Updated March 2018
After crude oil prices in 2016 reached a low not seen since 2004, the price of WTI began to recover at the end of 2016. This recovery was in response to a November 2016 agreement by the Organization of the Petroleum Exporting Countries (OPEC) and several other oil-producing nonmember countries to cut production by a combined 1.8 million barrels per day (106 bbl/d) over a six-month period starting in January 2017. The intent of the deal was to decrease world inventory levels and balance supply and demand. Global crude oil inventories have grown in recent years driven by a resurgence of light crude oil production in the United States.
In May 2017, OPEC member countries and nonmember countries agreed to extend the cuts to March 2018, and in November 2017, they extended the cuts to the end of 2018, with the addition that previously exempt countries—Libya and Nigeria—would now be part of the deal. After production cuts came into effect in January 2017, commercial stocks held by member countries of the Organisation for Economic Co-operation and Development (OECD) fell from 3067 106 bbl in January to an estimated 2906 106 bbl in November.
In 2014, world oil supply increased to 93.7 106 bbl/d, primarily driven by production growth in the United States, while oil demand increased only moderately, reaching 93.0 106 bbl/d. As a result, global inventories grew and crude oil prices began to fall. As shown in Figure 1.2 [Tableau], the price of WTI declined from US$94.86/bbl in January 2014 to US$59.29/bbl by December 2014. Crude oil prices remained low in 2015 and 2016 as oil production continued to increase and inventories continued to grow. U.S. production continued to increase, even with declining prices, as producers hedged against low prices, gained efficiencies, and reduced operating costs. As prices fell below US$50.00/bbl, producers focused on efficiency by cutting costs and drilling in the most productive areas, such as shales. Prices did not start to recover until the end of 2016 after U.S. production started to decline and the announcement of forthcoming production cuts started to affect the market.
The price of WTI in January 2017 reached US$52.61/bbl, averaging US$51.91/bbl in the first quarter of 2017. However, a price above US$50.00/bbl could not be sustained long term, and the price began to decrease as U.S. production began to increase again in response to higher prices. The price of WTI continued to fall in the second quarter of 2017 despite OPEC announcing in May that production cuts would be extended due to increasing global light oil production volumes. The price of WTI averaged US$48.29/bbl in the second quarter, falling to US$45.20/bbl in June as drilling increased by 34 per cent from January levels.
The price of WTI began to recover in the third quarter of 2017 as U.S. crude stocks were drawn down due to record-high refinery runs and slower oil drilling. Prices averaged US$48.06/bbl in August; however, strong production in the Permian basin kept the WTI price low, widening the price differential between Brent and WTI to US$3.64/bbl in August from an average of US$1.61/bbl between January and July. The price of WTI temporally fell as a result of Hurricane Harvey, which made landfall in late August, as shown in Figure 1.3 [Tableau]. At its peak, Hurricane Harvey reduced output by almost 400 000 bbl/d and U.S. refinery capacity by about 25 per cent. In addition, the storm shut in major pipelines and disrupted shipping routes, halting transport and export of oil and resulting in a buildup of oil inventories. As refineries and infrastructure came back in service, inventories were drawn down, and prices recovered. The differential between Brent and WTI averaged between US$5.00/bbl and US$7.00/bbl in the third quarter and into the fourth quarter due to lower demand following Hurricane Harvey, which weakened the WTI price, and to field maintenance in the North Sea, which constrained supply, strengthening the Brent price. Oil exports increased in late September and October as marine ports reopened. Exports also increased as a result of higher discounts for U.S. crude compared with international benchmarks. In early October, U.S. Gulf Coast oil production was again shut in due to Hurricane Nate, taking off line about 1.6 106 bbl/d, almost 93 per cent, of U.S. offshore Gulf of Mexico oil production.
The price of WTI increased in the fourth quarter of 2017 and reached a two-year high, averaging an estimated US$55.39/bbl, as OPEC-led production cuts were extended until the end of 2018. This extension, coupled with potential supply disruptions due to geopolitical tensions in the Middle East and Africa and an outage on the Forties pipeline system in the United Kingdom, helped strengthen prices. The wide price differential between Brent and WTI, in combination with pipelines restarting and ports reopening after the hurricanes, led to increases in U.S. oil exports because global refiners were able to purchase a similar quality of crude at a lower price. The price differential remained wide throughout the fourth quarter because many refineries were not fully restored to pre-storm levels in October, and others were undergoing maintenance in preparation for processing winter grades of gasoline. These conditions resulted in U.S. oil exports remaining elevated compared with historical levels for the rest of the fourth quarter, reaching over an estimated 2.0 106 bbl/d near the end of October.
U.S. oil exports have increased significantly since a 40-year export ban in the United States was lifted at the end of 2015. In particular, exports to the Asia-Pacific market have increased, with about 26 per cent of crude oil exports going to China in October 2017. The price of WTI typically trades under other world benchmarks, allowing Asia-Pacific refiners to take advantage of price differentials of similarly priced crudes. Currently, there are no infrastructure constraints to U.S. exports, and given numerous planned expansions and dredging projects over the next couple of years, including the potential to reverse the Louisiana Offshore Oil Port and make it bidirectional, exports should not be constrained over the forecast period.
As shown in Figure 1.1 [Tableau], the price of WTI averaged an estimated US$50.95/bbl in 2017. Over the forecast period, the price is projected to average US$53.00/bbl in 2018 and US$58.75/bbl in 2019 and to increase to US$84.47/bbl by 2027, with a range of US$60.75/bbl to US$108.19/bbl.
In the short term, supply-side disruptions from geopolitical tensions and supply outages will keep the price of WTI volatile because oil prices will be prone to spikes in response to events that reduce the global oil supply. However, supply disruptions are not anticipated to be sufficient to balance global supply and demand. Even with the extended global production cuts, global supply is forecast to continue to increase in the short term, with U.S. production projected to reach record highs of 10.6 106 bbl/d in 2018. U.S. shale output is also predicted to add to the global supply due to a combination of technological advancements, continued cost-cutting measures, and quick responses by operators to oil-price movements. In addition, the significant number of drilled but uncompleted wells (DUCs), numbering 7354 in November 2017, will act to keep prices in check because low-cost production can be brought into service quickly, increasing supply within a relatively short period of time.
The effect of low capital investment in the oil industry on the price of WTI is anticipated to be muted in the short term as companies continue to implement strategies to operate more efficiently in a low-price environment. After global upstream spending peaked at almost US$700 billion in 2014, it fell to US$433 billion in 2016. However, upstream spending started to recover in 2017, as discussed in Capital Expenditures. It is expected that investment dollars will go further in this period than in 2014, when prices were over $100.00/bbl and industry operating costs were high. Since 2014, operating costs have fallen by an estimated 30 per cent, helping to reduce the risk of low capital expenditures. Producers continue to gain efficiencies through cost deflations and technological improvements and to apply cost-cutting strategies to maximize their investments.
In the medium to long term, the price of WTI is projected to stabilize within the US$75.00/bbl to US$85.00/bbl range as markets start to tighten and global supply and demand come into balance as a result of low global spending, project deferrals, and the natural decline of mature oil fields. Lower capital investment is anticipated to put upward pressure on the price in the medium term as producers pay off debt instead of reinvesting in replacing production. In 2017, many oil companies paid off debt while funding investment through selling assets and issuing equity. The U.S. Federal Reserve is anticipated to continue to increase the interest rate in 2018, potentially pushing out less efficient shale oil operators and lowering supply.
In the long term, the market is expected to remain in balance, with the price of WTI strengthening through slowing supply growth and modest demand growth. Over the forecast period, demand is anticipated to come from emerging economies; however, due to concerns over pollution, it is expected that countries such as China will continue to introduce legislation that restricts gasoline use. In North America and Europe, legislated efficiencies are expected to keep demand flat or lead to declines.
The high and low price scenarios represent the near-term and long-term volatility of the price of WTI. In the high price scenario, the price of WTI is forecast to rebound fairly quickly as cuts to global production significantly reduce global supplies. In the low price scenario, compliance with the OPEC-led cuts is forecast to be low, and these cuts are forecast to end early, resulting in a resurgence of global production that will keep a ceiling on the price of WTI.
For information on how the WTI price is derived, see the Methodology section.