Global Crude Oil and Liquid Fuels

Global Crude Oil and Liquid Fuels Overview

The oil market has tightened in recent months as the seasonal increase in global demand outpaced supply in August and unplanned production outages in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) persist. Most recently, Hurricane Isaac led to the shut-in of 13 million barrels of crude oil production from August 25 through September 10 in the Gulf of Mexico. EIA expects oil markets to begin to loosen, with non-OPEC liquid fuels production growing by 1.2 million bbl/d in 2013 compared with world consumption growth of 1.0 million bbl/d. The possibility of a deteriorating economic situation in the countries of the European Union and slowing growth in China adds significant downside risk to future prices, though supply disruptions and lower-than-expected supply growth could raise prices. EIA expects stock builds during 2013, reflecting a looser oil market over that time period.

Global Crude Oil and Liquid Fuels Consumption

World liquid fuels consumption grew by an estimated 1.0 million bbl/d in 2011. EIA expects consumption growth of 0.8 million bbl/d in 2012 and 1.0 million bb/d in 2013, with China, Russia, the Middle East, Brazil, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for most of the consumption growth. Although forecast liquid fuels consumption in the United States increases by 0.1 million bbl/d in 2013, total OECD liquid fuels consumption falls by 0.2 million bbd/d in 2013, led by declines in consumption in Europe and Japan.

Non-OPEC Supply

EIA expects non-OPEC liquid fuels production to rise by 0.5 million bbl/d in 2012 and by a further 1.2 million bbl/d in 2013. The largest area of non-OPEC growth is North America, where production increases by 1.0 million bbl/d and 0.6 million bbl/d in 2012 and 2013, respectively, due to continued production growth from U.S. onshore shale and other tight oil formations and from Canadian oil sands. EIA expects that Kazakhstan will commence commercial production in the Kashagan field next year, increasing its total production by 160 thousand bbl/d in 2013. In Brazil, EIA projects output to rise by 200 thousand bbl/d in 2013, with increased output from its offshore, pre-salt oil fields. Forecast production also rises in Columbia, Russia, and China over the next two years, while production declines in Mexico and the North Sea.

Unplanned non-OPEC disruptions declined in recent months, from almost 1 million bbl/d in June to around 0.8 million bbl/d in August, mainly due to the temporary completion of unplanned maintenance activities in the North Sea and the repair of the Marib pipeline in Yemen. Sudan and South Sudan reached an understanding on pipeline transit and processing fees, as well as having South Sudan pay compensation for loss of oil revenue due to the split. Also, both sides intend to reach an agreement on border security, particularly in the contested Abyei oil region, before resuming oil production and exports.

OPEC Supply

EIA expects that OPEC member countries will continue to produce more than 30 million bbl/d of crude oil over the next two years. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and 0.1 million bbl/day 2013. The growth in OPEC supply is due in part to Iraq, where new infrastructure has enabled the country to increase production to the highest level since 1989. Following a disruption in early July, Libya restored oil production and exports to about 1.5 million bbl/d in August. OPEC non-crude oil liquids (condensates, natural gas liquids, and gas-to-liquids), which are not covered by OPEC's production quotas, averaged 5.3 million bbl/d in 2011. EIA forecasts that non-crude oil liquids will increase by 0.3 million bbl/d in 2012 and by 0.2 million bbl/d in 2013.

EIA's forecast of Iranian crude oil production is unchanged from last month's Outlook, with forecast production falling by about 1 million bbl/d by the end of 2012 relative to an estimated output level of 3.6 million bbl/d at the end of 2011, and by an additional 0.2 million bbl/d in 2013.

OPEC members serve as the swing producers in the world market because only OPEC producers possess surplus crude oil production capacity, most of which is in Saudi Arabia. EIA projects that OPEC surplus production capacity will average 2.2 million bbl/d in 2012 and rise to an average of just under 2.4 million bbl/d in 2013.

OECD Petroleum Inventories

EIA estimates that OECD commercial liquid fuel inventories ended 2011 at 2.60 billion barrels, equivalent to 56 days of forward cover. OECD stocks at the end of August 2012 are estimated to be about 22 million barrels higher than at the end of 2011, but are projected to fall back to 2.60 billion barrels by the end of 2012. OECD commercial inventories increase to 2.65 billion barrels and 57 days of forward cover by the end of 2013.

Global Crude Oil Prices

EIA projects the price of Brent crude oil will average $112 per barrel in 2012 and $103 per barrel in 2013, both about 3 percent higher than last month's Outlook. EIA expects the WTI price to average $93 per barrel in the second half of 2012 and largely remain at this level throughout the forecast period. EIA expects that the WTI crude oil spot price discount to the Brent crude oil spot price will continue, averaging $17 per barrel in the fourth quarter of 2012 and then falling to $9 per barrel by the end of 2013.

Energy price forecasts are highly uncertain (Market Prices and Uncertainty Report). WTI futures for December 2012 delivery during the five-day period ending September 6, 2012 averaged $96.11 per barrel. Implied volatility averaged 31 percent, establishing the lower and upper limits of the 95-percent confidence interval for the market's expectations of monthly average WTI prices in December 2012 at $74 per barrel and $126 per barrel, respectively. Last year at this time, WTI for December 2011 delivery averaged $89 per barrel and implied volatility averaged 40 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $62 per barrel and $127 per barrel.