EIA Forecasts Mostly Balanced Oil Market Emerging in 2018

The U.S. Energy Information Administration (EIA) expects global liquid fuels demand to increase in 2018, but not keep pace with supply growth, resulting in global liquids inventories increasing modestly this year. The agency forecasts increasing global liquid fuels inventories by an average of 50,000 bbld in 2018, a downward revision from a 290,000-bbld inventory increase forecast in November. The change is driven by upward historical revisions to Chinese consumption and downward revisions to forecast production from countries within the Organization of the Petroleum Exporting Countries (OPEC).

On Nov. 30, 2017, OPEC announced an extension of its agreement to reduce crude oil production through the end of 2018, which was broadly in line with both EIA’s November forecast and market expectations in the days leading up to the meeting. The non-OPEC nations that agreed to crude oil production cuts in 2017 also agreed to continue limiting output through the end of this year. Saudi Arabia and Russia will co-chair a monitoring committee designed to assess the group’s adherence to the production targets. The group plans to reassess target production levels at its June 2018 meeting in the context of market conditions at that time. EIA estimates OPEC crude oil production averaged 32.5 MMbbld in 2017, a 200,000 bbld decrease from 2016 levels, and forecasts OPEC oil production to average 32.7 MMbbld in 2018.

Although OPEC is expected to restrain production growth, EIA forecasts that higher output from non-OPEC countries will contribute to overall growth in world liquid fuels production this year. The non-OPEC outlook for liquid fuels production is 100,000 bbld higher than EIA’s November outlook, averaging 60.3 MMbbld in 2018, 1.7 MMbbld higher than the 2017 level. This growth, together with the forecast 300,000-bbld growth in OPEC crude oil production and another 100,000- bbld increase in OPEC non-crude liquids production, results in forecast total global liquids production growth of 2 MMbbld in 2018. EIA expects that crude oil price increases in late 2017 will support growth in U.S. crude production to more than 10 MMbbld by mid-2018. Overall U.S. crude oil production is forecast to rise by an average of 800,000 bbld in 2018. Canada, Brazil, Norway, the United Kingdom, and Kazakhstan are also forecast to add a combined 700,000 bbld of growth in liquids production this year.

Despite higher oil prices, EIA expects global liquid fuels demand to increase by more than 1.6 MMbbld in 2018, up from growth of nearly 1.4 MMbbld in 2017. Demand growth is not forecast to keep pace with supply growth, however, resulting in global liquids inventories increasing modestly this year. With global inventories expected to rise, EIA forecasts Brent crude oil prices will decline from current levels of more than $60/bbl to an average of $57/bbl in 2018, nearly $2/bbl higher than previously forecast. EIA forecasts West Texas Intermediate (WTI) crude oil prices to average $53/bbl in 2018, which is also nearly $2/bbl higher than previously forecast.

The forecast for oil prices remains highly uncertain. WTI futures for March 2018 delivery, traded during the five-day period ending Dec. 7, 2017, averaged $57/ bbl. The value of options contracts currently establishes the lower and upper limits of the 95% confidence interval for the market’s expectations of monthly average WTI prices for March at $48/bbl and $68/bbl, respectively. The 95% confidence interval for market expectations widens considerably over time, with lower and upper limits of $36/bbl and $84/bbl, respectively, for prices in December 2018.