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EIA drops oil price projections further Agency says production more resilient to low prices than expected; Brent averages $32 in February, forecast to average $34 this year KRISTEN NELSON Petroleum News
The U.S. Energy Information Administration has dropped its forecast for average North Sea Brent crude oil prices to $34 per barrel for this year and $40 per barrel in 2017.
EIA said in its March 8 Short-Term Energy Outlook that those prices are $3 and $10 per barrel lower than in its February forecast, reflecting production which has been “more resilient than expected in a low-price environment and lower expectations for forecast oil demand growth.”
West Texas Intermediate crude oil prices are expected to average the same as Brent this year and next, the agency said, but noted that futures and options contracts “suggest high uncertainty in the price outlook.”
“Global oil inventories over the next two years are expected to grow more rapidly than previously expected because of higher world oil production and less oil demand due to weaker economic growth worldwide,” EIA Administrator Adam Sieminski said in a statement.
“Higher growth in world oil inventories tends to delay the rebalancing of supply and demand in the global oil market, keeping oil prices low,” he said.
Inventory growth larger The agency said global oil inventories continue to increase, and are forecast to grow by an average of 1.6 million barrels per day this year and by an additional 600,000 bpd in 2017.
“These inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices,” the agency said.
Petroleum and other liquid fuels production from outside the Organization of the Petroleum Exporting Countries grew by 1.5 million bpd in 2015, mostly growth in North America. EIA said it expects non-OPEC production to decline this year by 400,000 bpd, which would mark the first decline since 2008, with most of the forecast production decline from the United States.
Non-OPEC production is forecast to decline by a further 500,000 bpd in 2017.
The U.S. decline is driven by changes in tight oil production, which EIA characterized as having “high decline rates and relatively short investment horizons, making it among the most price-sensitive globally.”
The agency also said the increased hydrocarbon gas liquids production from natural gas plants and in crude oil production from the Gulf of Mexico would partially offset the lower tight oil production.
U.S. liquids fuels production is projected to decline 500,000 bpd in 2016 and 200,000 bpd in 2017, “both less than the decline in crude oil considered separately.”
Brent at $32 per barrel EIA said Brent crude averaged $32 per month in February, up $1 per barrel from January.
The agency said accelerating reductions in the U.S. rig count and market reactions to a potential OPEC/non-OPEC supply price freeze provided February price support offsetting downward pressure from growth in global inventories and uncertainty over demand strength.
“With large global oil inventory builds expected to continue in 2016, oil prices are expected to remain near current levels,” the agency said, averaging $34 per barrel this year.
“Higher forecast inventory builds and slower market rebalancing contribute to a more limited price recovery in 2017 than previously forecast,” EIA said, with the 2017 price now estimated at $40, opposed to the $50 forecast in January, although prices are expected to average $45 per barrel in the fourth quarter of 2017, “as the oil market becomes relatively balanced at that point, with the potential for inventory draws beyond the forecast period.”
EIA said West Texas Intermediate is expected to be on parity with Brent based on an assumption of competition between the crudes in the U.S. Gulf Coast refinery market, “as transportation differentials are similar to move the crudes from their respective pricing points to that market.”
Large inventory builds are expected to continue, and the agency said if the capacity of global oil storage “becomes stressed, the cost of storage will rise to reflect more expensive marginal storage options such as floating inventories on crude oil tankers,” which would lower near-month prices. The pace of economic growth also adds uncertainty to price forecasts, EIA said, along with uncertainty about the responsiveness of producers to sustained oil prices.
US production EIA expects U.S. crude oil production to decrease from a 2015 average of 9.4 million bpd to 8.7 million bpd this year and 8.2 million bpd in 2017, reflecting an “extended decline in Lower 48 onshore production driven by persistently low oil prices that is partially offset by growing production in the federal Gulf of Mexico.”
The agency estimates U.S. production has fallen 600,000 bpd since April 2015, to an average of 9.1 million bpd in February, with the entire decline coming from Lower 48 onshore production.
At low WTI prices the agency said it expects to see most production decline from the Lower 48 onshore.
“The expectation of reduced cash flows in 2016 and 2017 has prompted many companies to scale back investment programs, deferring major new undertakings until a sustained price recovery occurs,” EIA said. It also noted that the prospect of higher interest rates and tighter lending conditions will likely limit the availability of capital for many small producers, “giving rise to distressed asset sales and consolidation of acreage holdings by more financially found firms.”
The count of oil-directed drilling rigs and well completions is also expected to drop in 2016 and 2017.
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