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Production is expected to increase, despite lower crude prices

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Dec. 4 2020, Updated 10:42 a.m. ET

EIA’s crude price forecasts for 2015

In its recent STEO (Short-Term Energy Outlook), the EIA (U.S. Energy Information Administration) stated that January marked the seventh consecutive month that the monthly average Brent prices decreased. They decreased by $15 per barrel from December to a monthly average of $48 per barrel. This is the lowest since March 2009.

WTI (West Texas Intermediate) prices also fell from an average of $59 per barrel in December to $47 per barrel in January—the lowest level since February 2009.

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What depressed oil prices?

A combination of robust supply levels and weak global demand depressed oil prices.

Tanking oil prices will hurt oil producers’ margins—like ConocoPhillips (COP), Chevron (CVX), Pioneer Resources (PXD), and Anadarko Petroleum (APC). All of these companies are part of the Energy Select Sector SPDR ETF (XLE).

The EIA estimates WTI crude oil will average $55 per barrel in 2015 and $71 per barrel in 2016.

For Brent, the EIA expects prices to average $58 per barrel in 2015 and $75 per barrel in 2016. These forecasts didn’t change from last month’s STEO.

The discount of WTI to Brent is estimated to have narrowed less than $1 per barrel in January—the narrowest monthly average price spread since August 2010. The EIA forecasts that the discount to Brent will average $3 per barrel in 2015 and $4 per barrel in 2016.

According to the EIA, WTI prices will average $50 per barrel in the first half of 2015. As a result, it expects many companies to reduce drilling activity. Companies already slashed their 2015 capex budgets, due to unattractive economic returns. The companies include BP Plc (BP) and Chevron. Tthey both cut capex by ~13%. ConocoPhillips (COP) and Occidental Petroleum (OXY) cut capex by ~33% each. Most of these companies are part of the Energy Select Sector SPDR ETF (XLE).

Rising oil prices

However, the EIA believes that as oil prices start rising in the second half of 2015, drilling activity will likely increase again. The EIA expects 2015 production to touch 9.3 million barrels per day, or MMbbls/d—despite the low prices. In 2014, production averaged 8.6 MMbbls/d, according to the EIA’s estimates.

Capex cuts and lower drilling might offer some hope for oil prices. Markets might see supply and demand balancing out.

In the next part of this series, we’ll discuss the EIA’s global oil supply projections.

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