Oil prices tend to be both volatile and hard to predict. Back in the summer of 2008, they surged as high as $150 a barrel, only to come crashing back down to under $40 a barrel later that year.
Though there are several factors that drive crude oil prices, such as geopolitics, the value of the dollar, and speculation, the single most important determinant over the long run is global supply and demand.
After assessing these two crucial dynamics, many prognosticators are lowering their outlooks for oil prices, including the U.S. Energy Information Administration (EIA). Let's take a look at why the agency expects oil prices to fall further next year.
EIA's short-term oil price outlook
According to the EIA's most recent short-term energy outlook, crude oil prices will not only continue to decline through the remainder of the year, but will also average lower next year. The agency forecasts the price of West Texas Intermediate, the main U.S. crude oil benchmark, to average $95 per barrel next year, down from an average of $97.74 this year. Meanwhile, Brent crude, the main international crude oil benchmark, is expected to average $103 per barrel, down from an average of $108.01 this year.
The main reason behind the EIA's bearish forecast is that global crude oil production will outpace global demand. On the supply side, the agency expects continued growth in non-OPEC liquid fuels production, which is forecast to increase by 1.6 million barrels per day (bbl/d) in 2013 and by 1.5 million bbl/d in 2014, led by North American supply growth that is expected to increase by 1.5 million bbl/d in 2013 and by 1.1 million bbl/d in 2014. Meanwhile, OPEC liquid fuels production is projected to fall by 0.8 million bbl/d this year and remain at roughly that level next year.
On the demand side, the EIA expects global consumption to grow by an annual 1.1 million bbl/d next year and in 2014, led almost entirely by consumption growth in non-OECD regions, including China, India, the Middle East, and Central & South America.
U.S. shale oil production growth
The single largest contributor to non-OPEC supply growth over the past few years has been the U.S., which recently reached a crucial milestone, producing more oil than it imported for the first time in nearly two decades. Much of this growth is being led by shale plays such as Texas' Eagle Ford and North Dakota's Bakken.
In North Dakota's portion of the Bakken, production surged to a record 847,150 barrels a day in August, up 4.3% from the previous month, as energy producers coaxed more and more oil from the play through continuous efficiency improvements.
For instance, Kodiak Oil & Gas (UNKNOWN:KOG.DL) reported average daily sales volumes of 35,400 barrels of oil equivalent per day in the third quarter, up more than 50% from the second quarter of this year, while Continental Resources (NYSE:CLR), the largest producer in the Bakken, reported 7% sequential growth in net Bakken production, which averaged 94,500 barrels of oil equivalent per day in the third quarter.
Companies are seeing similar success in the in the Eagle Ford, a highly prolific oil play in south Texas, where output surged by 60% year-over-year to 617,884 barrels of crude a day in June, according to data from the Texas Railroad Commission.
Chesapeake Energy (NYSE:CHK), which counts the Eagle Ford as its most prized liquids-rich asset, reported a whopping 82% year-over-year increase in net production from the play, which averaged roughly 95,000 barrels of oil equivalent per day during the third quarter, while ConocoPhillips (NYSE:COP) saw its Eagle Ford production surge 66% year-over-year to 126,000 barrels of oil equivalent per day, representing a quarter of the company's total production from the lower 48 states.
The bottom line
These companies' continued success in shale oil plays like the Bakken and the Eagle Ford has helped radically alter the global energy paradigm. Not only has the domestic shale boom helped the U.S. drastically reduce its crude oil imports and improve its trade deficit, it has also significantly reduced the threat of a future supply shortage and, therefore, the risk of a sustained spike in crude oil prices.
But while lower oil prices are good news for large oil-importing countries, allowing them to lower their oil import bills and improve their current account balances, they would negatively impact OPEC and other large oil-exporting countries, especially those with higher break-even costs such as Nigeria and Angola, as well as exploration and production companies with high break-even costs, such as those involved in Canadian oil sands mining projects.