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Short-Term Energy Outlook

Release Date: February 6, 2018  |  Next Release Date: March 6, 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 $69.65 per barrel (b) on February 1, an increase of $3.08/b since January 2. Front-month futures prices for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, increased by $5.43/b over the same period, settling at $65.80/b on February 1 (Figure 1). January Brent and WTI monthly average spot prices were $4.71/b and $5.82/b higher, respectively, than the December average spot prices.

Figure 1: Crude oil front month futures prices

Brent crude oil futures prices closed above $70/b in mid-January for the first time since December 2014. Prices have increased over the past seven months as oil inventories, both in the United States and globally, have fallen steadily. In January, oil prices may have received some support following the Organization of the Petroleum Exporting Countries’ (OPEC) monitoring committee meeting, where some oil ministers suggested extending the production cut agreement in some form beyond the current expiration at the end of 2018. Rapid declines in Venezuelan crude oil output are also likely contributing to higher crude oil prices (Figure 2). Average U.S. imports of crude oil from Venezuela declined to 0.4 million b/d for the four weeks ending January 26, approaching the lowest level in decades. Trade press reports indicate that workers at the national oil company may be fleeing the country amid social unrest.

Figure 2: Venezuela crude oil production

Improved global economic growth expectations could also be supporting oil prices. The International Monetary Fund (IMF) recently forecast that world Gross Domestic Product (GDP) would grow by 3.9% in both 2018 and 2019, rates that are both 0.2 percentage points higher than its previous forecast. The IMF’s forecast of higher economic growth is consistent with the increases in leading economic indicators from the fourth quarter of 2017. Faster economic growth along with increases in world trade would be significant factors contributing to increases in crude oil and petroleum product consumption. EIA, based on forecasts from Oxford Economics, projects oil-weighted GDP growth will be 3.4% in 2018 and 3.2% in 2019. EIA expects global petroleum and other liquid fuels consumption to increase by 1.7 million b/d in both 2018 and 2019, up from an estimated 1.6 million b/d in 2017

Crude oil inventories in the United States declined by 6 million barrels during the first four weeks of 2018 in contrast to a five-year average build of 14 million barrels during those four weeks. High levels of refinery inputs of crude oil and crude oil exports contributed to the counter-seasonal draw in crude oil inventories. A cold snap in the U.S. Northeast in early January increased demand for home heating oil and likely contributed to higher refinery utilization than is typical for this time of year. Inputs of crude oil at U.S. refineries averaged 16.7 million b/d for the four weeks ending January 26, which, if confirmed in the Petroleum Supply Monthly, would be the highest level of refinery runs on record for the month of January. Also, U.S. crude oil exports averaged almost 1.4 million b/d for the four weeks ending January 26. In January 2017, U.S. crude oil exports averaged about 0.7 million b/d.

Similar to the draw in U.S. inventories, Organization for Economic Cooperation and Development (OECD) oil inventories also declined. EIA estimated OECD total petroleum inventories at 2.87 billion barrels; this was a decline of 183 million barrels from January 2017, the largest year-over-year decline since March 2003. However, a continued acceleration in non-OPEC supply growth is expected to contribute to global total petroleum and other liquids inventories rising by 0.2 million b/d in 2018. This expected modest increase in global oil inventories could put downward pressure on crude oil prices in the coming months. EIA forecasts Brent crude oil prices to decline to $60/b and WTI prices to decline to $56/b by the third quarter of 2018. EIA expects Brent prices to average $62/b for all of 2018 and WTI prices to average $58/b for the year.

The increase in crude oil prices in recent months has been mitigated for some countries whose currency exchange rate with the U.S. dollar has appreciated. Even though Brent crude oil prices increased by 40% from July 3, 2017, through February 1, 2018, in U.S. dollar terms, crude oil prices in Indian rupees, Thai baht, and euros have only increased by 38%, 29%, and 27%, respectively, during the same period (Figure 3). Rising economic growth in several European countries, as well as in non-OECD countries, has likely contributed to larger demand for their goods and services, which is reflected in currency appreciation compared with the U.S. dollar. For countries that import crude oil, a stronger currency can lessen the effect higher crude oil prices have on businesses and households.

Figure 3: Brent crude oil prices in various currencies

Even though crude oil prices reached the highest levels in more than three years, implied volatility for crude oil options approached the lowest levels in more than three years in January. Brent front-month implied volatility decreased 0.5 percentage points since the beginning of January to settle at 18.2% on February 1 (Figure 4), and monthly average implied volatility for January was the lowest since September 2014. Higher oil prices and lower implied volatility often occur in times of improving economic conditions.

Figure 4: Crude oil implied volatility

U.S. crude oil prices compared with Brent crude oil prices diverged from recent trends in January. The Light Louisiana Sweet (LLS) price difference with Brent crude oil fell from a slight premium to Brent to trade $1/b or more under Brent for 23 consecutive trading days in December and January, settling at -$1.07/b on February 1 (Figure 5). These 23 days were the longest stretch where LLS traded more than $1/b under Brent since February and March 2015. Although the Forties pipeline outage in mid-December contributed to rising Brent crude oil prices relative other light sweet crude oils, LLS differentials remained lower even after the pipeline was restored to full service. The discount could be attributable to the startup of the Diamond pipeline from Cushing, Oklahoma, to Memphis, Tennessee, which may be lowering the demand for U.S. Gulf Coast crude oil from refineries in the U.S. Midwest.

In contrast to LLS, WTI Cushing and WTI Midland crude oil prices increased relative to Brent in recent weeks. On February 1, the WTI Cushing and WTI Midland spreads with Brent settled at -$4.02/b and -$3.82/b, respectively, increases of $2.30/b and $1.70/b, respectively, since January 2. The Diamond pipeline startup and a likely reduction in Canadian crude oil deliveries to Cushing have contributed to a stock draw at the hub of 12 million barrels since the last week of December and likely increased WTI Cushing prices. Cold winter weather in west Texas led to some production shut-ins, increasing the WTI Midland-Brent crude oil price spread.

Figure 5: U.S. crude oil spot price differentials to Brent

Price Summary
  2016201720182019
aWest Texas Intermediate.
WTI Crude Oila
(dollars per barrel)
43.3350.7958.2857.51
Brent Crude Oil
(dollars per barrel)
43.7454.1562.3961.51
Global Petroleum and Other Liquids
  2016201720182019
aWeighted by oil consumption.
bForeign currency per U.S. dollar.
Supply & Consumption (million barrels per day)
Non-OPEC Production 57.9858.6961.0462.31
OECD Consumption 46.7447.1647.5948.02
Non-OECD Consumption 50.2051.3552.6353.93
Total World Consumption 96.9598.50100.23101.95
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.73.23.43.2
Real U.S. Dollar Exchange Rateb 2.0-0.5-2.7-1.2