No relief for crude prices in the latest EIA inventory report (Part 8 of 9)
EIA forecasts for 2015
In its recent Short-Term Energy Outlook (or STEO), the EIA stated that December marked the sixth consecutive month in which monthly average Brent prices decreased. December prices decreased $17 per barrel from November to a monthly average of $62 per barrel. This is the lowest Brent prices have been since May 2009.
WTI prices also fell from an average of $76 per barrel in November to $59 per barrel in December.
Tanking oil prices will hurt the margins of oil producers such as ConocoPhillips (COP), Chevron (CVX), Pioneer Resources (PXD), and Whiting Petroleum (WLL). All these companies are components of the Energy Select Sector SPDR ETF (XLE).
In the STEO, the EIA trimmed its WTI crude oil price forecasts to $55 per barrel in 2015. The 2015 forecast is 13% lower than EIA’s previous projection. The EIA projects WTI prices to average $71 per barrel in 2016.
For Brent, the EIA expects prices to average $58 per barrel in 2015. This is ~15% lower than the previous forecast. The 2016 forecast is considerably higher at $75 per barrel.
These projections result from a strong supply and weak demand scenario. According to the EIA, supply will likely stay strong through the first three quarters of 2015. However, with increased demand and weakening supply, the market will likely become more balanced post mid-2015, as the image above shows.
High production levels have weakened crude price
According to the EIA, US crude output increased 16% from 2013 to 8.6 million barrels per day (or MMbpd) in 2014. This is the highest level in nearly 30 years.
The EIA expects production to increase further to average 9.31 MMbpd in 2015 and 9.5 MMbpd in 2016. Crude prices have now declined ~50% since their June highs last year. The drop in prices was the biggest annual drop since 2008.
Prices have also taken a hit ever since OPEC (Organization of the Petroleum Exporting Countries), including Saudi Arabia and Iraq, decided to maintain current production levels.
However, as plunging oil prices make their way into 2015, producers might have to cut losses, especially if the price of crude falls below their break-even levels. The EIA has already scaled down its 2015 production growth forecast by 10,000 barrels per day.
Continue to the next part to read about EIA’s global oil supply projections.
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