Global Crude Oil and Liquid Fuels

Global Crude Oil and Liquid Fuels Overview

EIA expects the oil market to loosen in the fourth quarter of 2012, as global liquid fuels consumption falls from its seasonal peak and output from countries outside of the Organization of the Petroleum Exporting Countries (OPEC) recovers from unplanned outages and scheduled maintenance. Persistent unplanned production outages in non-OPEC countries helped keep the spot price for Brent crude oil near $110 per barrel in the third quarter of 2012. EIA forecasts that Brent crude, a benchmark for the global oil price, will average $111 per barrel for the fourth quarter of 2012. In 2013, EIA projects the Brent crude price to fall to an average of $103 per barrel, although a lingering supply risk because of instability in the Middle East and North Africa could keep prices higher. EIA also expects global inventory builds in the first half of 2013 to reach higher levels relative to the same period in 2012, mostly due to an increase in non-OPEC supply.

Global Crude Oil and Liquid Fuels Consumption

World liquid fuels consumption grew by an estimated 1.1 million bbl/d in 2011. EIA expects consumption growth of about 0.8 million bbl/d in 2012 and 0.9 million bbl/d in 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth. However, forecast consumption falls by 0.5 million bbl/d during the fourth quarters of 2012, following the end of the global seasonal demand peak in the third quarter.

Projected OECD liquid fuels consumption declines by 0.4 million bbl/d in 2012 and by an additional 0.2 million bbl/d in 2013. Although EIA forecasts U.S. liquid fuels consumption to grow by 0.1 million bbl/d in 2013, this is more than offset by declines in consumption in Europe and other OECD countries. One possible exception is Japan, where only a handful of nuclear facilities, at best, will be brought back online in 2013, which could cause its oil consumption to remain relatively resilient through the forecast period. China has been experiencing a slowing of its economic growth rate. EIA's forecast for China's oil consumption growth remains at lower levels than the country experienced in previous years. EIA projects China's liquid fuels consumption to rise by 3.6 percent (355 thousand bbl/d) in 2012, the lowest rate of annual growth since 2001, and by 400 thousand bbl/d in 2013.

Non-OPEC Supply

EIA expects non-OPEC liquid fuels production to rise by 570 thousand 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 670 thousand 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.

Some large non-OPEC producers continue to undergo planned maintenance that traditionally takes place during this time of the year. Kazakhstan's crude and condensate production was down by about 160 thousand bbl/d in September 2012 because of planned maintenance at Tengiz. The field is slowly returning to normal operations. In the North Sea the Buzzard, Elgin, and Franklin fields are currently out for maintenance. Buzzard is expected to return to full production at the end of October. Total announced that Elgin and Franklin maintenance will be extended through December. Maintenance in Norway's fields reduced output by more than 20 thousand bbl/d in September 2012. This was mainly due to maintenance at the Troll field, but also includes smaller volumes from other fields, such as Gullfaks and Ekofisk.

Unplanned outages and disruptions to non-OPEC production increased in August and September, averaging around 1.1 million bbl/d. Hurricane Isaac contributed to production shut-ins in the Gulf of Mexico averaging about 210 thousand bbl/d in both August and September.

EIA has made slight adjustments in its forecasts for Colombia and Brazil, the two leading sources of non-OPEC supply in South America, due in part to lower output in recent months. In Colombia, anti-government rebels had intensified the frequency and severity of their attacks on the Caño Limón pipeline and other oil infrastructure, which contributed to an estimated decline in August production relative to the previous month and year-ago levels. However, security threats have abated in anticipation of peace talks and Colombian oil production is estimated to have partially recovered in September, which has led to renewed optimism that the country can resume its production gains. Brazilian liquid fuels production has also consistently failed to meet expectations in recent months due to persistent maintenance-related shutdowns, larger-than-expected field declines, the impacts of a relatively poor sugarcane harvest on ethanol production, and the continued outage at the Chevron-operated Frade field. Unless output is quickly restored, Brazilian liquids production is likely to decline on a year-to-year basis.

Sudan and South Sudan signed a series of agreements to settle their dispute and restart oil production in the South, eight months after South Sudan halted its crude oil exports via pipelines through Sudan and shut in all production. Sudan and South Sudan had already reached an understanding on oil transit fees, but the resumption of production was contingent on a broader deal on border security. The two countries have now signed an agreement on security arrangements; however, some post-independence issues such as border demarcation, rights to the disputed Abyei region, and Sudan's claim for compensation of Sudapet's assets that went to South Sudan remain unresolved. Nonetheless, South Sudan expects to restart production and exports before the end of this year, but has previously cautioned it could take four to six months to bring output back to full volumes, possibly longer for areas damaged during military clashes.

Forecasting South Sudan's oil restart and the pace of the ramp-up remains a challenge given uncertainties include: the extent of damage to infrastructure at fields within the Greater Nile Oil Project; the ability for some mature fields that were previously declining in output to reach pre-shut-in levels; the extent to which the shut-in left any permanent irreversible damage that could compromise future output; how quickly export pipelines will be flushed out; and any other mechanical issues that may arise during the restart. EIA does not expect South Sudan's production to return to pre-shut-in levels in the forecast period.

OPEC Supply

EIA expects that OPEC members will continue to produce more than 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil consumption and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 1.2 million bbl/d in 2012 and remains mostly flat in 2013. 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 and are forecast to increase by 0.3 million bbl/d in 2012 and by 0.2 million bbl/d in 2013.

EIA estimates that Iran's crude oil production declined by 50 thousand bbl/d in September 2012, following a 100-thousand-bbl/d decline the month before. EIA expects Iran's crude oil production to fall 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. The decline in Iran's crude oil production capacity will continue due to the country's inability to carry out investment projects that are necessary to offset the natural decline in production from existing wells.

It is difficult to differentiate between the effects of the latest round of sanctions on Iran and those enacted in previous years when assessing impacts on Iranian oil production. While countries in the European Union appear to have ceased imports of Iranian crude oil, the reinsurance ban affected Iran's ability to sell its crude to some of its largest customers in Asia, including Japan and South Korea. Most of Iran's crude oil customers have been able to replace insurance coverage, once provided by European protection and indemnity (P&I) clubs, over the last two months, although preliminary data show a very small increase in imports of Iranian crude oil by those customers in August. EIA bases this assessment on preliminary commercial data on tanker liftings from Iran, press reports, official Iranian statements, and other relevant information. This tentative interpretation of a very fluid situation could change as data are revised and more details emerge.

The attacks on American personnel in Benghazi, Libya, serve as a tragic reminder that insecurity continues to plague the country, including some areas in which oil infrastructure is concentrated. Though Libya has continued to maintain production at relatively high levels and recently restarted its largest refinery, it poses a downside risk to the supply forecast given the possibility of future disruption.

World oil surplus production capacity is almost entirely concentrated in one country: Saudi Arabia. With Saudi Arabian oil production at or near 10 million bbl/d for much of 2012, global surplus production capacity has been in the neighborhood of 2 million bbl/d during this time.

OECD Petroleum Inventories

EIA estimates that OECD commercial oil inventories ended 2011 at 2.60 billion barrels, equivalent to just under 56 days of forward-cover. Projected OECD oil inventories increase to 2.64 billion barrels and 57 days of forward-cover by the end of 2012. Forecast days of supply are at the highest end-of-year levels since 1991 because of the decline in OECD consumption over the last 7 years.

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 mostly unchanged from 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. After increasing to as high as $19 per barrel in August and September of this year, EIA expects that the WTI crude oil spot price discount to the Brent crude oil spot price will average $17 per barrel in the fourth quarter of 2012 before falling to $9 per barrel by the end of 2013.

Energy price forecasts are highly uncertain (Market Prices and Uncertainty Report). WTI futures for January 2013 delivery during the five-day period ending October 4, 2012, averaged $92.09 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 January 2013 at $70 per barrel and $121 per barrel, respectively. Last year at this time, WTI for January 2012 delivery averaged $79 per barrel and implied volatility averaged 50 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $51 per barrel and $123 per barrel.