The global oil market has loosened since our previous report. World oil inventories are estimated to have grown by an average 1.0 million barrels per day (bbl/d) during May and June, a marked contrast to the year-ago period when global inventories were being drawn down following the disruption in supplies from Libya (Figure 1). In addition, the latest available estimates for March and April show significantly higher production and lower consumption,   and therefore, much larger inventory additions than had previously been estimated.
Oil prices and backwardation of the futures curve have declined significantly over the last month, both indicators of a looser market (Figure 2 and Figure 15). The average price for Brent in June decreased by $14 per barrel compared with its May average, and it is the lowest price since December 2010. The Brent market has moved into contango for the first time in almost a year with the average 1st — 12th month spread for the five days ending June 22 at -$0.77 per barrel. This marks a significant change from March 1 when the Brent market was backwardated and the five-day average for 1st — 12th month spread peaked at about $8 per barrel.
Organization of the Petroleum Exporting Countries (OPEC) production has increased over the past year, especially in Iraq and Libya. Saudi Arabia, which acts as a balancing force in the global oil market, continues to produce at high levels.
The overall growth in non-OPEC production is led by North America, particularly in the tight oil plays of the United States (Table 2). While unplanned production outages in non-OPEC countries remain higher than normal, they have declined from the elevated levels of earlier this year.
Global spare capacity remains relatively tight by historical standards, and is currently estimated at less than 3 percent of total world consumption.
Economic growth concerns have increased due to the debt crisis in Europe and indicators of slowing growth in China, both of which could have significant spillover effects on other economies. Prospects for slower economic growth and changing expectations about current and potential supply disruptions are among the economic and political indicators influencing market expectations, beyond the easing in the supply and demand balance over the last few months that have significantly contributed to recent oil price changes.
This is the third in a series of reports prepared in fulfillment of Section 1245(d)(4)(A) of the National Defense Authorization Act (NDAA) for Fiscal Year 2012, which requires the U.S. Energy Information Administration (EIA) to “submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60-day period preceding the submission of the report.” EIA consulted with the Department of Treasury, the Department of State, and the intelligence community in the process of developing this report. The statutory language in the NDAA clearly envisions a report that is primarily, if not exclusively, historical in nature.
It is important to recognize that due to time lags in the collection of production and consumption data, nearly all of the petroleum and petroleum product volumes presented in this report are estimates rather than actual data. EIA revises estimates as new information becomes available, and production and consumption estimates featured in the previous two reports in this series have since changed accordingly. For example, after incorporating the latest data for March and April, EIA's current estimate of average global liquid fuels production over that time period is 0.7 million barrels per day (bbl/d) higher than previously estimated, while consumption is 0.6 million bbl/d lower. This suggests that the looser view of the market presented in this report extends to months prior to May and June.
EIA estimates that global liquid fuels production in May and June 2012 increased by 2.9 million bbl/d from the same time period last year. Additionally, global liquid fuels production exceeded consumption by an average of 1.0 million bbl/d in May and June, causing oil stocks to build. Inventories in the United States were estimated to have risen by an average of 0.5 million bbl/d in May and June. Over that same time frame, commercial inventories in other member states of the Organization for Economic Cooperation and Development (OECD) were built by an estimated 0.2 million bbl/d, and EIA's balance suggests that non-OECD inventories increased by 0.3 million bbl/d in May and June.
In contrast to data on petroleum and petroleum product volumes, price data is available on a real-time or near-real-time basis. Over the five days ending on June 22, the price of the front-month futures contract for Brent crude from the North Sea, a proxy for the global oil price, averaged about $92.94 per barrel, a $33 per barrel decline from its average over the March 9 - 14 period when prices were at their highest level for 2012. Brent futures prices are at their lowest levels since December 2010. The Brent market has moved into “contango,” when current prices are less than future prices, for the first time in almost a year with the average 1st — 12th month spread for the five days ending June 22 at -$0.77 per barrel. This marks a significant change from March 1 when the Brent market was “backwardated,” which occurs when current prices are higher than future prices, and the five-day average for 1st — 12th month spread peaked at about $8 per barrel. The switch from backwardation to contango is another sign of easing in the world oil markets.
EIA estimates that 88.9 million bbl/d of liquid fuels were produced in May and June, which is roughly 2.9 million bbl/d higher than both the 2009-2011 annual average and for the same time period in 2011. The increase can be attributed largely to a combination of increased output from some members of the Organization of the Petroleum Exporting Countries (OPEC), continued growth in North American oil supply, and lower aggregate disruption to non-OPEC production. Iraq and Libya stand out among OPEC countries. Iraq's estimated production level of 2.9 million bbl/d in May and June is the country's highest since 2000, as new infrastructure has facilitated increased exports from its large southern fields, while Libya's production, which virtually ceased for much of 2011, has now been restored to between 80 and 90 percent of its pre-disruption level. The United States is the largest source of non-OPEC liquids production growth over the past year and the largest source of liquids production growth relative to the recent three-year average for any country. Due to the continued success of tight oil plays, U.S. crude oil production averaged 6.3 million bbl/d in June, the highest it has been in 14 years.
Unplanned non-OPEC disruptions declined from an average of 1.2 million bbl/d in March and April to 0.9 million bbl/d in May and June, largely explained by the completion of unplanned maintenance activities that had reduced Canada's oil sands production. An above-normal volume of non-OPEC production is still offline due to political issues for Sudan, South Sudan, Syria, and Yemen, as well as technical issues in the North Sea.
EIA estimates that spare crude oil production capacity grew to 2.4 million bbl/d in May and June from 2.1 million bbl/d in March and April, caused by a decrease in Saudi Arabia's production. Nonetheless, spare capacity in May and June is still quite modest by historical standards, especially when measured as a percentage of global oil production and consumption.
Estimates of Production, Consumption, Spare Capacity and Inventories
Because biofuels are a close substitute for petroleum products, this report examines "availability and price" in the global liquid fuels market. The term "liquid fuels" encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains.
Once the availability of global liquid fuels is established, EIA estimates the volume of "petroleum and petroleum products produced in countries other than Iran" by subtracting global biofuels and liquid fuels produced and consumed in Iran from the global liquid fuels totals.
Looking at the total global market during May and June 2012, EIA estimates that world liquid fuels production averaged 88.9 million bbl/d, which is 2.9 million bbl/d higher than the comparable year-ago average of 86.0 million bbl/d and 2.8 million bbl/d higher than the three-year annual average of 86.1 million bbl/d. During this same period, EIA estimates that global liquid fuels consumption averaged 87.9 million bbl/d, 0.7 million bbl/d higher than the comparable year-ago period and 1.3 million bbl/d higher than its previous three-year annual average.
During the last two months, EIA estimates that liquid fuels production and consumption in Iran were 3.8 million bbl/d and 1.6 million bbl/d, respectively. Iran is the world's fifth-largest producer of liquid fuels — accounting for between 4 and 5 percent of global supply — and the third-largest exporter of crude oil. Iran's crude oil production capacity has eroded in recent years, due to its inability to carry out investment projects that are necessary to offset the natural decline in production from existing wells. Although its output of lease condensate and natural gas liquids has increased somewhat, these increases have not been enough to offset the decline in crude oil production, and EIA estimates that Iran's total liquids production capability has fallen. In addition, Iran has historically been a net importer of petroleum products, particularly gasoline, since its consumption levels exceed its own refining capacity.
In May and June 2012, EIA estimates consumption of petroleum and petroleum products in countries other than Iran averaged 84.5 million bbl/d. During the same period, EIA estimates that production of petroleum and petroleum products in countries other than Iran averaged 83.2 million barrels bbl/d, which is 3.1 million bbl/d or almost 4 percent higher than the three-year annual average from 2009-2011. EIA's balance in May and June suggests that global oil inventories grew by an average of 1.0 million bbl/d during the past two months. The growth in global oil inventories includes growth in Iranian oil inventories, as sanctions have caused some disruption in Iranian oil sales.
Currently, all of the world's spare crude oil production capacity is held by the member countries of the Organization of the Petroleum Exporting Countries (OPEC), and largely by Saudi Arabia. EIA estimates that spare OPEC oil production capacity averaged 2.4 million bbl/d during May and June. Spare oil production capacity is currently quite modest relative to historical levels, including an average of 3.1 million bbl/d in the comparable year-ago period and a 2009-2011 average of 3.4 million bbl/d. Spare capacity must also be considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran. For example, if Iran is forced to shut in production because difficulties with marketing its oil outstrip available oil storage capacity, then that shut-in capacity may be technically counted as new spare capacity. However, that hypothetical spare capacity would not be readily available to alleviate market tightness in the same manner as regular spare capacity not forced by sanctions.
Crude Oil and Petroleum Product Prices
Crude oil prices have declined sharply since the end of April. These changes are reflected in price movements on the most commonly traded oil futures contracts. Comparing the 5-day periods ending April 27, 2012 and June 22, 2012, the price of the front month of the New York Mercantile Exchange (NYMEX) light sweet crude oil contract (WTI) declined from $104.05 per barrel to $81.41 per barrel. The Brent front month price, which is widely viewed as being more representative of global prices for light sweet crude oil, declined from $119.15 to $92.94 per barrel over the same period. WTI and Brent prices have declined by $26.75 and $32.65 per barrel, respectively, from their 2012 peaks of $108.16 per barrel on March 1 and $125.59 per barrel on March 14.
Despite the decline in oil prices during May and June 2012, petroleum and petroleum product prices were higher than they had been on average over the last three years. The average of the monthly price for May and June of the front month WTI contract was $89.71 per barrel and the two-month average for the Brent front month contract was $104.42 per barrel. These prices were $10.78 and $19.78 per barrel higher than the three-year averages, but $15.15 and $18.38 per barrel lower than their March and April 2012 averages, respectively.
The 1st — 12th month spread for Brent had a May and June average of $2.89 per barrel, signifying an easing in the relative current tightness in the world waterborne crude market indicated in the previous report. The Brent curve has recently moved into contango for the first time since the summer of 2011 and is now closer to its three-year average of -$3.08 per barrel. The WTI spread also remains in contango, averaging -$1.84 per barrel between May and June, but this is a much smaller spread than the three-year average of -$5.39 per barrel. WTI prices continue to reflect transportation bottlenecks in the midcontinent region and future plans to ameliorate them by reconfiguring existing pipelines and building new ones.
For the five days ending June 22, the average price of the September 2012 WTI crude oil futures contract was $81.83 per barrel and the average price of the September 2012 Brent contract was $93.17 per barrel. The WTI and Brent prices for the 5-day average ending June 22 for the September 2012 contract have decreased by about $23 per barrel and $25 per barrel, respectively, since April 27. Based on implied volatilities calculated from options and futures prices over the 5 days ending June 22, the probability of the September 2012 WTI futures contract expiring above $100 per barrel is 6 percent, a decrease of 55 percentage points from the same calculation made using price data from the 5-day period ending April 27. Given the higher absolute level of Brent prices relative to WTI prices over the last two months, the probabilities that the September Brent contract will exceed specified dollar thresholds are higher.
Reformulated blendstock for oxygenate blending (RBOB) is an unfinished gasoline that requires blending with an oxygenate, such as ethanol, before being sold. RBOB (or Eurobob in Europe) is often traded instead of finished motor gasoline that already has been blended with ethanol since oxygenate blending typically takes place at terminals along the distribution chain.
RBOB prices had been generally rising over the past two months, but have decreased significantly in recent weeks. Comparing the 5-day periods ending April 27, 2012 and June 22, 2012, the price of the front month of the NYMEX RBOB contract, which calls for delivery in New York Harbor, fell from $3.18 per gallon to $2.60 per gallon. During May and June, the average price for the front month RBOB futures contract was $2.82 per gallon, $0.61 per gallon higher than the average front month price over the three-year period from 2009-2011, but $0.20 per gallon below the May and June 2011 average.
The average price of the September 2012 RBOB futures contract for the 5-day period ending June 22 was $2.45 per gallon, a decrease of $0.55 per gallon since April 27. Based on implied volatilities calculated from options and futures prices over the 5 days ending June 22,the probability of the September 2012 RBOB futures contract expiring above $3.30 per gallon (comparable to a $4.00 per gallon national average retail price for regular grade gasoline) is now 1 percent, a 23 percentage point decrease from April 27. A combination of lower prices and decreased time to expiration contributed to decreased probability of the September gasoline contracts exceeding these price levels.
Source: EIA