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Both the US Energy Information Administration and the International Energy Agency recently released their monthly reports, which both point to a recovering oil market, uncertainty about the trajectory OPEC production cuts, and a resurgence of US production. Today, we’ll explore the major takeaways of the EIA’s Short-Term Energy Outlook. We’ll visit the IEA’s findings on Thursday.

The EIA expects the oil market to be “relatively balanced in 2017 and 2018, with inventory draws averaging 0.1 M/bpd in 2017 and builds averaging 0.2 M/bpd in 2018.” It also expects global liquid fuel consumption to increase by 1.6 M/bpd in 2017 and by 1.5 M/bpd in 2018. The agency forecasts a 0.2 M/bpd decline in global inventories in 1Q17, versus the estimated 1.5 M/bpd stock build in the same period in 2016. But despite these upward revisions, the EIA did not change its oil price forecast. This implies that current oil prices are already near the point where the market balances, which allows US and OPEC production to increase to meet higher demand this year and in 2018. “The current Brent crude oil price projections of $55/b and $57/b in 2017 and 2018, respectively, contribute to a roughly balanced market through the projection period,” the EIA said.

Oil price volatility declined in December following the announced of production cut agreements by OPEC and other major oil producers. The EIA noted that all front-month crude oil transactions traded in the mid-$50/bbl range last month, with Brent trading the narrowest range since May 2014 and WTI since December 2006. This indicates that buyers and sellers increasingly concur that a mid-$50/bbl oil price is enough to balance the market, according to the report, as world oil demand continues growing robustly and as producers transition from maintenance to growth in their 2017 and 2018 budgets.

The EIA expects total OPEC supply to rise by 0.2 M/bpd this year and by 0.5 M/bpd in 2018. Notably, recent estimates of production from Libya indicate that output averaged nearly 0.7 M/bpd in January, marking the country’s highest level of production in three years. Libya, Nigeria and Iran were all exempt from OPEC’s November 30 agreement to cut production by 1.2 M/bpd. As we noted in our post last week, Iran especially could become a “black swan” in the oil market in 2017 if its production rises north of the 4 M/bpd post-sanctions target it set last January.

Saudi Arabia recently said that the country is meeting its production cut pledge, and is estimated to have produced slightly less of 10.0 M/bpd in January after topping this monthly volume for all of 2016. Russian production was also reportedly down by 100 K/bpd in January, and Oman may have cut by 45,000 bpd in line with its pledge. Kazakhstan is reportedly exceeding its target as well, which is unexpected given the ramp-up of the giant Kashagan oilfield in the Caspian Sea.

Zeroing in on the US, the EIA forecasts oil production to rise by 0.1 M/bpd this year YOY and by 0.5 M/bpd in 2018. The active oil rig count rose by 41 in January, representing the eighth straight monthly increase and the first YOY increase since December 2014, roughly half-a-year before the downturn started, according to Baker Hughes data.

Breaking this production down regionally, the EIA expects US lower 48 oil production to average 6.88 M/bpd this year and 7.29 M/bpd next year; 70,000 bpd and 310,000 bpd higher, respectively, than the previous forecast. Gulf of Mexico oil production is forecast to average 1.63 M/bpd this year- 100 K/bpd lower than previously expected. The net result of these changes is that the agency forecasts total US oil production to average 8.98 M/bpd this year and 9.53 M/bpd next year, levels that are 20,000 b/d lower and 230,000 b/d higher, respectively, than previously forecast.

Other important data points from the EIA’s most recent STEO report include the following:

    1. Brent crude oil spot prices averaged $55/bbl in January, a $1 bbl increase from December. This was $24/bbl higher than the January 2016 average, and the highest monthly average for the global benchmark since July 2015.
    2. Turning to natural gas, the EIA forecasts US dry natural gas production to average 73.7 Bcf/d this year, a 1.3 Bcf/d increase from last year’s level. This increase will reverse a production decline in 2016, which was the first decline since 2005. Natural gas production in 2018 is projected to rise by an average of 4.1 Bcf/d from this year’s level.
    3. Average Henry Hub natural gas prices dropped by $0.29 MMBtu in January from December levels to $3.30 MMBtu due to relatively mild January temperatures.
    4. Growing natural gas consumption and a burgeoning LNG export market contributed to the forecast Henry Hub natural gas spot price rising from an average of $3.43 MMBtu this year to $3.70 MMBtu in 2018.
    5. Natural gas plant production of hydrocarbon gas liquids (HGL) is 50,000 bpd higher in 2017 and 110,000 higher in 2018 than in the prior month’s forecast, which results in higher HGL export growth and inventory levels compared with the previous projection.

About The Author Jeff Reed

I specialize in analysis of the oil and gas sector- with emphasis on the Middle East, OPEC, and the politics of energy. I hold a BA in Political Science and MA in Theological Studies from the University of St. Thomas. Prior to a career in oil and gas journalism, I was a Roman Catholic priest serving churches in the Houston area. I also taught high school for a year in Oakland, California, and worked for two years in retail management. Among my other areas of interest are political philosophy, religion and society, culture and the arts, and philosophy.