Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $73.45 per barrel (b) on August 2, a decrease of $3.85/b from July 2. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, decreased by $4.98/b during the same period, settling at $68.96/b on August 2 (Figure 1).

Crude oil prices declined during July as several key oil producers increased production from the first half of 2018 and as a major supply disruption that many analysts expected to persist for several months was resolved quickly. Crude oil production from most members of the Organization of the Petroleum Exporting Countries (OPEC), Russia, and other exporting countries were estimated to be higher in July compared with the first-half average of 2018. In addition, a faster-than-expected return of Libyan crude oil production following last month’s unplanned supply outage could have put downward pressure on crude oil prices. Despite these developments, oil supply disruption risk increased during July because of Iranian threats to block the Strait of Hormuz and Saudi Arabia’s decision to halt oil shipments through the Bab al-Mandeb strait amid Yemeni Houthi rebel attacks. This increased disruption risk could be contributing to higher price volatility. Petroleum inventories remain slightly lower than five-year (2013–17) average levels, and any actual outages could cause crude oil prices to increase.

EIA forecasts that global petroleum inventories will decrease by an average of 0.1 million barrels per day (b/d) during the final five months of 2018 and then increase by an average of 0.3 million b/d in 2019. EIA forecasts Brent crude oil prices to average $73/b in the second half of 2018 and to decline to an average of $71/b in 2019. Although forecast inventory builds in 2019 put modest downward pressure on crude oil prices, competing upside and downside price risks will play a large role in price formation during the forecast period. Upside price risks stem largely from the possibility of supply outages amid a market where petroleum inventories are lower than average and OPEC spare crude oil production capacity is low. Downside price risks stem largely from the demand side, because economic growth could be lower than expected and put downward pressure on oil demand growth and prices.

Increased supply availability in the Atlantic basin market has likely affected the shape of the Brent futures curve. The Brent 1st–13th month spread settled at $1.73/b on August 2, a decrease of $3.00/b since July 2, to reach the lowest levels since September 2017 (Figure 2). Price spreads in the front part of the Brent futures curve, such as the 1st–2nd month spread, have exhibited contango (when near-term futures contracts are lower than longer-dated ones) in recent weeks, suggesting near-term demand for crude oil in global waterborne markets is less than available supply.

In contrast to the waterborne crude oil market, local conditions in the North American midcontinent contributed to steep backwardation (when near-term prices are higher than longer-dated ones) in the middle of July. Crude oil refinery inputs in the Midwest, Petroleum Administration for Defense District (PADD) 2, for example, reached a record high in early June and remained higher than the five-year range during July. Crude oil inventories in Cushing, Oklahoma, declined by more than 5 million barrels from June 29 through July 27. The WTI 1st–13th month spread approached a four-year high of $10.24/b on July 3, eventually declining to $5.32/b on August 2.

Historical volatility: Unlike implied volatility, which is a calculated measure from options prices, historical volatility measures the magnitude of daily changes in closing prices for a commodity during a given time in the past. Brent and WTI 30-day historical volatility increased from July 2 to August 2, settling at 32.8% and 34.8%, respectively (Figure 3). In the second half of 2017, historical volatility had declined as Brent crude oil prices steadily increased from the mid-$40/b level to more than $60/b by the end of the year. Compliance with OPEC’s voluntary supply reductions was high and generally in line with market expectations. Global demand growth was also stable for most regions of the world. In contrast, different factors in 2018 could be contributing to higher volatility. Price increases have been largely driven by unplanned supply disruptions and the potential for further supply losses later in 2018. In addition, concerns regarding the pace of future economic and oil consumption growth has likely contributed to demand-side uncertainty.

Energy and nonenergy commodities: Energy commodity prices have increased more than prices for nonenergy commodities this year. The Standard & Poor’s Goldman Sachs Commodity Index (S&P GSCI) energy component is heavily weighted toward crude oil and petroleum product prices. The S&P GSCI energy index is up 13% from the beginning of the year through August 2. During the same period the S&P GSCI grains index increased by 2%, the precious metals index declined by 10%, the softs index (which includes coffee, sugar, cocoa, and cotton) declined by 12%, and the industrial metals index declined by 14% (Figure 4). Oil supply disruptions and other petroleum-specific factors have likely contributed to the divergence in commodity price trends, with nonenergy commodity prices likely affected by tariffs.