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This report was prepared in fulfillment of Section 1245(d)(4)(A) of the National Defense Authorization Act (NDAA) for Fiscal Year 2012, which requires that, not later than 60 days from enactment and every 60 days thereafter, the U.S. Energy Information Administration (EIA) "submit to Congress a report on the availability and price of petroleum and petroleum products produced in countries other than Iran in the 60-day period preceding the submission of the report." As specified by the NDAA, EIA consulted with the Department of Treasury, the Department of State, and the intelligence community in the process of developing this report.
The statutory language in the NDAA clearly envisions a report that is primarily, if not exclusively, backward looking in nature. Given this focus, it is important to recognize that due to time lags in the collection of production and consumption data nearly all of the petroleum and petroleum product volumes presented in this report for the 60-day period preceding its publication are estimates rather than actual data. In contrast to data on petroleum and petroleum product volumes, price data is available on a real-time or near-real-time basis.
As discussed in the remainder of this summary section and in the body of this report, EIA estimates that the world oil market has become increasingly tight over the first two months of this year. Oil prices have risen since the beginning of the year and are currently at a high level. Global liquid fuels consumption is at historically high levels. While the economic outlook, especially in Europe, remains uncertain, continued growth is expected. Unusually cold weather in Europe contributed to tighter markets by increasing the demand for heating oil, particularly during February.
With respect to supply, the world has experienced a number of supply interruptions in the last two months, including production drops in South Sudan, Syria, Yemen, and the North Sea. Both the United States and the European Union (EU) have acted to tighten sanctions against Iran, including measures with both immediate and future effective dates. There is some evidence that these measures may already be causing some adjustments in oil supply patterns. For example, there is emerging evidence that some shipments of Iranian crude oil under existing contracts are being curtailed due to the unwillingness of U.S. and EU insurance providers to cover them, even though the EU sanctions only require existing oil contracts to be completely phased out by July 1, 2012.
Finally, spare crude oil production capacity, while estimated to be higher than during the 2003 to 2008 period, is quite modest by historical standards, especially when measured as a percentage of global oil production and considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran.
Market Indicators Considered in this Report
In addition to estimated volumes of production and consumption and spot market and futures prices, this report focuses on a variety of other indicators of volumes, spare production capacity, and price spreads relevant to the "availability and price of petroleum and petroleum products".
Spare capacity, which EIA defines as the amount of additional production that can be brought onstream within 30 days and sustained for at least 90 days consistent with sound business and reservoir management practices, is an indicator of the world oil market's ability to respond to potential disruptions that reduce oil supply. Oil prices tend to rise when spare capacity reaches very low levels, as occurred in the 2003 to 2008 period.
Crude oil and petroleum product inventories, also referred to as stocks, act as the balancing point between supply and demand. Given the uncertainty of supply and demand, inventories are often seen as a precautionary measure and, along with spare capacity, serve to cushion the market in addressing negative supply shocks and/or positive demand shocks. The term structure of prices for future delivery, discussed below, is one factor that signals the market to build or reduce stocks.
Petroleum and petroleum product prices are indicators of the relative balance of supply and demand. Rising prices suggest that demand is growing more rapidly (or declining at a slower rate) than supply, while falling prices imply that demand is growing less quickly (or falling more rapidly) than supply. Prices also reflect expectations regarding future changes in the balance between supply and demand, which can be influenced by a variety of supply and demand drivers. This report reflects price data through February 27, 2012.
Differences in prices, commonly referred to as price spreads, also convey important information about the current state of the market and of market expectations. The term structure of prices for future delivery is one key indicator of market participants' expectations regarding changes in market tightness over time. For example, the difference between the price of the front month and twelfth month futures contracts provides insight into current market tightness relative to expectations for the coming year. A positive difference, referred to as backwardation, indicates tightness in the current market, while a negative difference, called contango, indicates a relatively looser near-term supply-demand balance and encourages stock building.
There are a variety of other spreads that also provide important market insights. These include the price spread across different crude streams which can arise due to differences in physical characteristics (for example, American Petroleum Institute (API) gravity and sulfur content) or their location. With respect to location, transportation bottlenecks can result in significant price differences between physically similar crudes in markets with different balances between crude supply and demand.
The price spread between crude oil and refined products, often referred to as a crack spread, provides an indication of the relative tightness in the supply-demand balance for different petroleum products. In recent years, the crack spread for distillate fuels (a category that includes diesel fuel and heating oil) has generally been greater than the crack spread for gasoline. Crack spreads also provide insight into the profitability of refining operations, which is often a reflection of the availability of refinery capacity relative to the demand for refined products.
The value of options on futures contracts is another current indicator of forward-looking market sentiment. Call options provide the holder with the right to buy a commodity at a specified price up to a specified future date, while put options provide the right to sell at a specified price up to a specified future date. Given strike prices and the time to expiration, the value of options contracts can be used to calculate the market's current assessment of the uncertainty range for future prices and/or the market's view that prices for future delivery at specified dates will exceed or fall below any particular level.
Estimates of Production, Consumption, Spare Capacity and Inventories
Because Iran participates in the global oil market and because biofuels are a close substitute for petroleum products, this report examines "availability and price" in the global liquid fuels market. The term "liquid fuels" encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains.
Once the availability of global liquid fuels is established, EIA estimates the volume of "petroleum and petroleum products produced in countries other than Iran" by subtracting global biofuels and liquid fuels produced and consumed in Iran from the global liquid fuels totals.
Looking at the total global market during January and February, EIA estimates world liquid fuels production averaged 88.9 million barrels per day (bbl/d), which is 0.8 million bbl/d higher than in the comparable year-ago period and 2.7 million bbl/d higher than the 2009-2011 three-year annual average of 86.2 million bbl/d (Table 1). During this same period, EIA estimates that global liquid fuels consumption averaged 88.1 million bbl/d, 0.9 million bbl/d higher than the comparable year-ago period and 1.5 million bbl/d higher than its previous three-year annual average.
During the last two months, EIA estimates that liquid fuels production and consumption in Iran was 4.1 million bbl/d and 1.8 million bbl/d, respectively. Iran is the world's fifth-largest producer of liquid fuels - accounting for between 4 and 5 percent of global supply - and the third-largest exporter of crude oil. Though Iran's crude oil production capacity has eroded in recent years, its output of lease condensate and natural gas liquids has increased. Iran has historically been a net importer of petroleum products, particularly gasoline, since its consumption levels exceed its own refining capacity.
In January and February 2012, EIA estimates consumption of petroleum and petroleum products in countries other than Iran averaged 84.5 million bbl/d. During the same period, EIA estimates that production of petroleum and petroleum products in countries other than Iran averaged 82.9 million barrels per day (bbl/d), which is 2.7 million bbl/d or 3 percent higher than the three-year annual average from 2009 through 2011 (Table 1).
As a result, EIA estimates global oil inventories grew by an average of 0.8 million bbl/d during the first two months of 2012. The growth in global oil inventories occurred notwithstanding the fact that consumption in countries outside Iran exceeded their production by an estimated 1.6 million bbl/d, reflecting Iran's net exports of petroleum and petroleum products that are estimated to be 2.3 million bbl/d. Inventory changes in February do show the world oil market tightening. In January, EIA estimates that inventories grew by 2.1 million bbl/d. In contrast, EIA estimates global inventories fell by 0.5 million bbl/d in February.
Currently, all the world's spare crude oil production capacity is held by the member countries of the Organization of the Petroleum Exporting Countries (OPEC), and largely by Saudi Arabia. EIA estimates that spare OPEC oil production capacity averaged 2.5 million bbl/d during January and February, compared with an average of 3.7 million bbl/d in the comparable year-ago period and a 2009-2011 average of 3.5 million bbl/d. Spare oil production capacity is currently quite modest relative to historical levels, in part because Libyan oil production capacity has not yet returned to pre-disruption levels and new oil production capacity additions have not kept pace with growing demand and the natural decline in the production capacity of existing fields. Spare capacity must also be considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran.
Crude oil prices have been generally rising over the past two months, particularly in recent weeks. This is reflected in price movements on the most commonly traded oil futures contracts. Comparing the 5-day periods ending December 30, 2011 and February 27, 2012, the price of the front month of the New York Mercantile Exchange (NYMEX) light sweet crude oil contract (WTI) rose from $99.77 per bbl to $107.66 per barrel. The Brent front month price, which is widely viewed as being more representative of global prices for light sweet crude oil, rose from $108.04 to $123.56 over the same period.
During January and February 2012, petroleum and petroleum product prices were generally higher than they had been on average over the last three years. The average of the monthly price for January and February of the front month NYMEX light sweet crude oil contract (WTI) was $101.22 per bbl and the two month average for the Brent front month contract was $115.21 per bbl. These prices were $22.28 and $30.57 per bbl higher than the three year averages, respectively.
The 1st - 12th month spread for Brent had a January and February average of $4.86 per bbl, indicating a relative current tightness in the world waterborne crude market. The Brent curve has been in backwardation since summer of 2011, in contrast to the three year average of -$3.08 per barrel. WTI, on the other hand, is in contango, averaging -$0.97 per barrel between January and February, but this is a much smaller spread than the three year average of -$5.39 per barrel. The contango for WTI likely reflects transportation bottlenecks in the mid-continent region and future plans to ameliorate them by reconfiguring existing pipelines and building new ones.
For the five days ending February 27, the average price of the June 2012 WTI crude oil futures contract was $108.64 per bbl and the average price of the June 2012 Brent contract was $121.91 per bbl. The WTI and Brent prices for June 2012 have increased by about $8 per bbl and $15 per bbl respectively since the end of December. Based on implied volatilities calculated from options and futures prices over the 5 days ending February 27, the probability of the June 2012 WTI futures contract expiring above $120 per barrel is 23 percent, a 4 percentage point increase relative to the same calculation made using price data from the 5-day period ending December 30. Given the higher absolute level and greater upward movement of Brent prices relative to WTI prices over the last two months, the change in the probabilities that the June Brent contract will exceed specified dollar thresholds are higher and have increase more over the past 60 days.
Reformulated blendstock for oxygenate blending (RBOB) is an unfinished gasoline that requires blending with an oxygenate, such as ethanol, before being sold. RBOB (or Eurobob in Europe) is often traded instead of finished motor gasoline that already has been blended with ethanol since oxygenate blending typically takes place at terminals along the distribution chain.
RBOB prices have also been generally rising over the past two months, particularly in recent weeks. Comparing the 5-day periods ending December 30, 2011 and February 27, 2012, the price of the front month of the NYMEX RBOB contract, which calls for delivery in New York Harbor, rose from $2.68 per gallon to $3.11 per gallon. During January and February, the average price for the front month of the RBOB futures contract was $2.90 per gallon, $0.69 per gallon higher than the average front month price over the three-year period from 2009-2011.
The average price of the June 2012 RBOB futures contract for the 5-day period ending February 27 was $3.25 per gallon, an increase of 49 cents per gallon from the 5-day period ending December 30. Based on implied volatilities calculated from options and futures prices over the 5 days ending February 27, the probability of the June 2012 RBOB futures contract expiring above $3.35 per gallon (comparable to a $4.00 per gallon national average retail price for regular grade gasoline) is 39 percent, a 23 percentage point increase from the result of the same calculation made using data for the 5-day period ending December 30.