In EIA’s December STEO, both the West Texas Intermediate (WTI) and Brent crude oil 2017 price forecasts increased by about $1 per barrel (b) from the November STEO, with prices expected to average $51/b and $52/b, respectively. The WTI price is forecast to average $49/b in the first half of 2017 and end the year at $54/b, while the Brent price is forecast to average $50/b in the first half of 2017 and end the year at $55/b. The forecast includes consideration of the Organization of the Petroleum Exporting Countries’ (OPEC) recent announcement to reduce production. However, the agreement only resulted in small changes to the STEO forecast.
At the November 30 OPEC meeting, member countries agreed to reduce production by approximately 1.2 million barrels per day (b/d) from an October baseline and to lower OPEC’s production ceiling to 32.5 million b/d beginning January 1, 2017. The agreement is meant to last six months with an option to extend for an additional six months.
EIA adjusted the December STEO by reducing OPEC’s crude oil production by 100,000 b/d in the first quarter of 2017 to 32.8 million b/d. The difference between OPEC’s and EIA’s production estimates reflects, in part, differences in production in Indonesia, Libya, and Nigeria, which are not participating in the agreement. OPEC’s agreed-upon output levels for early 2017 were similar to EIA’s November STEO forecast, and already included some expectation of slower production growth in 2017.
Several non-OPEC producers also announced their intention to freeze or reduce production, with the agreement stating that non-OPEC countries will reduce production by 600,000 b/d. Trade press indicates that Russia will account for 300,000 b/d of this reduction, staged over the first quarter of 2017, but it is currently unclear where the other 300,000 b/d will come from other than modest reductions from some Persian Gulf nations such as Oman.
Oil prices rose as the OPEC agreement came together and was announced. However, the extent to which the plans will be carried out and actually reduce supply below levels that would have occurred in its absence remains uncertain. A price recovery above $50/b could contribute to supply growth in U.S. tight oil regions and in other non-OPEC producing countries that do not participate in the OPEC-led supply reductions. Crude oil prices near $50/b have led to increased investment by some U.S. production companies, particularly those operating in the Permian Basin in Texas and New Mexico.—Matthew French, principal contributor