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Last Updated: August 10, 2018
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In the August 2018 update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts Brent crude oil prices to average $73 per barrel (b) in the second half of 2018 and decline to an average of $71/b in 2019 (Figure 1). Competing upside and downside price risks are expected to play a large role in price formation during the forecast period. Upside price risks stem largely from the possibility of supply outages when both petroleum inventories and spare crude oil production capacity for members of the Organization of the Petroleum Exporting Countries (OPEC) are lower than average. Downside price risks stem largely from potentially reduced demand because economic growth and resulting crude oil demand could be lower than forecast. 


Daily and monthly average crude oil prices could vary significantly from annual average forecasts because 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.

EIA forecasts total global liquid fuels inventories to decrease by 0.3 million barrels per day (b/d) in 2018, followed by an increase of 0.3 million b/d in 2019 (Figure 2). Inventory changes of this magnitude should be considered mostly balanced, contributing to forecast Brent crude oil prices remaining between $70/b and $73/b from August 2018 through the end of 2019. However, the forecast for slight inventory increases in 2019 contributes to expectations of modest downward price pressure in 2019.


On the supply side, the combination of relatively low inventory and OPEC spare capacity levels elevates the risk of upward price movements if a supply disruption occurs or if forecast production growth does not materialize. 

Changes in global petroleum inventories data are not collected directly, but are estimated based on forecasts for global production and consumption. However, inventory data for the United States and other countries within the Organization for Economic Cooperation and Development (OECD) are available and may provide insight into global supply. In terms of days of supply, OECD inventories are expected to remain less than the monthly average for the previous five years, so any outages could have a significant effect on crude oil prices (Figure 3).


In 2018 and in 2019, EIA expects OPEC spare crude oil production capacity to decrease from 2017 levels (Figure 4). Although spare capacity in 2016 was lower than that forecast for 2018 and 2019, OECD inventories were higher in 2016, as seen in Figure 3. OPEC spare production capacity is forecast to average 1.6 million b/d in 2018 and to fall to 1.3 million b/d in 2019, down from 2.1 million b/d in 2017 and lower than the 10-year (2008–17) average of 2.3 million b/d. With little spare capacity, risks on the supply side (including greater-than-forecast disruptions in Iran, Venezuela, or Libya) may have significant price impacts.


EIA forecasts OPEC’s petroleum and other liquids production to decrease from the 2017 level of 39.5 million b/d to 39.1 million b/d in 2018 and to 39.0 million b/d in 2019. The small decline in 2019 reflects crude oil production increases from some producers that nearly offset anticipated declines from other OPEC members.

Brent spot prices averaged more than $74/b in June 2018, up $10/b from December 2017. Price increases in 2018 have been largely driven by unplanned supply disruptions and the expected loss of some Iranian crude oil production by the end of the year because of renewed sanctions. The August 2018 STEO reflects the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the plan to reinstate sanctions on companies doing business with Iran. Sanctions will likely affect the Iranian oil sector, which would limit the country’s crude oil production and exports by the end of 2018. Uncertainty remains regarding the degree to which the U.S. sanctions will take Iranian crude oil off the market.

Future crude oil production in Venezuela and Libya and the magnitude of the production response from other OPEC members and Russia are also highly uncertain. Developments regarding these and other variables could influence prices in either direction.

Concerns about the pace of future economic and oil consumption growth have likely contributed to demand side uncertainty. The August STEO forecasts global demand growth for petroleum and other liquids to average 1.66 million b/d in 2018 and 1.57 million b/d in 2019, down from the July STEO forecast of 1.72 million b/d and 1.71 million b/d for 2018 and 2019, respectively.

U.S. average regular gasoline price increases, diesel price decreases

The U.S. average regular gasoline retail price increased less than one cent from last week to remain at $2.85 per gallon on August 6, 2018, up 47 cents from the same time last year. Rocky Mountain and East Coast prices each rose over a penny to $2.92 per gallon and $2.80 per gallon, respectively, and Midwest prices increased less than one cent to $2.77 per gallon. West Coast and Gulf Coast prices each decreased less than one cent to $3.34 per gallon and $2.59 per gallon, respectively.

The U.S. average diesel fuel price decreased less than one cent from last week to $3.22 per gallon on August 6, 2018, 64 cents higher than year ago. Midwest prices fell nearly one cent to $3.15 per gallon, and West Coast, East Coast, and Gulf Coast prices each decreased less than a penny, remaining virtually unchanged at $3.72 per gallon, $3.22 per gallon, and $3.00 per gallon, respectively. Rocky Mountain prices were unchanged at $3.36 per gallon.

Propane/propylene inventories rise slightly

U.S. propane/propylene stocks increased by 0.1 million barrels last week to 66.4 million barrels as of August 3, 2018, 9.3 million barrels (12.2%) lower than the five-year (2013-2017) average inventory level for this same time of year. Gulf Coast inventories increased by 0.3 million barrels and Rocky Mountain/West Coast inventories rose slightly, remaining virtually unchanged. Midwest and East Coast inventories decreased by 0.2 million barrels and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 4.3% of total propane/propylene inventories.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Crude oil gasoline STEO (Short-Term Energy Outlook) Petroleum USA Iran Libya Venezuela OPEC OECD
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Your Weekly Update: 23 - 27 March 2020

Market Watch   

Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b

  • After falling to an 18-year low last week, crude oil prices have managed to recover from their lowest level since 2003… but just barely
  • A huge swathe of economic stimulus packages announced by governments worldwide, including a US$2 trillion bipartisan injection in the US economy, soothed financial markets, which in turn supported commodity prices
  • More stimulus, however, may be needed as confirmed Covid-19 cases in Italy and the USA overtake China’s total, with the pandemic increasingly containing in the latter but accelerating at a dangerous pace in Europe and North America
  • While the Covid-19 saga plays out, former allies Saudi Arabia and Russia remain at odds over crude oil prices; Russian President Vladimir Putin has accused Saudi Arabia of ‘oil price blackmail’, vowing not to cave in
  • However, various reports from Russia suggest the low crude prices are beginning to bite economically, with Russia still ‘open to cooperation’ but committed to a war of attrition
  • With Saudi Arabia unlikely to want to cave either, the USA is exercising its muscle in an attempt to intervene in the price war; the Department of Energy will be purchasing some 77 million barrels of (US) crude to bring its Strategic Petroleum Reserve to maximum capacity
  • Meanwhile, the US is reportedly also open to a joint US-Saudi Arabia alliance in a bid to stabilise prices, a scenario that was previously unthinkable but may be necessary if the US shale patch is to be saved; such an alliance, however, is likely to invite reprisals from Russia
  • The record low crude oil prices has led some traders to build up positions, hiring tankers and supertankers to store crude and fuel products at sea while betting that prices will eventually rise; the world’s largest oil trader Glencore has chartered one of the world’s two Ultra Large Crude Carriers for six months to serve as floating storage, while other traders are beginning to store jet fuel
  • As expected, the low prices have begun to bite on the US active rig count, which fell by a net 20 to 772 sites; the situation is worse in Canada, where the industry lost 77 sites over the week to fall to 98 active sites
  • While prices have managed to recover from their lows, the outlook for crude remains weak as long as the oil price war persists and the Covid-19 pandemic shows no sign of containment; expect prices to remain rangebound at US$28-30/b range for Brent and US$23-25 for WTI

Headlines of the week

Upstream

  • CNOOC has announced a new ‘large-sized’ oil discovery in the Bohai Bay, with the Kenli 6-1 structure being the first major discovery in the Laibei Lower Uplift
  • Husky has halted work on the West White Rose project offshore Newfoundland and Labrador in Canada until the Covid-19 pandemic blows over
  • MOL and its partners in the PL820S in the Norwegian North Sea have struck oil, with the Evra and Iving exploratory wells fielding oil (and gas) in multiple formations in the Balder and Ringhorne fields; the discoveries are expected to be developed as a tie-back to nearby existing installations
  • Malaysia is preparing for its 2020 licensing round – with bids due in late May – offering stakes in eight fields, which include discovered assets with more than 12 million boe of proven undeveloped resources

Midstream/Downstream

  • Brazil’s Petrobras has extended the deadline to submit binding offers for eight of its refineries in Brazil, hampered by the volatility in global oil prices
  • Shell has paused construction of its massive ethane cracker in Beaver Country, Pennsylvania to help contain the rapid spread of Covid-19 in the USA
  • A second fire in less than a year has broken out at the Petronas-Saudi Aramco 300 kb/d PRefChem refinery in Malaysia, with output likely to be further curbed by a strict lockdown on private operations instituted by the government
  • Work on upgrading the Abadan oil refinery in Iran has been halted until at least mid-April, until the Covid-19 situation in the country is under control
  • Gazprom has started up a new CDU at its Moscow refinery, adding some 140 kb/d of processing capacity to the key processing site

Natural Gas/LNG

  • After almost two decades of attempted development, the Abadi LNG project in Indonesia may be in jeopardy as Japan’s Inpex is ‘reviewing investment plans’ in light of the Covid-19 virus; a delay is very likely, although Inpex has recently secured key land permits for the project’s planned onshore LNG plant
  • Australia is planning legislation to lift the country’s current moratorium on onshore gas exploration and production in 2021, following a cautious green-light by the Victorian Gas Program task force
  • US regulators have given Cameron LNG an additional four years to complete a two-train expansion at its LNG export project in Louisiana
  • Sempra expects to delay FID on its Port Arthur LNG export project, but remains on course to sanction its Energia Costa Azul project by Q2 2020
  • The Woodfibre LNG project in Canada’s British Columbia has delayed construction until 2021, as a key contractor filed for bankruptcy
  • Total has announced a new gas/condensate discovery in the UK North Sea – with the Isabella 30/12d-11 well in license P1820 yielding ‘encouraging flows’
  • INOX India and an Indian subsidiary of Shell have signed an MoU to partner and develop LNG demand and distribution, to be sourced from Shell Energy India’s 5 million tpa LNG receiving terminal in Hazira, Gujarat
March, 27 2020
This Week in Petroleum: Oil market volatility is at an all-time high

Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.

Figure 1. West Texas Intermediate crude oil futures prices

WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.

Figure 2. Crude oil futures price spreads and inventories

Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).

Figure 3. Frequency of West Texas Intermediate (WTI) futures daily price percentage changes (January 1999 - March 2020)

On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.

Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.

Figure 4. Changes in implied and historical volatility measures

Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.

Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.

Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).

Figure 5. Rolling 60-day correlation between daily price changes in West Texas Intermediate (WTI) crude oil prices and other indicators

U.S. average regular gasoline and diesel prices fall

The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.

The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.

Residential heating fuel prices decrease

As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.

Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.

March, 27 2020
Your Weekly Update: 16 - 20 March 2020

Market Watch   

Headline crude prices for the week beginning 16 March 2020 – Brent: US$30/b; WTI: US$28/b

  • The dark days continue, with global crude oil prices at their weakest point since 2015 as the Covid-19 pandemic deepens worldwide and the Saudi Arabia-Russia oil war heats up
  • With infections and deaths piling up in Europe and the US – and a second wave of infections threatening Asia – the number of global cases has topped 240,000 and 10,000 respectively
  • Travel lockdown are taking place worldwide; Europe has largely shut its borders, as well as the US and other major countries, resulting in airlines slashing international travel and cratering jet fuel demand
  • But of more concern for oil prices, is the standoff between Saudi Arabia and Russia, as both countries dig in their heels to engage in a protracted price war
  • Saudi Arabia is on the hunt for more supertankers, with the intention of flooding the market with oil; Saudi Aramco will supply a record 12.3 million barrels in April and is looking to raise capacity by another 1 mmb/d after
  • Russian producers are also ready to raise production, with Rosneft announcing it would lift production as soon as the current supply deal ends on March 31
  • Abu Dhabi, a close ally of Saudi Arabia, is fanning the flames as well; ADNOC is discounting its flagship Murban crude and pledging a rise of output to 4 mmb/d in April, and possibly 5 mmb/d in May, to join the race for market share
  • There is a glimmer of hope that a joint resolution could halt the price war, with OPEC+ still holding meetings – albeit virtually – to assess the situation
  • In light of the meltdown in oil prices, the US has suspended its planned sale of inventories from its Strategic Petroleum Reserve, but instead will add to it by purchasing large volumes in an attempt to prop up US shale oil producers
  • With weak oil prices, the active US rig count according to Baker Hughes is holding steady so far, down by a net one site with the loss of two gas rigs offset by a single gain in the oil rig count; however, do expect sharp drops in the near future if there is no resolution to the oil price imbroglio
  • With sentiment over the global macroeconomic situation and oil prices at near worst-case scenario levels, crude oil prices will remain depressed – Brent in the US$29-33/b range and WTI in the US$25-28/b range

 

Headlines of the week

Upstream

  • Beset by a blockade of its oilfields and ports by strongman Khalifa Haftar, Libya’s oil production fell to a new low of 97,508 b/d in early March
  • Petronas and ExxonMobil are looking to sell their stakes in the Chad-Cameroon Petroleum Development and Pipeline Project – connecting three fields in Chad to a floating facility offshore Cameroon; Petronas holds a 35% stake in the project, with ExxonMobil holding a 40% stake
  • Petronas has halted production at the Garraf area in Iraq’s Thi Qar province, evacuating all its employees as Iraq grapples with a major Covid-19 outbreak
  • Murphy Oil has announced some delays to its projects in the Gulf of Mexico as the global oil industry is hit by the Covid-19 pandemic and the price war, reducing its 2020 budget by US$500 million to US$950 million
  • As the Covid-19 pandemic rolls across the globe, licensing rounds are either being suspended or postponed: South Sudan deferring its debut round, Liberia taking its offshore round online and Bangladesh postponing indefinitely
  • Equinor has halted all work on the Martin Linge field offshore Norway, adding to the project’s delay woes as uncertainty over Covid-19 boils over
  • WPX Energy has acquired Felix Energy, expanding its footprint in the eastern part of the Permian Delaware Basin, adding 60 mboe/d of production and bringing WPX Energy’s total output to some 150,000 b/d of shale oil

Midstream/Downstream

  • Asian refiners are looking to cash in on cheap crude being offered as a result of the price war – with Chinese teapots planning to ramp out output – but are planning to curb jet fuel output by redirecting processing to gasoil, as a result of travel bans worldwide that will severely distress international travel
  • Marathon Petroleum – the largest American independent refinery – is looking to sell off its pipeline subsidiary MPLX LP for some US$15 billion
  • ExxonMobil has restarted the fourth and final CDU at its 502,500 b/d Baton Rouge refinery, after the entire plant was taken out by a fire in February 2020
  • Calumet is planning to sell its 30 kb/d refinery in Great Falls, Montana, retaining a bank to begin sales proceedings; Great Falls is the second refinery in Montana to go under the block, after ExxonMobil’s 61.5 kb/d Billings site
  • Production of very low sulfur fuel oil (VLSFO) in China is ramping up, with Jinxi Petrochemical being the latest refiner to begin exports of the marine fuel
  • Austria’s OMV will be purchasing an additional 39% in petrochemicals processor Borealis from Abu Dhabi’s Mubadala for some US$4.7 billion
  • The GTI Statia crude and refined storage terminal in the Caribbean island of St. Eustatius will undergo a US$100 million upgrade to meet growing demand

Natural Gas/LNG

  • The Alaska LNG project – which is designed to produced 3.5 bcf/d of gas in Nikiski on the Kenai Peninsula, sourced from a 1,300km pipeline from the North Slope – has been granted EIS (Environment Impact Statement) by the US FERC, the first step towards authorisation of project to go ahead
  • BP and Azerbaijan’s SOCAR are in discussion over a new Caspian Sea project that goes beyond the current deep gas scheme, called Future Gas
  • Norway’s Golar Power has announced plans to develop an LNG import terminal with the Brazilian northeastern state of Pernambuco
  • Lithuania’s Kaipedos Nafta is moving to fully acquire the Hoegh floating storage and regasification unit that is it currently leasing
March, 20 2020