Recent ISIS Threats to OPEC

On June 7th, armed assailants in Tehran attacked both the Parliament building and the tomb of its revolutionary founder.  These attacks were the worst to hit the Islamic Republic in years, shattering Iran’s self-proclaimed image of calm in a turbulent region.

Iran’s Islamic Revolutionary Guards Corps blamed both Saudi Arabia and the United States for the assaults.  At the same time, a Sunni extremist group called the Islamic State took credit for the terrorist attacks.

These terrorist attacks on June 7th also raised concerns about the region’s oil markets.  The key concern is whether Iran’s response to those attacks could destabilize OPEC and the international oil market.  On May 19th, the Islamic State had also claimed responsibility for attacks on two checkpoints near the oil fields in Basra, Iraq.

If ISIS-related factions continue to target onshore oil and natural gas infrastructure in southern Iraq, it could impact the OPEC members’ agreement to cut production, creating downward pressure on oil prices.

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 June 15, 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 June 15, 2017 option prices, the futures markets indicate that in mid-July 2017 there is about a 68% chance that oil prices will be between $40.50 and $48.50 per barrel. Likewise, there is about a 95% chance that prices will be between $36.50 and $55.00.  For a longer-term view, by mid-December 2017 the +/- one standard deviation price range is between $37.50 to $63.00 per barrel with an expected value of $45.94.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $2.94 per MMBtu on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in August 2017, the +/- 1σ price range is $2.55 to $3.45 per MMBtu, and the 2σ range (95%) is $2.15 to $4.15 per MMBTU.  The expected value of natural gas prices in mid-August 2017 is $2.94 per MMBTU.


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

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