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Short-Term Energy Outlook

Release Date: October 11, 2017  |  Next Release Date: November 7, 2017  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: The Brent crude oil front-month futures price increased by $4.25 per barrel (b) from September 1 to settle at $57.00/b on October 5, 2017. West Texas Intermediate (WTI) crude oil prices increased by $3.50/b during the same period, settling at $50.79/b (Figure 1). September Brent and WTI monthly average spot prices were $4.45/b and $1.71/b higher, respectively, than the August average spot prices.

Figure 1: Crude oil front month futures prices

The oil industry on the U.S. Gulf Coast began to resume normal operations throughout September after refineries and ports were shut down in late August because of Hurricane Harvey. U.S. Gulf Coast refinery utilization reached 86% for the week ending September 29, 10 percentage points below the week ending August 25, but only 5 percentage points below five-year average utilization for this time of year. Hurricane Irma, which made landfall in Florida on September 10, did not significantly affect U.S. crude oil supply or refining operations, but because of increased evacuation-related demand, tanker truck limitations, and power outages, many retail gasoline stations were out of service.

Higher crude oil prices over the past month reflect declining global oil inventories, increasing expectations for global economic and oil demand growth, and geopolitical events. EIA estimates that global oil inventories fell by 0.5 million barrels per day (b/d) in the third quarter of 2017. This draw marked the third consecutive quarterly draw, the longest such stretch since 2013-14.

Falling production from the Organization of the Petroleum Exporting Countries (OPEC) has contributed to global oil inventory withdrawals in 2017. EIA estimates that OPEC crude oil production averaged 32.9 million b/d in the third quarter of 2017, down from an average of 33.4 million b/d in November 2016 (before the group's voluntary production reductions). Libya, which is exempt from any production reductions, increased crude oil output in September, but a shutdown at one of its largest oil fields at the beginning of October presents uncertainty about the country's longer-term production potential. Total OPEC crude oil production in the fourth quarter of 2017 is forecast to decline from the third quarter, averaging 32.7 million b/d.

Although unplanned OPEC supply outages remain low, crude oil prices may have increased based on a referendum in the Kurdistan Region of Iraq on September 25, where the majority of people voted for independence. Turkey sided with Iraq's central government in opposing the vote. Turkey threatened to disrupt pipeline flows of approximately 0.5 million b/d of crude oil produced in the Kurdistan Region that is exported from the Turkish port of Ceyhan.

Economic conditions appear to be strengthening globally, which could contribute to oil demand growth in 2018. Manufacturing Purchasing Managers' Indexes (PMI) in many countries continued to indicate expanding activity in September. The PMI is a leading indicator of economic activity, surveying purchasing managers in manufacturing businesses on expectations of output, new orders, employment, and other measures. An index level above 50 indicates expansion in manufacturing activity. Among these 27 countries' manufacturing PMI surveys in September—10 of which are from outside the Organization for Economic Cooperation and Development (OECD)—25 countries had readings greater than 50, with the median at 53 (Figure 2). A total of 9 countries had survey readings greater than or equal to 55, and 2 had readings at 60 or higher.

Continued expansion of business activity in these countries could raise expectations for global gross domestic product (GDP) growth in the fourth quarter of 2017 and indicate higher consumption of crude oil and petroleum products. Expanding manufacturing and economic activity is a particularly important source of growth in distillate fuel consumption. EIA forecasts global liquid fuels consumption to grow by 1.6 million b/d in 2018 and to be more than 100 million b/d consistently by the middle of 2018.

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

Increases in front-month prices compared with longer-dated futures contracts typically reflect an increased need for oil inventories to meet demand. The Brent 1st–13th month futures price spread reached the highest level in more than three years in late September, closing at $1.63/b on October 5 (Figure 3). OECD total liquid fuel inventories declined from 2.997 billion barrels (8% higher than the five-year average) at the end of the second quarter of 2017 to 2.982 billion barrels (6% above the five-year average) at the end of the third quarter of 2017. Weekly crude oil inventories at the Amsterdam, Rotterdam, and Antwerp (ARA) hub in Europe fell 3.8 million barrels from the end of August to the end of September. In addition, total U.S. inventories of crude oil and petroleum products declined by 44.4 million barrels from the last week of June to the last week of September. During the past five years, inventories have typically increased by 10.9 million barrels over that period. Outside the OECD, trade press reports that crude oil inventories at Saldanha Bay, South Africa, were sold in recent weeks. The Saldanha Bay crude oil storage center can hold approximately 45 million barrels and is a key location for crude oil trade to East Asia and the Atlantic Basin.

Figure 3: Light crude oil prices minus Urals spot price

The shape of the Brent futures curve remains steeper than that of the WTI futures curve, as the WTI 1st–13th spread settled at -66 cents/b on October 5. The difference stems partly from the disruptive effects of Hurricane Harvey on the U.S. refining system, which contributed to a build in crude oil inventories in Cushing, Oklahoma, the physical delivery point for the WTI futures contract. However, part of the price difference between Brent and WTI partly reflects the expectations of increasing U.S. liquid fuels production in 2018.

The Brent-WTI spot price spread averaged $6.40/b in September. Although EIA expects the hurricane-related increase in the spread to subside, EIA forecasts the Brent-WTI spot price spread to average $3.50/b in 2018, which is higher than the first half of 2017 average of $1.69/b. The wider spread allows for increasing crude oil exports to more varied and distant locations amid rising U.S. production. Asia, in particular, has become a growing destination for U.S. crude oil exports.

Brent and WTI open interest: Trading activity in Brent and WTI futures contracts as measured by open interest, or the number of futures contracts opened but not settled, reached new highs in 2017. Brent average daily open interest reached an all-time high of 2.5 million contracts in May, whereas WTI reached an all-time high of 2.4 million contracts in September (Figure 4). All classifications of traders, as defined by the U.S. Commodity Futures Trading Commission, increased their open interest during the past several years.

WTI open interest overtook Brent in September. A contributing factor could be increased hedging among U.S. crude oil producers. Open interest in short positions (which locks in prices for a producer's future production) among swap dealers (entities that hedge futures on behalf of oil companies) neared its all-time high for the week ending September 26 at 0.53 million contracts.

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 49.69 50.57
Brent Crude Oil
(dollars per barrel)
52.32 43.74 52.43 54.07
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 58.63 60.12
OECD Consumption 46.44 46.88 47.24 47.62
Non-OECD Consumption 48.99 50.08 51.07 52.27
Total World Consumption 95.43 96.96 98.31 99.89
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.7 2.4 2.8 3.1
Real U.S. Dollar Exchange Rateb 10.7 6.3 1.9 1.5