Tag: Oil and Gas Price Outlook

Oil Prices: Supply, Demand and the S&P 500

It is common knowledge that oil is a commodity, with what economists describe as “elastic pricing” set by the markets. The following supply and demand factors consistently move oil (and natural gas) prices and are the focus of Wall Street analysts and academics, both in the long and short run.

Supply / Capacity

• Oil Reserves (BBl’s or Barrels of Oil)
• Equivalent Oil Reserves (BOE or Barrels of Oil Equivalent)
• Equivalent Gas Reserves (MCFE or Cubic Feet of Gas Equivalent)
• Domestic Production of existing reserves
• Imports

Demand / Consumption

• Fuel and other requirements
  • Jet fuel
  • Gasoline and Diesel
• Refining and distribution facilities
• Export opportunities

However, given the stock market’s recent volatility (with some indices losing almost 5% of their value since the beginning of October) another key driver of oil price has been front and center, the price changes of the S&P 500.

As shown in the chart above, the recent prices of the WTI index and the S&P 500 have moved almost in lock step. This relationship can also be shown in a regression analysis, whereby the daily price changes of WTI oil prices are tested against the S&P 500 daily returns.

As shown in the analysis above, oil prices (at least in the short-term) are moving about 120% of the rate of change of the market’s pricing. In other words, a 1.0% percent change in the S&P 500 would result in a 1.2% change in the WTI. Also, the R-squared term shows that statistically, the change in the S&P 500 is accounting for approximately 70% of the change in daily WTI pricing.

The key take way from this limited analysis is that many of the same factors that affect the market’s expected returns also affect expected demand for US oil consumption, driving prices and returns in similar directions.

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 October 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 October 15, 2018, pricing, the futures markets indicate that in mid-November 2018 the expected strip price is $71.27, with a 68% chance that oil prices will be between $65 and $77 per barrel. Likewise, there is about a 95% chance that prices will be between $58 and $86. For a longer-term view, by mid-January 2019 the approximate one standard deviation price range is between $62 to $81 per barrel with an expected value of $71.11.

Natural Gas Outlook

The natural gas futures contracts are currently trading at $3.23 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in November 2018, the expected price is $3.23 with a +/- 1σ price range of $2.85 to $3.85 per MMBtu, and the 2σ range (95%) of $2.50 to $4.65 per MMBtu. For a longer-term view, by mid-January 2019 the expected price is $3.35 per MMBtu with a +/- 1σ price range of $2.65 to $4.50 per MMBtu.

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

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Permian Activity Flattening / Growth is Moderating Given Pipeline Constraints

Although the Permian rig count has continued to climb to over 500 drilling rigs running, new well completions in the play have flattened out month over month as in-basin transportation constraints begin to materialize.¹ As shown in a recent EIA report graphics below, the ratio of new-well production per rig has also begun to decrease.²

E&P companies are waiting for additional pipeline capacity to move the hydrocarbons produced, and therefore many newly drilled wells are not being completed until there is a clear path to market.

Beyond 2018, limited Permian Basin production takeaway capacity is likely to emerge as the most challenging constraint for producers. Through 2020, just a single capacity expansion project, Kinder Morgan’s 1.98 Billion Cubic Feet per day (“Bcf/d”) Gulf Coast Express Pipeline, has reached final investment decision (“FID”) status and began construction in May 2018. The expected price tag for this pipeline running from the Permian Basin to the Agua Dulce, Texas area is $1.75 billion.³ At least four other pipeline projects, with a combined capacity of more than 5.7 Bcf/d, are still awaiting a final investment decision.⁴ Oil pipeline constraints out of the Permian basin may continue through early 2020, according to an analysis by Wells Fargo.

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 September 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 September 17, 2018, pricing, the futures markets indicate that in mid-October 2018 the expected strip price is $69.33, with a 68% chance that oil prices will be between $64 and $75 per barrel. Likewise, there is about a 95% chance that prices will be between $58 and $83. For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $60 to $79 per barrel with an expected value of $69.08. Also, oil future prices are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.80 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in October 2018, the expected price is $2.80 with a +/- 1σ price range of $2.55 to $3.00 per MMBtu, and the 2σ range (95%) of $2.35 to $3.30 per MMBtu. For a longer-term view, by mid-December 2018 the expected price is $2.86 per MMBtu with a +/- 1σ price range of $2.55 to $3.60 per MMBtu.

1. CreditSuisse, 31 August 2018, Americas/United States Equity Research, Oil & Gas Exploration & Production U.S. E&P Weekly

2. https://www.eia.gov/petroleum/drilling/pdf/permian.pdf

3. https://www.kindermorgan.com/pages/business/gas_pipelines/projects/kmtp/

4. https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/031618-analysis-permian-gas-production-surge-faces-looming-market-infrastructure-constraints

5. https://www.chron.com/business/energy/article/Wells-Fargo-Permian-oil-pipeline-constraints-may-13100363.php

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

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Oil Price Forecasts Diverge

According to a recent Credit Suisse analyst report,¹ the investment bank forecasts longer term oil and gas prices at $65.00 per barrel, approximately $9.00 above the Nymex Futures strip pricing and the Bloomberg Consensus forecast.

All three of the forecasts, however, show that the markets expect oil prices to remain in a state of backwardation from their current levels. Ultimately, these price levels will significantly impact the economic feasibility of future drilling opportunities.

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 August 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 August 15, 2018, pricing, the futures markets indicate that in mid-October 2018 the expected strip price is $64.16, with a 68% chance that oil prices will be between $57.50 and $71.00 per barrel. Likewise, there is about a 95% chance that prices will be between $49.50 and $81.50. For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $54.50 to $74.00 per barrel with an expected value of $63.75. As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.94 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in October 2018, the expected price is $2.95 with a +/- 1σ price range of $2.70 to $3.30 per MMBtu, and the 2σ range (95%) of $2.40 to $3.70 per MMBtu. For a longer-term view, by mid-December 2018 the expected price is $3.08 per MMBtu with a +/- 1σ price range of $2.65 to $4.00 per MMBtu.

1. U.S. E&P Weekly, 27 July 2018, Americas/United States Equity Research, Oil & Gas Exploration & Production

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

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Geopolitics and the Strategic Petroleum Reserve

On May 8, 2018, The Trump administration declared that the United States was withdrawing from the Joint Comprehensive Plan of Action (the Iran nuclear deal) that lifted economic sanctions upon Iran, most notably restriction on Iran’s oil imported to the US.¹ Furthermore, the U.S. threatened to put pressure on other nations not to import Iranian oil. These actions placed upward pressure on oil prices as U.S. supply could be reduced by 200 to 500 thousand barrels of oil per day.²

Recently, however, the spike in oil prices appears to be receding. Other OPEC nations, most notably Saudi Arabia, indicated that a willingness to increase exports to offset the loss of Iranian oil supplies.³ Also, the Trump administration considering tapping the U.S.’s Strategic Petroleum Reserve (“SPR”) have held oil prices at approximately $70.00 per barrel.⁴ This suggests that although the price of oil may experience some increased volatility, the future strip pricing could be collared within a relatively small range.

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 July 16, 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 July 16, 2018, pricing, the futures markets indicate that in mid-September 2018 the expected strip price is $66.82, with a 68% chance that oil prices will be between $59.50 and $74.50 per barrel. Likewise, there is about a 95% chance that prices will be between $51.00 and $84.50. For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $55.00 to $78.00 per barrel with an expected value of $65.48. As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.76 per MMBtu for the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in September 2018, the expected price is $2.73 with a +/- 1σ price range of $2.50 to $3.00 per MMBtu, and the 2σ range (95%) of $2.25 to $3.35 per MMBtu. For a longer-term view, by mid-December 2018 the expected price is $2.91 per MMBtu with a +/- 1σ price range of $2.50 to $3.75 per MMBtu.

1. https://oilprice.com/Energy/Crude-Oil/Who-Was-Buying-Iranian-Oil-And-What-Happens-Next.html

2. https://oilprice.com/Energy/Crude-Oil/Who-Was-Buying-Iranian-Oil-And-What-Happens-Next.html

3. Bloomberg, July 16, 2018, https://www.bloomberg.com/news/articles/2018-07-16/oil-holds-below-71-on-prospect-of-u-s-and-opec-boosting-output

4. Bloomberg, July 13, 2018, https://www.bloomberg.com/news/articles/2018-07-13/trump-said-to-mull-tapping-u-s-oil-reserve-as-pump-prices-rise

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

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Diesel and Gasoline Price Spreads Higher This Summer

Since January 2017, diesel prices have exceeded regular gasoline prices, but to varying degrees. Demand for gasoline tends to increase in the spring and summer while diesel demand (and the similar hydrocarbon product heating oil) is typically higher in the fall and winter.

However, there has been a significant increase in this spread from 15 cents per gallon in April and May of 2017 to approximately 35 cents today.¹

 

As would be expected, supply and demand forces are the key drivers for this price spread.  Gasoline prices are driven mainly by the price-sensitive personal transportation market.  Also, gasoline demand is increasingly influenced by apps such as Gas Buddy, providing consumers with greater price transparency for retail gasoline prices.  For diesel demand, growth in shopping services such as Amazon may also be affecting the ability of logistic operations to optimize diesel mileage as was possible with large retail outlets.

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 June 18, 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 June 18, 2018, pricing, the futures markets indicate that in mid-August 2018 the expected strip price is $64.62, with a 68% chance that oil prices will be between $58.00 and $71.50 per barrel.  Likewise, there is about a 95% chance that prices will be between $50.00 and $82.00.  For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $52.50 to $76.50 per barrel with an expected value of $63.51.  As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.99 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in August 2018, the expected price is $2.99 with a +/- 1σ price range of $2.70 to $3.25 per MMBtu, and the 2σ range (95%) of $2.40 to $3.65 per MMBtu.  For a longer-term view, by mid-December 2018 the expected price is $3.12 per MMBtu with a +/- 1σ price range of $2.60 to $4.00 per MMBtu.

1. EIA Weekly Petroleum Status Report, June 8, 2018

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

 

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Is Gold a Substitute for Crude Oil?

Oil and gold are not often considered substitutes, but there is a long-standing financial theory regarding the gold-oil relationship.  On one hand, oil is a major consumable commodity and its market price partly drives US inflation rates (via the cost of diesel and gasoline).  Higher oil and gas prices impact the cost of goods purchased and when these costs are passed through to consumers, prices, and inflation both increase.

On the other hand, precious metals like gold tend to also appreciate with inflation.  So, an increase in the price of crude oil can, eventually, translate into higher precious metals prices, via the link to inflation.

Although not perfectly in step, both commodities tend to trade in the same direction. By our calculations, these two commodities have a long-term regression coefficient (r-squared) of 67%, which indicates their returns have a strong correlation.  However, this relation declines to only about 15% over the last 5 to 10 years. 

The Gold to Oil Ratio can be defined as the price of gold divided by the price of one barrel of oil. 

In theory, if the Gold to Oil Ratio were high versus historical relationships, then gold could be considered expensive versus oil prices.  Therefore, an investing position where one was long oil and short gold would be suggested.  Unfortunately, however, this theory runs counter to the Efficient Market Hypotheses and the Random Walk of stock and commodity pricing.  Today, the ratio is slightly above the historical mean.

While it is an interesting relationship to observe, oil and gold still do not appear to be attractive substitutes for each other.

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 May 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 May 15, 2018, pricing, the futures markets indicate that in mid-July 2018 the expected strip price is $70.43, with a 68% chance that oil prices will be between $63.00 and $79.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $54.00 and $91.00.  For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $56.00 to $84.00 per barrel with an expected value of $68.35.  As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.86 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in July 2018, the expected price is $2.87 with a +/- 1σ price range of $2.60 to $3.15 per MMBtu, and the 2σ range (95%) of $2.30 to $3.55 per MMBtu.  For a longer-term view, by mid-Oct 2018 the expected price is $2.87 per MMBtu with a +/- 1σ price range of $2.50 to $3.40 per MMBtu.

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

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Even as Oil & Gas Prices Increase, MLP Values Decline

When the Federal Energy Regulatory Commission (“FERC”) evaluates tariff rates on regulated pipelines, they target a “just and reasonable” return on equity (“ROE”) to compensate pipeline operators.  To determine these rates, operators calculate their expenses associated with running their pipelines and are allowed to charge a certain amount over and above those expenses. Previously, MLPs¹  included an income tax allowance (“ITA”) as one of these expenses.²

On March 15th, FERC announced it would no longer allow MLPs to recover ITAs from their expense calculations.  The impact of this ruling is that FERC-regulated cost-of-service pipelines may need to adjust their prices downwards to prevent over-earning their “just and reasonable” ROE.  Natural gas pipelines have been directed to review their rates by the end of this year, while oil pipelines will face a review of their pricing in 2020.

In a second announcement, FERC issued a Notice of Proposed Rulemaking (“NOPR”) for natural gas pipelines, regardless of whether MLP or a C-Corporation own them.  This NOPR requires MLPs to review their tariff rates by year-end to adjust for the corporate tax rate falling from 35% to 21% as a result of the Tax Cuts and Jobs Act of 2017.

Does this signal a buying opportunity for investors?  According to a recent Wells Fargo research report:³

“Compelling valuations are not enough of a reason to overweight MLPs.  We remain neutral (even weight).  A positive fundamental or technical trigger would be needed for us to become more optimistic toward MLPs.”

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 April 16, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).

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 April 16, 2018, pricing, the futures markets indicate that in mid-July 2018 the expected strip price is $65.74, with a 68% chance that oil prices will be between $57.50 and $75.50 per barrel.  Likewise, there is about a 95% chance that prices will be between $48.00 and $90.50.  For a longer-term view, by mid-November 2018 the approximate one standard deviation price range is between $52.00 to $78.50 per barrel with an expected value of $63.50.  As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.77 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in July 2018, the expected price is $2.83 with a +/- 1σ price range of $2.55 to $3.15 per MMBtu, and the 2σ range (95%) of $2.15 to $3.65 per MMBtu.  For a longer-term view, by mid-Oct 2018 the expected price is $2.85 per MMBtu with a +/- one standard deviation price range is between $2.45 to $3.35 per MMBtu.

1. A Master Limited Partnership (“MLP”), is a limited partnership that is traded publicly on an exchange.  An MLP combines the tax benefits of a limited partnership with the liquidity that publicly traded securities offer.

2. Seeking Alpha, April 11, 2018, https://seekingalpha.com/article/4162472-ferc-ruling-impact-mlps

3. Wells Fargo Investment Institute, Real Asset Strategy, “Where We Stand on Master Limited Partnerships,” April 2, 2018

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

 

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International Energy Agency’s Report is Bullish on U.S. Oil Production

According to the U.S. Energy Information Administration (“EIA”), U.S. crude oil production has grown to 10.4 million BPD (“Barrels per Day”) as of March 2018. ¹ This production level surpassed the previous peak of 9.6 million BPD dating back to 1970. ²

The International Energy Agency (“IEA”) recently predicted that U.S. production will grow to 12.1 million BPD by 2023, making the U.S. the world’s largest oil producer. ³ Other major producing regions are also expected to continue their production growth, with the countries within the Middle East remaining the largest exporter of crude.

Note: “LTO” in the chart above refers to Light Tight Oil from shale plays.

IEA Executive Director Faith Birol also is forecasting for annual oil consumption to grow by 1.2 million BPD over their forecast period, driven by increasing demand from China and India despite pollution reduction policies.

These stable growth expectations have laid the foundation for additional upstream investment.  Aging fields are facing annual production declines of approximately 3.0 million BPD and will need to be replaced with new producing wells.  Without a strong increase in drilling expenditures, crude prices could become more volatile and undermine their recent stability.

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 March 15, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).

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 March 15, 2018, pricing, the futures markets indicate that in mid-May 2018 the expected strip price is $61.08, with a 68% chance that oil prices will be between $55.00 and $67.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $48.00 and $76.00.  For a longer-term view, by mid-November 2018 the approximate one standard deviation price range is between $48.00 to $63.00 per barrel with an expected value of $59.00.

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.74 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in June 2018, the expected price is $2.82 with a +/- 1σ price range of $2.45 to $3.25 per MMBtu, and the 2σ range (95%) of $2.15 to $3.85 per MMBtu.  For a longer-term view, by mid-Oct 2018 the expected price is $2.85 per MMBtu with a +/- one standard deviation price range is between $2.25 to $3.50 per MMBtu.

1. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

2. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=a

3. IEA Sees No End to US Shale Output Surge. Journal of Petroleum Technology. M. Zborowski. March 6, 2018.

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

 

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Backward Days Are Here Again

After Q4-2017’s run up in oil prices, the futures market pricing is now in a state of “backwardation.”  Beginning around November 2017, the WTI calendar spread for the next six months moved from “contango” into “backwardation.”  According to Reuters’ data, oil prices have not been shown “backwardation” since November 20, 2014. ¹

Oil futures contracts are financial instruments that carry legally binding obligations — so a buyer and a seller have the obligation to take or make delivery of an underlying instrument, such as oil, at a specified settlement date in the future.

A calendar spread measures the difference in price between any pair of futures contracts (WTI Oil) with different delivery dates and provides insight to the current supply-demand balance in the market.

In the current case, concerns over future supply are the primary driver since demand forecasts are relatively steady.  The International Energy Agency (“IEA”) recently predicted U.S. production would overtake Saudi Arabia and Russia as the world’s leading energy producer by 2019.

News of the growth in shale production has been aided to drive down spot prices from a high of $66.66 in late January to their current levels.

As shown above, the futures markets currently expect future supplies to lower oil clearing prices in the future.

Natural gas futures prices are not showing the same expected reductions; however, they are remaining essentially flat.

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 February 15, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).

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 February 15, 2018 pricing, the futures markets indicate that in mid-May 2018 the expected price is $58.97 with a 68% chance that oil prices will be between $51.00 and $67.00 per barrel. Likewise, there is about a 95% chance that prices will be between $41.50 and $80.00.  For a longer-term view, by mid-November 2018 the +/- one standard deviation price range is between $45.00 to $63.00 per barrel with an expected value of $56.26.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $2.57 per MMBtu on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in April 2018, the expected price is $2.61 with a +/- 1σ price range of $2.35 to $2.95 per MMBtu, and the 2σ range (95%) of $2.05 to $3.45 per MMBtu.  For a longer-term view, by mid-July 2018 the expected price is $2.72 per MMBtu with a +/- one standard deviation price range is between $2.25 to $3.25 per MMBtu.

1. CNBC: “The oil market just did something it hasn’t done for nearly three years,”

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

 

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Banks are Increasing Price Decks

Given the last month’s increased hydrocarbon prices (approximately +18% for gas and +11% for oil), banks are increasing their price decks for evaluating loans to E&P companies.  In a recent Wells Fargo Securities Equity Research Report¹, the table below shows their current oil price decks for both WTI and Brent.  This reflects about an $8.00 per barrel increase in the first quarter of 2018 and a $3.25 increase for 2018 overall.

The price deck used to evaluate oil and gas drilling, combined with drilling costs, lease operating expenses and present value factors are the key determinants of the value of an oil and gas property/company and the corresponding collateral value for a bank loan.

Wells Fargo’s report attributes oil’s recent outperformance to a number of factors, including OPEC production cut compliance, declining inventories, multiple minor supply disruptions, favorable weather, and an improved global economic performance and outlook.  Therefore, the bank has adjusted their oil price deck upward to reflect:

• improved inventories,
• the stronger demand trend, and
• a modest expected improvement in E&P capital investment discipline.

Even though Wells Fargo increased its price decks for the long-term, they do have a bearish outlook on 2018 with a quarterly reduction from $58.00 in Q1 to $53.25 by year-end.  This equates to an expected one standard deviation reduction in oil prices by year-end.

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 January 16, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).

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 January 16, 2018 pricing, the futures markets indicate that in mid-May 2018 the expected price is $63.17 with a 68% chance that oil prices will be between $55.50 and $71.00 per barrel. Likewise, there is about a 95% chance that prices will be between $46.00 and $83.00.  For a longer-term view, by mid-November 2018 the +/- one standard deviation price range is between $49.50 to $63.00 per barrel with an expected value of $60.75.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $3.09 per MMBtu on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in March 2018, the expected price is $2.91 with a +/- 1σ price range of $2.35 to $3.15 per MMBtu, and the 2σ range (95%) of $2.05 to $3.85 per MMBtu.  For a longer-term view, by mid-May 2018 the expected price is $2.75 per MMBtu with a +/- one standard deviation price range is between $2.35 to $3.25 per MMBtu.

1. Wells Fargo: “Oil Macro: How Much Good News Is Priced In?,” January 11, 2018

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

 

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