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


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

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