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Short-Term Energy Outlook

Release Date: March 6, 2018  |  Next Release Date: April 10, 2018  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: The front-month futures price for North Sea Brent crude oil settled at $63.83 per barrel (b) on March 1, a decrease of $5.82/b since February 1. Front-month futures prices for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, decreased $4.81/b over the same period, settling at $60.99/b on March 1 (Figure 1). February Brent and WTI monthly average spot prices were $3.76/b and $1.49/b lower than the January average spot prices, respectively.

Figure 1: Crude oil front month futures prices

Crude oil prices declined in February after seven consecutive months of increases. Despite the recent price declines, most fundamental crude oil supply and demand indicators suggest global petroleum inventories are declining. EIA estimates that total commercial petroleum inventories in countries in the Organization for Economic Cooperation and Development (OECD) declined to 2.83 billion barrels in February 2018, a decrease of 211 million barrels since February 2017 and the largest annual decrease in inventories since 2003. Inventories are 40 million barrels (1.4%) higher than the five-year average level for February, the narrowest difference to five-year average levels since November 2014, suggesting an increasingly balanced market.

A significant increase in price volatility after prices started declining in equity and bond markets likely affected crude oil prices as well. The rolling 60-day correlation between daily price changes of WTI crude oil and the S&P 500 index recently increased from near zero at the beginning of January to over 0.3 in late February. The VIX, a measure of implied volatility (the market’s expected range of near-term price changes) on S&P 500 index options, closed above the OVX, a measure of implied volatility on crude oil options prices, for four consecutive days in early February. Not only was this the first time since 2008 that the VIX closed above the OVX, but the VIX has only closed above the OVX four other times since the inception of the OVX in 2007 (Figure 2).

Under typical trading conditions, a single commodity would be expected to have higher volatility than an index whose underlying value consists of a basket of 500 large capitalization stocks, representing a variety of U.S. companies. Although the direct causes of increased equity market volatility remain uncertain, increased trading volume of inverse VIX exchange-traded funds (ETF) and exchange-traded notes, as well as direct selling of VIX futures contracts, could have contributed to the increase. A significant increase in volatility may have prompted the inverse VIX ETF to close positions. Several inverse VIX products have ceased trading, having lost more than 80% of their value in one day on the some of the highest trading volume in the many ETFs’ history. Both the VIX and the OVX have declined since their early February increases, but remain at higher levels than at the beginning of 2018.

Figure 2: Equity and crude oil volatility indicies

The Brent-WTI price spread narrowed to its lowest level in more than six months, closing at $3.03/b on March 1 (Figure 3). Several factors specific to the crude oil market in the U.S. midcontinent could be contributing to a narrowing spread. Crude oil stocks in Cushing, Oklahoma, the delivery point for the U.S. light sweet crude oil futures contract, continued to decrease in February. Stocks declined to less than 29 million barrels the week ending February 23, 2018, the lowest level in more than three years, and they are being drawn down at the largest rolling 13-week rate since EIA began publishing Cushing stock levels in 2004. Recent trade press reports that the Keystone pipeline, which flows directly into Cushing, is still operating below nameplate capacity. Crude oil inputs to refineries in Petroleum Administration for Defense District (PADD) 2 averaged 3.7 million barrels per day (b/d) for the four weeks ending February 23, 2018, according to EIA’s Weekly Petroleum Supply Report, which would be an all-time high for the month of February.

Figure 3: Brent-WTI futures price spread

In addition to high refinery demand in PADD 2, higher export demand could be contributing to near-term price support for U.S. light sweet crude oil. Weekly U.S. crude oil exports were more than 2 million b/d for the week ending February 16, 2018, the second highest level since EIA began publishing weekly export data from U.S. Customs and Border Protection in 2016 (Figure 4). The Louisiana Offshore Oil Port (LOOP) is the largest crude oil import terminal in the United States, but recently the port began to test loading crude oil for export. LOOP loaded a Very Large Crude Carrier (VLCC) on February 18February 18, which can hold approximately 2 million barrels of crude oil. Further infrastructure developments along the U.S. Gulf Coast (PADD 3) could allow more U.S. crude oil exports.

Figure 4: Weekly U.S. exports of crude oil

Price Summary
aWest Texas Intermediate.
WTI Crude Oila
(dollars per barrel)
Brent Crude Oil
(dollars per barrel)
Global Petroleum and Other Liquids
aWeighted by oil consumption.
bForeign currency per U.S. dollar.
Supply & Consumption (million barrels per day)
Non-OPEC Production 57.9758.6761.1862.37
OECD Consumption 46.7447.2047.5947.99
Non-OECD Consumption 50.1251.3052.6153.94
Total World Consumption 96.8798.50100.20101.92
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta
Real U.S. Dollar Exchange Rateb 2.3-1.2-4.0-0.9