In its latest Short-Term Energy Outlook (STEO), the US Energy Information Administration has revised its 2019 price forecasts for Brent and West Texas Intermediate to $61/bbl and $54/bbl, respectively, which are both $11/bbl lower than forecast in the STEO for November.
Meanwhile, EIA expects that the magnitude of the recent price declines combined with the Organization of Petroleum Exporting Countries’ production cuts will bring 2019 supply and demand numbers largely into balance, which EIA forecasts will keep prices near current levels in the coming months.
Global liquid fuels production is forecast to increase by 1.4 million b/d in 2019. EIA expects US production growth to be partially offset by declining production elsewhere, notably within OPEC, where EIA forecasts that liquid fuels production will decline by 900,000 b/d in 2019.
EIA also revised downward its forecast of Canadian oil production for 2019 by 120,000 b/d to reflect Alberta’s announced production cuts on Dec. 3. EIA’s forecast for 2019 is an average of 5.1 million b/d compared with last month’s forecast of 5.2 million b/d.
EIA expects global liquid fuels consumption to increase by 1.5 million b/d in 2019, with growth largely coming from China, the US, and India.
Crude oil prices declined markedly in November but increased during the first week in December amid heightened price volatility. WTI prices experienced three rare and large price declines (each between -6% and -8%) within the span of 10 days in mid-November, and WTI prices were down by more than 33% from the 4-year highs set in early October by the end of November.
Several factors contributed to falling prices:
• Crude oil production from the world’s three largest producers—US, Russia, and Saudi Arabia—were at or near record levels in November.
• Implementation of sanctions on Iran began on Nov. 5, but US granted waivers for some of Iran’s largest customers to continue importing limited volumes of crude oil for 6 months.
• Concerns about the pace of global economic growth in the coming months have led to related concerns about the pace of oil-demand growth.
On Dec. 7, OPEC and several non-OPEC countries announced a reduction in production of 1.2 million b/d from their October production levels for 6 months beginning in January.
“The cuts were in response to increasing evidence that oil markets could become oversupplied in 2019. This potential oversupply was reflected in recent price declines,” EIA said.
Oil price volatility
The realized volatility in crude oil prices last month, as measured by the difference between the monthly high and low prices (trading range), was the largest since 2012 for Brent and the largest for WTI since 2014.
The implied volatility of Brent and WTI, calculated from options prices, more than doubled during the month, reflecting the market’s heightened uncertainty regarding future oil supply and demand.
The crude oil 1st–13th futures contract price spreads for Brent and WTI declined to the lowest levels since the third quarter of 2017, settling at -$1.02/bbl and -$1.95/bbl, respectively, on Dec. 6. Both crude oils are in contango, reflecting recent increases in global oil inventories.
Some recent supply increases in Saudi Arabia and the US have been larger than expected and likely contributed to an estimated global liquid fuels inventory build of 1.3 million b/d during November.
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, only occurring in markets where producers and traders have more difficulty finding customers or accessing available onshore storage.
However, the increase in floating storage may not entirely be because of the recent market weakness. The increase also likely reflects, in part, the effects of US sanctions on Iran, limiting the country’s ability to sell crude oil openly. EIA estimates that Iranian crude oil exports have declined at a faster rate than their total crude oil production, indicating their oil is being stored. A similar phenomenon occurred during the 2012 sanctions.
EIA forecasts total global liquid fuels inventories will increase by about 300,000 b/d in 2018 and by 200,000 b/d in 2019.
