Major Forecast Revisions By EIA, OPEC, And IEA

The major international agencies that monitor, advise, or seek to control oil release monthly reports. Below is a summary of the major changes noted by each. I would encourage you to skim this summary and then for a synopsis, make sure to read this weeks Ty’s Take where I will distill the critical information for you into a few key points and tell you the basis for the negative revisions.

EIA Updated Short Term Energy Outlook

On September 7, 2016, the EIA released its Monthly revision to the Short Term Energy Outlook Report and its STEO Market Prices and Uncertainty Report. Here are some of the key highlights and changes:

• The EIA raised its global oil demand estimates for this year and in 2017 due to economic growth in developing countries. The agency said it expects global oil consumption to grow at the rate of 1.5 million bpd this year to 95.357 million bpd, revised up 49,000 bpd versus estimates published last month. For 2017, annual oil consumption growth is estimated at 1.4 million bpd to 96.780 million bpd, an increase of 24,000 bpd versus estimates published a month ago.
• U.S. crude oil production averaged 9.4 million barrels per day (b/d) in 2015. Production is forecast to average 8.8 million b/d in 2016 and 8.5 million b/d in 2017. Production levels in 2017 for this forecast are 0.2 million b/d higher than in the August STEO. The upward revisions to production largely reflect an assumption of higher drilling activity, rig efficiency, and well-level productivity than assumed in previous forecasts. For most of 2017, production is expected to be relatively stable between 8.5 million b/d and 8.6 million b/d, except during the third quarter when EIA assumes some production declines because of hurricane-related outages. Production is expected to stabilize in 2017 because of productivity improvements, lower breakeven costs, and forecast oil price increases.
• Price volatility in global equity markets declined in the past two months, potentially indicating more stability in the outlooks for the global economy and demand for petroleum products. As a result, the EIA’s forecast for global demand was relatively unchanged and suggests that supply side factors were the main drivers of prices.
• Through much of August, the discount between of U.S. domestic crudes to Brent crude oil grew because of increasing U.S. crude oil inventories and rising crude oil imports, which reached a four-year high in August. Brent’s price premium, however, may have incentivized more U.S. crude oil to be exported. Preliminary crude oil weekly exports show that as of August 26, nearly 0.7 million barrels per day (b/d) of crude were exported, a record high.
• Brent Crude spot prices averaged $46/barrel in August, a $1/b increase from July.
• Brent crude oil prices are forecast to average $43/b in 2016 and $52/b in 2017.   This is an increase of $1/b for 2016 and does not reflect a change for 2017 from the previous August report.
• West Texas Intermediate (WTI) crude oil prices are forecast to average $1/b less than Brent in 2016 and 2017. The current values of futures and options contracts suggest high uncertainty in the price outlook. This reflects little to no change from the prior month’s forecast.
• The December 2016 WTI futures contract averaged $47.03/b for the five trading days ending September 1 and has a 56% probability of exceeding $45/b at expiration. The same contract for the five trading days ending August 1 had a 41% probability of exceeding $45/b.
• The EIA estimates that global petroleum and other liquid fuels inventory builds averaged 1.8 million b/d in 2015. The pace of inventory builds is expected to slow to an average of 0.8 million b/d in 2016. Inventory builds are expected to continue into early 2017, and then consistent inventory draws are forecast to begin in June 2017. This is a major change from the prior EIA projections which expected global consumption to exceed global supply by 170,000 bpd next year, and markets coming into balance in late 2016 (my observation).
• U.S. regular gasoline retail prices are expected to decline from an average of $2.18/gallon (gal) in August to $1.92/gal in December. For the year, U.S. regular gasoline retail prices are forecast to average $2.08/gal in 2016 and $2.26/gal in 2017. This projection is an increase of $0.02 per gallon.
• Natural gas working inventories were 3,401 billion cubic feet (Bcf) on August 26. This level is 8% higher than last year during the same week, and 11% higher than the previous five-year (2011-15) average for that week. The EIA projects that natural gas inventories will be 4,042 Bcf at the end of October 2016, which would be the highest end-of-October level on record. However, I would note that inventories started high, and we have had historically low injections each week even though we are in the season where Nat gas inventories tend to build (this particular note is my own editorial)

OPEC Releases Monthly Oil Market Report (MOMR)

On September 12, 2016, OPEC released its updated monthly market highlights and forecast. The following are the highlights from that report:

• World economic growth was revised down to 2.9% for 2016 and remains at 3.1% for 2017. Weak 1H16 growth caused a downward revision to the US growth forecast for 2016 to 1.5%, while the 2017 forecast remains at 2.1%. Growth in Japan was also revised down to 0.7% given weak 1H16 growth. Euro-zone growth remains unchanged at 1.5% for this year and 1.2% for 2017. Forecasts for China and India are also unchanged at 6.5% and 7.5% for 2016 and 6.1% and 7.2% for 2017. The figures for Brazil and Russia remain unchanged from the August MOMR, with growth forecast at 0.4% and 0.7% respectively for next year.
• World oil demand growth in 2016 is now anticipated to increase by 1.23 mb/d after a marginal upward revision, mainly to reflect better-than-expected OECD data for the first half of the year. Oil demand in 2016 is expected to average 94.27 mb/d. In 2017, world oil demand is anticipated to rise by 1.15 mb/d, unchanged from the August MOMR, to average 95.42 mb/d. The main growth centers for next year continue to be India, China and the US.
• Non-OPEC oil supply in 2016 is now expected to contract by 0.61 mb/d, following an upward revision of 0.18 mb/d from the August MOMR to average 56.32 mb/d. This has been mainly due to a lower-than-expected decline in US tight oil and a better-than expected performance in Norway, as well as the early start-up of Kashagan field in Kazakhstan. In 2017, non-OPEC supply was revised up by 0.35 mb/d to show growth of 0.20 mb/d to average of 56.52 mb/d, mainly due to new production from Kashagan. OPEC NGLs are expected to average 6.43 mb/d in 2017, an increase of 0.15 mb/d over the current year. OPEC output, according to secondary sources, dropped by 23 tb/d in August to 33.24 mb/d.
• OPEC did not specifically say when they expect crude markets to come into balance, but their revisions indicate they believe the market will come into balance later than they believe the market will take longer to balance than they previously anticipated.

Internal Energy Agency (IAE) Issues Revised Forecast

On September 13, 2016, the International Energy Agency released their revised forecast. Highlights include the following:

• Global oil demand growth is slowing at a faster pace than initially predicted. For 2016, a gain of 1.3 mb/d is expected – a downgrade of 0.1 mb/d on our previous forecast due to a more pronounced 3Q16 slowdown. Momentum eases further to 1.2 mb/d in 2017 as underlying macroeconomic conditions remain uncertain.
• World oil supplies fell by 0.3 mb/d in August, dragged lower by non-OPEC production loses. At 96.9 mb/d, global oil output was 0.3 mb/d below a year ago, but near-record OPEC supply just about offset steep non-OPEC declines. Non-OPEC supply is expected to return to growth in 2017.
• OPEC crude production edged up to 33.47 mb/d in August - testing record rates as Middle East producers opened the taps. Kuwait and the UAE hit their highest output ever and Iraq lifted supplies. Output from Saudi Arabia held near a record, while Iran reached a post-sanctions high.
• Refinery runs in 2016 are set to grow at the lowest rate in a decade.

What is particularly interesting about the IEA report is their projection for when oil markets come into balance. Specifically, the IEA wrote the following:

To find out what I believe all of this means, read Ty’s Take for the week!

By: Ty Chapman and Bryan Shirley

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

Please like us on Facebook!