The projected pace of global oil demand growth in this month's Outlook reflects less optimistic assumptions about the global economy. The forecast for global economic growth was lowered by 0.1 and 0.6 percentage points in 2012 and 2013, respectively, from last month's Outlook, and is now expected to average 2.9 percent in both years. The weaker growth outlook is prompted by increased economic concerns about the debt crisis in Europe and indications of slowing growth in China, both which could have spillover effects on other economies. The global liquid fuels consumption growth forecast for 2012 was lowered to 0.7 million bbl/d from 0.8 million bbl/d in last month's Outlook. Projected global consumption growth in 2013 was lowered by 0.4 million bb/d to 0.7 million bbl/d.
EIA recently released its recurring 60-day report on The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran. As noted in the report, oil markets have loosened over the last several months, which is reflected in a sharp decline in crude oil prices and backwardation since the end of April. EIA's historical supply and demand balance also shows signs of a looser market, as supply outpaced consumption by an average of 1.1 million bbl/d for the first half of 2012, and stocks built counter-seasonally during the first quarter—a marked contrast to significant stock draws during 2011.
EIA's downward price revisions reflect shifts in expectations about oil market balances and the additional downside risks that are currently dominating market sentiments. However, there are both upside and downside uncertainties. The possibility that the economic situation in European Union (EU) countries could deteriorate further poses a downside risk to global oil demand and prices, though the market's positive reaction to recent EU negotiations serves as a reminder that oil prices will fluctuate in both directions as perceptions about the likelihood of a deeper crisis evolve. In the current Outlook, consumption in Europe is expected to fall year-over-year by 0.3 million bbl/d in 2012 and by a further 0.4 million bbl/d in 2013. The prospect of slower growth in China, which has been a key driver of increased oil demand in recent years, could also curb demand. China's weakening exports, particularly to Europe, and slower industrial and domestic growth experienced in the first half of 2012 could continue to place downward pressure on oil prices. EIA currently projects annual increases in consumption in China of about 0.4 million bbl/d in both 2012 and 2013. On the supply side, oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected.
EU sanctions, including an embargo on Iranian crude and an insurance ban on tankers carrying Iranian oil, became fully effective on July 1, shortly after the latest set of U.S. sanctions entered into force. The United States issued exceptions to all major importers of Iranian oil from sanctions that could have been imposed on foreign financial institutions which facilitated oil-related transactions with the Central Bank of Iran, but only after they had demonstrated or pledged significant reductions in their purchases of Iranian crude oil. The complete market effects of these sanctions are unknown and difficult to disentangle from previous rounds of sanctions, but EIA believes that most of their current and expected effects on Iranian oil supplies have already been priced into the global oil market. Despite the market's mild reaction to the sanction start dates, upside price risks still persist, particularly if negotiations with Iran fail to progress.
Global Crude Oil and Liquid Fuels Consumption
World liquid fuels consumption grew by an estimated 0.8 million bbl/d in 2011. EIA expects consumption growth of 0.7 million bbl/d in both 2012 and 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth (World Liquid Fuels Consumption Chart). Projected OECD liquid fuels consumption declines by 0.5 million bbl/d in 2012 and a further 0.3 million bbd/d in 2013.
In the third quarter of 2012, world demand will reach its seasonal peak, reflecting both the U.S. driving season and increased oil use for electricity generation in the Middle East. Projected consumption exceeds production by 0.7 million bbl/d, leading to global stock draws. Given overall lower demand expectations, the impact of seasonality on the tightness of global oil markets is expected to be substantially less than in 2010 or 2011, when third-quarter consumption outpaced supply by 1.5 million bbl/d and 1.8 million bbl/d, respectively.
EIA expects crude oil and liquid fuels production by non-Organization of the Petroleum Exporting Countries (OPEC) to rise by 0.8 million bbl/d in 2012, and by a further 1.3 million bbl/d in 2013. The largest area of non-OPEC growth is North America, where production increases by 880 thousand bbl/d and 540 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and from Canadian oil sands. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field next year, will increase its total production by 170 thousand bbl/d in 2013. In Brazil, output is projected to rise by 120 thousand bbl/d in 2013, with increased output from its offshore, pre-salt oil fields. Forecast production also rises in China, Russia, and Colombia over the next two years, while production declines in Mexico and the North Sea.
Several notable disruptions to non-OPEC production commenced or intensified since the beginning of this year, as discussed in the June 26, 2012 report on The Availability and Price of Petroleum and Petroleum Products Produced in Countries Other Than Iran. Unplanned outages to non-OPEC production totaled around 1.0 million bbl/d in June 2012, higher than the estimate given in the June 26th report. The increase is due to an offshore workers' strike in Norway that affected 230 to 250 thousand bbl/d of crude oil and natural gas liquids production, according to Statoil. On July 9, Norway's government ordered mandatory arbitration and an end to the strike, forestalling a threatened lockout that could have impacted all of Norway's offshore production.
Unplanned disruptions also rose slightly in the second half of June due to a labor protest in Argentina that lowered production from the Cerro Dragon oil field, which has a capacity of 100 thousand bbl/d. The field's operator is gradually ramping up production at the field as protestors have mostly withdrawn from the area.
EIA expects that OPEC members will continue to produce about 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil consumption and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 0.8 million bbl/d in 2012, and then falls by 0.9 million bbl/d in 2013, as non-OPEC supply growth increases and stocks rise slightly. OPEC non-crude oil liquids (condensates, natural gas liquids, and gas-to-liquids), which are not covered by OPEC's production quotas, averaged 5.5 million bbl/d in 2011 and are forecast to increase by 0.3 million bbl/d in 2012 and less than 0.1 million bbl/d in 2013.
EIA expects Iran's crude oil production to fall by about 1 million bbl/d by the end of 2012 relative to an estimated output level of 3.6 million bbl/d at the end of 2011, and by an additional 200 thousand bbl/d in 2013. Iran's output decline has continued to accelerate since the fourth quarter of 2011. EIA believes that this acceleration reflects erosion in Iran's crude oil production capacity due to the country's inability to carry out investment projects that are necessary to offset the natural decline in production from existing wells, as well as the impact of lower Iranian crude oil exports due to recently enforced EU and U.S. sanctions. A number of foreign companies that were investing in Iran's upstream have halted their activities as a result of previous U.S. sanctions, which have been compounded by tighter measures enforced since the start of this year that have made it increasingly difficult to do business with the country. EIA expects that the forecast decline in Iran's output will be offset by increased production from other OPEC member countries.
The impacts of newly imposed EU and U.S. sanctions on supplies and exports of Iranian oil are not easily extricated from the effects of sanctions enacted in previous years, the more general decline in Iran's production capacity, and other oil market developments. Undoubtedly, the EU embargo eliminates a significant market for Iranian oil. U.S. financial sanctions and EU insurance provisions have also impeded other countries' transactions for Iranian oil, leading to reports that Iran's ability to produce oil has outstripped its ability to sell it. Until recently, Iran could react to lower demand for its oil by adjusting the amount of oil it uses domestically or holds in onshore and offshore storage, in order to temporarily maintain relatively normal, albeit declining, levels of production. However, EIA estimates that Iranian production fell faster than the prevailing trend in June as unsold or undelivered Iran cargoes tested the limits of available storage capacity and some combination of production shut-ins, greater-than-anticipated declines in production capacity, or overdue maintenance occurred. EIA bases this assessment on preliminary commercial data on tanker liftings from Iran, press reports, official Iranian statements, and other relevant information. However, this tentative interpretation of a very fluid situation could change as data are revised, independent estimates of Iranian production are issued, and more details about Iranian storage levels, refinery utilization, and domestic consumption emerge.
OPEC members serve as the swing producers in the world market because only OPEC producers possess surplus or spare oil production capacity, most of which is in Saudi Arabia. EIA projects that OPEC surplus production capacity will average 2.4 million bbl/d in 2012 and rise to an average 3.6 million bbl/d in 2013 (OPEC Surplus Crude Oil Production Capacity Chart). However, as discussed above, markets may be closely watching the composition of OPEC spare capacity, as well as its aggregate level, as the situation with respect to Iran evolves. Under plausible circumstances, the market may discount a portion of OPEC members' aggregate spare capacity.
OECD Petroleum Inventories
EIA estimates that OECD commercial oil inventories ended 2011 at 2.59 billion barrels, equivalent to 55.9 days of forward-cover (Days of Supply of OECD Commercial Stocks Chart). Projected OECD oil inventories increase to 2.63 billion barrels and 57.3 days of forward-cover by the end of 2012, which is among the highest end-of-year levels in the last decade, because of the decline in OECD consumption.
Global Crude Oil Prices
Beginning in this month's Outlook, EIA is providing a forecast of Brent crude oil spot prices (see Brent Crude Oil Spot Price Added to Forecast). After WTI and Brent fell to year-to-date lows of $78 per barrel and $89 per barrel, respectively, on June 21, 2012, oil prices rose following news of a possible Euro-zone agreement regarding debt issues that have clouded the European and global economic outlooks. EIA projects the price of Brent crude oil to average $106 per barrel in 2012 and $98 per barrel in 2013. The WTI price forecast has been lowered by $4 per barrel from last month's Outlook to $93 per barrel in 2012 and by $9 per barrel to $89 per barrel in 2013 (West Texas Intermediate Crude Oil Price Chart).
Energy price forecasts are highly uncertain (Market Prices and Uncertainty Report). WTI futures for October 2012 delivery during the 5-day period ending July 5, 2012 averaged $85 per barrel. Implied volatility averaged 33 percent, establishing the lower and upper limits of the 95-percent confidence interval for the market's expectations of monthly average WTI prices in October 2012 at $64 per barrel and $114 per barrel, respectively. Last year at this time, WTI for October 2011 delivery averaged $98 per barrel and implied volatility averaged 28 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $76 per barrel and $125 per barrel.