EIA: Global oil markets expected to tighten in Q3 2017, then loosen through 2018
Forecast world production of crude oil and other liquids in 2017 and 2018 was revised slightly downward in the June edition of EIA’s Short-Term Energy Outlook (STEO), which was issued after the May 25 announcement by the Organization of the Petroleum Exporting Countries (OPEC) of an extension to production cuts that were originally set to end this month.
OPEC’s crude oil production target will remain at 32.5 MMbpd through the end of the first quarter of 2018. Given the extended production cuts, EIA now forecasts OPEC members’ crude oil production to average 32.3 MMbpd in 2017 and 32.8 MMbpd in 2018, down 0.2 MMbpd and 0.4 MMbpd, respectively, from the previous STEO. Total OPEC liquid fuels production is also expected to be lower than previously forecast. However, continuing production growth in many non-OPEC countries is expected to moderate the pace of global liquid fuels inventory draws in 2017. EIA expects a small inventory build in 2018.
Inventory draws expected in the second and third quarters of 2017 suggest the possibility of some increases in crude oil prices over the coming months. However, because US tight oil production is relatively responsive to changes in oil prices compared with offshore production, and even given an estimated six-month lag between a change in oil prices and realized production, higher crude oil prices in mid-2017 have the potential to raise US supply in 2018.
The largest global inventory increase in the forecast occurs in the second quarter of 2018, when Brazilian and OPEC production are expected to increase by 570,000 bpd and 220,000 bpd, respectively. Supply growth in 2018 could contribute to downward pressure in oil prices as early as late 2017. EIA’s STEO forecast assumes OPEC cuts will be extended beyond March 2018 but that non-compliance will begin to grow late in 2017 and increase in the second half of 2018. Although this forecast reflects the assumption of increased non-compliance with a second production-cut extension in 2018, any extension provides some support for crude oil prices, even if only temporarily, which would partially offset downward price pressure from growing inventories.
The June STEO forecasts a 2017 average spot price for Brent crude oil of $53/bbl (b), with prices increasing to $56/bbl in 2018. Average West Texas Intermediate (WTI) prices are forecast to be $2/bbl lower than Brent prices in both 2017 and 2018. As always, all oil price forecasts are subject to considerable uncertainty. For example, EIA’s forecast for the average WTI price in September 2017 is $51/bbl, but analysis of options trading suggests market expectations range from $39/bbl to $64/bbl at the 95% confidence interval.
EIA expects US crude oil production to increase through 2018, averaging 9.3 MMbpd in 2017 and 10.0 MMbpd in 2018. The 2018 STEO forecast exceeds the previous record US production level of 9.6 MMbpd set in 1970. Growth in US production of crude oil and hydrocarbon gas liquids has been the largest contributor to the 820,000 bpd of non-OPEC liquids supply growth from January through May 2017. Continued increases in drilling activity in US shale basins, particularly in Texas, support production increases throughout the forecast.
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