Oil & Gas Price Outlook March 2016

It can actually go up …

For the last few months, oil prices have been continually testing the lower price ranges reflected in the futures and options markets. Although February’s pricing reflected a two-sided market, the general trend reflected an increase in oil prices to a level of $33.75 per barrel.

Although this was still within a one-standard deviation move, some general movement to the upside was nice to see.

The figure below presents the WTI price movement over the previous month, including the recent rebound from the intra-day low point of $26.05 on February 11.

Oil & Gas Price Outlook March 2016

Rig Counts

According to a recent Credit Suisse research report[1], drilling rig counts are at about 30% of their early 2015 levels. The chart below illustrates this concept, with the US total rig count reflected on the right axis and the individual basins on the left axis.

Oil & Gas Price Outlook March 2016

Over time, given the rapid depletion of fracked, horizontal wells, the decline in rig count will continue to affect the supply of US production.

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 March 2, 2016[2] 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 March 2016

Based on the March 2, 2016 prices, the markets indicate that in mid-April, there is about a 68% chance that oil prices will be between $30.50 and $43.00 per barrel. Likewise, there is about a 95% chance that prices will be between $23.00 and $52.00. For a longer-term view, I have added a six-month outlook[3] which indicates that by mid-September 2016, the +/- 1σ price range is $28.50 to $54.00 per barrel. This upward skew in the price ranges also drives the expected midpoint of $39.30 per barrel 6-months out.

Natural Gas Outlook

We can do the same thing for natural gas futures, currently trading at about $1.70 per MMBTU on the Henry Hub (ticker /NG). Although more affected by seasonal factors than crude oil, in mid-September 2016, the +/- 1σ price range is $1.55 to $2.75 per MMBTU and the 2σ range is $0.75 to $3.05 per MMBTU.

  • [1] Credit Suisse, 22 February 2016, Americas/United States Equity Research, Oil & Gas Exploration & Production
  • [2] As of approximately 1:00 PM.
  • [3] Crude oil futures and their options are too thinly traded farther out in time be considered statistically significant.

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

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