Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $66.30 per barrel (b) on March 7, 2019, an increase of $3.55/b from February 1, 2019. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, increased by $1.40/b during the same period, settling at $56.66/b on March 7 (Figure 1).

Price increases in February coincided with EIA’s estimate that global liquid fuels inventories fell by 1.4 million barrels per day (b/d), the largest inventory withdrawal for any month since June 2017. Declining estimated crude oil production for February in both the Organization of the Petroleum Exporting Countries (OPEC) and the United States contributed to the draws, with U.S. petroleum inventories declining by 17.9 million barrels during the week ending February 22, the largest one-week decline since 2011. Despite high price volatility during the past year, Brent crude oil prices as of the first week of March were at essentially the same levels as in March 2018.

Notwithstanding the strong draw in February, EIA forecasts that global liquid fuels inventories will rise by 0.2 million b/d in 2019 and by 0.4 million b/d in 2020. The March STEO’s expected inventory builds in both years are lower than the forecast in last month’s STEO. The lower forecast inventory builds reflect lower expected crude oil production in both OPEC and the United States. Saudi Arabia cut crude oil production by more than expected in February, with production averaging 10 million b/d, and EIA assumes that joint OPEC/non-OPEC crude oil production cuts will remain in place through the end of 2019.

In addition, the U.S. active oil rig count reached a 10-month low of 834 rigs as of March 8, suggesting the rate of U.S. crude oil production growth could slow. Even though U.S. crude oil production is estimated to have remained near 11.9 million b/d for the past four months, EIA still forecasts U.S. crude oil production to increase by 1.3 million b/d in 2019 and by 0.7 million b/d in 2020.

OPEC and U.S. production levels, as well as the pace of global oil demand growth, present considerable uncertainty to oil market balances and price expectations. Based on the current forecast, however, EIA expects global inventory builds and rising OPEC spare capacity will limit significant upward oil price pressures in 2019 and in 2020.

Crude oil price spreads: Crude oil prices in the Permian region have increased since the beginning of the year. Two recent pipeline capacity additions reduced some of the takeaway constraints that developed in the second half of 2018. The WTI Midland crude oil price spreads with WTI Cushing and Magellan East Houston crude oil began narrowing in late January and settled at 15 cents/b and -$7.00/b on March 7, respectively (Figure 2). The Sunrise Expansion project added an estimated 120,000 b/d by early 2019, increasing takeaway capacity to Cushing. In addition, the Seminole-Red natural gas liquids pipeline was repurposed to deliver crude oil from the Permian region to the U.S. Gulf Coast and began operating ahead of schedule, adding an estimated 200,000 b/d of takeaway capacity by April. Although EIA expects growing Permian production to face takeaway constraints again in the coming months, EIA expects that the recent capacity additions will prevent price spreads from widening back to the levels reached in the second and third quarters of 2018. EIA expects that new pipelines coming online in the third quarter of 2019 will alleviate the remaining takeaway constraints.

The recent changes in price spreads also reveal the takeaway constraints out of Cushing, particularly during refinery maintenance season, a phenomenon which also occurred last October. Cushing stocks increased by 5 million barrels from the first week in February through March 1. In addition, Midwest gross refinery inputs fell to 3.5 million b/d for the four-week average ending March 1, which is lower than the five-year (2014–18) average level for those four weeks. The Brent–WTI Cushing spot price spread averaged $8.97/b in February, the second widest level for any month in the past five years. Although EIA expects the spread to narrow from current levels by the end of the year, EIA is revising its forecast for the Brent–WTI spread to remain at $9/b until June 2019, compared with $8/b in the February STEO.

Correlations: Typically, a strong positive correlation between equity prices and crude oil prices indicates demand-side factors, such as global economic growth, are contributing to crude oil price formation. Front-month Brent crude oil’s rolling 60-day correlation between the daily percentage changes of the S&P 500 index reached the highest levels since 2016 in early March (Figure 3). Correlations increased as prices for both equities and crude oil declined in the fourth quarter of 2018 with the release of some economic data points that came in lower than market expectations and tightening global monetary policy. However, recently, the improvement in some economic data may have contributed to upward price pressure for both equities and crude oil. The delay of tariffs between the United States and China, as well as the potential for a trade agreement between the two countries, could contribute to increased economic activity. Furthermore, recent global central bank guidance has indicated looser monetary policy in 2019 compared with guidance from the fourth-quarter 2018, which could allow for easier financial conditions.