One of the Reasons That Oil’s Price Recovery Has Stalled

Over the long-term, US active drilling rig counts and oil prices have moved reasonably in sync.  As shown below, over the last ten years, there has been a high degree of correlation, as basic economics would suggest.

Recently, however, this relationship has reversed, at least in the short term.  Rig counts have increased as oil prices have retreated due to increased inventories.

This breakdown has exacerbated oil’s price recovery, hopefully temporarily. 

Crude Oil Outlook

While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future ranges, or “confidence intervals,” for crude oil and natural gas prices.

The graphic below shows crude oil price as of July 17, 2017 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).  The drop from last month was primarily driven by recent EIA reports showing that inventories had increased, versus the expected decrease priced into the market.

On the graphic below, the blue lines are within one standard deviation (σ) of the settlement price (green line) and the red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on July 17, 2017 option prices, the futures markets indicate that in mid-September 2017 there is about a 68% chance that oil prices will be between $41.50 and $52.50 per barrel. Likewise, there is about a 95% chance that prices will be between $36.00 and $59.00.  For a longer-term view, by mid-December 2017 the +/- one standard deviation price range is between $39.00 to $63.00 per barrel with an expected value of $47.55.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $3.04 per MMBtu on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in September 2017, the +/- 1σ price range is $2.65 to $3.55 per MMBtu, and the 2σ range (95%) is $2.25 to $4.15 per MMBTU.  The expected value of natural gas prices in mid-December 2017 is $3.36 per MMBTU.


Tags: Oil & Gas Price Outlook July 2017, Gas Price Outlook July 2017, Oil Price Outlook July 2017

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