Updated Forecast Implies Slower Path to Global Oil Market Balance

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The U.S. Energy Information Administration’s (EIA) October Short-Term Energy Outlook (STEO) indicates that oil market conditions are somewhat looser by the end of 2017 than previously projected. Although the annual average spot prices for West Texas Intermediate (WTI) and Brent are similar across the current and previous outlooks, quarterly WTI and Brent spot prices were revised more significantly. EIA’s October STEO Brent crude oil price forecast for the fourth quarter of 2016 and the first quarter of 2017 is $48/bbl, about $3 higher than in the September forecast, reflecting recent price movements and a reduction in near-term downside price risks. However, the forecast for prices toward the end of 2017 has been reduced, with prices for 2017 as a whole slightly below the September forecast. The recent activity of U.S. onshore producers, along with expectations of higher U.S. production in 2017, is one of the drivers for lowering EIA’s Brent crude oil forecast for the fourth quarter of 2017 to $55/bbl from a forecast of $58/bbl in the September STEO.

Compared with September, the October outlook reduces annual U.S. crude oil production in 2016, but increases production in 2017. The October STEO forecasts U.S. crude production to be 120,000 bbld lower in the fourth quarter of this year compared with the September outlook. However, it expects U.S. crude production to rise faster than last month’s forecast, reaching 8.8 MMbbld in the fourth quarter of 2017.

In the four oil-producing regions—Bakken, Niobrara, Permian, and Eagle Ford—included in EIA’s Drilling Productivity Report, the ratio of drilled but uncompleted wells (DUCs) to completed wells was about 2:1 at the end of 2014, but increased to nearly 12:1 in early 2016. While the number of DUCs in the four oil-dominant drilling report regions has declined by about 400 between March and August 2016, more than 4100 DUCs remain as of the end of August with the ratio of DUCs to completed wells still nearly 10:1. The current inventory of DUCs, which can be brought into production more quickly than wells that must be drilled prior to completion, may increase the responsiveness of U.S. production to crude oil price increases.

Data suggest that the number of active oil rigs may be trending upward, and from June through August of this year the number of oil rigs in the Bakken, Eagle Ford, Niobrara, and Permian regions increased by four, seven, five, and 42, respectively. Productivity from new oil wells is also increasing as production techniques are refined. Reversing a decreasing trend since 2015, crude oil production in the Lower 48 states, which includes the tight oil producing regions, is forecast to rise during 2017 from 6.2 MMbbld in the first quarter to 6.4 MMbbld in the fourth quarter.

After an unofficial meeting in Algeria on Sept. 28, members of the Organization of the Petroleum Exporting Countries (OPEC) announced a framework agreement that could lead to a cap on OPEC crude oil production of about 32.5 MMbbld to 33 MMbbld in 2017. Important details of the agreement, including target outputs for individual countries, still remain to be decided and agreed upon at a regular OPEC meeting in November. Even if such a decision/agreement is actually reached, the extent of compliance with whatever targets are stated remains an important question in light of past experience. Notwithstanding the recent framework agreement, the total OPEC production forecast for 2017 of 33 MMbbld in the October STEO is almost unchanged from the September forecast.

The October STEO reflects a continuation of rebalancing between global production and consumption that is characterized by a deceleration of the annual growth rate of global inventories. In 2015, growth in global crude oil stocks was 1.8 MMbbld. Growth in crude oil stocks is expected to slow to 0.7 MMbbld in 2016 and slow even further to 0.3 MMbbld for 2017, with the first quarterly global stock draw since the end of 2013 expected in the third quarter of 2017. The decelerating growth in global stocks mainly reflects a forecast in which oil consumption grows faster than oil production, although overall production remains greater than consumption. The October STEO expects global production to increase from 96 MMbbld in 2016 to 97 MMbbld in 2017, a slight increase compared with the September STEO, but still less-than-anticipated consumption growth.

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