The Short-Term Energy Outlook (STEO) released on January 12 forecasts that Brent crude oil prices will average $40 per barrel (b) in 2016 and $50/b in 2017. This is the first STEO to include forecasts for 2017. Forecast West Texas Intermediate (WTI) crude oil prices average $2/b lower than Brent in 2016 and $3/b lower in 2017.
However, the current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Figure 1).
For example, EIA’s forecast for the average WTI price in April 2016 of $37/b should be considered in the context of recent contract values for April 2016 delivery (Market Prices and Uncertainty Report), suggesting that the market expects WTI prices to range from $25/b to $56/b (at the 95% confidence interval).
The confidence range for crude oil prices as shown in Figure 1 is derived using a variation of the Black-Scholes that is often used by financial analysts to estimate the price of options. EIA starts with options prices for WTI crude oil, and uses the Black-Scholes model to calculate the implied volatility. WTI futures contracts and options are the among the most actively traded commodity derivative products, with many producers, consumers (including refiners, airlines, trucking companies, and fuel distributors), and other investors and risk-takers involved. The confidence interval is thus a market-derived range that is not directly dependent on EIA’s supply and demand estimates.
Continuing increases in global liquids inventories have put significant downward pressure on oil prices since mid-2014. EIA estimates that global oil inventories increased by 1.9 million b/d in 2015, marking the second consecutive year of inventory builds. This oversupply has contributed to oil prices falling to the lowest monthly average since mid-2004. Inventories are forecast to rise by an additional 0.7 million b/d in 2016, before the global oil market becomes relatively balanced in 2017 (Figure 2). The first draw on global oil inventories in 15 consecutive quarters is expected in the third quarter of 2017.
EIA estimates that petroleum and other liquid fuels production in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) grew by 1.3 million b/d in 2015. The 2015 growth occurred mainly in North America. EIA expects non-OPEC production to decline by 0.6 million b/d in 2016, which would be the first decline since 2008. Most of the forecast decline in 2016 is expected to be in the United States. Non-OPEC production is forecast to decrease by an additional 0.1 million b/d in 2017.
Changes in non-OPEC production are driven by changes in U.S. tight oil production, which is characterized by high decline rates and relatively short investment horizons that make it among the more price-sensitive crude production globally. Forecast total U.S. liquid fuels production declines by 0.4 million b/d in 2016 and remains relatively flat in 2017.
Forecast OPEC crude oil production increases by 0.5 million b/d in 2016, with Iran expected to increase production once international sanctions targeting its oil sector are suspended. Although uncertainty remains as to the timing of sanctions relief, EIA assumes the implementation occurs in the first quarter of 2016, clearing the way to ease sanctions at that time. EIA has moved up the anticipated implementation day because Iran has made faster-than-expected progress in meeting key obligations required under the Joint Comprehensive Plan of Action.
Iran’s crude oil production is forecast to grow by about 0.3 million b/d in 2016 and by 0.5 million b/d in 2017. The growth of Iran’s crude oil production through the forecast period also depends on internal factors, including Iran’s ability to mitigate production decline rates and meet technical challenges, and on its willingness to discount the price of oil.
At OPEC’s December 4 meeting, members voted to reactivate Indonesia’s OPEC membership after an almost seven-year hiatus. EIA therefore includes Indonesia’s crude oil and other liquids production in the OPEC total for both history and the forecast.
EIA expects global consumption of petroleum and other liquid fuels to grow by 1.4 million b/d in both 2016 and 2017. Forecast real gross domestic product (GDP) for the world weighted by oil consumption, which increased by an estimated 2.4% in 2015, rises by 2.7% in 2016 and by 3.2% in 2017.
U.S. average retail regular gasoline price below $2.00 per gallon for the first time since 2009; diesel fuel prices decrease
The U.S. average retail price for regular gasoline fell three cents from the previous week to $1.996 per gallon on January 11, 2016, 14 cents lower than the same time last year and the first time since March 2009 that the U.S. average was below $2.00 per gallon. The Midwest price fell four cents to $1.82 per gallon. The West Coast and East Coast prices each decreased three cents to $2.63 per gallon and $1.97 per gallon, respectively. The Gulf Coast and Rocky Mountain prices both decreased two cents to $1.73 per gallon and $1.95 per gallon, respectively.
The U.S. average diesel fuel price decreased three cents from the prior week to $2.18 per gallon, 88 cents lower than the same time last year. The Rocky Mountain price was down six cents to $2.13 per gallon. The West Coast price decreased four cents to $2.43 per gallon. The East Coast, Midwest, and Gulf Coast prices all decreased three cents to $2.23 per gallon, $2.10 per gallon, and $2.08 per gallon, respectively.
Propane inventories fall
U.S. propane stocks decreased by 4.5 million barrels last week to 91.9 million barrels as of January 8, 2016, 17.0 million barrels (22.7%) higher than a year ago. Gulf Coast inventories decreased by 2.9 million barrels and Midwest inventories decreased by 1.2 million barrels. East Coast and Rocky Mountain/West Coast inventories each decreased comparatively modestly, falling by 0.3 million barrels and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 3.4% of total propane inventories.
Residential heating oil price decreases while propane price increases
As of January 11, 2016, residential heating oil prices averaged $2.16 per gallon, almost 2 cents per gallon lower than last week and nearly 75 cents lower than one year ago. The average wholesale heating oil price this week is $1.09 per gallon, 9 cents lower than last week and almost 70 cents per gallon lower than a year ago.
Residential propane prices averaged $2.01 per gallon, 1 cent per gallon higher than last week’s price and nearly 34 cents lower than one year ago. Wholesale propane prices averaged just over 43 cents per gallon, 2 cents per gallon lower than last week and nearly 14 cents lower than last year’s price for the same week.