Oil & Gas Price Outlook June 2016

“Market Gurus” – Worth Following?

Many financial players (investors, bankers, fund managers, etc.) are quoted daily with their view on the markets, predictions for oil and gas prices, etc.  For instance, in September 2015, a forecast by Goldman Sachs suggested that oil could tank to $20 per barrel.[1]  Fast forward a few months, and in January 2016 Goldman said it was sticking with its $40 per barrel forecast (2X their previous forecast) for the first half of 2016.  The investment bank went on to say that it sees a new bull market in oil starting to evolve in late 2016 as market adjustments balance out supply and demand.[2]  Curious that Goldman was sticking with a $40 per barrel forecast shortly after Oil & Gas Price Outlook June 2016predicting that oil prices would go to $20 per barrel? Oil & Gas Price Outlook June 2016.

Another example is that T. Boone Pickens predicted on CNBC’s “Squawk Box” on February 1, 2016 that oil prices will advance to at least $52 per barrel by the end of 2016, saying that U.S crude oil had touched the bottom at $26 per barrel. Nonetheless, just a few days after his interview on “Squawk Box”, the founder of energy-focused BP Capital claimed in a separate interview on “Bloomberg Go” that he had sold out of all of his oil-related holdings and awaits better entry points.[3]

Our point of view is that markets are reasonably efficient and that when market participants invest, they put “their money where their mouth is.”  With market gurus making predictions daily, many seem to be doing just the opposite of their advice.

Crude Oil Outlook

While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future price ranges or “confidence intervals” for crude oil and natural gas.

The graphic below shows the crude oil price on June 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).

Oil & Gas Price Outlook June 2016

Based on the June 1, 2016 prices, the markets indicate that in mid-August, there is about a 68% chance that oil prices will be between $42.50 and $55.00 per barrel. Likewise, there is about a 95% chance that prices will be between $36.00 and $62.00.  For a longer-term view, by mid-December 2016, the +/- 1σ price range is $39.00 to $64.50 per barrel.  This upward skew in the price ranges also drives the expected midpoint of $50.00 per barrel at year end.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at about $2.30 per MMBTU on the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in mid-November 2016, the +/- 1σ price range is $2.15 to $3.45 per MMBTU and the 2σ range is $1.55 to $4.65 per MMBTU.  The expected midpoint of natural gas prices is $3.00 for the end of 2016.


Tags: Oil & Gas Price Outlook June 2016, Oil Price Outlook, Gas Price Outlook, Crude Oil Price Outlook, Natural Gas Price Outlook

[1] CNBC September 11, 2015 Interview
[2] OilPrice.com, January 20, 2016
[3] Commodities, Hedge Fund Analysis, February 18, 2016

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