Record U.S. Oil Production Contributes to Lower Prices

The U.S. Energy Information Administration (EIA) lowered its Brent crude oil spot price forecast to $71/bbl in 2018 and $61/bbl in 2019 in its December 2018 Short-Term Energy Outlook. Prices were down $2/bbl and $11/bbl, respectively, from a month earlier. EIA also said it expects West Texas Intermediate (WTI) crude oil prices will average about $7/bbl lower than Brent prices next year. In a continuing price decline that began in mid-October, Brent spot prices fell from $71/bbl on Nov. 1 to $58/bbl on Nov. 30, averaging $65/bbl for the month, which was down $16/bbl from October.

WTI prices experienced three rare and steep 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 highs—2015-2018—set in early October. These price decreases were reflected in November’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, as measured by the monthly high-low trading range, was the largest since 2012 for Brent and since 2014 for WTI.

EIA notes that several factors contributed to oil prices falling in November. Production from the world’s three largest producers—the U.S., Russia, and Saudi Arabia—were at or near record levels. Implementation of Iranian sanctions began Nov. 5, but the U.S. granted waivers for some of Iran’s largest customers to continue import- ing 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 production will continue to increase to new record-high levels each month through May 2019, which will put further downward pressure on oil prices. U.S. production will remain relatively flat from May to September before rising again toward the end of the year. The agency expects U.S. output will aver- age 10.9 MMbbld in 2018 and 12.1 MMbbld in 2019.

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

In that previous report, EIA expected downward price pressure could materialize by the middle of 2019 to reduce global inventory builds. However, it now expects that the magnitude of the recent price declines, combined with the OPEC and non-OPEC production cuts, will bring 2019 supply-and-demand numbers largely into balance, which EIA forecasts will keep prices near current levels.

The agency forecasts that total global liquid fuels inventories will increase by about 300,000 bbld in 2018 and by 200,000 bbld in 2019. Global liquid fuels production is forecast to increase by 1.4 MMbbld in 2019. EIA expects production growth in the U.S. to be partially offset by declining output elsewhere, notably in OPEC member countries where production is forecast to fall by 900,000 bbld next year. EIA forecasts that global liquid fuels consumption will rise by 1.5 MMbbld in 2019, with growth coming largely from China, the U.S., and India.

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 weak- ness, 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, these volumes may not be easily accessible to the global oil markets.

(SOURCE: The Weekly Propane Newsletter, December 31, 2018)