ValueScope’s Oil & Gas Price Outlook: December 2016

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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