‹ Analysis & Projections

Short-Term Energy Outlook

Release Date: November 7, 2017  |  Next Release Date: December 12, 2017  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: The front-month futures price for North Sea Brent crude oil settled at $60.62 per barrel (b) on November 2, an increase of $4.50/b from October 2. Front-month futures prices for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, increased by $3.96/b over the same period, settling at $54.54/b on November 2 (Figure 1). October Brent and WTI monthly average spot prices were $1.36/b and $1.76/b higher, respectively, than the September average spot prices.

Figure 1: Crude oil front month futures prices

The Brent crude oil price closed at its highest level in more than two years in late October, settling at more than $60/b for the first time since July 2015. Global economic data remain robust and support rising oil demand. Global refinery outages were below their five-year average in October as refiners likely deferred maintenance to take advantage of high crack spreads (the difference between petroleum product prices and crude oil prices), which increased near-term demand for crude oil. In addition, some near-term supply disruptions temporarily removed crude oil from the market. Market participants could also be expecting an extension to the crude oil supply reduction agreement at the next meeting of the Organization of the Petroleum Exporting Countries (OPEC) on November 30, as leaders in Saudi Arabia and Russia made public announcements supporting a nine-month extension to the end of 2018.

Oil deliveries from the Kurdistan Region of Iraq and Kirkuk area of Iraq to the Turkish port of Ceyhan declined to less than 0.3 million barrels per day (b/d) in October, as the Iraqi central government took control of the Kirkuk oil fields following the Kurdistan Regional Government's independence vote in September. Previously, exports from the Kurdistan Region to Ceyhan had been about 0.5 million b/d. Although a significant supply disruption could put upward pressure on crude oil prices, Iraq made up for the shortfall by increasing exports from its southern Basra port, because infrastructure expansions to increase export capacity were completed recently.

Hurricane Nate disrupted crude oil production in the Federal Offshore Gulf of Mexico briefly, but operations and production resumed by the week ending October 20. The disruptions in Iraq and the United States slightly reduced EIA's estimates for liquid fuels supply in October, but total global unplanned supply disruptions remain low by historical standards.

Despite the recent increase in Brent crude oil prices to more than $60/b, EIA forecasts Brent prices to ease somewhat in the coming months and to average $56/b in 2018. EIA expects global oil supply growth to outpace global oil demand growth in 2018, contributing to global oil inventories rising by a forecast 0.3 million b/d in 2018, compared with an estimated 0.2 million b/d draw in 2017. However, global economic developments, geopolitical events, and crude oil production dynamics in the United States and in other major producers in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast.

WTI crude oil price differentials with Brent remain near their widest levels of the year. Based on spot prices, the WTI Cushing-Brent spread settled at -$6.09/b on November 2, and the WTI Midland-Brent spread settled at -$5.84/b. In comparison, the Light Louisiana Sweet (LLS)-Brent spread settled at -34 cents/b (Figure 2) .

Figure 2: Crude oil front-month - 3rd month futures price spread

The WTI Cushing-Brent price spread likely reflects the transportation costs associated with bringing light sweet crude oil from Cushing, Oklahoma, to the U.S. Gulf Coast and the costs to export the crude oil to the marginal market. Because LLS is produced in the Gulf of Mexico, it competes with global waterborne crude oils without the same transportation costs faced by inland crude oil and, as a result, trades closer to Brent prices.

The widening WTI Cushing-Brent spread in recent months could reflect increasing constraints on the capacity to transport additional crude oil from Cushing to the U.S. Gulf Coast. Increasingly constrained transportation and related high levels of crude oil stocks in Petroleum Administration for Defense District (PADD) 2 are likely affecting WTI prices-both in Cushing, Oklahoma and in Midland, Texas compared with waterborne crude oils like Brent and LLS.

Total commercial U.S. crude oil inventories declined by 27 million barrels from the last week of July to the last week in October, according to EIA's Weekly Petroleum Status Report (WPSR), whereas inventories in Cushing, Oklahoma, increased by 8 million barrels.

Pipeline expansions in recent years have increased crude oil flows from rising Canadian and Bakken output into Cushing, Oklahoma, contributing to relatively high stock levels in the region. In addition, increased output from the Permian basin in West Texas and New Mexico is flowing into Cushing, Oklahoma. At the same time, new pipeline connectivity has also allowed more Permian barrels to flow directly to the U.S. Gulf Coast.

Until new pipeline capacity is brought online in the first quarter of 2018, EIA expects Brent crude oil prices to remain $6/b higher than WTI prices. EIA expects this spread to narrow to $4/b during the second half of 2018. In the Texas region of the Permian Basin the 0.4 million b/d Midland to Sealy pipeline is scheduled to come online by the second quarter of 2018, which will increase Permian crude oil flows to the U.S. Gulf Coast. The 0.2 million b/d Diamond pipeline from Cushing, Oklahoma, to Memphis, Tennessee, is scheduled to be complete by the end of 2017 and could begin to reduce some of the stocks in Cushing, Oklahoma.

Implied volatility: Crude oil implied volatility reached some of the lowest levels of the year in October. The WTI front-month average volatility was the lowest since September 2014 and settled at 21.2% on November 2. Although Brent front-month average volatility increased compared with September levels, settling at 20.7% on November 2 (Figure 3), it has remained lower than levels during much of the past two years. Despite considerable uncertainty ahead of the November 30 OPEC meeting, market participants expect less price volatility than they did ahead of the previous OPEC meeting in May 2017.

Figure 3: Light crude oil prices minus Urals spot price

High-Yield bond issuance: U.S. exploration and production companies issued $3.6 billion in high-yield bonds in October, the largest amount issued during any month in 2017 (Figure 4). Companies with a rating below investment grade by one of the corporate rating agencies (S&P, Moody's, and Fitch) have already issued more bonds through October 2017 than during all of 2016, based on Bloomberg data. Many U.S. oil companies have been expanding drilling programs and development expenditures this year, and borrowing costs remain at levels similar to those when crude oil prices were more than $100/b. Access to capital is necessary for many companies to increase investment spending, and it supports growth in U.S. crude oil production.

Figure 4: OECD composite leading indicators

Price Summary
  2015 2016 2017 2018
a West Texas Intermediate.
WTI Crude Oila
(dollars per barrel)
48.67 43.33 49.70 51.04
Brent Crude Oil
(dollars per barrel)
52.32 43.74 53.01 55.61
Global Petroleum and Other Liquids
  2015 2016 2017 2018
a Weighted by oil consumption.
Supply & Consumption (million barrels per day)
Non-OPEC Production 58.48 57.99 58.69 60.21
OECD Consumption 46.27 46.73 47.04 47.44
Non-OECD Consumption 48.99 50.17 51.16 52.43
Total World Consumption 95.26 96.90 98.21 99.87
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.7 2.4 2.9 3.0
Real U.S. Dollar Exchange Rateb 10.7 6.3 1.7 1.1