As increases in demand outpace growth in production, the Energy Information Administration (EIA) predicts crude oil will average $62 per barrel (b) in 2018. Originally forecasting that average at $59/b, EIA raised its prediction this week noting seven consecutive months of Brent crude price increases. On Jan. 11, spot prices topped $70/b, levels the industry has not seen since December 2014.

While EIA predicts higher U.S. crude oil production throughout its short-term forecast, it also sees relatively little production growth from members of the Organization of the Petroleum Exporting Countries (OPEC) and higher global consumption. Oil prices may have received some support following a recent OPEC monitoring committee meeting where some oil ministers suggested extending its production cut agreement in some form beyond the currently scheduled expiration at the end of 2018. OPEC Chairman and Saudi Arabia's Minister of Energy Khalid A. Al-Falih underscored the success in reducing supply.

“During the first half of 2017 we faced considerable challenges in bringing down inventories due to structural and seasonal factors. But by now, from an overhang in the market of around 340 million barrels of oil, we have eliminated more than 220 million barrels,” Al-Falih said. “Clearly, our work is achieving the desired effect, and there is widespread recognition of those successes. Results speak for themselves.”

OPEC total liquids production is expected to grow modestly through the next two years, averaging 39.4 million b/d in 2018 and 39.9 million b/d in 2019. As a result, EIA estimates that global inventories will build by 0.2 million b/d in both 2018 and 2019, indicating that global markets are largely in balance.

EIA estimates that U.S. crude oil production averaged 10.2 million b/d in January, up 100,000 b/d from December. EIA estimates that total U.S. crude oil production averaged 9.3 million b/d in 2017 and will average 10.6 million b/d in 2018, the highest ever, surpassing the record of 9.6 million b/d set in 1970. EIA forecasts 2019 crude oil production will average 11.2 million b/d.

Although EIA expects oil prices to decline in the first half of 2018, the timing and magnitude of price moves are uncertain. Global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. Uncertainty remains regarding the adherence to and duration of the OPEC and non-OPEC production cuts. Another key unknown in the oil market is the continued dynamism of the U.S. shale sector and how it responds to recent oil price increases with regard to capital outlays and potential input costs escalation. Although the pace of economic growth is forecast to quicken this year, there are both downside and upside risks to that forecast, and significant deviations could influence oil prices.