Oil & Gas Price Outlook February 2016
A wild ride to expected values!
In our January blog, we showed that futures markets predicted a one-standard deviation range (68% probability) for oil prices was expected to be approximately $33 – $39 per barrel as of month end. The day after we published, oil prices began falling like a snow skier on a double-black diamond slope.
Throughout January, announcements about over-supply, OPEC’s sentiments and Chinese demand rocked the markets, moving below the two standard deviation expectation. However, as of last Friday, the price of WTI settled close to the bottom of the lower one standard deviation price and today it is flirting with the two standard deviation decline.
Bullish on Oil Prices, then buy the S&P500??
As oil prices tumbled early in 2016, global equities recorded one of their worst-ever starts for a new year. In addition to oversupply, traders are now growing concerned that demand may be weakening as well.
Interestingly, year-to-date oil prices and global stock markets have moved almost one for one. The graphic above shows that up and down pricing days for oil and the overall stock market matched almost perfectly. According to the Wall Street Journal, a correlation this high has not been seen in the past 26 years.
Crude Oil Outlook
While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future price ranges, or “confidence intervals”, for crude oil and natural gas.
Based on the February 1, 2016 prices, the markets indicate that in mid-March, there is about a 68% chance that oil prices will be between $26.00 and $41.00 per barrel. Likewise, there is about a 95% chance that prices will be between $19.00 and $53.00. For a longer-term view, I have added a six-month outlook which indicates that by mid-August 2016, the +/- 1σ price range is $28.00 to $57.00 per barrel.  This upward skew in the price ranges also drives the expected midpoint of $40.00 per barrel 6-months out.
If there were a positive spin to this data, it would be that currently the market shows an 85% expectation that the price of oil will not drop below $26.00 over the next six months.
Natural Gas Outlook
We can do the same thing for natural gas futures, currently trading at about $2.15 per MMBTU on the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in mid-August 2016, the +/- 1σ price range is $1.95 to $3.10 per MMBTU and the 2σ range is $1.50 to $3.95 per MMBTU.
 No part of this blog should be considered a trade recommendation.
 Wall Street Journal, http://www.wsj.com/articles/oil-stocks-dance-the-bear-market-tango-1453722783
 Crude oil futures and their options are too thinly traded farther out in time be considered statistically significant.
Tags: Oil & Gas Price Outlook February 2016, Crude Oil Price Outlook, Natural Gas Price Outlook
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