Brent crude oil averaged $72 per barrel (b) in 2018, nearly $17/b more than the average price for Brent in 2017. The annual change for West Texas Intermediate (WTI) increased similarly, averaging $65/b, more than $14/b greater than in 2017. Nevertheless, Brent ended the year at $54/b, nearly $13/b lower than it began the year, while the WTI price ended the year at $45/b, nearly $15/b lower than at the beginning of the year. Last year marks the first time since 2015 that either crude oil ended the year at a lower price than it began. The spread between Brent and WTI prices increased in 2018, averaging $7.02/b, nearly double the 2017 average spread.
After rising through much of 2018, crude oil prices declined significantly beginning in October amid heightened crude oil price volatility. On October 3, Brent and WTI prices each hit annual highs of $86/b and $76/b, respectively. Subsequently, however, the prices for each crude oil fell quickly. On December 24, Brent reached an annual low of $50/b, down nearly $36/b from its October high, and WTI reached an annual low of $43/b, more than $33/b lower than its October high.
Several factors contributed to the rapid decline in prices. Crude oil production from the world’s three largest producers—the United States, Russia, and Saudi Arabia—was at or near record levels in November. Furthermore, concerns about the pace of global economic growth in coming months have added to uncertainty regarding global oil demand growth. Although implementation of sanctions on Iran began on November 5, the United States granted waivers to some of Iran’s largest customers to continue importing limited volumes of crude oil for six months, which resulted in more crude oil available to the global oil markets than many market participants expected.
The U.S. Energy Information Administration’s (EIA) December Short-Term Energy Outlook (STEO) estimated that total world crude oil and other liquids production would average 100.4 million barrels per day (b/d) in 2018, 2.4 million b/d more than in 2017. EIA forecasts that the Organization of the Petroleum Exporting Countries’ (OPEC) total crude oil and other liquids production will average 39.2 million b/d in 2018, down slightly from 39.3 million b/d in 2017. However, EIA estimates that global oil consumption increased by about 1.5 million b/d in 2018 to 100.1 million b/d. Global liquid fuels production exceeded consumption, which contributed to global oil inventories build in 2018, particularly in the fourth quarter. Estimated fourth-quarter inventory builds were likely the result of factors listed above, which contributed to oversupply in the global oil market and put significant downward pressure on oil prices.
The United States was the leading contributor to global oil supply growth in 2018. U.S. crude oil production was at record levels in 2018, and the December STEO forecasts 2018 annual U.S. crude oil production to average 10.9 million b/d. If accurate, the forecast volume will surpass the 2017 production level of 9.4 million b/d and the previous record high of 9.6 million b/d set in 1970.
The high production levels in the United States were met despite pipeline constraints moving crude oil out of the Permian Basin. The pipeline constraints in the Permian contributed to the price discount for crude oil priced in Midland, Texas, and also led producers without pipeline space to ship crude oil by more costly modes of transportation, such as trucks. Similar constraints contributed to price discounts for Western Canada Select (WCS).
Increasing production in Saudi Arabia at the end of 2018 helped offset the effect of the Iranian sanctions on OPEC’s total production levels. Saudi Arabia’s crude oil production averaged 10.2 million b/d in January 2018 and increased to an estimated 10.9 million b/d in November 2018 (EIA does not publish forecast production volumes for individual OPEC member countries). Russian production also increased in 2018 from an estimated 11.2 million b/d in January to a forecast 11.6 million b/d in December.
In an effort to limit excess supply, OPEC announced on December 7, 2018, that it would cut production by 1.2 million b/d (from October 2018 levels) during the first six months of 2019. The agreement indicates that the cut will be split between OPEC members and non-OPEC member countries (including Russia). OPEC members agreed to cut production by 800,000 b/d, and non-OPEC participants agreed to cut production by 400,000 b/d.
U.S. crude oil and other liquids production increased in 2018 and EIA forecasts that it will average 17.8 million b/d for the year, an increase of 2.2 million b/d from 2017. U.S. production began the year at 16.4 million b/d and EIA forecasts that it will increase to 19.0 million b/d in December, ending the year almost 7.4 million b/d greater than Russia and 6.0 million b/d greater than Saudi Arabia. In addition, earlier in the year, the U.S. surpassed Russia and Saudi Arabia to become the largest crude oil producer in the world.
Transportation constraints in Western Canada contributed to more crude oil shipped by rail from Canada to the United States, a more expensive option than pipelines. At the beginning of December, Alberta’s provincial government announced mandatory cuts in crude oil production, after which the WCS price rose to $30/b on December 3 from $22/b on November 30. This increase contributed to the narrowing of the price spread between WCS and WTI (Cushing). The announcement calls for 325,000 b/d of crude oil production cuts beginning in January 2019 and will be re-evaluated as the crude oil in storage in Canada is worked off.
U.S. crude oil exports averaged 1.97 million b/d in 2018, 810,000 b/d higher than the 2017 level of 1.16 million b/d. Crude oil overtook distillate as the largest U.S. petroleum export in 2018. The growth in U.S. exports of crude oil and petroleum products led to a one-week period in November when the U.S. was a net exporter for the first time in EIA’s historical data (going back to 1991).
U.S. average regular gasoline and diesel prices decrease
The U.S. average regular gasoline retail price decreased nearly 3 cents from last week to $2.24 per gallon on January 7, 2019, down nearly 29 cents per gallon from the same time last year. Rocky Mountain prices fell nearly 6 cents to $2.37 per gallon, West Coast and Gulf Coast prices each decreased 4 cents to $3.01 per gallon and $1.89 per gallon, respectively, East Coast prices decreased nearly 4 cents to $2.22 per gallon, and Midwest prices fell less than 1 cent to $2.00 per gallon.
The U.S. average diesel fuel price decreased nearly 4 cents from last week to $3.01 per gallon on January 7, 2019, nearly 2 cents per gallon higher than a year ago. Rocky Mountain prices fell nearly 5 cents to $3.03 per gallon, East Coast prices decreased more than 4 cents to $3.07 per gallon, Midwest prices decreased nearly 4 cents to $2.87 per gallon, West Coast prices fell more than 3 cents to $3.53 per gallon, and Gulf Coast prices fell 2 cents to $2.82 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.9 million barrels last week to 68.7 million barrels as of January 4, 2019, 2.4 million barrels (3.4%) lower than the five-year (2014-2018) average inventory level for this same time of year. Gulf Coast, Midwest, and East Coast inventories decreased by 1.0 million barrels, 0.6 million barrels, and 0.2 million barrels, respectively, while Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 7.4% of total propane/propylene inventories.
Residential heating fuel prices decrease slightly
As of January 7, 2019, residential heating oil prices averaged almost $3.10 per gallon, less than 1 cent per gallon lower than last week’s price and nearly 8 cents per gallon lower than last year’s price at this time. The average wholesale heating oil price for this week averaged almost $1.89 per gallon, 11 cents per gallon more than last week but nearly 31 cents per gallon lower than a year ago.
Residential propane prices averaged $2.43 per gallon, a slight drop from last week and nearly 12 cents per gallon lower than a year ago. Wholesale propane prices averaged almost $0.77 per gallon, nearly 3 cents per gallon lower than last week and 38 cents per gallon below last year’s price.
