‹ Analysis & Projections

Short-Term Energy and SUmmer Fuels Outlook

Release Date: April 11, 2017  |  Next Release Date: May 9, 2017  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: After three months of trading in a narrow range, crude oil prices declined in March. Between March 1 and April 6, Brent crude oil front-month futures prices declined by $1.47 per barrel (b) to settle at $54.89/b, and West Texas Intermediate (WTI) front-month futures prices declined by $2.13/b to settle at $51.70/b (Figure 1). Brent and WTI average spot prices in March were $3.28/b and $4.14/b lower, respectively, than the February averages.

Figure 1: Historical crude oil front month futures prices

In early March, crude oil prices declined as U.S. crude oil inventories built to a multi-decade high and as U.S. crude oil production rose. The price decline occurred despite the voluntary crude oil production cuts in the first quarter of 2017 among the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers.

Unplanned supply outages in Libya and market perceptions of an increased likelihood of an extension of the voluntary production cuts may have contributed to price increases at the end of March. On March 26, the Joint OPEC/Non-OPEC Ministerial Monitoring Committee (JMMC) met and reported that there was a high degree of compliance among the members to the agreed-upon crude oil production cuts. Further, the United Arab Emirates announced they would increase compliance with their required cuts under the current agreement, and Russia reduced crude oil production in March to bring their levels closer to their required amount. Pending an official announcement regarding the extension of the crude oil production agreement and future assessments of compliance, EIA currently assumes that OPEC crude oil production volumes will approach pre-agreement levels during the second half of 2017.

EIA expects world crude oil and liquid fuels supply to grow by 1.1 million barrels per day (b/d) in 2017 and by 1.9 million b/d in 2018. Compared with the previous forecast, these growth estimates are higher by about by 0.1 million b/d and 0.2 million b/d, respectively, because of higher expected U.S. and Brazilian crude oil production growth. Expected world liquid fuels consumption growth is mostly unchanged from the previous forecast at 1.5 million b/d in 2017 and 1.6 million b/d in 2018. EIA expects the market to be relatively balanced in 2017 and forecasts the Brent crude oil spot price to average $54/b in 2017 and $57/b in 2018, mostly unchanged from the March STEO.

Reductions in international crude oil supply and rising U.S. crude oil production have put upward price pressure on the price premium of Brent crude oil to WTI crude oil in recent months. The price premium of Brent to WTI in the futures market rose to an average of $2/b in December 2016 following the announcement of the OPEC/non-OPEC crude oil production cut agreement, after being closer to $1/b for much of 2016. From January to March, U.S. crude oil and liquid fuels production rose by 3%, while crude oil and liquid fuels production outside the United States fell by 1%. The Brent-WTI futures price spread rose 68 cents/b to $2.76/b from March 1 to April 6 (Figure 2), reaching a 16-month high on April 5. U.S. crude oil inventories reached their highest level in several decades on March 31.

U.S. crude oil production was an estimated 9.1 million b/d in March, the highest level in a year. Production is forecast to grow by an average of 0.3 million b/d in 2017 and by 0.7 million b/d 2018. The forecast growth for 2018 is about 0.2 million b/d more than forecast in the March STEO.

As a result of growing U.S. supply, which has lowered U.S. crude oil prices relative to international crude oil prices, more U.S. crude oil is being exported to balance the domestic light sweet crude oil market. Recent export data indicate that the marginal destination for U.S. crude oil is Asia. With U.S. supply continuing to grow in the forecast, EIA expects the marginal destination for U.S. crude oil will continue to be the Asian market. Based on this assumption and associated transportation costs, EIA expects the spot price spread between Brent and WTI to be $2/b in both 2017 and 2018.

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

Recent capital expenditure activity by oil companies supports EIA's expectations of higher U.S. production. Capital expenditures for 44 U.S. onshore-focused oil production companies increased $4.9 billion between the fourth quarter of 2015 and the fourth quarter of 2016 based on their public quarterly financial statements (Figure 3). This was a 72% increase in investment spending, the largest year-over-year increase for any quarter by these 44 companies since at least the first quarter of 2012. Oil prices in the $45/b to $50/b range are contributing to an increase in upstream earnings for U.S. producers, prompting some companies to increase their investment budgets. Company announcements and increases in the number of active oil rigs suggest U.S. oil production companies continued investment growth in the first quarter of 2017.

Figure 3: Brent and WTI Net Money Manager Positions

Expectations for global growth in liquid fuels consumption in 2017 are roughly the same as in the March STEO. India's oil consumption in 2017 was revised down slightly because of the effects of India's demonetization (removal of currency from circulation) on its liquid fuels consumption, but increases in forecast oil consumption in other countries offset that decline. Generally, though, economic indicators from developing countries continue to imply stronger economic growth in 2017 than in recent years, which supports oil consumption growth. Since the start of this year, the MSCI Emerging Markets Currency Index has strengthened against the U.S. dollar (USD), despite an increase in the U.S. federal funds rate, which tends to strengthen the USD against other currencies. This trend suggests there is confidence in economic growth prospects of developing countries.

The MSCI Emerging Markets Currency Index tracks the strength of 23 emerging market currencies against the USD, with a rising value representing higher currency valuations against the USD. The MSCI Emerging Markets Currency Index approached a two-year high in March (Figure 4). Industrial production growth and export volume growth from developing countries accelerated in late 2016 and early 2017. In addition, higher commodity prices help to stabilize economies reliant on revenues from commodity exports. Stronger emerging market currencies can help make any increase in dollar-denominated crude oil prices less pronounced when converted to local currencies, which could limit negative impacts on oil consumption.

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 52.24 55.10
Brent Crude Oil
(dollars per barrel)
52.32 43.74 54.23 57.10
Global Petroleum and Other Liquids
  2015 2016 2017 2018
a Weighted by oil consumption.
Supply & Consumption (million barrels per day)
Non-OPEC Production 58.77 58.18 58.80 59.96
OECD Consumption 46.37 46.81 47.05 47.34
Non-OECD Consumption 48.73 49.86 51.11 52.45
Total World Consumption 95.10 96.67 98.16 99.79
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.7 2.3 2.7 3.0
Real U.S. Dollar Exchange Rateb 10.6 6.3 4.2 2.2