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Short-Term Energy Outlook

Release Date: June 6, 2017  |  Next Release Date: July 11, 2017  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: Brent front-month crude oil prices declined by 89 cents per barrel (b) since May 1, settling at $50.63/b on June 1. The West Texas Intermediate (WTI) front-month crude oil price declined by 48 cents/b during the same period, settling at $48.36/b on June 1 (Figure 1). May Brent and WTI monthly average spot prices were $1.98/b and $2.54/b lower, respectively, than the April averages.

Figure 1: Historical crude oil front month futures prices

The Organization of the Petroleum Exporting Countries (OPEC) met on May 25 and announced an extension to voluntary production cuts that were originally set to end this month. The agreed-upon OPEC crude oil production target will remain at 32.5 million barrels per day (b/d) through the end of the first quarter of 2018. The non-OPEC countries that participated in the original six-month agreement met with OPEC ministers on the same day, with Russia being the only non-OPEC member that has formally agreed to remain a party to the extended cuts.

The expectations of oil market participants regarding the OPEC announcement were likely already settled in the weeks leading up to the meeting, as various OPEC ministers made public comments about extending the cuts. Although front-month crude oil prices declined by almost 5% on the day of the announcement, suggesting many participants were expecting a larger or longer cut, prices continued trading within a range established over the past 6-8 months around the $50/b level.

Concerns regarding the high level of global liquid fuels inventories relative to their five-year average level appeared to be a significant consideration in OPEC's decision to extend production cuts through March 2018. Commercial liquid fuels inventories in countries in the Organization of Economic Cooperation and Development (OECD) remain 257 million barrels higher than the five-year average, based on estimates in the current STEO, a 79-million-barrel reduction in the excess relative to the five-year average since January 2017 (Figure 2). However, voluntary production cuts from OPEC and non-OPEC countries are being partially offset by production growth in other countries, moderating the pace of global liquid fuels inventory draws in 2017.

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

EIA now forecasts OPEC crude oil production to average 32.3 million b/d in 2017 and 32.8 million b/d in 2018, about 0.2 million b/d and 0.4 million b/d, respectively, lower than previously forecast. With lower forecast OPEC production, EIA expects global oil inventories to decline by an average of almost 0.2 million b/d in 2017. The largest draws are expected during the third quarter of 2017, when global oil inventories are forecast to fall by an average of 0.4 million b/d.

If inventory draws of this magnitude materialize in the coming months and gross U.S. refinery runs remain above 17 million b/d, the possibility exists for some upward pressure on crude oil prices. EIA expects Brent spot prices to average $54/b in the third quarter of 2017, up from an average of $50/b in May. However, because U.S. tight oil production is relatively responsive to changes in oil price, and given an estimated six-month lag between a change in oil prices and realized production, higher crude oil prices in mid-2017 have the potential to raise U.S. production in 2018.

The expectation of supply growth in 2018 could contribute to oil price weakness in late 2017 and early 2018. The current forecast assumes OPEC's cuts are extended beyond next March, but that non-compliance, which begins to grow in late-2017, increases somewhat in the second half of 2018. Without a further extension of the OPEC agreement, EIA would expect larger inventory builds in 2018 than are included in this forecast.

EIA expects that supply growth from the United States, Brazil, and OPEC in 2018 will contribute to global oil inventories increasing by 0.1 million b/d in 2018, with the largest builds expected in the second quarter of 2018.

The possibility of a return to modest oversupply in global oil markets contributes to the Brent spot price forecast averaging $56/b in 2018, $1/b lower than in the May STEO. However, some upward price pressures could emerge in the second half of 2018 if EIA's forecast that global inventories will decline during that period materializes and if the market expects global oil inventory withdrawals into 2019.

EIA's OPEC production figures this month do not include Equatorial Guinea, which joined OPEC on May 25. EIA will include Equatorial Guinea in OPEC starting in the July 2017 STEO.

EIA forecasts U.S. crude oil production to average 9.3 million b/d in 2017 and 10.0 million b/d in 2018. Growth in U.S. production has been the largest contributor to the 0.8 million b/d of non-OPEC liquids supply growth from January through May 2017. Continued increases in drilling activity in U.S. shale basins, particularly a recent resumption in production growth from the Eagle Ford region in Texas, support production growth throughout the forecast.

After reaching a trough of 316 oil-directed active rigs in May 2016, the U.S. oil-directed rig count has more than doubled to 733 active rigs at the beginning of June. Rapid U.S. crude oil production growth could be a contributing factor in lowering WTI crude oil prices in Cushing, Oklahoma, the main trading hub and delivery point for WTI crude oil contracts, compared with Brent crude oil prices. The Brent premium to WTI closed at a 17-month high on May 19 at $2.94/b before falling to $2.03/b on June 1 (Figure 3). A wide Brent-WTI price spread can open opportunities for U.S. producers to export light sweet crude oil.

Figure 3: Brent and WTI Net Money Manager Positions

Recent activity in crude oil options trading suggests market participants may have been anticipating an increase in prices. The monthly average ratio of open interest in put option contracts compared with call option contracts for WTI crude oil fell to 0.61 in May, an all-time low (Figure 4). The put-call open interest ratio measures the total number of put contracts divided by the total number of call options outstanding. A put option gives the owner the right, but not the obligation, to sell a commodity for a given price by a certain date, whereas a call option gives the owner the right to buy a commodity at a given price by a certain date.

Monthly average open interest in call options increased by 464,000 contracts from January through May 2017, whereas open interest in put options increased by 78,000 contracts. Market participants may have been expecting the possibility of an increase in prices following the OPEC meeting, which could have driven the increase in call option trading.

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 50.78 53.61
Brent Crude Oil
(dollars per barrel)
52.32 43.74 52.69 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 58.77 58.17 59.08 60.30
OECD Consumption 46.41 46.85 47.14 47.50
Non-OECD Consumption 48.99 50.07 51.32 52.58
Total World Consumption 95.40 96.92 98.46 100.08
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.7 2.3 2.7 3.1
Real U.S. Dollar Exchange Rateb 10.7 6.3 2.9 2.3