Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $72.89 per barrel (b) on November 1, a decrease of $12.09/b from October 1. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, decreased by $11.61/b during the same period, settling at $63.69/b on November 1 (Figure 1).

Crude oil prices declined from the end of September to the end of October at a faster percentage rate than in any month since July 2016. Prices approached four-year highs in early October given the uncertainty about the amount of Iranian crude oil supply coming off the market and whether or not other producers could make up for the shortfall. However, increased indications of a global economic slowdown, as well as higher than expected global petroleum supply, contributed to rapid price declines later in the month.

Similar to early 2018, financial markets exhibited significant price volatility in October, contributing to selloffs in risk assets such as equities and commodities. Chinese economic growth was lower than expectations, and leading economic indicators for several countries have slowed, leading to market concerns over the pace of oil demand growth in the coming months. Continued depreciation in emerging market countries’ currencies—which makes the cost of crude oil imports more expensive—have also put downward pressure on the petroleum demand outlook. EIA is forecasting global petroleum and other liquid fuels consumption growth to average 1.4 million barrels per day (b/d) in 2019, which is 0.1 million b/d lower than forecast in the October STEO.

In addition to lower expectations for oil demand, higher oil supply estimates for October led to a large increase in global oil inventories. U.S. crude oil production increased at a faster rate than EIA previously anticipated. Crude oil production reached a new monthly record of 11.3 million b/d in August 2018, according to EIA’s latest Petroleum Supply Monthly, which was 0.3 million b/d higher than EIA expected in the October STEO. EIA now estimates that October U.S. crude oil production averaged 11.4 million b/d, compared with a forecast of 11.0 million b/d in the previous STEO. Crude oil production in Saudi Arabia and Russia reached some of the highest levels in history last month, helping to offset the months of supply losses from Iran and Venezuela. Venezuela’s crude oil production declines have slowed, and estimates of its crude oil exports have increased as its domestic refining system is operating at low utilization rates. Libyan production has resumed at a faster than expected rate because of improved security, and Libya has produced more than 1 million b/d for two consecutive months.

These supply developments have occurred when global refinery maintenance is typically at its highest for the year, contributing to an estimated global petroleum inventory build of 2.0 million b/d in October. The loosening global petroleum balance is also evident in both the Brent and WTI futures curves (Figure 2). The Brent and WTI 1st –13th futures price spread declined $3.60/b and $3.34/b, since October 1, respectively, settling at $1.13/b and -18 cents/b on November 1, respectively. Refinery utilization in the United States in October averaged 89% and commercial crude oil inventories increased by 22 million barrels from the end of September, the largest monthly increase since January 2017. The WTI futures curve is now exhibiting slight contango (when near-term futures prices are lower than longer-dated ones), and the entire curve has flattened considerably in recent months. The rapid flattening of the futures curve reflects the recent petroleum oversupply and lower demand.

Even though total U.S. refinery utilization was about average for this time of year, it was particularly low in the Midwest, Petroleum Administration for Defense District (PADD) 2. Four-week average refinery utilization for the week ending October 26 was 73%, which, if confirmed in EIA’s monthly data, would be the lowest utilization rate in the region for any month in EIA data back to 1985. Several large refineries planned month-long maintenance, which lowered the demand for and the prices of major crude oils that are typically processed in these refineries, including Western Canada Select (WCS) and Bakken. In October, the WCS–Brent spread traded at the lowest level since 2012, settling at -$53.88/b on November 1, and the Bakken–Brent spread hit its lowest level since 2013, settling at -$29.38/b on November 1 (Figure 3). Transportation constraints in Western Canada have resulted in more crude oil that must be delivered by rail, a more expensive option than pipelines, which further affects the crude oil discounts at a time of low refinery demand. In the Bakken region, available pipeline capacity could begin to face constraints as production in the region is estimated to approach 1.4 million b/d in November, an all-time high.

Correlations: Front-month Brent crude oil’s rolling 60-day correlation between both the daily percentage changes of the S&P 500 and Brent implied volatility increased in October. The correlation between Brent prices and Brent implied volatility tends to be negative and typically turns positive during periods of supply disruptions. Disruptions can occur quickly, and given the price sensitivity of oil to relatively small production outages, the resulting price movements tend to be volatile. The 60-day correlation represents about three months of trading activity, and the increased correlation between the two suggests that disruptions in supply from Venezuela and Iran have contributed to higher prices during the past quarter. Alternatively, Brent’s correlation with the S&P 500 index has been positively correlated for all of 2018 (Figure 4). Because underlying economic factors can drive both equity prices and crude oil demand, a positive correlation between these two assets suggests trends in economic growth are influencing both sets of prices. The recent volatility and price declines in equity markets could be contributing to some of the recent downward price pressure in crude oil markets.