Global Liquid Fuels

EIA estimates that global petroleum and other liquid fuels inventory builds averaged 0.9 million b/d in 2016. The annual average inventory build in 2016 marked the third consecutive year of inventory builds. The pace of inventory builds is expected to slow considerably to an annual average of 0.3 million b/d in 2017 and 0.1 million b/d in 2018. However, inventories are forecast to draw by an average of 0.1 million b/d in the second half of 2018.

Continuing global oil inventory builds contribute to crude oil prices remaining below $60/b through the end of 2018. Brent crude oil prices averaged $44/b in 2016, down from an average of $52/b in 2015. However, Brent prices rose in the second half of 2016 and averaged $53/b in December. The price increase in late 2016 at least partly reflects tighter balances than previously forecast during mid-2016, along with negotiations and the eventual agreement among members of the Organization of the Petroleum Exporting Countries (OPEC) to cut crude oil production starting in January 2017.

Brent prices are expected to remain near current levels through 2017, averaging $53/b for the year. The responsiveness of U.S. tight oil production to rising oil prices in late 2016 is expected to limit significant upward oil price pressures this year. In 2018, Brent prices are forecast to rise to an average of $56/b, ending the year at $59/b in December. Upward price pressures are expected to emerge in mid-2018 as the oil market becomes more balanced.

Significant upward revisions to historical consumption in the countries of the Organization for Economic Cooperation and Development (OECD) in mid-2016 have led to a revision in the historical global balances. Based on these revisions, EIA now estimates there was a global oil inventory draw during the third quarter of 2016, which was the first quarterly draw since late 2013. EIA's previous estimates had global markets close to balance in mid-2016, but still showed inventory builds. The draw during the third quarter of 2016 was more than offset by the sizeable builds in the first and last quarters of the year, leading to an annual average build in inventories. The fourth quarter build came amid significant production increases by a number of OPEC producers ahead of announced production cuts set to take effect in January 2017, a 0.2 million b/d quarter-over-quarter increase in U.S. crude oil production, and a seasonal downturn in demand.

Global Petroleum and Other Liquid Fuels Consumption

Global consumption of petroleum and other liquid fuels averaged 95.6 million b/d in 2016, an increase of 1.4 million b/d from 2015. Consumption growth in 2016 was driven by non-OECD countries. Consumption growth is expected to be about 1.6 million b/d in 2017 and 1.5 million b/d in 2018, with 1.2 million b/d of the growth in both years coming from rising non-OECD consumption. Forecast growth in the consumption of hydrocarbon gas liquids (HGL) is an important driver of overall global liquid fuels consumption growth.

China and India are expected to be the largest contributors to non-OECD petroleum consumption growth. China's consumption growth is forecast to average 0.3 million b/d in both 2017 and 2018. China's growth in consumption of petroleum and other liquid fuels is driven by increased use of gasoline, jet fuel, and HGL, which more than offsets decreases in diesel consumption. Last year's significant rise in the use of HGL in China will continue through at least 2017 as new propane dehydrogenation (PDH) plants contribute to rising propane use. In India, consumption growth averaging 0.2 million b/d in both 2017 and 2018 is expected to result from increased use of transportation fuels and of naphtha and ethane for new petrochemical projects.

In addition to increases in China and India, consumption growth in the Middle East is forecast to average 0.3 million b/d in both 2017 and 2018, up from 0.1 million b/d in 2016. Saudi Arabia is a key contributor to this growth. Although Saudi Arabia decreased the use of crude oil for electricity generation in 2016 by burning more natural gas, the expected increased use of natural gas as a petrochemical feedstock in 2017 and 2018 will once again result in an increase of direct crude oil burn for electricity generation.

OECD petroleum and other liquid fuels consumption rose by 0.3 million b/d in 2016. In 2017, EIA forecasts OECD consumption growth to average 0.4 million b/d as increasing consumption in the United States, Europe, and South Korea drive overall OECD consumption growth. In 2018, consumption growth slows to 0.3 million b/d. Although U.S. consumption growth accelerates in 2018, it is partially offset by a shift in Europe to declining consumption. Consumption in Japan declines by about 0.1 million b/d in both 2017 and 2018.

Forecast U.S. total liquid fuels consumption increases by 0.3 million b/d in 2017 and by 0.4 million b/d in 2018. In 2017, increasing use of gasoline and distillate fuel spur U.S. consumption growth. In 2018, forecast growth is mainly the result of increased use of HGL, which is forecast to increase by 0.2 million b/d. Rising ethane consumption accounts for almost all of this increase, as several new ethane crackers are expected to come online during the forecast period.

Non-OPEC Petroleum and Other Liquid Fuels Supply

EIA estimates that petroleum and other liquid fuels production in non-OPEC oil producing countries decreased by 0.6 million b/d in 2016, with more than half of the decrease occurring in North America. However, EIA expects non-OPEC production to rise by 0.4 million b/d in 2017 and by 0.7 million b/d in 2018, as total U.S. liquid fuels production increases by 0.3 million b/d and by 0.7 million b/d, in those respective years, in response to rising oil prices and increases in drilling productivity.

Among non-OPEC producers excluding the United States, declining oil production in some areas is expected to be countered by rising production in other areas. Some of the largest declines are expected to be in the North Sea and Mexico. Production in Norway and the United Kingdom, both of which posted increases in 2016, is expected to fall in the next two years, with total North Sea liquids production declining by more than 0.1 million b/d in 2017 and by almost 0.2 million b/d in 2018. In Mexico, liquids production is forecast to decline by more than 0.1 million b/d in both 2017 and 2018.

The largest production decline outside of the United States in 2016 was in China, which fell by about 0.3 million b/d. EIA expects China's output to continue to decline throughout the forecast period by 0.1 million b/d in both in 2017 and 2018 because of investment cuts and relatively few new offshore developments.

Canadian oil production in 2016 was roughly flat compared with the previous year because of production lost to wildfires in Alberta during May, June, and July. Curtailed output in mid-2016, effectively erased all of the increases in annual average Canadian output during the year. However, Canadian production is expected to increase by about 0.2 million b/d in both 2017 and 2018. The expected growth in Canadian production for 2017 includes restoration of production that was disrupted as a result of the Alberta wildfires.

Russia is also expected to be a source of non-OPEC production growth throughout the forecast period, with increases in annual average production projected to be 0.1 million b/d for both 2017 and 2018. Russia's output broke post-Soviet records numerous times in 2016, with liquid fuels production averaging 11.2 million b/d, posting growth of 0.2 million b/d during the year. Despite the forecast for year-over-year liquid supply growth in 2017, Russia's production is expected to decline through much of 2017, at least in part due to its agreement with OPEC to restrain output. Kazakhstan's output is also expected to rise in 2017 and 2018 as a result of the production restart at the giant Kashagan field. Kashagan began commercial production in November, and EIA expects that the field will increase output to 0.3 million b/d by the end of 2017.

Non-OPEC unplanned production outages in December were about 0.3 million b/d, a slight decrease from the November level. During 2016, non-OPEC unplanned supply outages averaged slightly below 0.5 million b/d, roughly 0.1 million b/d higher than the 2015 average. The increase was mainly the result of the wildfire-related outages in Canada during the spring and summer of 2016.

OPEC Petroleum and Other Liquid Fuels Supply

OPEC crude oil production averaged 32.9 million b/d in 2016, an increase of 0.8 million b/d from 2015, led by rising production in Iran, Iraq, and, to a lesser extent, Saudi Arabia. Forecast OPEC crude oil production rises by 0.3 million b/d in 2017, with Iran and Libya accounting for nearly all of the increase. EIA expects that OPEC crude oil output will rise by an additional 0.5 million b/d in 2018, driven by an increase in Iraqi output. The increase in Iraq's production will likely be delayed from 2017 until 2018 as a result of the November 2016 OPEC production target agreement, limiting Iraq's output to roughly 4.4 million b/d starting in January 2017 and lasting for six months. The forecast assumes that OPEC countries subject to the recent production targets will largely adhere to them.

EIA expects crude oil production to increase in countries not covered by the agreement, most notably Libya, where previously shut-in fields continue to see increasing production. EIA also expects Nigeria's production to increase slightly in 2017.

In addition, OPEC's largest producer, Saudi Arabia, could increase crude oil production going into the summer months to satisfy domestic demand for crude oil use for electric power generation, which has been as high as 0.9 million b/d during peak demand months.

OPEC noncrude liquids production averaged 6.7 million b/d in 2016 and is forecast to increase by 0.3 million b/d in 2017 and by 0.2 million b/d in 2018, led by increases in Iran and Qatar.

OPEC unplanned crude oil supply disruptions averaged nearly 1.9 million b/d in December, down slightly from the November level. Outages in Libya decreased in December because of the reopening of the Sharara and El-Feel fields in the western part of the country. The fields had been shut since November 2014 and April 2015, respectively, as Zintani militias and a faction associated with Libya's Petroleum Facilities Guard had closed vital pipelines that transport oil from these fields to oil Libya's western export terminals. This development follows the reopening of Libya's eastern ports in September. Libya's National Oil Company lifted a long-standing force majeure at the Zuetinia and Ras Lanuf ports, which resulted in Libya's crude oil output doubling between September and December. Unplanned outages in Nigeria continue at roughly 0.6 million b/d, as major crude oil streams (Bonny Light, Forcados, Brass River, and Qua Iboe) continue to experience production disruptions.

OPEC surplus crude oil production capacity is expected to be 1.3 million b/d in 2017 and to be 1.2 million b/d in 2018. Surplus capacity is typically an indicator of market conditions, and surplus capacity below 2.5 million b/d indicates a relatively tight oil market. However, high current and forecast levels of global oil inventories make the forecast low surplus capacity less significant.

OECD Petroleum Inventories

EIA estimates that OECD commercial crude oil and other liquid fuels inventories were 3.10 billion barrels at the end of 2016, equivalent to roughly 66 days of consumption. Forecast OECD inventories rise to 3.13 billion barrels at the end of 2017 and to 3.16 billion barrels at the end of 2018.

Crude Oil Prices

The monthly average spot price of Brent crude oil increased by $9/b in December to $53/b. Market reactions to the November 30 OPEC agreement to cut production by 1.2 million b/d starting in January 2017 were a major contributor to rising oil prices in December.

Brent crude oil spot prices are expected to remain fairly flat in the coming months. Despite the recent OPEC agreement, EIA expects global oil inventory builds to continue but at a generally slower rate in 2017 and 2018 than the 2016 average build of 0.9 million b/d. Inventory builds are forecast to average 0.4 million b/d in the first half of 2017 before falling to an average of 0.2 million b/d in the second half of 2017, with a draw expected during the third quarter. The expected persistence of excess global oil supply in the near term, along with the responsiveness of U.S. tight oil production to rising oil prices in late 2016, is expected to limit significant upward oil price pressures in 2017. Brent crude oil prices are forecast to average $53/b in the first half of 2017 and $54/b in the second half of 2017.

Some upward price pressures are expected to emerge in 2018. Global oil markets are expected to be more balanced by mid-2018, with global oil inventories transitioning from moderate builds of 0.4 million b/d in the first half of the year to an average draw of 0.1 million b/d in the second half, resulting in a build of about 0.1 million b/d build for all of 2018. EIA forecasts Brent prices to average $55/b during the first half of 2018 and $57/b in the second half of 2018.

Average West Texas Intermediate (WTI) crude oil prices are forecast to be $1/b lower than Brent prices in 2017 and 2018. The slight price discount of WTI to Brent in the forecast is based on the assumption of competition between the two crude oils in the U.S. Gulf Coast refinery market.

Global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. Uncertainty remains as to the effectiveness and duration of the concurrent OPEC and non-OPEC production cuts, which could influence prices in either direction. Also, the potential for continued efficiency gains and cost reductions from non-OPEC producers in the new higher price environment could result in additional volumes of supply that could put downward pressure on prices.

The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook. WTI futures contracts for April 2017 delivery that were traded during the five-day period ending January 5 averaged $55/b, and implied volatility averaged 29%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in April 2017 at $43/b and $71/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $35/b and $93/b for prices in December 2017. In January 2016, WTI for April 2016 delivery averaged $38/b, and implied volatility averaged 46%, with the corresponding lower and upper limits of the 95% confidence interval at $25/b and $56/b.