According to the US Energy Information Administration’s (EIA) Short Term Energy Outlook (STEO) for December, North Sea Brent crude oil spot prices averaged US$79/bbl in November, down US$8/bbl from the October average and the first month Brent crude oil prices have averaged below US$80/bbl since September 2010. The combination of robust world crude oil supply growth and weak global demand has contributed to rising global inventories and falling crude oil prices. On 27 November, following OPEC’s decision to leave its crude oil production target unchanged, Brent crude oil spot prices fell by more than 10%, and have since fallen to US$68/bbl as of 4 December, the lowest daily price since 25 May 2010.
EIA expects global oil inventories to continue to build over the next year, keeping downward pressure on oil prices. The forecast Brent crude oil price averages US$68/bbl in 2015, US$15/bbl lower than projected in last month’s STEO. Based on current market balances, EIA expects downward price pressures to be concentrated in the first half of 2015 when global inventory builds are expected to be particularly strong. EIA projects that Brent prices will reach a 2015 monthly average low of US$63/bbl for each month from March through May, and then increase through the remainder of the year to average US$73/bbl during the fourth quarter.
The monthly average WTI crude oil spot price fell from an average of US$84/bbl in October to US$76/bbl in November. Like Brent crude oil prices, WTI prices have decreased considerably, falling by more than 28% since reaching their 2014 peak at an average of US$ 106/bbl in June. EIA now expects WTI crude oil prices to average US$ 75/bbl in the fourth quarter of 2014 and US$63/bbl in 2015, US$5/bbl and US$15/bbl lower than projected in last month’s STEO, respectively. The discount of WTI to Brent crude oil is forecast to widen slightly from current levels, averaging US$5/bbl in 2015.
However, the current values of futures and options contracts high uncertainty in the price outlook. WTI futures contracts for March 2015 delivery, traded during the five day period ending 4 December, averaged US$67/bbl. Implied volatility averaged 32%, establishing the lower and upper limits of the 95% confidence interval for the market’s expectations of monthly average WTI prices in March 2015 at US$51/bbl and US$89/bbl, respectively. Last year at this time, WTI for March 2014 delivery averaged US$96/bbl and implied volatility averaged 19%. The corresponding lower and upper limits of the 95% confidence interval were US$82/bbl and US$112/bbl.
The recent declines in oil price and associated increases in oil price volatility have created a particularly uncertain forecasting environment, and several factors could cause oil prices to deviate significantly from current projections. Among these is the responsiveness of supply to the lower price environment. Despite OPEC’s recent decision to leave its crude oil production target at 30 million bpd, if crude oil prices continue to fall, Saudi Arabia and others could choose to cut production, tightening market balances. The level of crude oil production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Iran, Nigeria, and Venezuela. Additionally, the price and lag time required to cause a reduction in forecast non-OPEC supply growth, particularly US tight oil, is not known. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices.
Several OPEC and non-OPEC oil producers rely heavily on oil revenues to finance their fiscal budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices continue to fall or are sustained at a lower level, then oil dependent producers will have to make tough policy decisions. This could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protestors target oil infrastructure. Potential new supply disruptions are a real possibility in a lower than expected price climate and present an uncertainty in the world oil supply forecast.
Petroleum product prices
US average regular gasoline prices fell from a monthly average of US$3.69/gal. in June to US$2.91/gal. in November, the first month in which prices have averaged below US$3.00/gal. since December 2010. EIA expects that US regular gasoline retail prices will fall to an average of US$2.61/gal. in December 2014. The US regular gasoline retail price, which averaged US$3.51/gal. in 2013, is projected to average US$3.37/gal. in 2014 and US$2.60/gal. in 2015. Forecast retail gasoline prices for 2015 are US$0.35/gal. lower than last month’s STEO. Diesel fuel prices, which averaged US$3.92/gal. in 2013, are projected to fall to an average of US$3.82/gal. in 2014 and US$3.07/gal. in 2015. Forecast diesel fuel prices for 2015 are US$0.31/gal. lower than in last month’s STEO.
The February 2015 New York Harbor reformulated blendstock for oxygenate blending (RBOB) futures contract averaged US$1.85/gal. for the five trading days ending 4 December 2014. An RBOB futures contract price of US$1.85/gal. is consistent with a monthly average regular grade gasoline retail price less than US$2.50/gal. in March 2015. There is a 4% probability that the RBOB futures contract price at expiration may exceed US$2.35/gal., consistent with a retail price of US$3.00/gal. of higher. Daily and weekly national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas falling above or below the national average price by US$0.30/gal. or more.
Lower projected crude oil prices also contribute to a reduction in the forecast residential heating oil price and average household heating oil expenditures this winter compared to last winter. The average household that uses heating oil as its primary space heating fuel is expected to pay an average of US$3.09/gal. this winter, US$0.79/gal. lower than last winter. The average household is now expected to spend US$1722 for heating oil this winter, US$57 lower than in last month’s STEO.
Adapted from a report by Emma McAleavey.
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