How reliable is the EIA’s Short-Term Energy Outlook?
As discussed in yesterday’s edition of The Schork Report, the EIA’s Short Term Energy Outlook (STEO) revised its average price for crude oil in 2011 from $91 to $105, but how reliable is this?
The EIA has a tendency to hew conservative — prices are closely related to recent levels and do not vary widely between months. The graph in today’s issue illustrates that in January 2010, the EIA forecast prices to rise to $82.00 by June, then spend the rest of the next two years rising slowly to $85.00. Instead, the summer driving season saw the lowest crude oil prices, before 2011 rocketed higher.
In the March 2011 STEO, a similar scene plays out — prices are forecast to rise from $102.00 in March (EIA collated data as of March 3rd, when WTI settled at $101.91) to $105.00 by July and $106.00 by January 2012. But if the EIA’s estimates are conservative at best, what seems like a more realistic scenario?
Consider that July 2011 is currently trading at $106.82. Call options with a strike price of 110.00 have seen their price increase from $3.62 per barrel on February 28th, when the troubles in Egypt began in earnest, to $7.12 as of yesterday, a 96.69% increase. The interpretation is that traders are willing to pay to bet that prices will rise above $113.94 in July 2010.
This is also reflected in the volatility skew. On February 28th, before the problems in Egypt began in earnest, a July 2011 option with 110% moneyness saw a volatility of 35.54. As of writing, volatility has risen to 40.28, a 15.75% increase. In contrast, an option at 90% moneyness has seen volatility rise just 8.32%. Further out, the January 2012 options have seen a roughly equal increase in volatility for both 90% and 110% options.
Thus, clients of The Schork Report are being advised that in the mid-term we are leaning bullish.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.