Schork Oil Outlook: Are You Watching The 'STEO'

Published Thu, Dec 10 200910:35 AM ESTUpdated Wed, Mar 17 201011:12 PM EDT

Stephen Schork, Editor, The Schork Report

Energy prices were weak on Wednesday, the liquids sank on a bearishly construed inventory report. Natural gas also took a header as momentum stalled short of the season-to-date high. As far as today’s EIA report for underground gas storage goes, the crowd is expecting the first delivery of the season… a much below normal 50 Bcf.

On Tuesday the DOE released its Short Term Energy Outlook (STEO) price forecasts and confidence intervals for crude oil and natural gas. To allow for preparation and publication, the confidence intervals (CI) are derived from market information on December 3, 2009. What a difference one week makes.

According to the DOE, the January crude contract is due to expire at 76.00, while the February contract has a 65% CI of (69.33, 88.73). The DOE did not calculate a CI for January, but our analysis at comes to (56.32, 75.31). The DOE predicts prices for 2010 will average 78.67.

The absolute figures will be thrown off by recent market weakness, but an interesting effect occurs on the breakdown - the STEO predicts February prices will close (at 75.00) lower than January and March (76.00). That dip may be due to a heavy turnaround season implying lower demand for oil.

Looking back, prices are more likely to settle at the levels forecast in the October STEO, which predicted that the January contract would expire at 71.00. But it also predicted that February through April would all close at 71.00. The average CI for 2010 was forecast at (61.73, 104.09) in October and has been revised to (63.77, 106.90) in December’s STEO.

The Natural Gas STEO has seen a similar downward revision in prices. The DOE now forecasts that the January contract will expire at 4.38 (down from 4.77 in November’s STEO) with a confidence interval of (3.60, 6.29), expectedly tighter than November’s CI of (3.52, 7.67).

As far as December’s forecasts go, with November’s forecast in brackets as comparison, prices will peak in February at 4.54 (4.88) before declining to a turning point of 4.08 (4.41) in July, after which they will increase up to 5.46 (6.00) by December 2010. The average CI for the year is a huge (2.72, 10.43) reflecting a 7.6% increase in average volatility as compared to November’s STEO, which had a CI of (4.09, 7.50).

Traders are paying increasing attention to the STEO, December settled just once cent away from the DOE’s forecast, so analysts at maintain it will be worth keeping the STEO’s bearish but still strong forecasts in mind as the January contract approaches expiry.