecast see inventories remaining relatively low, keeping WTI prices on average close to $30.