Crude oil prices forecast to increase, but remain lower than 2018 averages as global inventories build

In the January 2019 update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that Brent crude oil prices will average $61 per barrel (b) in 2019 and $65/b in 2020, down from the 2018 average of $71/b (Figure 1). EIA forecasts that oil prices will remain lower than levels seen for much of 2018 because relatively strong global oil supply growth over the next two years outpaces growth in consumption. In 2019, EIA forecasts global liquid fuels production to average 101.8 million barrels per day (b/d) and consumption to average 101.5 million b/d, which would result in inventory builds.

Although crude oil prices reached four-year highs in early October 2018, record supply from the world’s leading crude oil producers, concerns about global economic growth, and sanctions waivers for some countries to import reduced levels of Iranian crude oil contributed to declining prices beginning in mid-October. In early December, the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC participants (OPEC+) announced plans to cut production starting in January 2019. However, the announced cuts did not fully offset other factors affecting crude oil prices. As a result, the price for Brent crude oil fell from a monthly average of $81/b in October to $57/b in December.

EIA forecasts that Brent crude oil prices will increase at a relatively modest pace in 2019 and 2020. However, EIA’s forecast indicates that prices will stay lower than the 2018 annual average of $71/b. Forecast global oil inventory growth would restrain significant upward price movements during the forecast period. EIA expects global oil inventories to build by 0.2 million barrels per day (b/d) in 2019 and 0.4 million b/d in 2020 following the build of 0.4 million b/d in 2018.

Despite the forecast inventory builds, EIA expects price increases above December 2018 price levels in early 2019 because global oil inventories will need to rise slightly to maintain demand cover as oil demand grows. EIA forecasts additional price increases in late 2019 and early 2020 because of an increase in refinery demand for light-sweet crude oil as a result of International Marine Organization (IMO) regulations. Finally, EIA expects some of the forecast inventories to be unavailable to the market as Iran increases floating storage of crude oil that cannot be sold because of U.S. sanctions.

Production growth forecast in the STEO is led by non-OPEC countries in 2019, particularly the United States and Brazil. EIA expects non-OPEC producers will increase petroleum and other liquids supply by 2.4 million b/d in 2019, which will more than offset forecast supply declines of 1.0 million b/d from OPEC members, leading to global supply growth of 1.4 million b/d. Global liquids supply growth will rise by 1.7 million b/d in 2020 (Figure 2) according to the EIA forecast, with U.S. oil production continuing to grow to reach 13 million b/d by the end of 2020 while OPEC production remains relatively flat. 

EIA forecasts global petroleum and other liquid fuels consumption to increase by 1.5 million b/d in 2019 and in 2020, up from growth of 1.4 million b/d in 2018. The slight increase in the pace of oil demand growth reflects EIA’s expectation of relatively stable gross domestic product (GDP) growth. The global oil-weighted GDP underlying the STEO forecast increases by 2.9% in 2019 and in 2020. Although this expected growth rate is down from the 3.1% growth in 2018, EIA does not expect this moderate slowdown to have a significant effect on oil consumption. In addition, IMO regulations will lead to a slightly higher oil consumption because the shipping industry will need to switch from highly energy-dense residual fuel to less energy-dense marine distillate, requiring an increase in fuel volume for an equivalent level of shipping traffic. 

EIA’s forecast calls for inventory builds in each of the next eight quarters; however, excluding the second quarters of both 2019 and 2020, forecast builds will average less than 0.2 million b/d. This margin is relatively thin, and relatively small disruptions could eliminate these builds and cause markets to move into deficit. 

Although EIA expects upward price pressures to be limited, actual results are uncertain. How much oil the U.S. sanctions on Iran will take off the market after the waivers expire in the first half of 2019 is unclear. Questions also remain about compliance and how long the current OPEC+ production cuts will last. Furthermore, although EIA expects the IMO regulations starting in 2020 to have limited effects on crude oil prices, exactly how the global refining and shipping industries will respond is unclear. Finally, unplanned supply disruptions in politically volatile areas, such as Libya, may limit supply more than anticipated. 

Downside price pressures are also a possibility. If global economic growth is weaker than currently anticipated, weakening oil demand could place downward pressure on crude oil prices. Faster-than-anticipated growth in the U.S. tight oil sector could also put downward pressure on prices by strengthening supply. In addition, if the OPEC+ cuts in oil production are less than EIA currently anticipates, it could lead to lower oil prices. Further, EIA forecasts that OPEC spare crude oil production capacity will increase from 1.5 million b/d in 2018 to 1.9 million b/d in 2019 and to 2.3 million b/d in 2020. Higher levels of spare capacity give the oil market larger buffers against supply disruptions if spare-capacity holders choose to use it.

U.S. average regular gasoline price increases, diesel price decreases

The U.S. average regular gasoline retail price increased less than 1 cent from last week to remain at $2.25 per gallon on January 21, 2019, down 32 cents per gallon from the same time last year. Rocky Mountain prices fell more than 3 cents to $2.27 per gallon, West Coast prices decreased more than 2 cents to $2.96 per gallon, and Midwest prices fell nearly 1 cent to $2.04 per gallon. East Coast prices rose nearly 3 cents to $2.24 per gallon and Gulf Coast prices increased less than 1 cent, remaining at $1.91.

The U.S. average diesel fuel price decreased more than 1 cent from last week to $2.97 per gallon on January 21, 2019, 6 cents per gallon lower than a year ago. Rocky Mountain prices fell more than 4 cents to $2.94 per gallon, Midwest prices decreased nearly 2 cents to $2.81 per gallon, East Coast prices fell more than 1 cent to $3.04 per gallon, and West Coast prices decreased nearly 1 cent to $3.46 per gallon. Gulf Coast prices rose less than a cent, remaining at $2.79 per gallon. 

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 3.7 million barrels last week to 63.8 million barrels as of January 18, 2019, 0.1 million barrels (0.1%) greater than the five-year (2014-2018) average inventory levels for this same time of year. Gulf Coast, Midwest, and Rocky Mountain/West Coast inventories decreased by 2.1 million barrels, 1.2 million barrels, and 0.6 million barrels, respectively. East Coast inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.9% of total propane/propylene inventories.

Residential heating oil prices increase, propane prices decrease slightly

As of January 21, 2019, residential heating oil prices averaged almost $3.17 per gallon, nearly 3 cents per gallon higher than last week’s price but almost 5 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged nearly $2.03 per gallon, almost 5 cents per gallon more than last week but nearly 18 cents per gallon below last year’s price. 

Residential propane prices averaged almost $2.43 per gallon, less than 1 cent per gallon lower than last week and 18 cents per gallon lower than a year ago. Wholesale propane prices averaged $0.80 per gallon, 2 cents per gallon higher than last week but nearly 48 cents per gallon lower than a year ago.