Crude oil prices for 2018 projected to rise 11%: STEO

Brent crude oil averaged $54/barrel in 2017, an increase of $10/Bbl from 2016 levels, the Energy Information Administration’s Short-Term Energy Outlook (STEO) reveals.

Prices increased “fairly steadily” through the second half of the year, with year-end prices higher than the annual average, according to STEO.

Daily Brent spot market prices ended 2017 near $67/Bbl — the highest level since December 2014, Kallanish Energy reports. The monthly average spot price of Brent crude oil increased by $2/Bbl in December, to $64/Bbl, marking only the fourth time in the past three years monthly Brent crude oil prices averaged more than $60/Bbl.

EIA forecasts the Brent crude oil spot price will average $60/Bbl in 2018, and $61/Bbl in 2019.

After falling in 2017, EIA expects global oil inventories to rise by 0.2 million b/d (MMBPD) in 2018, and 0.3 MMBPD in 2019.

EIA/STEO forecasts inventory builds in 2018 and 2019 will contribute to crude oil prices declining from current levels to an average $60/Bbl during the first quarter of 2018. Prices are then expected to remain relatively flat through 2019.

Daily and monthly average crude oil prices could vary significantly from annual average forecasts, because global economic developments and geopolitical events in coming months have the potential to push oil prices higher or lower than the current STEO price forecast.

“Also, the U.S. tight oil sector continues to be dynamic, and quickly evolving trends in this sector could affect both current crude oil prices and expectations for future prices,” according to STEO.

Average West Texas Intermediate (WTI) crude oil prices are forecast to be $4/Bbl lower than Brent prices in 2018 and in 2019, falling from the $6/Bbl average price difference seen in the fourth quarter of 2017.

The falling price discount of WTI to Brent in the forecast is based on the assumption current constraints on the capacity to transport crude oil from the Cushing, Okla., storage hub to the U.S. Gulf Coast will gradually lessen.

EIA/STEO estimates the price difference between Brent and WTI reflects the competition of the two crude oils in global export markets.

Thus, there are two components of the price difference: the cost of delivering WTI crude oil from its pricing point at Cushing to the U.S. Gulf Coast for export; and the additional transportation costs U.S. crude oil exports incur on their way to Asia compared with costs to deliver Brent from the North Sea to Asia.

EIA estimates without pipeline constraints, moving crude oil from Cushing to the U.S. Gulf Coast typically costs roughly $3.50/Bbl.

“EIA estimates it costs roughly $0.50/Bbl more to transport WTI from the U.S. to Asia than it costs to ship Brent from the North Sea to Asia,” EIA/STEO reported.

The current values of futures and options contracts suggest uncertainty in the oil price outlook. WTI futures contracts for April 2018 delivery that were traded during the five-day period ending Jan. 4, averaged $61/Bbl, and implied volatility averaged 19%.

These levels established the lower and upper limits of the 95% confidence interval for the market’s expectations of monthly average WTI prices in April 2018, at $52/Bbl and $71/Bbl, respectively.

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