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EIA: Brent lowest since September 2010 Energy Information Administration says price outlook highly uncertain; supply disruptions ‘real possibility’ in low-price climate Kristen Nelson Petroleum News
North Sea Brent crude oil spot prices were down by more than 15 percent in November, and down 29 percent from a 2014 high, dropping from $85 a barrel early in the month to $72 a barrel Nov. 28. In its December Short-Term Energy Outlook the U.S. Energy Information Administration said the Brent monthly average peaked at $112 in June, falling to a monthly average of $79 for November.
The agency said its Brent forecast for 2015 is $68 per barrel, down $15 per barrel from its November forecast.
EIA attributed the November price drop to “continued growth in U.S. tight oil production along with weakening outlooks for the global economy and oil demand growth,” with the decision of the Organization of the Petroleum Exporting Countries in late November to maintain production levels putting “additional downward pressure on price expectations.”
On Nov. 27, following OPEC’s decision to leave its production target unchanged, Brent crude oil spot prices fell by more than 10 percent; by Dec. 4, Brent had fallen to $68 per barrel, EIA said, the lowest daily price since May 25, 2010.
The agency said current values of futures and options contracts “suggest high uncertainty in the price outlook,” with West Texas Intermediate futures contracts for March delivery during the five-day period ending Dec. 4 averaging $67 per barrel, but with implied volatility averaging 32 percent, putting the lower and upper limits of the 95 percent confidence level at $51 and $89 per barrel. This time last year, EIA said, WTI for March 2014 delivery averaged $96 per barrel with implied volatility averaging 19 percent, for corresponding lower and upper limits of $82 and $112 per barrel.
Inventories expected to grow EIA said it expected global crude oil inventories to continue to build over the next year, “keeping downward pressure on oil prices,” with downward price pressures expected to be concentrated in the first half of 2015.
EIA projects that Brent will reach a monthly average low for the year at $63 per barrel from March through May, increasing through the rest of the year to average $73 in the fourth quarter of 2015.
WTI averaged $84 in October, dropping to $76 in November.
“Like Brent crude oil prices, WTI prices have decreased considerably,” EIA said, down by more than 28 percent from a 2014 peak of $106 per barrel for June.
The agency said it expects WTI to average $75 per barrel in the fourth quarter of this year and $63 in 2015, $5 and $15 per barrel lower than projected in November outlook. The discount of WTI to Brent is forecast to widen slightly, averaging $5 per barrel next year.
Uncertain forecasting environment EIA said recent declines in oil price and associated increases in price volatility “have created a particularly uncertain forecasting environment, and several factors could cause oil prices to deviate significantly from current projections.”
The first such factor is responsiveness of supply to the lower price environment.
While OPEC kept its crude oil target at 30 million barrels per day, “if crude oil prices continue to fall, Saudi Arabia and others could choose to cut production, tightening market balances.”
Crude oil production outages could vary from forecast levels for a number of producers - including Libya, Iraq, Iran, Nigeria and Venezuela.
“Additionally, the price and lag time required to cause a reduction in forecast non-OPEC supply growth, particularly in 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.”
EIA noted that several OPEC and non-OPEC producers “rely heavily on oil revenues to finance their fiscal budgets,” and some producers have already started adjusting budgets to reflect the 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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