Global Petroleum and Other Liquids

Market fundamentals remain largely unchanged since last month's STEO, as global production continues to exceed demand, resulting in inventory builds. Global oil inventory builds are projected to average 1.3 million bbl/d through the first half of 2015, with the builds moderating during the second half of the year, as demand rises and non-OPEC supply growth slows, particularly in the United States, because of lower oil prices. The expected inventory builds in 2015 are on top of an estimated average 0.9 million bbl/d increase in 2014.

Global Petroleum and Other Liquids Consumption

EIA estimates that global consumption grew by 0.9 million bbl/d in 2014, averaging 92.2 million bbl/d for the year. EIA expects global consumption to grow by 1.0 million bbl/d in both 2015 and 2016. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2014, is projected to grow by 2.6% in 2015 and by 3.1% in 2016.

Consumption outside of the Organization for Economic Cooperation and Development (OECD), which grew by 1.2 million bbl/d in 2014, is projected to grow by 0.8 million bbl/d in 2015 and by 1.1 million bbl/d in 2016. The reduction in forecast non-OECD consumption growth in 2015 is mostly attributable to a 0.2 million bbl/d decline in Russia's consumption as a result of its economic downturn. Russia's oil consumption is expected to decline by a similar amount in 2016. China's economic growth slowed in the second half of 2014, as key manufacturing indexes decreased. Nonetheless, China remains the main source of non-OECD oil consumption growth, with a projected annual average increase of 0.3 million bbl/d in both 2015 and 2016, down from growth of 0.4 million bbl/d in 2014.

OECD consumption, which fell by 0.3 million bbl/d in 2014, is expected to grow by 0.2 million bbl/d in 2015 and then stay relatively flat in 2016. Japan and Europe accounted for almost the entire 2014 decline in OECD oil consumption. Consumption in these areas is expected to continue declining over the next two years, albeit at a slower rate than in 2014. The United States is the leading contributor to projected OECD consumption growth, with U.S. consumption increasing by 0.3 million bbl/d in 2015 and by 0.1 million bbl/d in 2016.

Non-OPEC Petroleum and Other Liquids Supply

EIA estimates that non-OPEC production grew by 2.2 million bbl/d in 2014. EIA expects non-OPEC production to grow by 1.0 million bbl/d in 2015 and by 0.6 million bbl/d in 2016, in part because of lower projected oil prices. The slower growth in total non-OPEC supply is largely attributable to slower production growth in the United States and Canada and declining production in Europe and Eurasia. After a slight decline in 2015, production in Eurasia is projected to decline by 0.1 million bbl/d in 2016. The projected decline reflects reduced investment in Russia's oil sector stemming from low oil prices and international sanctions.

Unplanned supply disruptions among non-OPEC producers averaged slightly less than 0.6 million bbl/d in February 2015, similar to the previous month. South Sudan, Syria, and Yemen accounted for more than 85% of total non-OPEC supply disruptions in February. EIA estimates that unplanned non-OPEC supply disruptions averaged slightly more than 0.6 million bbl/d in 2014.

OPEC Petroleum and Other Liquids Supply

EIA estimates that OPEC crude oil production averaged 30.1 million bbl/d in 2014, unchanged from the previous year. Crude oil production declines in Libya, Angola, Algeria, and Kuwait offset production growth in Iraq and Iran. In EIA's forecast, OPEC crude oil production remains flat in 2015 and falls by 0.3 million bbl/d in 2016. Iraq is the largest contributor to OPEC production growth over the forecast period, but its growth is expected to be offset by production declines from other OPEC producers.

OPEC noncrude liquids production, which averaged 6.4 million bbl/d in 2014, is expected to increase by less than 0.1 million bbl/d in both 2015 and 2016, led by increases in Qatar and Kuwait.

In February 2015, unplanned crude oil supply disruptions among OPEC producers averaged 2.7 million bbl/d, an increase of 0.1 million bbl/d compared with the previous month. This increase was mainly attributable to rising outages in Iraq, Nigeria, and Libya. Unplanned OPEC crude supply disruptions averaged 2.4 million bbl/d in 2014, 0.5 million bbl/d higher than in the previous year. The high level of OPEC disruptions contributed to higher crude oil prices during the first half of 2014. Unplanned supply disruptions could still affect crude oil prices, but the threshold that the market can bear has risen in light of robust global production and increases in inventory levels.

EIA expects OPEC surplus crude oil production capacity, which is concentrated in Saudi Arabia, to increase to an annual average of 2.1 million bbl/d in 2015 and 2.6 million bbl/d in 2016, after averaging about 2.0 million bbl/d in 2014. Surplus capacity is typically an indication of market conditions, and surplus capacity below 2.5 million bbl/d is an indicator of a relatively tight market. However, the current and forecast levels of global inventory builds make the projected low surplus capacity level in 2015 less significant.

OECD Petroleum Inventories

EIA estimates that OECD commercial oil inventories totaled 2.75 billion barrels at the end of 2014, the highest end-of-year level on record and equivalent to roughly 60 days of consumption. Projected OECD oil inventories rise to 2.90 billion barrels at the end of 2015 and to 2.92 billion barrels by the end of 2016.

Crude Oil Prices

North Sea Brent crude oil spot prices increased by $10/bbl from January to reach an average of $58/bbl in February, the first month in which Brent prices increased since June 2014. Several factors supported Brent prices in February, including news of falling U.S. crude oil rig counts and announced reductions in capital expenditures by major oil companies, both of which contributed to expectations that oil supplies could decline more quickly than previous market expectations. Additionally, lower-than-expected Iraqi crude oil exports and a reduction in Libyan production contributed to an increase in global unplanned supply disruptions. However, the sustainability of the recent price increase is very uncertain, as it occurred amid strong global oil inventory growth, which is 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 increased to an average of $51/bbl in February, up $3/bbl from January. WTI prices increased less than Brent prices in February as U.S. commercial crude oil inventories increased to 444 million barrels as of February 27, an increase of over 50 million barrels since the end of 2014. The record inventory levels have put downward pressure on the price of crude oil for prompt delivery relative to the price of crude oil for delivery in the future.

EIA projects the Brent crude oil price will average $59/bbl in 2015, up $2/bbl 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.

WTI prices in 2015 and 2016 are expected to average $7/bbl and $5/bbl, respectively, below Brent. The Brent-WTI spread for 2015 is more than twice the projection in last month's STEO, reflecting continuing 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 very high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for June 2015 delivery traded during the five-day period ending March 5 averaged $54/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 $36/bbl and $80/bbl, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $35/bbl and $102/bbl for prices in December 2015. Last year at this time, WTI for June 2014 delivery averaged $101/bbl, and implied volatility averaged 18%. The corresponding lower and upper limits of the 95% confidence interval were $87/bbl and $118/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 responsiveness of supply to lower prices. Despite OPEC's November 2014 decision to leave its crude oil production target at 30 million bbl/d, key producers could decide to reduce output, tightening market balances. The level of unplanned production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Iran, 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 a major uncertainty in the world oil supply forecast.