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EIA October Short-Term Energy Outlook Lowers Crude Price Forecast For 2016 – Analysis

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The Short-Term Energy Outlook released on November 10 forecasts average North Sea Brent crude oil prices of $54/barrel (b) in 2015 and $56/b in 2016. Forecast West Texas Intermediate (WTI) crude oil prices average $4/b lower than the Brent price in 2015 and $5/b lower in 2016.

Current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). Based on contracts traded during the five-day period ending November 5, the lower and upper limits of the 95% confidence interval for the market’s expectation of monthly average WTI prices are estimated at $35/b and $66/b for February 2016 widening to $28/b and $95/b for December 2016 (Figure 1). Key market uncertainties include the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices.

twip151112fig1-lgGlobal petroleum and other liquids production continues to outpace consumption, leading to inventory expansion throughout the forecast period. However, the current average price forecast for Brent crude oil in 2016, which is $2/b lower than in last month’s outlook, is associated with a further reduction in the outlook for supply growth that in turn reduces the surplus of supply over consumption.

Global oil inventory builds in the third quarter of 2015 averaged 1.6 million b/d, down from 2.0 million b/d in the second quarter, which had the highest level of inventory builds since the fourth quarter of 2008. The pace of inventory builds is expected to slow in the fourth quarter to roughly 1.2 million b/d.

In 2016, inventory builds are expected to slow further to an average of 0.4 million b/d as global liquids output is expected to be unchanged from 2015. The 0.4 million b/d reduction in projected 2016 inventory builds from last month’s STEO mostly reflects lower forecast oil production in Canada and the United States.

EIA expects non-OPEC production to grow by 1.1 million b/d in 2015, and then decline by 0.3 million b/d in 2016, which would be the first annual decline in non-OPEC production since 2008. The shift in expectation from non-OPEC production growth to declines in 2016 is mostly because of lower expected growth in Canada and larger expected declines in U.S. onshore production.

The reduction in forecast growth in Canada reflects persistently low oil prices resulting in announced delays or cancellations of projects previously scheduled to come online during the forecast period, including Shell’s October announcement canceling the 80,000 b/d Camron Creek project. However, some oil sands projects continue as planned, including the Imperial Oil and Cenovus oil sands projects scheduled to come online by the end of 2016.

U.S. crude oil production is projected to increase from an average of 8.7 million b/d in 2014 to 9.3 million b/d in 2015 and then decrease to 8.8 million b/d in 2016. Expected crude oil production declines through September 2016 are largely attributable to unattractive economic returns in some areas of both emerging and mature onshore oil production regions, as well as seasonal factors such as anticipated hurricane-related production disruptions in the Gulf of Mexico. Reductions in 2015 cash flows and capital expenditures have prompted companies to defer or redirect investment away from marginal exploration and research drilling to focus on core areas of major tight oil plays. Reduced investment has resulted in the lowest count of oil-directed rigs in about five years and in well completions that are significantly behind 2014 levels.

According to the latest survey-based reporting of monthly crude oil production estimates, U.S. production averaged 9.4 million b/d through the first eight months of 2015. This level is 0.1 million b/d higher than the average production during the fourth quarter of 2014, despite a more than 60% decline in the total U.S. oil-directed rig count since October 2014. However, EIA estimates total crude oil production has declined almost 0.5 million b/d since April, averaging 9.1 million b/d in October. EIA expects U.S. crude oil production declines to generally continue through September 2016, when total production is forecast to average 8.5 million b/d. Forecast production begins increasing in late 2016, returning to an average of 8.9 million b/d in the fourth quarter.

EIA forecasts OPEC crude oil production to increase by 0.9 million b/d in 2015, led by production increases in Iraq. Forecast OPEC crude oil production increases by 0.2 million b/d in 2016, with Iran expected to increase production once international sanctions targeting its oil sector are suspended. Under the Joint Comprehensive Plan of Action (JCPOA) between the P5+1 and Iran that was announced on July 14, sanctions relief is contingent on verification by the International Atomic Energy Agency (IAEA) that Iran has complied with key nuclear-related steps. While much uncertainty remains as to the timing of sanctions relief, EIA assumes sanctions will ease in the second quarter of 2016. As a result, EIA forecasts Iranian crude oil supplies will increase by more than 0.2 million b/d on average in 2016, reaching roughly 3.3 million b/d by the end of the year.

EIA expects global consumption of petroleum and other liquids to grow by 1.4 million b/d in both 2015 and 2016. Projected real gross domestic product (GDP) for the world weighted by oil consumption, which increased by 2.7% in 2014, is expected to rise by 2.3% in 2015 and by 2.7% in 2016.

U.S. average regular retail gasoline price and diesel fuel prices increase

The U.S. average regular retail gasoline price increased one cent from the previous week to $2.24 per gallon on November 9, down 71 cents per gallon from the same time last year. The Midwest and Rocky Mountain prices each decreased, five cents and six cents to $2.22 per gallon, and $2.18 per gallon, respectively. The Gulf Coast price increased six cents to $1.97 per gallon. The East Coast price rose five cents to $2.16 per gallon, and the West Coast price was up two cents to $2.67 per gallon.

The U.S. average diesel fuel price increased two cents from a week ago to $2.50 per gallon, down $1.18 per gallon from the same time last year. The Rocky Mountain price was the only decrease, down one cent to $2.49 per gallon. The Gulf Coast price increased three cents to $2.32 per gallon. The West Coast and East Coast prices each increased two cents to $2.71 per gallon, and $2.51 per gallon, respectively. The Midwest price was up one cent to $2.53 per gallon.

Residential heating oil price increases while propane price decreases

As of November 9, 2015, residential heating oil prices averaged nearly $2.43 per gallon, less than 1 cent per gallon higher than last week and 99 cents lower than one year ago. The average wholesale heating oil price this week is almost $1.58 per gallon, more than 4 cents less than last week and $1.13 per gallon less than a year ago.

Residential propane prices averaged just under $1.92 per gallon, less than 1 cent per gallon lower than last week’s price and 49 cents lower than one year ago. Wholesale propane prices averaged nearly 53 cents per gallon, 1 cent per gallon lower than last week’s price and 49 cents lower than last year’s price.

Propane inventories gain

U.S. propane stocks increased by 1.6 million barrels last week to 104.0 million barrels as of November 6, 2015, 22.9 million barrels (28.3%) higher than a year ago. Gulf Coast inventories increased by 0.9 million barrels and Midwest inventories increased by 0.4 million barrels. East Coast inventories increase by 0.2 million barrels while Rocky Mountain/West Coast inventories remained unchanged. Propylene non-fuel-use inventories represented 3.5% of total propane inventories.

EIA

EIA

The U.S. Energy Information Administration (EIA) collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.

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