Crude oil to remain low until 2017

According to the EIA, the Short-Term Energy Outlook (STEO), which is the first STEO to include projections for 2017, forecasts Brent crude oil prices will average US$40/bbl in 2016 and US$50/bbl in 2017. West Texas Intermediate (WTI) crude oil prices are expected to be US$2/bbl lower than Brent in 2016 and US$3/bbl lower than Brent in 2017.

EIA recognises that there is still high uncertainty in the crude oil price outlook. For example, EIA's forecast for the average WTI price in April 2016 is US$37/bbl, while the market expects WTI prices to range from US$25/b - 56/bbl (at the 95% confidence interval) based on the recent prices of futures and options contracts for April 2016 delivery.

Crude oil prices are expected to remain low as supply continues to outpace demand in 2016 and more crude oil is placed into storage. EIA estimates that global oil inventories increased by1.9 million bbl/d in 2015, marking the second consecutive year of inventory builds. Inventories are forecast to rise by an additional 0.7 million bbl/d in 2016, before the global oil market becomes relatively balanced in 2017. The first forecasted draw on global oil inventories is expected in the 3Q17, marking the end of 14 consecutive quarters of inventory builds.

Since 2012, the US has been the source of much of the global increase in production of petroleum and other liquids. In 2016 and 2017, however, members of the Organization of the Petroleum Exporting Countries (OPEC) are expected to account for most of production growth. EIA expects non-OPEC production to decline by 0.6 million bbl/d in 2016, which would be the first decline in non-OPEC production since 2008. About two-thirds of this forecasted decline in 2016 comes from the US.

Changes in non-OPEC production are driven by changes in US tight oil production, which is characterised by high decline rates and relatively short investment horizons that make it among the most price sensitive production globally. Forecast total US liquid fuels production declines by0.4 million bbl/d in 2016 and remains relatively flat in 2017, as low oil prices contribute to drilling rig counts falling below levels required to sustain current production rates.

OPEC crude oil production is forecast to increase by 0.5 million bbl/d in 2016, with Iran accounting for most of that increase. Iran is expected to increase its production once international sanctions targeting its oil sector are suspended. Although uncertainty remains as to the timing of sanctions relief, EIA assumes this occurs in 1Q16. EIA's timing reflects Iran's progress in meeting key obligations required under the Joint Comprehensive Plan of Action, which has been faster than previously anticipated.

EIA expects global consumption of petroleum and other liquid fuels to grow by 1.4 million bbl/d in both 2016 and 2017. Forecast real gross domestic product (GDP) for the world, weighted by oil consumption, which increased by an estimated 2.4% in 2015, rises by 2.7% in 2016 and by 3.2% in 2017.

Adapted from press release by Francesca Brindle

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