Crude Oil

Prices: Crude oil prices traded below October levels for most of November before increasing significantly on the last day of the month. West Texas Intermediate (WTI) crude oil prices increased from $46.67 per barrel (b) on November 1 to $51.06/b on December 1, while international benchmark Brent crude oil increased by $5.80/b over the same period to settle at $53.94/b (Figure 1). WTI and Brent average spot prices in November were $4.07/b and $4.79/b lower, respectively, than the October averages.

At their November 30 meeting, members of the Organization of the Petroleum Exporting Countries (OPEC) announced a framework for supply reductions among most of its members. Several non-OPEC producers also announced their intention to freeze or reduce production. The extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain. If the agreement contributes to prices rising above $50/b in the coming months, it could encourage a return to supply growth in U.S. tight oil more quickly than currently expected. Crude oil prices near $50/b have led to increased investment by some U.S. production companies, particularly in the Permian Basin. A price recovery above $50/b could contribute to supply growth in other U.S. tight oil regions and in other non-OPEC producing countries that do not participate in the OPEC-led supply reductions.

Continuing global supply growth in 2017 may postpone significant global inventory withdrawals until 2018, with the first half of 2017 showing inventory builds averaging 0.8 million b/d in our current forecast. Global inventory builds are forecast to average 0.4 million b/d for all of 2017. Despite new oil production coming online when oil inventories are at high levels globally, global economic data have been more positive than previous expectations, and increases in oil demand growth could help to support prices in the coming quarters.

The Brent crude oil price forecast for 2017 was increased by $1/b from the November STEO, with 2017 prices expected to average $52/b in the December STEO. Brent and WTI crude oil prices for the first half of 2017 are projected to remain near $50/b, with prices ending the year around $55/b. Implied volatility increased in the weeks prior to the OPEC meeting, suggesting significant uncertainty regarding both the prospects for the recent agreement and its potential implications for global oil balances.

Oil production, particularly in the United States, has been more resilient in the current oil price environment than had been expected, as reflected in improving financial conditions at oil companies. Improved profits could encourage oil producers to increase capital expenditures and expand production in 2017 and beyond, especially if oil prices increase. In the third quarter of 2016, a group of publicly traded global oil companies reported the first quarterly profit from upstream production business segments since the fourth quarter of 2014, according to recently released earnings statements from 91 companies (Figure 2). Collectively, the group earned almost $2.3 billion in the third quarter when front-month Brent crude oil prices averaged $47/b. In the same period in 2015, when prices averaged $51/b, the group lost $54.1 billion.

Since the fourth quarter of 2014, many companies have written down the value of their assets to reflect lower oil prices, which reduces earnings in the quarter in which a company recognizes the write-down. The increase in earnings this year is partially attributable to a reduction in asset write-downs, which declined 80% year-over-year. Additionally, company reductions in operating expenses were greater than the declines in revenue, contributing to higher profitability.

Crude oil supply and price spreads: EIA revised the U.S. crude oil production forecast upward from the November STEO, with average 2017 production expected to decline by less than 0.1 million b/d from 2016 levels. Total U.S. liquids production, which includes production of hydrocarbon gas liquids (HGL) and biofuels, is expected to increase by 0.2 million b/d in 2017.

Total non-OPEC liquids production is expected to grow by almost 0.4 million b/d in 2017 from 2016 levels. Outside the United States, non-OPEC total liquid fuels production is expected to increase by slightly more than 0.1 million b/d in 2017. Canada's liquid fuels production is expected to grow by about 0.3 million b/d in 2017, making up for the low production growth in 2016, when wildfires during the summer resulted in large production shut-ins. Russia, Kazakhstan, and Brazil are also expected to see an increase in liquids output in 2017. Liquid fuels growth in these countries in 2017 is expected to be partially offset by declining production in the North Sea, China, and Mexico.

OPEC crude oil production is expected to average 33.2 million b/d in 2017. The Nigerian oil sector continues to experience setbacks as militant attacks continue to target oil infrastructure, lowering the country's production outlook. Libya's crude oil production was almost 0.6 million b/d at the end of November, a slight increase compared with the previous month. Additional oil production increases from Libya in the near term are not likely to occur without an agreement with the Zintani militia, which controls the pipelines that transport crude oil from some of Libya's largest fields, including the El Sharara and El Feel fields.

A return from seasonal maintenance at North Sea offshore oil fields in the United Kingdom and Norway increased collective production by almost 0.1 million b/d in November compared with October. Sustained production near 0.6 million b/d in Libya and an increase in North Sea production could be weakening near-term Brent prices compared with Middle Eastern crude oil. Along with relatively low shipping rates, weaker Brent prices have made crude oils produced in the Atlantic Basin market more competitive for refiners in Asia, whose traditional suppliers are Middle Eastern crude oil producers.

The front-month Brent-Dubai Exchange of Futures for Swaps (EFS), which is an instrument that allows trade between the Brent futures market and the Dubai swaps market and represents the price premium of Brent over Dubai crude oil, reached its lowest point so far this year towards the end of November, before rising in response to the OPEC supply cut agreement (Figure 3). Last November, when the spread between Brent and Dubai was similarly low, Chinese refiners increased purchases of West African crude oil. This year, some Asian refineries are purchasing Atlantic-based crude oils, with the trade press reporting that refineries in countries like South Korea and China recently purchased crude oil cargoes from the North Sea.

Liquid fuels demand and economic growth indicators: The outlook for global liquid fuels demand in the December STEO has been revised upward from the November STEO, with global oil demand now expected to grow by 1.4 and 1.6 million b/d in 2016 and 2017, respectively. The projection for real oil-weighted world GDP growth increases slightly from 2.2% in 2016 to 2.7% in 2017.

Higher expectations for demand growth are supported by relatively strong economic data released in November. U.S. GDP growth in the third quarter of 2016 was revised upward from initial estimates of 2.9% to 3.2%, according to the Bureau of Economic Analysis, and improvements in leading economic indicators across the world provide support for the increased global demand forecast. Manufacturing Purchasing Managers' Indexes (PMI) in major developed and emerging markets indicate expansion in the manufacturing sectors in these regions (Figure 4). A manufacturing PMI measures conditions within the manufacturing sector and is used as an indicator of economic growth. An index level above 50 indicates the manufacturing sector is expanding.

Four major manufacturing regions of the world are reporting continued expansion, indicating strength in global economic growth. The U.S. manufacturing PMI has increased over the past few months, while the latest PMI reading for the Eurozone was at its highest in nearly three years. The manufacturing PMI for China and India were at multi-year highs in October before declining slightly in November. An expanding manufacturing sector typically leads to increasing consumption of fuels like distillate, but it can also indirectly indicate that domestic and international demand for goods is increasing, which can lead to future economic growth and oil demand.