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Petroleum & Other Liquids

This Week in Petroleum

Release date: December 12, 2018  |  Next release date: December 19, 2018

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Record-high U.S. crude oil production contributes to lower forecast prices

In the December 2018 update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) decreased its Brent spot price forecast to $71 per barrel (b) in 2018 and $61/b in 2019, down $2/b and $11/b, respectively, from last month. EIA expects that West Texas Intermediate (WTI) crude oil prices will average about $7/b lower than Brent prices next year. In a continuing price decline that began in mid-October, Brent spot prices fell from $71/b on November 1 to $58/b on November 30 (Figure 1), averaging $65/b for the month, down $16/b from October.

Figure 1. Monthly crude oil spot prices

WTI prices experienced three rare and large price declines (each between 6% and 8%) within the span of 10 days in the middle of November. By the end of the month, WTI prices were down by more than 33% from the four-year (2015–2018) highs set in early October. These price decreases are reflected in last month’s higher overall implied and realized market volatility.

The implied volatility of Brent and WTI options prices more than doubled during November, reflecting the market’s heightened uncertainty regarding future oil supply and demand. The realized volatility in crude oil prices last month, as measured by the monthly high-low trading range, was the largest since 2012 for Brent and since 2014 for WTI. The two crude oils traded in a $17.49/b and a $15.98/b range, respectively, during the month.

Several factors contributed to oil prices falling in November. Crude oil production from the world’s three largest producers—the United States, Russia, and Saudi Arabia—were at or near record levels. Implementation of Iranian sanctions began on November 5, but the United States granted waivers for some of Iran’s largest customers to continue importing Iranian crude oil for six months. In addition, concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth.

EIA forecasts that U.S. crude oil production will continue to increase to new record-high levels each month through May 2019, which will put further downward pressure on crude oil prices. U.S. crude oil production will remain relatively flat from May to September before increasing toward the end of the year. EIA expects that U.S. crude oil production will average 10.9 million barrels per day (b/d) in 2018 and 12.1 million b/d in 2019 (Figure 2).

Figure 2. U.S. crude oil production

On December 7, 2018, the Organization of the Petroleum Exporting Countries (OPEC) and several non-OPEC countries announced a production cut of 1.2 million b/d from their October production levels beginning in January 2019 and running for the following six months. The cuts were in response to increasing evidence that oil markets could become oversupplied in 2019. This expectation of potential oversupply was reflected in recent price declines. In the December STEO, EIA revised its 2019 price forecasts for Brent and WTI to $61/b and $54/b, respectively, which are both $11/b lower than forecast in the November STEO.

In last month’s STEO, EIA expected downward price pressures could materialize by the middle of 2019 to reduce global inventory builds. However, EIA now expects that the magnitude of the recent price declines, combined with the OPEC production cuts, will bring 2019 supply and demand numbers largely into balance, which EIA forecasts will keep prices near current levels.

EIA forecasts that total global liquid fuels inventories will increase by about 0.3 million b/d in 2018 and by 0.2 million b/d in 2019 (Figure 3). Global liquid fuels production is forecast to increase by 1.4 million b/d in 2019. EIA expects production growth in the United States to be partially offset by declining production elsewhere, notably in OPEC member countries, where liquid fuels production is forecast to decline by 0.9 million b/d in 2019. EIA forecasts that global liquid fuels consumption will increase by 1.5 million b/d in 2019, with growth coming largely from China, the United States, and India.

Figure 3. World liquid fuels production and consumption balance

Third-party ship tracking data suggest some of the inventories have recently built in floating storage. Floating storage is typically the most expensive way to store oil, occurring only in markets where producers and traders have more difficulty finding customers or accessing available onshore storage. The increase in floating storage may not be entirely because of the recent market weakness, however. Some of the increases are likely the effects of U.S. sanctions on Iran, affecting the country’s ability to sell crude oil openly. EIA estimates that Iranian crude oil exports have declined at a faster rate than Iran’s total crude oil production, suggesting that its oil is being stored. A similar phenomenon occurred during the 2012 sanctions. Although the crude oil that Iran puts into storage is reflected in EIA’s global balances shown in Figure 3, these volumes may not be easily accessible to the global oil markets.

U.S. average regular gasoline and diesel prices decrease

The U.S. average regular gasoline retail price decreased 3 cents from last week to $2.42 per gallon on December 10, 2018, down more than 6 cents per gallon from the same time last year. West Coast prices fell 7 cents to $3.17 per gallon, Rocky Mountain prices decreased more than 6 cents to $2.66 per gallon, Gulf Coast prices fell nearly 5 cents to $2.07 per gallon, and East Coast prices fell nearly 4 cents to $2.38 per gallon. Midwest prices increased more than 1 cent to $2.21 per gallon.

The U.S. average diesel fuel price decreased nearly 5 cents from last week to $3.16 per gallon on December 10, 2018, more than 25 cents per gallon higher than a year ago. Gulf Coast prices decreased nearly 6 cents to $2.93 per gallon, Rocky Mountain and Midwest prices each fell more than 5 cents to $3.24 per gallon and $3.07 per gallon, respectively, West Coast prices decreased more than 4 cents to $3.65 per gallon, and East Coast prices fell nearly 4 cents to $3.19 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 3.2 million barrels last week to 76.6 million barrels as of December 7, 2018, 4.7 million barrels (5.8%) lower than the five-year (2013-2017) average inventory level for this same time of year. Gulf Coast, Midwest, Rocky Mountain/West Coast, and East Coast inventories decreased by 1.6 million barrels, 0.8 million barrels, 0.5 million barrels, and 0.3 million barrels, respectively. Propylene non-fuel-use inventories represented 5.8% of total propane/propylene inventories.

Residential heating oil prices decrease slightly, propane prices increase slightly

As of December 10, 2018, residential heating oil prices averaged nearly $3.20 per gallon, down less than 1 cent per gallon from last week’s price but almost 32 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price for this week averaged nearly $2.00 per gallon, almost 3 cents per gallon more than last week but nearly 3 cents per gallon lower than a year ago.

Residential propane prices averaged $2.44 per gallon, nearly 1 cent per gallon higher than last week but 4 cents per gallon lower than a year ago. Wholesale propane prices averaged $0.91 per gallon, 7 cents per gallon more than last week but 19 cents per gallon lower than a year ago.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: crude oil , inventories/stocks , prices , production/supply , STEO (Short-Term Energy Outlook)

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  12/10/18 Week Year
Gasoline 2.421 -0.030 -0.064
Diesel 3.161 -0.046 0.251
Heating Oil 3.198 -0.005 0.318
Propane 2.440 0.009 -0.042

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  12/07/18 Week Year
Crude oil 52.61 1.68 -4.75
Gasoline 1.486 0.045 -0.231
Heating oil 1.886 0.040 -0.043
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  12/07/18 Week Year
Crude oil 442.0 -1.2 -1.0
Gasoline 228.3 2.1 1.8
Distillate 124.1 -1.5 -3.9
Propane 76.559 -3.247 1.891