December was the sixth consecutive month in which monthly average Brent crude oil prices decreased, falling $17/barrel (bbl) from November to a monthly average of $62/bbl, the lowest since May 2009. The December price decline, and its continuation into early January, reflects continued growth in U.S. tight oil production, strong global supply, and weakening outlooks for the global economy and oil demand growth.
As oil prices have sharply declined, market expectations of uncertainty in the price outlook have increased, as reflected in the current values of futures and options contracts (Market Prices and Uncertainty Report). West Texas Intermediate (WTI) futures contracts for April 2015 delivery, traded during the five-day period ending January 8, averaged $51/bbl, with the value of options contracts establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices that month at $34/bbl and $76/bbl, respectively (Figure 1). The 95% confidence interval for market expectations widens considerably over time, with lower and upper limits of $28/bbl and $112/bbl for prices in December 2015. Volatility in front-month contracts also moved higher for both WTI and Brent in December and the first week of January, crossing the 50% level for the first time since August 2011.
The growing uncertainty surrounding oil prices presents a major challenge to all price forecasts. EIA's January Short-Term Energy Outlook (STEO), released yesterday, forecasts Brent crude oil prices averaging $58/bbl in 2015 and $75/bbl in 2016, with annual average WTI prices expected to be $3/bbl to $4/bbl below Brent.
These price projections reflect a scenario in which supply is expected to continue to exceed demand, leading to inventory builds through the first three quarters of 2015. With increased demand and weakening supply, the market becomes more balanced beyond mid-2015 (Figure 2), and prices are expected to begin to rise.
Recent global economic data outside the United States have generally been below expectations. With most of the projected increases in future global petroleum consumption expected in developing countries, disappointing international economic news had more downward influence on crude oil prices than positive U.S. economic data. The manufacturing Purchasing Managers Index (PMI), which serves as a leading indicator for manufacturing activity, was below expectations in December for the United States, China, and Europe. Slowing manufacturing activity increases the risk that future economic growth may fall below projections and potentially reduce future consumption of crude oil and petroleum products, thus putting downward pressure on crude oil prices. This situation is exacerbated by the current excess of crude oil supplies and inventory builds.
EIA expects global petroleum and other liquids demand to grow by 1.0 million barrels per day (bbl/d) in both 2015 and 2016 from an average of 91.4 million bbl/d in 2014. Nearly all the forecast demand growth comes from non-OECD (Organization for Economic Cooperation and Development) countries. The biggest reduction in forecast non-OECD consumption growth in 2015 comes from a 0.2-million-bbl/d decline in Russia's consumption because of its economic downturn. Russia's consumption is expected to decline by a similar amount in 2016. China is the leading contributor to projected global consumption growth, with consumption expected to increase by an annual average of 0.3 million bbl/d over the next two years. As always, weaker-than-expected demand in Russia, China, or elsewhere would put further downward pressure on prices.
EIA estimates that non-OPEC (Organization of the Petroleum Exporting Countries) production grew by 2.0 million bbl/d in 2014, averaging 56.2 million bbl/d for the year. Non-OPEC supply growth is expected to slow over the next two years, mostly because of lower projected oil prices. EIA expects non-OPEC production to grow by 0.7 million bbl/d in 2015 and by 0.5 million bbl/d in 2016, with the United States as the leading contributor. Given the rapid growth in oil production throughout 2014, the year-over-year comparisons between 2015 and 2014 oil production overstate projected growth in 2015 relative to levels at the end of 2014. For example, U.S. oil production in December 2014 is estimated at 9.2 million barrels per day, only slightly below the average daily 2015 production level in EIA's STEO forecast. In considering its U.S. production forecast, EIA recognizes that tight U.S. oil production, a key component of lower-48 onshore production, is more sensitive to short-term price movements than production in the Federal Gulf of Mexico, which is expected to increase through 2016 as production from projects nearing completion begins, or Alaska production that is expected to continue its gradual long-term decline.
Oil prices could deviate significantly from current projections under different supply and demand conditions. Weaker-than-expected global demand growth would increase the supply overhang requiring larger production cuts to bring the market into balance. Producers' responsiveness to lower prices will determine how soon, and by how much, production is cut. The price decline and lag time required to cause a reduction in forecast non-OPEC supply growth, particularly U.S. tight oil, vary by producer and are also difficult to gauge.
U.S. gasoline and diesel fuel prices continue to decrease
The U.S. average price for regular gasoline fell eight cents from the previous week to $2.14 per gallon as of January 12, 2014, $1.19 per gallon lower than the same time last year. The Rocky Mountain price declined 13 cents to $1.99 per gallon, becoming the third region to have an average price below $2 per gallon. The East Coast price declined 10 cents to $2.25 per gallon, while the West Coast price fell nine cents to $2.49 per gallon. The Gulf Coast price was down eight cents to $1.91 per gallon, and the Midwest price shed two cents to $1.95 per gallon.
The U.S. average price for diesel fuel declined eight cents to $3.05 per gallon, 83 cents less than a year ago. The Gulf Coast price fell eight cents to be the first region with an average price below $3 per gallon since 2010, at $2.96 per gallon. The Rocky Mountain price decreased 11 cents to $3.03 per gallon. The Midwest and West Coast prices fell nine cents, to $3.01 per gallon and $3.13 per gallon, respectively. The East Coast price declined seven cents to $3.13 per gallon.
Propane inventories fall
U.S. propane stocks decreased by 0.8 million barrels last week to 74.9 million barrels as of January 9, 2015, 36.2 million barrels (93.6%) higher than a year ago. Midwest inventories decreased by 1.0 million barrels and East Coast inventories decreased by 0.4 million barrels. Rocky Mountain/West Coast inventories decreased by 0.2 million barrels while Gulf Coast inventories increased by 0.8 million barrels. Propylene non-fuel-use inventories represented 5.2% of total propane inventories.
Residential fuel prices decrease
As of January 12, 2015, residential heating oil prices averaged less than $2.91 per gallon, 6 cents per gallon lower than last week, and $1.10 per gallon less than last year's price for the same week. Wholesale heating oil prices averaged $1.79 per gallon, 12 cents per gallon lower than last week and $1.30 per gallon lower when compared to the same time last year.
Residential propane prices averaged less than $2.35 per gallon, 1 cent per gallon lower than last week, and 51 cents per gallon less than the price at the same time last year. The average wholesale propane price decreased by almost 2 cents per gallon this week to 57 cents per gallon, just under $1.14 per gallon lower than the January 13, 2014 price.