Oil falls further on debt concerns and supply build

The EIA released their latest Short Term Energy Outlook. Following are the highlights related to the Oil sector.

  • EIA has lowered the forecast 2012 average U.S. refiner acquisition cost of crude oil by $2 per barrel from last month’s Outlook to $112 per barrel, still $10 per barrel higher than last year’s average price. EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $106 per barrel in 2012, the same as in last month’s Outlook but $11 per barrel higher than the average price last year. Constraints in transporting crude oil from the U.S. midcontinent region contribute to the expected discount for WTI relative to other world crude oil prices. EIA expects WTI prices to remain relatively flat in 2013, averaging about $106 per barrel, while the average U.S. refiner acquisition cost of crude oil averages $110 per barrel.
  • World liquid fuels consumption grew by an estimated 0.79 million bbl/d to 87.9 million bbl/d in 2011. EIA expects that this growth will accelerate over the next two years, with consumption reaching 88.8 million bbl/d in 2012 and 90.1 million bbl/d in 2013. Non-OECD countries will account for essentially all of the world’s consumption growth over the next two years, with the largest contributions coming from China, the Middle East, and Central and South America. OECD liquid fuels consumption is projected to decline by about 400 thousand bbl/d in 2012, with Europe and the United States accounting for almost all the decline. In 2013, forecast OECD liquid fuels consumption is expected to recover slightly by 100 thousand bbl/d, driven by higher consumption in the United States.
  • EIA expects global liquid fuels consumption will increase by 0.89 million barrels per day (bbl/d) in 2012, while total liquids supply increases by 1.81 million bbl/d, 0.85 million bbl/d from countries outside of the Organization of the Petroleum Exporting Countries (OPEC) 0.97 million bbl/d of crude oil and non-crude liquids from OPEC-member countries. The larger increase in total supply compared with consumption growth is misleading, however, as the 2011 balance between supply and consumption resulted in a supply shortfall of 0.77 million bbl/d that contributed to a decline in world inventories, including the coordinated drawdown in government-held stocks in countries belonging to the Organization for Economic Cooperation and Development (OECD) last summer. Consequently, the change in the supply-demand balance for 2012 reflects the increase in supply over last year that is forecast to maintain stocks near current levels.
  • Several uncertainties could push oil prices higher or lower than projected. A number of non-OPEC countries are currently undergoing supply disruptions. Oil prices could be higher than projected in this Outlook if their recoveries from the disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, although the effects of the impending European Union embargo and other sanctions targeting Iranian crude oil imports are still uncertain, heightened market anxiety surrounding a potentially significant supply disruption could further bolster oil prices. On the demand side, if the pace of global economic growth fails to recover in countries belonging to the OECD, or if economic growth slows in non-OECD countries, prices could be lower.
  • EIA expects non-OPEC crude oil and liquid fuels production to rise by 850 thousand bbl/d in 2012 and by a further 840 thousand bbl/d in 2013. The largest area of non-OPEC growth will be North America, where production increases by 560 thousand bbl/d and 180 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field in the next year, will increase its total production annually by an average of 170 thousand bbl/d in both 2012 and 2013. In Brazil, output rises annually by an average of 130 thousand bbl/d over the next two years, with increased output from its offshore, pre-salt oil fields. Production also rises in China and Colombia over the next two years, while production declines in Russia, Mexico, and the North Sea.
  • EIA expects that OPEC members’ crude oil production will continue to rise over the next two years to accommodate the projected increase in world oil demand and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 720 thousand bbl/d in 2012 and then falls by 150 thousand bbl/d in 2013. OPEC non-crude petroleum liquids (condensates, natural gas liquids, coal-to-liquids, and gas-to-liquids), which are not covered by OPEC’s production quotas, are forecast to increase by 240 thousand bbl/d in 2012, and by 70 thousand bbl/d in 2013.
  • EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012, from its previous level of 3.55 million bbl/d at the end of 2011. Iran’s decline in output began to accelerate during the last quarter of 2011 and has continued. EIA believes that the acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran’s upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA’s forecast does not factor in any potential effects of the more recent sanctions targeting Iran’s central bank and the impending European Union embargo on Iran’s crude oil production, because it is too early to assess Iran’s ability to place its supply elsewhere.
  • EIA estimates that commercial oil inventories held in the OECD ended 2011 at 2.59 billion barrels, equivalent to about 56.0 days of forward-cover (days-of-supply). Projected OECD oil inventories increase slightly, to 2.62 billion barrels and 56.8 days of forward cover, by the end of 2012. Although the forecast December 2012 inventory is slightly lower than the 2.66-billion-barrel level at the end of December 2010, the days of forward-cover are at the highest end-of-year level since 1991 because of a decline in OECD consumption.
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