Highlights North Sea Brent crude oil prices averaged $38/barrel (b) in December, a $6/b decrease from November, and the lowest monthly average price since June 2004. Brent crude oil prices averaged $52/b in 2015, down $47/b from the average in 2014, as growth in global liquids inventories put downward pressure on Brent prices throughout much of the year. Forecast Brent crude oil prices average $40/b in 2016 and $50/b in 2017. Forecast West Texas Intermediate (WTI) crude oil prices average $2/b lower than Brent in 2016 and $3/b lower in 2017. However, the current values of futures and options contracts continue to suggest high uncertainty in the price outlook. For example, EIA’s forecast for the average WTI price in April 2016 of $37/b should be considered in the context of recent contract values for April 2016 delivery suggesting that the market expects WTI prices to range from $25/b to $56/b (at the 95% confidence interval). U.S. crude oil production averaged an estimated 9.4 million barrels per day (b/d) in 2015, and it is forecast to average 8.7 million b/d in 2016 and 8.5 million b/d in 2017. EIA estimates that crude oil production in December fell 80,000 b/d from the November level.
Global Petroleum and Other Liquid Fuels
EIA estimates that global oil inventories increased by 1.9 million b/d in 2015, marking the second consecutive year of inventory builds. This oversupply has contributed to oil prices reaching the lowest monthly average level since mid-2004. Inventories are forecast to rise by an additional 0.7 million b/d in 2016, before the global oil market becomes relatively balanced in 2017. The first draw on global oil inventories in 15 consecutive quarters is expected in the third quarter of 2017.
Global Petroleum and Other Liquid Fuels Consumption. EIA estimates global consumption of petroleum and other liquid fuels grew by 1.4 million b/d in 2015, averaging 93.8 million b/d for the year. EIA expects global consumption of petroleum and other liquid fuels to grow by 1.4 million b/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.
Consumption of petroleum and other liquid fuels in countries outside the Organization for Economic Cooperation and Development (OECD) increased by an estimated 0.8 million b/d in 2015, considerably lower than the 1.4 million b/d increase in 2014 mainly because of the slowdown in Eurasia, which saw a contraction in its consumption, and to a lesser degree because of China’s slightly slower demand growth. Non-OECD consumption growth is expected to be 1.1 million b/d in both 2016 and 2017, reflecting higher growth in the Middle East and Eurasia.
OECD petroleum and other liquid fuels consumption rose by 0.6 million b/d in 2015. OECD consumption is expected to continue rising in both 2016 and 2017 by 0.3 and 0.4 million b/d, respectively, driven by an increase in U.S. consumption. OECD Europe demand is also expected to increase through the forecast period, albeit at a slower pace than the 0.3 million b/d increase in 2015. U.S. consumption is forecast to increase by 0.2 and 0.3 million b/d in 2016 and 2017, respectively. Consumption in Japan is forecast to decline by less than 0.1 million b/d in both 2016 and 2017.
Non‐OPEC Petroleum and Other Liquid Fuels Supply. EIA estimates that petroleum and other liquid fuels production in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) grew by 1.3 million b/d in 2015. The 2015 growth occurred mainly in North America. EIA expects non-OPEC production to decline by 0.6 million b/d in 2016, which would be the first decline since 2008. Most of the forecast decline in 2016 is expected to be in the United States. Non-OPEC production is forecast to decrease by an additional 0.1 million b/d in 2017.
Changes in non-OPEC production are driven by changes in U.S. tight oil roduction, which is characterized by high decline rates and relatively short investment horizons that make it among the most price-sensitive production globally. Forecast total U.S. liquid fuels production declines by 0.4 million b/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.
Outside of the United States, forecast non-OPEC production declines by 0.2 million b/d in 2016 and by 0.1 million b/d in 2017. Despite low crude oil prices, production declines are relatively minor because of investments committed to projects when oil prices were higher. Although oil companies have reduced investments, most of the cuts have been in capital exploration budgets that largely affect production levels beyond the forecast period. Additionally, strength in the U.S. dollar and production cost reductions have moderated the effects of declining oil revenues in some countries. Because oil revenues are denominated in dollars, the appreciation of the dollar relative to the currencies of several large oil producers means each dollar of revenue has more purchasing power if production costs are denominated in local currency.
Among other non-OPEC producers, the largest declines are forecast to be in the North Sea and Russia. After increasing in 2015, production in the North Sea is expected to return to its longterm declining trend in 2016 and 2017, as the planned start of several projects is not enough to offset the region’s steep decline rates. Production in Russia also increased in 2015, as international sanctions had little effect on oil production, but Russia’s production is expected to decline by 0.1 million b/d in both 2016 and 2017. However, Russia’s exposure to low oil prices has been mitigated by the depreciation of the ruble relative to the dollar, given rubledenominated production costs, and by Russia’s taxation regime for the oil sector.
Some non-OPEC countries, led by Canada and Brazil, will continue to see increasing oil production during the forecast period. Production in Canada is expected to increase by 50,000 b/d in both 2015 and 2016, as a number of oil sands projects that are under construction will begin production, including the Imperial Oil and Cenovus projects scheduled to come online by the end of 2016. These projects were commissioned before the sharp decline in crude oil price. Production in Brazil is expected to increase by about 40,000 b/d in 2016 and 20,000 b/d in 2017. This growth is down from growth of 0.2 million b/d in 2015, which was the result of several floating production, storage, and offloading facilities coming online. Reduced growth in Brazil’s production occurs because Petrobras’s high debt levels and the legal fallout from the ongoing corruption probe are expected to reduce investment.
Unplanned supply disruptions among non-OPEC producers averaged 0.4 million b/d in December, reflecting a downward revision of roughly 0.3 million b/d compared with the last STEO. EIA revised downward its estimate of non-OPEC disruptions because of a revision in production capacity held by Syria and Yemen. EIA’s estimates of unplanned production outages are calculated as the difference between estimated effective production capacity (the level of supply that could be available within one year) and estimated production. Therefore, these outage estimates can differ from those measured against other capacity types, such as nameplate capacity or the production level prior to the disruption.
OPEC Petroleum and Other Liquid Fuels Supply. At their December 4 meeting, OPEC members voted to reactivate Indonesia’s OPEC membership after an almost seven-year hiatus. As of this STEO, EIA includes Indonesia’s crude oil and other liquids production in the OPEC total for both history and the forecast.
OPEC crude oil production averaged 31.6 million b/d in 2015, an increase of 0.9 million b/d from 2014. Iraq led the OPEC production increases. Its production rose by 0.7 million b/d in 2015. Saudi Arabia also boosted production to defend its share of the global oil market, with its production increasing by 0.3 million b/d in 2015.
Forecast OPEC crude oil production increases by 0.5 million b/d in 2016, with Iran expected to increase production once international sanctions targeting its oil sector are suspended. Under the Joint Comprehensive Plan of Action (JCPOA) between Iran and the five permanent members of the United Nations Security Council and Germany (P5+1), which was announced on July 14, 2015, sanctions relief is contingent on verification by the International Atomic Energy Agency (IAEA) that Iran has complied with key nuclear-related steps. Forecast OPEC crude oil production is expected to increase by 0.6 million b/d in 2017, with Iran accounting for most of the increase.
Although uncertainty remains as to the timing of sanctions relief, EIA assumes the implementation occurs in the first quarter of 2016, clearing the way to ease sanctions at that time. EIA has moved up the anticipated implementation day because Iran has made faster-thanexpected progress in meeting key obligations required under the JCPOA.
Iran’s crude oil production is forecast to grow by about 0.3 million b/d in 2016 and by 0.5 million b/d in 2017. The forecast growth of Iran’s crude oil production through the forecast period also depends on internal factors including Iran’s ability to mitigate production decline rates and meet technical challenges and on its willingness to discount oil.
OPEC noncrude liquids production averaged 6.7 million b/d in 2015, and it is forecast to increase by 0.3 million b/d in both 2016 and 2017, led by increases in Iran and Qatar.
In December, unplanned crude oil supply disruptions among OPEC producers averaged 2.8 million b/d, up slightly compared with the previous month. Kuwait and Saudi Arabia continue to have a combined disruption of 0.5 million b/d at the Wafra and Khafji fields in the Neutral Zone that straddles the two countries.
OPEC surplus crude oil production capacity, which averaged 1.6 million b/d in 2015, is expected to increase to 2.0 million b/d in 2016 and then be 1.9 million b/d in 2017. EIA estimates that Iran’s crude oil production capacity is 3.6 million b/d, which is 0.8 million b/d higher than its current estimated production level. EIA currently categorizes that 0.8 million b/d difference as a disruption because Iran’s production is restricted by sanctions that affect the country’s ability to sell its oil. However, if sanctions are lifted, any difference between its crude oil production capacity and its crude oil production level would henceforth be considered surplus capacity.
Surplus capacity is typically an indicator of market conditions, and surplus capacity below 2.5 million b/d indicates a relatively tight oil market. However, the continuing inventory builds and high current and forecast levels of global oil inventories make the projected low surplus capacity level less significant.
OECD Petroleum Inventories. EIA estimates that OECD commercial crude oil and other liquid fuels inventories totaled 3.06 billion barrels at the end of 2015, quivalent to roughly 66 days of consumption. Forecast OECD inventories rise to 3.13 billion barrels at the end of 2016, and they are also expected to be 3.13 billion barrels at the end of 2017.
Crude Oil Prices. Brent crude oil spot prices decreased by $ 6/b in December to a monthly average of $ 38/b, the lowest monthly average price since June 2004. Prices fell in December, as OPEC producers (at their December 4 meeting) indicated plans to continue the policy of defending market share in a low oil price environment and as global oil inventories continued to build. Continuing increases in global liquids inventories have put significant downward pressure on oil prices since mid-2014. Inventories rose by an estimated 1.9 million b/d in 2015, and Brent crude oil prices averaged $ 52/b in 2015, a decrease of $ 47/b from 2014.
With global inventory builds expected to continue in 2016, upward pressure on crude oil prices will be limited. Forecast Brent prices average $40/b in 2016. The largest inventory builds occur in the first half of 2016, keeping Brent prices below $ 40/b through April.
Brent prices are forecast to average $50/b in 2017, with upward price pressures concentrated in the latter part that year. At that point the market is expected to experience small inventory draws, with the possibility of further draws beyond the forecast period. Brent prices are forecast to average $56/b in the fourth quarter of 2017.
Forecast West Texas Intermediate (WTI) crude oil prices average $ 2/b lower than Brent in 2016 and $ 3/b lower in 2017. EIA had previously assumed the 2016 WTI discount to be $ 5/b. The lower forecast WTI discount to Brent is based on the relative storage availability in the United States compared with other regions that encourages placing crude oil in the U.S. market in a period of global oversupply.
During the forecast period, oil prices could continue to experience periods of heightened volatility. The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices.
The current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for April 2016 delivery, traded during the five-day period ending January 7, averaged $ 38/b, while implied volatility averaged 46%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in April 2016 at $25/b and $ 56/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $ 22/b and $ 82/b for prices in December 2016. Last year at this time, WTI for April 2015 delivery averaged $ 51/b, and implied volatility averaged 48%. The corresponding lower and upper limits of the 95% confidence interval were $34/b and $76/b.