North Sea Brent crude oil spot prices averaged $79/bbl in November, down $8/bbl from the October average and the first month Brent crude oil prices have averaged below $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 (EIA, This Week in Petroleum, November 13, 2014). On November 27, 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 $68/bbl as of December 4, the lowest daily price since May 25, 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 $68/bbl in 2015, $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 $63/bbl for each month from March through May, and then increase through the remainder of the year to average $73/bbl during the fourth quarter.
The monthly average WTI crude oil spot price fell from an average of $84/bbl in October to $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 $106/bbl in June. EIA now expects WTI crude oil prices to average $75/bbl in the fourth quarter of 2014 and $63/bbl in 2015, $5/bbl and $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 $5/bbl in 2015.
However, the current values of futures and options contracts suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for March 2015 delivery, traded during the five-day period ending December 4, averaged $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 $51/bbl and $89/bbl, respectively. Last year at this time, WTI for March 2014 delivery averaged $96/bbl and implied volatility averaged 19%. The corresponding lower and upper limits of the 95% confidence interval were $82/bbl and $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 bbl/d, 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 U.S. 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.
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