Crude Oil – Short-Term Energy Outlook

Onyx Power and Gas Consulting continues with its weekly series providing the Short-Term Energy Outlook as of June 12, 2018.  This series of news articles should provide a complete insight on the current conditions of the energy…enjoy, check out archives and come back each week for additional information on how all sorts of energy sources impact our daily lives.

Crude Oil

Prices: The front-month futures price for Brent crude oil settled at $77.32 per barrel (b) on June 7, an increase of $4.19/b from May 1. Front-month futures prices for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Oklahoma, decreased by $1.30/b during the same period, settling at $65.95/b on June 7 (Figure 1). May Brent and WTI monthly average spot prices were $4.87/b and $3.73/b higher, respectively, than the April average spot prices.

Figure 1: Crude oil front-month futures prices

Brent crude oil prices traded above $80/b on an intraday basis briefly in late May before declining during the first week of June. Prices increased in May as crude oil production declined for several members of the Organization of the Petroleum Exporting Countries (OPEC), including Venezuela and Nigeria, and as markets accounted for the uncertainty surrounding Iran’s future crude oil production levels. In early May, the United States announced it would withdraw from the Joint Comprehensive Plan of Action (JCPOA) and reinstitute sanctions on companies doing business with Iran. Even though essentially no U.S. companies are directly involved with Iranian companies, many European and Asian banks, insurers, and oil companies announced they might reduce commercial activity with Iran in light of potential U.S. sanctions. Sanctions will likely have a direct effect on the Iranian oil sector, which would limit crude oil exports and production from the country by the end of 2018.

OPEC, Russia, and other non-OPEC countries meet on June 22, 2018, to assess current oil market conditions as they relate to their existing crude oil production reductions, which are scheduled to continue through the end of 2018. Oil ministers from Saudi Arabia and Russia have announced they will re-evaluate the production reduction agreement given the accelerated output declines from Venezuela and the uncertainty surrounding Iran’s production levels. In this forecast, EIA assumes some supply increases from major oil producers in 2019. However, depending on the outcome of the June 22 meeting, the magnitude of any supply response is uncertain. Currently, EIA forecasts global oil inventories will increase by 210,000 barrels per day (b/d) in 2019, which EIA expects will put modest downward pressure on crude oil prices in the second half of 2018 and in 2019.

U.S. crude oil prices in the Permian region as well as in Cushing, Oklahoma, traded lower than Brent in May. This continued the trend of lower prices for inland U.S. crude oils as a result of constraints in pipeline capacity for transporting crude oil to the U.S. Gulf Coast for refining or for export, as discussed in the May and April STEOs. The Brent–WTI front-month futures price spread, in particular, widened to $11.43/b on June 7, its widest level since February 2015 (Figure 2). Although transportation constraints to the U.S. Gulf Coast are primarily affecting Permian Basin crude oils, the rapid increase in the Brent–WTI futures price spread in May and early June suggests some constraints are developing in crude oil transported from Cushing, Oklahoma (where the WTI futures contract is delivered), to the Gulf Coast.

Because transportation options out of Cushing are limited, it remains uncertain how much the spread could narrow if Gulf Coast refiners increase refinery runs, which were lower than expected in May. In addition, U.S. crude oil exports are currently limited to higher cost options which, unless port infrastructure buildout is expanded, will likely maintain a wide Brent–WTI spread. EIA is increasing the forecast of the Brent–WTI spot price spread for the second half of 2018 and 2019, from $5.49/b to $7.67/b and $5.12/b to $5.79/b, respectively.

Figure 2: Brent-WTI futures price spread

Oil prices by currency: The currencies of several crude oil importing countries depreciated against the U.S. dollar in recent weeks, reversing some of the appreciation from the second half of 2017 through the first quarter of 2018. In U.S. dollars, Brent crude oil prices increased by 21% from March 1 through June 7. However, crude oil prices increased by 23% in Thai baht, 25% in Indian rupees, 26% in euros, and 43% in Turkish lira during the same period (Figure 3).

Even though most leading economic indicators point to continuing economic growth in Europe and emerging markets, political uncertainty in several countries could be contributing to currency depreciation, which makes crude oil imports more expensive. Some emerging market economies reduced energy subsidies when oil prices fell in 2014–16, and the increase in prices during the past year has led some to call for a reinstitution of subsidies. Trade disputes between the United States and other countries would also affect the demand for other countries’ goods and could have contributed to U.S. dollar appreciation. In addition, concerns about sovereign debt levels in several European countries led to a significant increase in bond yields and depreciation of the euro in late May.

Figure 3: Brent crude oil prices in various currencies

Long-dated futures prices: Prices for longer-dated futures contracts have increased by a larger percentage during the past six months than they did during the second half of 2017. Brent crude oil prices for December 2022 delivery, for example, increased by 6% from June 7, 2017, to December 7, 2017. In the following six months from December 7, 2017, to June 7, 2018, the price of the same December 2022 contract increased by 12%, settling at more than $60/b (Figure 4). Upstream crude oil production projects with long lead times and investment periods often use futures prices several years in advance to aid final investment decisions. Higher prices for longer-dated futures contracts could trigger increased investment interest in upstream projects that would begin producing oil in future years.

Figure 4: Probability of the June 2018 WTI contract expiring above price levels

The professional consultants at Onyx Power & Gas Consulting are always ahead of the current issues that may affect energy consumption and pricing. Now is the time to partner with an Onyx professional consultant to discuss energy management and secure energy prices based on today’s stable pricing. Volatility in the energy markets makes it too precarious to take chances. Partner with Onyx Power & Gas in Making Energy Make a Difference!

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