Future Oil Usage to Join Cigarette Smoking?

The growth in demand growth for oil and gas has been curbing within developed nations for several years. Developments in greener energy sources and increased efficiency of energy-thirsty products like vehicles and cell phones have offset the increase in demand driven by population usage growth.  Similar to cigarette smoking, it appears that the end of an era of fossil fuels may be in sight.1

Domestically, wind energy has been the largest source of development, accounting for over half of growth in 2016.  Furthermore, wind energy has suppressed the price of wholesale natural gas and has driven some nuclear facilities into retirement.  Compound these forces with the decline of coal-based generation resulting from regulatory pressures; the U.S. is moving with a swift trajectory toward green energy.  The chart below shows the cresting of the traditional energy sources like coal and the increase of wind.

Globally, Germany has been exiting from nuclear power generation toward solar and has become a net exporter of its solar power. Additionally, Denmark has produced its first windfarm without the aid of subsidies.2 Also, foreign demand for U.S. Liquified Natural Gas (“LNG”) has not materialized as expected either.3

Despite the global progression towards renewable energy, oil and natural gas offer far too much incentive to be entirely cut within the foreseeable future. Technological improvements have allowed operators to earn profits at lower prices and offset an expected decline in market share. These lower oil and natural gas prices make it even more difficult to replace fossil fuels as an energy source Furthermore, renewable technology is still nascent and is far from displacing traditional fuel sources.  Political and sentimental forces aside, consumers still vote with their pocket books.

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 the crude oil price on May 15, 2017, and predicted crude oil prices based on options on oil futures contracts (ticker /CL).  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 May 15, 2017 prices, the futures markets indicate that in mid-July 2017, there is about a 68% chance that oil prices will be between $43.50 and $56.00 per barrel. Likewise, there is about a 95% chance that prices will be between $37.00 and $63.00.  For a longer-term view, by mid-December 2017, the +/- 1 standard deviation price range is between $40.50 to $63.00 per barrel, with an expected value of $50.41.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $3.36 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in July 2017, the +/- 1σ price range is $2.95 to $4.05 per MMBtu, and the 2σ range (95%) is $2.55 to $4.75 per MMBTU.  The expected value of natural gas prices in mid-July 2017 is $3.46 per MMBTU.

1. Credit Suisse. Another Oil Price Wobble – What to Make of the Bearish Oil Narratives (May 10, 2017)

2. Financial Times. Dong Energy breaks subsidy link with new offshore wind farms (April 17, 2017)

3. Credit Suisse. Another Oil Price Wobble – What to Make of the Bearish Oil Narratives (May 10, 2017)

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

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