Oil Price Averages Drops in Recent Estimates of EIA

The Energy Information Administration of the United States (EIA) just released its recent 2012 Short-Term Energy Outlook update. They reduced estimates of WTI’s average oil price per barrel for the remaining six months of the current year. With the decrease, the estimated average current oil price now stands at $88 per barrel, down from its June rate of $95 per barrel. Moreover, wholesale costs to refiners, previously amounting to a per barrel price of $100, was reduced by $7 for a price of $93 per barrel.

For the first time, the EIA added a Brent crude forecast, with an estimated year-long average of $106 per barrel for the current year. The agency’s forecast for the average oil price per barrel of Brent in the coming year fell to $98.

Based on the estimates of the EIA, the spread between Brent and WTI prices will end from today’s $14 per barrel to $8 per barrel by December of next year. The basis of the lower spread is the increased capacity of the Seaway pipeline to move crude oil to the Gulf Coast from Cushing, Oklahoma. Increased truck and rail transportation from the upper mid-western US should help move the spread even closer.

It is important to note that an oil price per barrel of $98 for Brent crude by the end of 2013 implies a per barrel oil price of $90 for WTI as well. WTI’s $88 per barrel current oil price estimate for this year’s second half is $2 per barrel lower than the projected cost for December of 2013. Refiners will spend more on crude, which will lead them to also increase the price of their products, such as gasoline.

Increased availability of transportation for WTI crude, especially from Cushing, Oklahoma to the Gulf Coast and from North Dakota and Canada, will raise costs of Canadian and domestic crude compared to Brent prices, said the EIA. A consequence of this is higher gasoline prices. However, the EIA projects the price of each gallon of gasoline to fall by 0.20 per gallon from an average of $3.39 per gallon in June of 2012 to $3.19 per gallon by the end of December 2013.

By: Chris Termeer