Tag: Oil and Gas Price Outlook

 

Natural Gas Producers Woes Continue

Two natural gas-focused E&P companies are now down approximately 95% over the last five years. Driven by the over-supply from Permian Basin development (focused on oil, where natural gas is merely a byproduct).

5-Year Stock Performance: CHK (Dark Blue) and RRC (Light Blue)

More recently, over the last 3 months, these two stocks have declined approximately 50%.

3-Month Stock Performance: CHK (Dark Blue) and RRC (Light Blue)

Given the declines in commodity prices, the market is now punishing gas-focused E&P companies for capital expenditures, where it once rewarded companies for quickly deploying investor capital.

Attempting to right the ship, CHK announced in its 2^nd quarter earnings call a focus on reductions in cash spending, margin improvement versus growth and increased oil production versus primarily naturally gas.

It remains to be seen whether gas-focused E&P stocks can recover, or whether their assets will be refinanced in bankruptcy.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on August 19, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the August 19, 2019 prices, the markets indicate that in mid-September there is a 68% chance that oil prices will be between $50.50 and $60.50 per barrel. Likewise, there is about a 95% chance that prices will be between $43.50 and $66.50. In mid-December 2019, the +/- 1σ price range is $45.50 to $64.50 per barrel, and the 2σ range is $35.00 to $77.00 per barrel. In other words, there is a 95% probability that the expected price of oil will be between approximately $35 and $77 per barrel and a 97.5% probability it will not be above $77 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.21 per MMBTU on the Henry Hub. Although more affected by seasonal factors than crude oil, in mid-September 2019, the +/- 1σ price range is $1.95 to $2.50 per barrel (68% probability) and the +/- 2σ range is $1.60 to $2.85 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful. If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $77 by mid-December 2019, so I wouldn’t count on it.”

Tags: Oil & Gas Price Outlook August 2019, Gas Price Outlook August 2019, Oil Price Outlook August 2019

 

Family Therapy: Parent-Child Issues in Shale Basins

A recent Society of Petroleum Engineers’ article¹ focuses on the disparities in production between parent and child wells in US shale basins, and its impact on the ability of operators to maintain high levels of output over the next few years.

However, Doug Suttles, Encana President and Chief Executive Officer, doesn’t think it’s “a big threat” to the shale sector. Encana’s approach to dealing with interwell communication is called “cube development.” Cube development involves developing dozens of wells at a time with multiple rigs and frac spreads on a single pad.

These megaprojects are delivering much needed economies of scale on everything from sand and water to parts and labor.²

Source: The Oklahoman: Encana to bring cube development to STACK wells in April

However, the bigger motivation lies deep in the ground. That is where shale producers have been battling poor production results for years because of frac hits between older and newer wells (often referred to as “parent” and “child” wells). The root of this complex problem lies in the fact that a child well’s hydraulic fractures often follow the path of least resistance into a reservoir’s most resource-­depleted zones, rather than to areas containing the best reserves. In some parts of the Permian, the effect has caused child wells to deliver a 30% lower recovery rate than their parents (when factors such as well lengths are normalized). The point of cube developments is to put an end to this cycle by creating only parent wells.

While some experts see cube developments as one of the best ways to relieve these pains, they caution against seeing the simultaneous operations as a panacea. Mohamed Soliman (the chair of the University of Houston’s petroleum engineering department whom holds a patent for two of the earliest versions of zipper fracturing) said the cube concept makes sense, in that avoiding the downsides of reservoir depletion moves the shale sector closer to its goal of production optimization.

“But there’s a catch,” he points out. “If you drill and complete all your wells, and you then produce them at one time, you may pay a massive price if the wells are not as productive as you think they will be.” In other words, these large-scale projects make it harder to run individual tests on new well designs to determine which are the best.

There is one more dose of reality to pour on: such massive onshore projects have been reported to cost from $120 million to $250 million, a price tag that for many smaller shale producers is simply out of reach.³

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on July 15, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the July 15, 2019 prices, the markets indicate that in mid-August there is a 68% chance that oil prices will be between $54.50 and $64.50 per barrel. Likewise, there is about a 95% chance that prices will be between $48.00 and $72.00. In mid-December 2019, the +/- 1σ price range is $48.00 to $70.00 per barrel, and the 2σ range is $35.50 to $87.00 per barrel. In other words, there is a 95% probability that the expected price of oil will be between approximately $35 and $87 per barrel and a 97.5% probability it will not be above $87 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.41 per MMBTU on the Henry Hub. Although more affected by seasonal factors than crude oil, in mid-August 2019, the +/- 1σ price range is $2.05 to $2.65 per barrel (68% probability) and the +/- 2σ range is $1.70 to $3.00 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful. If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $87 by mid-December 2019, so I wouldn’t count on it.”

[1] Journal of Petroleum Technology, “Shale CEO on Parent-Child Challenges, Well Declines, We Know”, Matt Zborowski, Technology Writer, 13 March 2019

[2] Journal of Petroleum Technology, “In the Battle Against Frac Hits, Shale Producers Go to New Extremes”, Trent Jacobs, JPT Digital Editor, 01 August 2018

[3] Ibid

Tags: Oil & Gas Price Outlook July 2019, Gas Price Outlook July 2019, Oil Price Outlook July 2019

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In this month, we take a look at market multiples as compared to the size of each company for a group of E&P companies (but excluding the majors like Exxon Mobil, Chevron, and others).  As shown in the table below, this group of companies had enterprise values in the range of $3.4 billion to $55.3 billion. 

On the graphic below, the upward trend of higher multiples for larger companies is evident.  What this demonstrates is that hypothetically, a larger company could buy the assets of a smaller E&P company and immediately enjoy a market valuation over the purchase price paid.  As an extreme example, purchasing an asset that produced $1,000 from Southwestern Energy Co (ticker SWN) could result in a valuation for Apache or EOG of almost twice that much.

Of course, other factors impact these decisions, but the current disparity in market valuation multiples would be expected to drive future industry consolidation.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on June 17, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the June 17, 2019 prices, the markets indicate that in mid-July there is a 68% chance that oil prices will be between $46.00 and $59.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $37.50 and $68.50.  In mid-November 2019, the +/- 1σ price range is $41.50 to $66.00 per barrel, and the 2σ range is $29.50 to $88.50 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $29 and $89 per barrel and a 97.5% probability it will not be above $89 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.40 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-July 2019, the +/- 1σ price range is $2.10 to $2.60 per barrel (68% probability) and the +/- 2σ range is $1.75 to $3.00 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $89 by mid-November 2019, so I wouldn’t count on it.”   

Tags: Oil & Gas Price Outlook June 2019, Gas Price Outlook June 2019, Oil Price Outlook June 2019

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Expected Range Cones

The “Expected Range Cone” for a stock’s expected prices in the future represents a theoretical price range that is calculated from options’ implied volatilities.  A selection of large Texas oil & gas companies is shown below.

 

If the implied volatility is relatively high, then the market is expecting a larger potential price range for the underlying stock. From this we can derive the market’s one standard deviation theoretical expectation of where prices might be in the future.  In other words, the market is expecting, with a 68% theoretical probability, that prices will fall within the boundary of the cone at the end of 30 days.

WTI Crude Oil Outlook

Take a look at the price distribution below, which shows the crude oil spot price on May 16, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the May 16, 2019 prices, the markets indicate that in mid-June there is a 68% chance that oil prices will be between $58.00 and $68.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $51.00 and $76.50.  In mid-October 2019, the +/- 1σ price range is $52.00 to $75.50 per barrel and the 2σ range is $40.00 to $94.50 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $40 and $95 per barrel, and a 97.5% probability it will not be above $95 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.62 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-June 2019, the +/- 1σ price range is $2.45–$2.85 per barrel (68% probability) and the +/- 2σ range is $2.15 to $3.15 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $95 by mid-October 2019, so I wouldn’t count on it.”  

  

Tags: Oil & Gas Price Outlook May 2019, Gas Price Outlook May 2019, Oil Price Outlook May 2019

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Increased Demand / Decreased Supply Drive Oil Higher

The April 15, 2019 Oil Price Dynamics Report, published by the Federal Reserve Bank of New York, tracks supply and demand-related changes to oil price (given their national focus, Brent Crude prices are tracked instead of West Texas Intermediate). 

Year to date, changes in the nation’s oil supply has had little to impact on pricing.  Rising demand, however, has been the primary driver of the 15+% increase in 2019.

WTI Crude Oil Outlook

Take a look at the price distribution below, which shows the crude oil spot price on April 15, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the April 15, 2019 prices, the markets indicate that in mid-May there is a 68% chance that oil prices will be between $58.50 and $67.50 per barrel.  Likewise, there is about a 95% chance that prices will be between $51.00 and $73.50.  In mid-September 2019, the +/- 1σ price range is $53.50 to $73.00 per barrel and the 2σ range is $41.50 to $86.50 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between $41 and $87 per barrel, and a 97.5% probability it will not be above $87 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.58 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-May 2019, the +/- 1σ price range is $2.40–$2.80 per barrel (68% probability) and the +/- 2σ range is $2.15 to $3.05 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $87 before mid-September 2019, so I wouldn’t count on it.”  Likewise, if you’re a banker whose borrower needs at least $2.80 natural gas prices in order to meet their debt service obligations in the summer of 2019, the fact that there’s about an 85% chance that gas prices will be lower than this number should help you make a more informed decision— no black magic required.

Tags: Oil & Gas Price Outlook April 2019, Gas Price Outlook April 2019, Oil Price Outlook April 2019

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ValueScope’s Oil and Gas Price Outlook: March 15, 2019

Don’t trust Wall Street soothsayers—if you want to predict the future of oil and gas prices, rely on probabilities and not a crystal ball.  Wall Street analysts can run large macroeconomic models to predict future prices, but they are all predicated on numerous assumptions, both macro and micro.

Is there a better source of insight for future oil and gas prices?  While futures markets today can’t determine the future for sure, with a little bit of straightforward statistical analysis, they can tell us what market participants expect.  All the information needed is readily available—we can examine where futures prices are today in order to predict where spot prices will be in a few weeks or months. This process is useful for estimating the future price range of any traded commodity.  It is also helpful as a barometer for the energy market as a whole.

Probability & Statistics 101

Remember the normal curve from your first statistics class?  We can use it and option prices to determine the probability that future prices will be within a certain range.  In a normal distribution, there’s about a 68% chance that a data point lies within one standard deviation of the mean, and about a 95% chance that it lies within two standard deviations of the mean.

Analysts and traders rely upon option “Greeks” in order to decode the sensitivities of option values to price changes in the underlying commodity.  Using option Greeks, we can determine the prices and probabilities that market participants as a whole are expecting, based on their investments.

How can we determine the likely behavior of such a large and often unpredictable group?  Because investors are already telling us what they expect by voting with their dollars, not just their intuition or potentially biased expectations. 

Crude Oil Outlook

Take a look at the price distribution below, which shows the crude oil spot price on March 15, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.83 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-April 2019, the +/- 1σ price range is $2.60–$3.00 per barrel (68% probability) and the +/- 2σ range is $2.35 to $3.35 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $84 before mid-August 2019, so I wouldn’t count on it.”  Likewise, if you’re a banker whose borrower needs at least $3.35 natural gas prices in order to meet their debt service obligations in the summer of 2019, the fact that there’s about an 85% chance that gas prices will be lower than this number should help you make a more informed decision— no black magic required.

Tags: Oil & Gas Price Outlook March 2019, Gas Price Outlook March 2019, Oil Price Outlook March 2019

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A Tale of Two Permian’s

While much of the press is focused on “the Permian,” current activity in the Permian is focused on two different sub basins: the Delaware Basin to the West and the Midland Basin to the East.  While there is a Central Basin Platform in between, most of the current activity is focused in the Delaware and the Midland basins.¹

Within each of these sub basins are multiple geologic formations, as shown in the table below.

A key difference between the two sub basins is the availability of pipeline capacity to move production from the wellhead to points of sale.  Although differentials are high, the Delaware sub basin has and is expected to have adequate capacity.

However, according to a recent Wells Fargo research report,² there will be a shortfall of gas processing capacity in the Midland sub basin over the next 5 years, expected to keep differentials high and potentially slow growth.

Another key difference between the two sub basins are the current break-even prices required to drill a well.³  As shown in the following table, the Midland sub basin has the lowest required pricing for a typical well to break-even ($44.05), while the Delaware has one of the highest required break-even prices of $49.45.

Break Even 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 illustrates the crude oil pricing as of February 15, 2018 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 (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on February 15, 2018, pricing, the futures markets indicate that in mid-March 2018 the expected strip price is $55.59, with a 68% chance that oil prices will be between $50.50 and $60.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $44.00 and $66.50.  For a longer-term view, by mid-July 2019 the approximate one standard deviation price range is between $47.00 to $70.00 per barrel with an expected value of $57.48.  Strip prices are no longer in backwardation.

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.60 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in March 2019, the expected price is $2.66 with a +/- 1σ price range of $2.35 to $3.05 per MMBtu, and the 2σ range (95%) of $1.95 to $3.60 per MMBtu.  For a longer-term view, by mid-July 2019 the expected price is $2.76 per MMBtu with a +/- 1σ price range of $2.35 to $3.20 per MMBtu.

 1.  https://www.shaleexperts.com/images/Permian-Basin-Map-Zones2.png

2. Wells Fargo Securities, Midstream Monthly Outlook: Feb 2019.  A Review of Midstream/MLP Trends & Statistics

3. Ibid.

Tags: Oil & Gas Price Outlook February 2019, Gas Price Outlook February 2019, Oil Price Outlook February 2019

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Satellite Imagery in the Permian

The December 2018 issue of the Journal of Petroleum Technology (the Society of Petroleum Engineers’ monthly magazine) had a very interesting piece on the use of satellites to track activity in the Permian basin.¹

Companies such as Sourcewater, Planet, and Westwood Global Energy Group are stepping up to monitor the world’s busiest oil play by leveraging relatively inexpensive satellite technology and machine learning.  Many of the images are taken using Planet’s “Dove” satellites that are smaller than a shoebox.  The key benefits to using this technology are to:

• aid planning for development, production, and logistics, and
• provide competitor intelligence and market research.

Satellite images are also being used to predict new drilling.  A preliminary step in drilling a well is to clear a pad, typically about 1 to 4 months before a rig is moved on site.  This means that satellite imagery analytics could predict drilling up to 4 months before a spud occurs. 

Sourcewater used its satellite analytics to compare how well new pad sites correlate to well permits, as shown below.

It is a new year and the future seems to have arrived: satellites the size of a shoe box are providing vital market and production insights for E&P investors and operators.

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 illustrates the crude oil pricing as of January 15, 2018 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 (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on January 15, 2018, pricing, the futures markets indicate that in mid-February 2018 the expected strip price is $52.02, with a 68% chance that oil prices will be between $46.00 and $58.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $39.50 and $65.00.  For a longer-term view, by mid-June 2019 the approximate one standard deviation price range is between $42.00 to $68.50 per barrel with an expected value of $53.39.  Strip prices are no longer in backwardnation.

Natural Gas Outlook

The natural gas futures contracts are currently trading at $3.54 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in February 2019, the expected price is $3.54 with a +/- 1σ price range of $2.70 to $4.90 per MMBtu, and the 2σ range (95%) of $2.25 to $5.00 per MMBtu.  For a longer-term view, by mid-May 2019 the expected price is $2.84 per MMBtu with a +/- 1σ price range of $2.35 to $3.40 per MMBtu.

 1.  Permian Pulse: Using Satellite Imagery Analytics to Track the World’s Busiest Oil Play

Tags: Oil & Gas Price Outlook January 2019, Gas Price Outlook January 2019, Oil Price Outlook January 2019

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Decomposing Oil Prices

The Federal Reserve Bank of New York’s Research & Statistics Group publishes a weekly Oil Price Dynamics Report¹ which provides some interesting insights into global oil price movements.

The chart below shows the relationship between supply and demand on a cumulative basis for the last half of 2018.  Given this analysis considers global supply and demand constraints, versus US prices alone, the price of Brent crude oil is referenced as opposed to West Texas Intermediate crude oil.

When the price of Brent crude peaked around the first of October, demand and supply factors were both higher than they had been mid-year.  Following that time, however, over-supply concerns increased, contributing to about 20% of Brent’s approximate 35% fall from its October peak pricing.  Reduced demand changes contributed to about 10% of the fall, with the term described as “residual” making up the rest of the price change.²  Supply, demand, and residual price changes always sum to the percentage price change in Brent’s crude price.

On a longer-term basis, since 2010 increased supply has been the key factor in keeping oil prices down, given new production in US shale basins.

Although demand has steadily increased, it is the supply swings that seem to be moving oil prices downward on a global basis.

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 illustrates the crude oil pricing as of December 17, 2018 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 (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on December 17, 2018, pricing, the futures markets indicate that in mid-January 2018 the expected strip price is $50.62, with a 68% chance that oil prices will be between $44 and $57 per barrel.  Likewise, there is about a 95% chance that prices will be between $37 and $64.  For a longer-term view, by mid-May 2019 the approximate one standard deviation price range is between $41 to $66 per barrel with an expected value of $52.03. 

Natural Gas Outlook

The natural gas futures contracts are currently trading at $3.67 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in January 2018, the expected price is $3.67 with a +/- 1σ price range of $2.95 to $5.00 per MMBtu, and the 2σ range (95%) of $2.45 to $5.00 per MMBtu.  For a longer-term view, by mid-April 2019 the expected price is $2.87 per MMBtu with a +/- 1σ price range of $2.35 to $3.20 per MMBtu. 

 1. 2018 Federal Reserve Bank of New York Oil Price Dynamics Report / December 3, 2018, https://www.newyorkfed.org/medialibrary/media/research/policy/oil_decomposition/oil-decomp_2018_1203.pdf?la=en, accessed 12/17/2018

2. Residual reflects price movements unexplained by supply and demand factors.

Tags: Oil & Gas Price Outlook December 2018, Gas Price Outlook December 2018, Oil Price Outlook December 2018

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Lions, Bears and Ducks, Oh My!¹

Well there are no lions, but Bear Markets and Drilled Uncompleted wells (“DUC wells” pronounced “Ducks”) in the Permian are moving oil prices this month.

Bear Markets for Oil Prices: WTI and Brent

Oil prices are in Bear Market territory this month, having had a 2 standard deviation downward move from last month, as this week’s crude futures pricing eliminated 2018’s gains.

The slump reflects current concerns over excess supply for 2019, when previously a shortage had been expected.

UCs in the Permian

The graphic below from the U.S. Energy Information Administration (EIA) shows all of the regions tracked by the EIA, but as of October 2018, the Permian has over half of the Drilled Uncompleted Wells.

In fact, between September and October 2018, 684 wells were drilled and over one-third of those wells were left uncompleted (249 wells).²

According to the EIA, when producers are under economic duress, the number of DUCs can provide useful insight into upstream industry conditions. A high inventory of DUCs also has potential implications for the size and timing of the domestic supply response to a persistent or significant rise in oil prices with or without significant changes in the number of active drilling rigs. Given requirements for planning and scheduling completion jobs, there will always be some DUCs.³

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 illustrates the crude oil pricing as of November 15, 2018 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 (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on November 15, 2018, pricing, the futures markets indicate that in mid-December 2018 the expected strip price is $56.74, with a 68% chance that oil prices will be between $50 and $62 per barrel. Likewise, there is about a 95% chance that prices will be between $41 and $71. For a longer-term view, by mid-February 2019 the approximate one standard deviation price range is between $68 to $47 per barrel with an expected value of $57.15.

Natural Gas Outlook

The natural gas futures contracts are currently trading at $3.92 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in December 2018, the expected price is $3.92 with a +/- 1σ price range of $3.15 to $5.00 per MMBtu, and the 2σ range (95%) of $2.55 to $5.00 per MMBtu. For a longer-term view, by mid-February 2019 the expected price is $3.79 per MMBtu with a +/- 1σ price range of $2.65 to $5.00 per MMBtu.

1. Adapted from The Wizard of Oz movie’s famous quote, “Lions and Tigers and Bears, Oh My!” This line was spoken by Dorothy, the Tin Man, and the Scarecrow, played by Judy Garland, Jack Haley, and Ray Bolger (respectively) in the film directed by Victor Fleming (1939).

2. EIA website: https://www.eia.gov/petroleum/drilling/#tabs-summary-3, accessed 11/14/2018

3. EIA website: https://www.eia.gov/petroleum/drilling/pdf/duc_supplement.pdf, accessed 11/14/2018

Tags: Oil & Gas Price Outlook November 2018, Gas Price Outlook November 2018, Oil Price Outlook November 2018

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