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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