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

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

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