Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $81.95 per barrel (b) on October 7, 2021, up $10.36/b from $71.59/b on September 1. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, increased by $9.71/b during the same period, settling at $78.30/b on October 7 (Figure 1).

WTI crude oil prices reached nearly seven-year highs on October 5 after gradually increasing throughout September and the first few trading days of October. Several developments during the past month are contributing to higher oil prices. First, U.S. crude oil inventories have decreased because of Hurricane Ida’s impact on crude oil production in the Gulf of Mexico. Second, OPEC+ members decided to follow their scheduled crude oil production increase of 400,000 barrels per day (b/d) in November rather than increase production by more, like some market participants expected based on recent price movements. Third, trade press reports increased purchases of oil and petroleum products as a result of high natural gas prices because electric power generators in parts of Asia and Europe may implement natural gas-to-oil fuel switching to decrease fuel costs. Lastly, crude oil prices continue to rise due to steady and sizable global oil inventory draws. We estimate that global inventories fell by 1.9 million b/d in third-quarter 2021 (3Q21), marking the fifth consecutive quarter of draws; quarterly draws averaged 2.2 million b/d over those five quarters.

We estimate U.S. crude oil inventories ended September at 420.9 million barrels, the lowest level since September 2018 (Figure 2). U.S. crude oil stocks have decreased each of the past six months, decreasing by 81.0 million barrels (16%) since March, the largest six-month withdrawal on record in our crude oil data for all inventories outside of the Strategic Petroleum Reserve, which go back to 1973. Furthermore, according to weekly data in our Weekly Petroleum Status Report, crude oil stocks on September 17 were 37.0 million barrels (8.2%) below the five-year average for that time of year, the largest percentage below the five-year average since July 4, 2008. Like domestic stocks, we estimate OECD commercial petroleum stocks at the end of September to be at their lowest levels in more than three years.

A major factor contributing to the stock draws has been low crude oil production, which has been outpaced by increases in demand. U.S. oil production averaged 11.0 million b/d from January through August (compared with 12.0 million b/d in the same months in 2019) and decreased to 10.6 million b/d in September because of lower U.S. offshore oil production in the Gulf of Mexico after Hurricane Ida. According to the Bureau of Safety and Environmental Enforcement (BSEE), from August 28 through September 6, more than 80% of oil production in the Gulf of Mexico was shut in, and more than 15% of Gulf of Mexico oil remained shut in through September 23, when BSEE issued its final outage report for Hurricane Ida. In total, disruptions in the Gulf of Mexico reduced crude oil production by about 30 million barrels since Hurricane Ida formed in late August.

Global liquid fuels production has also risen more slowly than global demand this year. Production increased by 2.7 million b/d (3%) from January to September, whereas global consumption increased by 6.3 million b/d (7%) during the same period. Despite relatively low global production and rising crude oil prices, OPEC+ members reaffirmed a previously agreed on production increase of 400,000 b/d in November, as opposed to a higher production increase for the month. Following this announcement on October 4, the price of Brent crude oil settled at $81.26, after beginning the day at $79.28.

In this forecast, we now expect that global oil inventories in 4Q21 and 1Q22 will fall at a faster rate than we had previously expected, which largely reflects lower global oil supply during this period across a range of producers. We have also raised our expectations for global oil demand during winter 2021–22., In the October STEO, we have increased our forecast for Brent crude oil prices. We now expect falling global oil inventories will keep Brent prices near $80/b this winter, averaging $81/b in 4Q21 and $78/b in 1Q21, both of which are $10/b higher than forecast last month.

Market-derived probabilities: In our most recent forecast, we expect WTI prices to average $78/b in 4Q21. The upward price pressure and market uncertainties are apparent in market-derived price probabilities that are based on futures and options prices. The market-derived probability of the December WTI futures contract expiring higher than $70/b was 77% on October 7, and the probability of the contract expiring higher than $80/b was 37% (Figure 3). On September 1, the market-derived probability of the December WTI futures contract expiring higher than $70/b had been 39%, and the probability of the contract expiring higher than $80/b was 12%. The increase in market-derived price expectations for the December WTI contract from September 1 to October 7 conveys the market’s reaction to factors such as decreasing stocks and the potential for natural gas-to-oil switching. The December WTI contract has not expired at more than $70/b since 2014 and has not expired at more than $80/b since 2013.

Commodity Prices: In 2021, energy commodity prices have increased more than other commodities and asset classes, especially since May, primarily as a result of production and supply developments specific to energy markets. The S&P GSCI (formerly the Goldman Sachs Commodity Index) is an index comprising 24 individual weighted commodity price contracts organized into 5 subindexes, and we use it for comparing energy commodities to other categories of commodities.

As of October 7, the non-energy index (an index consisting of agricultural, livestock, precious metal, and industrial metal commodities) was up 14% from the beginning of 2021 but down 5% from its peak on May 7. Energy commodities, on the other hand, have increased 27% since May 7 and are up 72% from January 1. The S&P 500, which is up by 19% from January 1, has also increased since May 7, but only by 4% (Figure 4).

Whereas general economic growth likely explained a portion of the increase in energy prices from January 1 through May 7, the growth in energy commodities since then has mostly been a result of factors specific to petroleum markets, such as production increases lagging demand increases. Brent and WTI make up 70% of the energy sub-index’s weight. Thus, the price increases from around $50/b for Brent and WTI at the beginning of the year to around $80/b in early October explains a significant portion of the increase in the energy sub-index. Higher prices for petroleum products, which make up 25% of the index, and for Henry Hub natural gas, which makes up the remaining 5% of the index, have also contributed to the rest of the growth in the energy sub-index.