Gianfrancesco Melpignano

North Sea Brent crude oil spot prices decreased by $2/bbl in March to a monthly average of $56/bbl. This decrease followed a $10/bbl increase in February, the first increase in eight months. Several factors put upward pressure on Brent prices in February, including news of falling U.S. crude oil rig counts and announced reductions in capital expenditures by major oil companies. This upward price pressure abated in March, as the combination of robust world crude oil supply growth and weak global demand contributed to an increase in the rate of global inventory builds. Total global oil inventories are estimated to have increased by 2.1 million bbl/d in March, compared with a 0.9 million bbl/d increase in February. Strong global oil inventory builds are expected to continue in the coming months. Inventory builds are projected to moderate later in the year and provide support to crude oil prices.

The monthly average WTI crude oil spot price decreased to an average of $48/bbl in March, down $3/bbl from February. WTI prices fell in March in large part because of commercial crude oil inventories in Cushing, Oklahoma, which increased to a record 58.9 million barrels as of March 27. The record inventory levels have put downward pressure on the price of crude oil for prompt delivery compared with the price of crude oil for delivery in later months.

EIA projects the Brent crude oil price will average $59/bbl in 2015, unchanged from last month's STEO, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events (see analysis box below). WTI prices in 2015 and 2016 are expected to average $7/bbl and $5/bbl, respectively, below Brent. The Brent-WTI spread for 2015 reflects continued large builds in U.S. crude oil inventories, including at the Cushing, Oklahoma, storage hub.

The current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for July 2015 delivery traded during the five-day period ending April 2 averaged $52/bbl while implied volatility averaged 46%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in June 2015 at $35/bbl and $78/bbl, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $32/bbl and $97/bbl for prices in December 2015. Last year at this time, WTI for July 2014 delivery averaged $99/bbl, and implied volatility averaged 17%. The corresponding lower and upper limits of the 95% confidence interval were $85/bbl and $115/bbl.

Given the high level of uncertainty in oil markets, several factors could cause oil prices to deviate significantly from current projections. Among these factors is the potential lifting of sanctions against Iran if a comprehensive agreement is reached (see box below). The level of unplanned production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Nigeria, and Venezuela. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices.

Several OPEC and non-OPEC oil producers rely heavily on oil revenue to finance their national budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices fall further or are sustained at current levels, oil-dependent producing countries will face tough decisions. These decisions could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protesters target oil infrastructure. Potential new supply disruptions are a real possibility and present major uncertainty in the world oil supply forecast.

http://www.eia.gov/forecasts/steo/report/prices.cfm