When you look at the oil situation around the world, some indicators are good; others suggest possible cause for concern. The U.S. Energy Information Administration (EIA) recently released its short-term energy outlook.
Crude oil prices declined in the latter half of February and into the first week of March. The Brent front month futures contract settled at $111.15 per barrel on March 7, $5.61 per barrel lower than its settlement price on February 1. The West Texas Intermediate (WTI) crude oil front month futures price followed a similar price path to Brent, declining by $6.21 per barrel since February 1 to settle at $91.56 on March 7.
EIA expects that the Brent crude oil spot price, which averaged $112 per barrel in 2012 and rose to $119 per barrel in early February 2013, will average $108 per barrel in 2013 and $101 per barrel in 2014. Also, planned new pipeline capacity for 2014 is expected to lower the cost of moving mid-continent crude oil to the Gulf Coast refining centers.
Economic uncertainty in Europe as well as manufacturing data from China that was below market expectations contributed to the recent crude oil price declines. The unemployment rate for Eurozone countries increased to 11.9% in February, an increase over last month and a record high. In China, the February Purchasing Managers Index (a leading indicator for the manufacturing sector) unexpectedly declined from January. Asia continues to be the area to watch for significant growth in oil demand. If it falters, the market could suddenly see prices decrease.
EIA estimates that global liquid fuels consumption outpaced production in January and February 2013, resulting in a 1.1-million-bbl/d average draw in global oil stocks. One of the major reasons was that OPEC member countries, particularly Saudi Arabia, cut production heavily in fourth-quarter 2012, which contributed to an increase in crude oil prices at the start of 2013. In Iraq, payment disputes between Baghdad and the Kurdistan Regional Government will lead to lost output in the north that at least partly offsets increased crude oil exports from Iraq’s southern fields.
EIA anticipates U.S. crude oil production will continue to grow rapidly over the next two years, increasing from an average 6.5 million bbl/d in 2012 to average 7.3 million bbl/d in 2013 and 7.9 million bbl/d in 2014. Drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian basins is expected to account for the bulk of forecast production growth over the next two years.
Government analysis suggests that U.S. crude oil production will exceed U.S. crude oil imports as early as the end of 2013, the first time this will have occurred since February 1995. Since reaching 12.5 million bbl/d in 2005, total U.S. liquid fuel net imports, including crude oil, have been falling. This turnaround is a sign that U.S. oil production is on the rebound as technology allows for greater access to older fields and discovery of new places to drill.
EIA expects falling crude prices will lead to on-highway diesel fuel retail prices averaging $3.90 per gallon in 2013 and $3.80 per gallon in 2014 compared to $3.97 per gallon in 2012. Remember that energy price forecasts are highly uncertain and the current values of futures and options contracts suggest that prices could differ significantly from this forecast.
