Analysis & Projections
The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran
Release date: August 24, 2012
Next release date: October 25, 2012
Summary
- The oil market has tightened since the previous edition of this report, as global demand outpaced supply in July and August due largely to expected seasonal factors. Crude oil prices also increased in July and August relative to the months covered in the last report, released on June 26, 2012, but prices still remain lower than the first quarter average of this year.
- World oil inventories are estimated to have declined by an average of 1.2 million barrels per day (bbl/d) during July and August, due primarily to the seasonal peak in world oil demand. By comparison, at the same time last year, global inventories were being drawn down by 1.6 million bbl/d. This year's lower drawdown reflects higher production relative to July and August 2011, when the market was coping with the loss of Libyan oil (Figure 1).
- Crude oil prices reversed the downward trends seen in May and June this year (Figure 3) and the Brent market returned to backwardation, both indications of tightening oil markets. Over the five days ending on August 22, the price of the front-month futures contract for Brent crude oil averaged about $114.77 per barrel, a $23 per barrel increase from the June 20 – 26 average when prices were at their lowest level for 2012. The spread on the Brent 1st – 13th month contracts averaged about $6 per barrel for the five days ending August 22, considerably higher than its 2012 low of -$1.17 for the five day period ending June 26.
- Production from member states of the Organization of the Petroleum Exporting Countries (OPEC) has increased over the past year, especially in Libya and Iraq. Saudi Arabia, which acts as a balancing force in the global oil market, continues to produce at high levels (Table 4).
- Non-OPEC production in July-August 2012 is estimated to be 0.3 million bbl/d above the July-August 2011 level, led by North America and particularly the tight oil plays of the United States (Table 3). While total unplanned production outages in non-OPEC countries remain higher than normal, they have declined from the level reached in June (Figure 2).
- Global surplus capacity remains relatively tight by historical standards, and is estimated at 2.4 million bbl/d over the last two months (Table 1).
- Expectations that policymakers in the European Union (EU), China, and the United States would provide additional economic stimulus to counteract slowing growth have contributed to broadly stronger performance in risk assets, including rising crude oil prices over the past two months. The entry into force of both U.S. financial sanctions on entities that pay for Iranian oil through the Central Bank of Iran and an EU ban on oil imports from Iran and insurance of Iranian vessels carrying Iranian oil, recent threats by Iran to block oil from transiting the Strait of Hormuz, the possibility that Israel might act unilaterally against Iran's nuclear capabilities, and the other continuing conflicts in the Middle East have increased market anxiety, adding to upward price pressure.
This is the fourth in a series of reports prepared in fulfillment of section 1245(d)(4)(A) of the National Defense Authorization Act (NDAA) for Fiscal Year 2012, which requires the U.S. Energy Information Administration (EIA) to "submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60-day period preceding the submission of the report." EIA consulted with the U.S. Department of the Treasury, the U.S. Department of State, and the intelligence community in the process of developing this report. Readers are encouraged to consult previous editions of this report for detailed background and contextual information not repeated here.
Estimates of production, consumption, surplus capacity and inventories
EIA estimates that global liquid fuels1 production in July and August 2012 averaged 88.7 million bbl/d, an increase of 1.4 million bbl/d from the same time period last year. Global liquid fuels consumption exceeded production, due to a seasonal upturn in demand, resulting in a 1.2 million bbl/d draw in oil stocks in July and August. The estimated net withdrawal of global stocks was larger in the comparable year-ago period, when the market was coping with the loss of Libyan oil (Table 1 and Figure 1). The increase in consumption in July and August relative to preceding months is consistent with the expected seasonal peak in world demand during the third quarter, which reflects both the United States driving season and increased oil use for electricity generation in the Middle East. Inventories in the United States fell by an average of 0.2 million bbl/d in July and August. Over that same time period, commercial inventories in other member states of the Organization for Economic Cooperation and Development (OECD) declined by an estimated 0.4 million bbl/d (Table 2).
During July and August, EIA estimates that liquid fuels production and consumption in Iran were 3.3 million bbl/d and 1.7 million bbl/d, respectively (Table 1). Iran's crude oil production capacity has eroded in recent years, due to its inability to carry out investment projects that are necessary to offset the natural decline in production from existing wells. However, the decline in Iranian exports and production has recently accelerated, contemporaneous with the entry into force of additional sanctions this summer. EIA estimates that Iran's total liquids production capability has fallen, although lease condensate and natural gas liquids production continues to remain flat. The change in global oil inventories includes the change in Iranian oil inventories, including any growth due to sanctions that have disrupted Iranian oil sales.
In July and August 2012, EIA estimates consumption of petroleum and petroleum products in countries other than Iran averaged 86.4 million bbl/d. During the same period, EIA estimates that production of petroleum and petroleum products in countries other than Iran averaged 83.1 million bbl/d, which is 3 million bbl/d or almost 4 percent higher than the three-year annual average from 2009-2011 (Table 1). The increase in global production compared with the three-year average can be attributed largely to a combination of increased output from some members of the Organization of the Petroleum Exporting Countries (OPEC), continued growth in North American oil supply, and lower aggregate disruption to non-OPEC production. Tables 3 and 4 provide further country-level reporting on supply estimates.
Much of the growth in OPEC supply in 2012 relative to last year derives from Iraq, Libya, and Saudi Arabia. Iraq's estimated average production level of 3.1 million bbl/d in July and August is the country's highest in recent decades, as new infrastructure has facilitated increased exports from its large southern fields and more than offset disruptions to production in the north due to pipeline sabotage and political disagreements between the central government and the Kurdish Regional Government. Though Libyan oil production and exports were briefly curtailed in early July, the country's oil production and exports have been restored to approximately 1.5 million bbl/d in August. This is a marked change from the same time last year, when the International Energy Agency coordinated a release of oil stocks to alleviate the market tightness caused by a near-complete disruption to Libyan supply. Meanwhile, Saudi Arabia continued to produce at relatively high levels, about 0.9 million bbl/d more than its three-year average (Table 4).
The United States is the largest source of non-OPEC liquids production growth over the past year and the largest source of liquids production growth relative to the recent three-year average for any country. Due to the continued production growth in onshore tight oil plays, U.S. crude oil production averaged 6.3 million bbl/d in July and August, as total liquids production reached 10.9 million bbl/d. Many of the other countries that are producing notably above three-year averages are also located in the Western Hemisphere, including Brazil, Canada, and Colombia (Table 3). Above-average output in Brazil reflects the seasonal upsurge in ethanol production, which peaks in the third quarter in accordance with that country's sugarcane harvest.
Unplanned non-OPEC disruptions declined over the last two 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 some unplanned maintenance activities in the North Sea as well as the repair of the Marib pipeline in Yemen, which allowed connected fields to resume some production (Figure 2). An above-normal volume of non-OPEC production is still offline due to unrest and a related embargo in Syria. Production in South Sudan is still completely offline, though South Sudan hopes to resume some oil production by the end of this year after recently reaching a conditional agreement with Sudan on oil export fees. The agreement, however, is contingent on achieving a broader accord on security matters, which have afflicted the two sides since even before South Sudan's independence.
EIA estimates that global surplus crude oil production capacity was 2.4 million bbl/d in July and August, only slightly higher than revised estimates for May and June (Table 1). Surplus production capacity in July and August was quite modest by historical standards (e.g. 3.6 million bbl/d average from 2009 to 2011), and especially when measured as a percentage of global oil production and consumption. Surplus capacity must also be considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran.
Crude oil and petroleum product prices
In contrast to data on petroleum and petroleum product volumes, price data is available on a real-time or near-real-time basis2. Over the last 60 days, crude oil prices have reversed the downward trends seen in May and June this year (Figure 3). Over the five days ending on August 22, the price of the front-month futures contract for Brent crude from the North Sea, a proxy for the global oil price, averaged about $114.77 per barrel, a $23 per barrel increase from its average over the June 20-26 period when prices were at their lowest level for 2012.
Crude oil prices are currently still below their year-ago levels, but are higher than their three-year averages. The average price for July and August of the front month WTI contract was $90.42 per barrel and the two-month average for the Brent front month contract was $107.00 per barrel (Table 5). The July and August average prices were $1.04 and $6.10 per barrel lower than at this time a year ago for WTI and Brent, but $11.48 and $22.36 per barrel higher than the three-year average from 2009 to 2011, respectively.
The Brent market briefly moved into contango, with prompt month prices below prices for future delivery during June, but has since returned to backwardation. For the five-days ending August 22, the 1st – 13th month spread averaged about $6 per barrel, well beyond its low of -$1.17 for the five-day period ending June 26. The switch from contango to backwardation is another sign of tightening in the world oil markets. One possible contributor to the recent tightness in the market may be related to the unavailability of insurance for tanker shipments from Iran due to sanctions imposed by the European Union. Commercial tanker tracking information and press reports indicate that discharges of Iranian oil were greatly diminished over the last two months in several Asian economies that have in recent years been important markets for Iran's oil exports. Both Iran and potential importers are known to be pursuing workarounds that may allow for a resumption of some shipments over the coming months, which could support some reduction in current market tightness.
The WTI spread has remained in contango, averaging -$1.93 per barrel in July and August, but this is a much smaller spread than the three-year average of -$5.59 per barrel. WTI prices continue to reflect transportation bottlenecks in the midcontinent region and ongoing efforts to ameliorate them by reconfiguring existing pipelines and building new ones.
For the five days ending August 22, the average price of the December 2012 WTI crude oil futures contract was $97.15 per barrel and the average price of the December 2012 Brent contract was $113.29 per barrel. The WTI and Brent prices for the 5-day average ending August 22 for the December 2012 contract have increased by about $16 per barrel and $21 per barrel, respectively, since June 26. Based on implied volatilities calculated from options and futures prices over the 5 days ending August 22, the probability of the December 2012 WTI futures contract expiring above $100 per barrel is 39 percent, an increase of almost 25 percentage points from the same calculation made using price data from the 5-day period ending June 26. Given the higher absolute level of Brent prices relative to WTI prices over the last two months, the probabilities that the December Brent contract will exceed specified dollar thresholds are higher.
Reformulated blendstock for oxygenate blending (RBOB) is a widely traded unfinished gasoline that requires blending with an oxygenate, such as ethanol, before being sold. RBOB prices rose along with crude oil prices over the last two months. Comparing the 5-day periods ending June 26, 2012 and August 22, the price of the front month of the NYMEX RBOB contract, which calls for delivery in New York Harbor, rose from $2.60 per gallon to $3.06 per gallon. During July and August, the average price for the front month RBOB futures contract was $2.90 per gallon, $0.69 per gallon higher than the average front month price over the three-year period from 2009-2011, but $0.08 per gallon below the July and August 2011 average.
The average price of the December 2012 RBOB futures contract for the 5-day period ending August 22 was $2.80 per gallon, an increase of $0.58 per gallon since June 26. Based on implied volatilities calculated from options and futures prices over the 5 days ending August 22, the probability of the December 2012 RBOB futures contract expiring above $3.35 per gallon (comparable to a $4.00 per gallon national average retail price for regular grade gasoline) is now 10 percent, a 8 percentage point increase from June 26. Higher crude oil prices were largely responsible for the increased probability of the December gasoline contract exceeding different price levels.
Footnotes
1The term "liquid fuels" encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains.
2The price data in this report are current as of August 22, 2012. In order to make it more understandable, and to respect contractual restrictions on EIA republication of certain data, most price data are reported using 5-day rolling or monthly averages and some are reported only in the figures.