EIA’s crude oil price forecasts for 2015

In its recent STEO (“Short-Term Energy Outlook”), the EIA (US Energy Information Administration) stated that Brent prices increased for the first time in February since June last year. They averaged $58 per barrel in February—$10 per barrel higher than January’s average.

WTI (West Texas Intermediate) prices also increased by $3 per barrel to average $51 per barrel in February from $48 per barrel in January.

4Q 2014 Upstream Capital Expenditure Falls 12% Year-over-Year

WTI increased less than Brent due to strong US supplies. Inventories increased over 50 MMbbls since the end of 2014, which has pressured WTI prices. However, the increase in prices in both crude oil benchmarks was a result of declining oil rig counts and announced capex reductions by major oil companies.

A key “supply-based” response to low oil prices has been a sharp decline in rig counts and reductions in 2015 capex budgets from major oil companies, including ConocoPhillips (COP), Chevron (CVX), Hess (HESS), and BP (BP).  COP, CVX, and HES are components of the iShares Global Energy ETF (IXC), and they make up ~11% of the ETF.

According to the EIA, upstream capital expenditure decreased by 12% year-over-year in 4Q 2014. Upstream companies are directly affected by changes in crude oil prices.

The EIA said, “Lower oil prices reduce expected returns from future production, decreasing incentives for upstream investment spending. As a result, new exploration and development projects may be delayed or canceled, and reduced investments in producing fields can ultimately slow the growth in production.”

The EIA estimates that WTI crude oil will average $52 per barrel in 2015 and $70 per barrel in 2016. For Brent, the EIA expects prices to average $59 per barrel in 2015 and $75 per barrel in 2016.

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

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