EIA lowers its price expectations
The Energy Information Administration (EIA) lowered its price expectations for West Texas Intermediate (WTI) this week. The EIA’s new price deck expects WTI to average $49 per barrel for 2015, and $54 per barrel in 2016. The EIA’s updated price expectations are $6/barrel lower for 2015, and $8/barrel lower for 2016, than the administration’s previous estimates.
The EIA decided to lower its price expectations over concerns of the pace of economic growth in emerging markets, continuing supply growth, increases in global liquids inventories, and the possibility of increasing volumes of Iranian crude oil entering the market, the administration said in its most recent Short-Term Energy Outlook (STEO). The new price expectations remain largely uncertain though. The pace and volume at which Iranian crude exports reenter the market, as well as demand growth and production responses from non-OPEC groups, could have significant impacts on oil prices.
Current values of futures and options contracts continue to suggest high uncertainty in the crude oil price outlook. These values established the lower and upper limits of the 95% confidence interval for the market’s expectations of monthly average WTI prices in November 2015 at $34/barrel and $64/barrel, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $27/barrel and $103/barrel for prices in December 2016. Implied volatility now averages 37%, more than double the implied volatility average this time last year (16%), according to the EIA.
West Coast gasoline prices expected to exceed national averages
As the price of crude oil changes, prices of wholesale, and ultimately retail, gasoline adjust to reflect crude oil costs. All other factors being equal, a $1 per barrel change in the price of crude oil will result in a change of about $0.02 per gallon in the price of wholesale and retail gasoline, says the EIA. As retail gas prices tend to follow Brent crude oil prices, retail gasoline prices are expected to remain relatively low.
Retail gasoline prices have remained strong over the last two months despite the continuing downward trend in oil prices, but the EIA attributes this to ongoing refinery outages in California. West Coast gasoline prices are expected to exceed national averages through at least 2016.