Lower Crude Futures Driving S&P 500 Declines
Stocks around the world extended losses Wednesday, affected by lower commodity prices and a weaker dollar. A key factor in this week’s 3% fall in crude prices was the American Petroleum Institute’s “surprise” report that U.S. inventories had increased in crude oil and gasoline.
The IEA also cut its forecast for oil prices to $83 per barrel for 2025 from $101 previously, reflecting increased future supplies. However, the resulting lower oil and gas prices are expected to help sustain global consumption to 2035, despite growing popularity of electric vehicles.1
In the equity markets, energy and materials companies have led losses in recent sessions.2 As oil prices fall, some investors also worry that lower oil prices could lessen investment plans from the energy sector into other parts of the economy. In the U.S. “essentially all investment we have seen recently appears to have been driven by the energy sector,” according to strategists at UBS.3
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 crude oil price as of November 15, 2017 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).
On the graphic below, 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 November 15, 2017, pricing, the futures markets indicate that in mid-December 2017 the expected price is $55.40 with a 68% chance that oil prices will be between $51.00 and $59.50 per barrel. Likewise, there is about a 95% chance that prices will be between $45.50 and $66.50. For a longer-term view, by mid-April 2018 the +/- one standard deviation price range is between $46.50 to $63.00 per barrel with an expected value of $55.72.
Natural Gas Outlook
We can do the same thing for natural gas futures, currently trading at $3.13 per MMBtu on the Henry Hub (ticker/NG). Although more affected by seasonal factors than crude oil, in December 2017, the expected price is $3.12 with a +/- 1σ price range of $2.75 to $3.85 per MMBtu, and the 2σ range (95%) of $2.35 to $4.75 per MMBtu. For a longer-term view, by mid-April 2018 the expected price is $2.95 per MMBtu with a +/- one standard deviation price range is between $2.45 to $3.45 per MMBtu.
1. Seeking Alpha, Nov. 13, 2017, Carl Surran
2. Charts taken from Investing.com, November 15, 2017
3. Dow Jones Newswires, 11-15-17, Riva Gold and Kevin Kingsbury
Tags: Oil & Gas Price Outlook November 2017, Gas Price Outlook November 2017, Oil Price Outlook November 2017
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