Tag: oil price

Oil & Gas Price Outlook January 2017

2016 Price Review and Looking Forward to 2017

As is popular this time of year, we wanted to do a quick review of the range of prices suggested by the strip price and the options markets as of the beginning of last year (2016). – Oil & Gas Price Outlook January 2017.

At the time (January 2016), the forecast oil strip price for year-end 2017 was approximately $43 per barrel and the one standard deviation range around that price was about $30 – $60 per barrel.  As of today, the price of oil is about $53 per barrel.

The price forecast chart from one year ago:

Put differently, although one could argue that the forecast strip price was approximately 20% too low, the price today is solidly within the one standard deviation range, or within the 68% probability-weighted range.  Making investment decisions based on this range and understanding the effects of both suggested price outcomes would have served an investor well last year.

In a recent equity research report, Credit Suisse sees 2017 as entering a Renaissance,¹ claiming that after three years, the downturn looks closer to its end.  The report notes that OPEC is cutting production to bring the rebalance of oil markets forward, the global economy has shrugged off its late 2015 weakness, and risk appetite is back in normal territory.  As shale players get back to work, investors will need to watch how much production can come back for a given level of oil price.  Broadly, Credit Suisse’s analysts remain comfortable with a “new normal” for oil prices at the $60’s per BBL level.  Below, we consider what market participants believe future commodity prices will be, given future strip prices and option clearing 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 the crude oil price on January 17, 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 the January 17, 2017 prices, the markets indicate that in mid-March 2017, there is about a 68% chance that oil prices will be between $48 and $60 per barrel. Likewise, there is about a 95% chance that prices will be between $40.50 and $67.  For a longer-term view, by mid-December 2017, the +/- 1σ price range is $40 to $70 per barrel, with an expected value of $56.31.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $3.40 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in March 2017, the +/- 1σ price range is $2.85 to $4.15 per MMBTU and the 2σ range (95%) is $2.35 to $5.15 per MMBTU.  The expected value of natural gas prices in mid-March 2017 is $3.40 per MMBTU.

1 – Credit Suisse, December 19, 2016 – Global Equity Research, Energy in 2017

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Tags: Oil & Gas Price Outlook January 2017, Oil Price Outlook Jan 2017, Natural Gas Outlook Jan 2017

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Oil & Gas Price Outlook December 2016

Happy Days are Here Again?

As reported by Bloomberg, OPEC clinched a deal to curtail oil supply, its first cuts in eight years.  OPEC will reduce production by 1.2 million barrels a day to 32.5 million a day in an effort to push inventories down (according to two delegates asking not to be identified as the decision wasn’t yet public). Oil & Gas Price Outlook December 2016.

The breakthrough deal showed an apparent acceptance by Saudi Arabia that Iran, as a special case, can raise its production.

Prior to 2014, the Organization of Petroleum Exporting Countries served the role as a “price fixer.”  In 2014, the group adopted a pump-at-will policy which contributed to the approximate 80% fall in oil prices.

This decision immediately impacted crude oil spot and futures prices, with Brent Crude prices rising above $50 per barrel (still half of its high price in 2014).  Additionally, Russia, the biggest producer outside the bloc, has said if OPEC agrees on individual country quotas it’s ready to participate, including possibly reducing.  According to Bloomberg, OPEC is likely to hold talks with non-OPEC producers next week.

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 December 1, 2016, 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 the December 1, 2016 prices, the markets indicate that in mid-January 2017, there is about a 68% chance that oil prices will be between $45.00 and $59.00 per barrel. Likewise, there is about a 95% chance that prices will be between $37.50 and $68.00.  For a longer-term view, by mid-March 2017, the +/- 1σ price range is $44.00 to $63.00 per barrel, with an expected value of $53.50.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $3.51 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in January 2017, the +/- 1σ price range is $2.95 to $4.45 per MMBTU and the 2σ range (95%) is $2.35 to $6.05 per MMBTU.  The expected value of natural gas prices in mid-January 2017 is $3.51 per MMBTU.

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Tags: Oil & Gas Price Outlook December 2016, Gas Price Outlook Dec 2016, Oil Price Outlook Dec 2016, Crude Oil Price Outlook Dec 2016

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Oil & Gas Price Outlook November 2016

Industry Survey Results Compared to Futures Pricing

The investment bank Credit Suisse recently surveyed a group of 128 investors on their outlook for oil prices in February 2018. According to the report, the survey group was comprised primarily of “Long Only” investors, hedge funds and energy companies. A summary graph of their responses is presented below. Oil & Gas Price Outlook November 2016

These results indicate that the average expected value is +/- $45/BBL for February of 2018.

Also, this price distribution from the survey closely approximates that shown in the NYMEX oil futures (/CL), and their option-driven probabilities that we discuss further below.

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 November 4, 2016 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 the November 4, 2016 prices, the markets indicate that in mid-December 2016, there is about a 68% chance that oil prices will be between $38.50 and $51.00 per barrel. Likewise, there is about a 95% chance that prices will be between $32.00 and $58.50.  For a longer-term view, by mid-April 2017, the +/- 1σ price range is $36.50 to $60.50 per barrel, with an expected value of $47.07.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $2.78 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in December 2016, the +/- 1σ price range is $2.45 to $3.65 per MMBTU and the 2σ range (95%) is $1.95 to $4.85 per MMBTU.  The expected value of natural gas prices is $2.95 for the end of 2016.

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Tags: Oil & Gas Price Outlook November 2016, Oil Price Outlook Nov 2016, Gas Price Outlook Nov 2016, Natural Gas Outlook Nov 2016, Crude Oil Outlook Nov 2016

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Oil & Gas Price Outlook October 2016

Oil and Gas are Political Commodities

After last Monday’s debate, when the media declared Hillary Clinton the winner, the overall stock market (S&P 500: SPX) increased by 20 points and oil prices declined by over a dollar per barrel. Oil & Gas Price Outlook October 2016.

As a long-time advocate for fighting climate change, Clinton has proposed generating enough renewable energy to power every home in America, with half a billion solar panels installed by the end of her first term.  She also seeks to cut energy waste and to reduce American oil consumption by one third through cleaner fuels and more efficient cars, boilers, ships, and trucks.¹

In contrast

Donald Trump supports an increase in fossil fuel production and the lifting of restrictions on E&P Companies to promote economic growth.² His message addresses the following actions taken by President Obama:

• President Obama’s administration has taken a huge percentage of the Alaska National Petroleum Reserve off the table.
• Oil and natural gas production on federal lands is down 10%.
• 87% of available land in the Outer Continental Shelf has been put off limits.
• Atlantic Lease sales were closed down too – despite the fact that they would create 280,000 jobs and $23.5 billion in economic activity.
• President Obama entered the United States into the Paris Climate Accords – unilaterally, and without the permission of Congress. This agreement gives foreign bureaucrats control over how much energy we use right here in America.³

He goes on to say that as bad as President Obama is, Hillary Clinton will be worse.  The following table provides a good summary of the candidates’ respective policies.

While certainly an admirable goal, expanding “clean or green energy” is driven by the economics of electric power generation.  As long as natural gas is plentiful and inexpensive, given the shale boom, the capital costs associated with solar and wind power can’t be justified without significant tax credits.

On the exploration front

Clinton opposes Arctic drilling and has expressed skepticism for oil production off the southeastern Atlantic coast.  Conversely, Trump’s “America First” energy plan will lift most restrictions on oil and gas companies and allow them to drill in both the Arctic and the Gulf of Mexico.

In the option markets, this uncertainty drives the implied volatility of options written on oil and gas futures.  Although it changes daily, the current average volatility of around 45% is about two to three times the implied volatility levels in 2015.  In approximately 40 days, America and the world will be watching for the results of this key “binary event” and its effect on future energy economics.

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 October 3, 2016 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 the October 3, 2016 prices, the markets indicate that in mid-December 2016, there is about a 68% chance that oil prices will be between $41.50 and $58.00 per barrel. Likewise, there is about a 95% chance that prices will be between $33.00 and $69.00.  For a longer-term view, by mid-March 2017, the +/- 1σ price range is $40.00 to $64.00 per barrel, with an expected value of $51.00.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at $2.89 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in December 2016, the +/- 1σ price range is $2.65 to $3.65 per MMBTU and the 2σ range (95%) is $2.15 to $5.55 per MMBTU.  The expected value of natural gas prices is $3.27 for the end of 2016.

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Tags: Oil & Gas Price Outlook October 2016, Oil Price Outlook Oct 2016, Gas Price Outlook 2016, Natural Gas Price Outlook Oct 2016, Crude Oil Price Outlook 2016

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