IndependentStatistics&Analysis

U.S. Energy Information Administration

April2012

ShortTermEnergyOutlook MarketPricesandUncertaintyReport1
April9,2012Release

CrudeOil
Prices:Aftermovinghigherinthefirsttwomonthsofthisyear,crudeoilpriceshavetradedin anarrowrangeduringthemonthofMarch.FrontmonthfuturespricesforBrentandWTI settledat$123.43and$103.31perbarrel,respectively,onApril5(Figure1).Thesepricesareat thelowerendofthe$4and$6perbarreltradingrangesobservedforthesetwobenchmarks overthelastmonth.TheaveragepriceforBrentinMarchwas$124.46perbarrel,thehighest sinceJuly2008.

Therecentpricestabilitysuggeststhatlittlehaschangedwithregardtothemarkets expectationsforfuturesupplyanddemandofcrudeoil.Continuedsupplydisruptionsin SouthSudan,SyriaandYemenhavebeenoffsetbyhigherOPECproductionaswellasreduced crudeoilconsumptionduetorefinerymaintenance.EIAestimatesthatglobalcrudeoiland petroleumproductinventoriesarecurrentlybuilding,abearishsignforprices,whiletightness inspareproductioncapacityprovidessupporttocurrentpricelevels.

This is a regular monthly companion to the EIA Short-Term Energy Outlook. (http://www.eia.doe.gov/emeu/steo/pub/contents.html) Contact: James Preciado (James.Preciado@eia.gov)
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 Timespreadsacrosscrudeoilfuturescontractsareameasureofcurrentmarketconditions relativetofutureexpectationsandcanprovideincentivetoeitherstoreoilnowordrawdown inventories.Thedifferencebetweenthefrontmonthcontractandthethirdmonthcontract focusesmoreonmarketexpectationsoverthenextfewmonths,asopposedtousingalonger termspreadsuchasfrontmonthand12thmonth.TheBrenttimespreadincreasedinFebruary, reachingabout$1.75perbarrelforthefivedayperiodendingMarch1,butthendecreasingby $.60perbarrelforthefivedayperiodendingApril5,reducingincentivetoselloiloutof inventoriesnow,andsupportingestimatesthatworldpetroleuminventoriesmaybuildmore thanpreviouslyanticipatedduringtherefinerymaintenanceperiod(Figure2).

ThediscountofWTItoBrentwidenedduringthemonthofMarchfromanaverageof$13per barrelforthe5dayperiodendingMarch1to$19perbarrelforthefivedayperiodendingApril 5(Figure3).Theupwardtrendofthepricespreadsuggeststhatthetransportationcostfor movingthemarginalbarrelofWTIfromCushingOklahomatoU.S.GulfCoastrefinerieshas risen.IncreasedoilproductionfromtheBakkenformationinNorthDakotamayalsobe causingtheBrentWTIspreadtowiden.Muchoftheincreasedproductionfromthetightoil play,partlyduetoarelativelymildwinterhavinglessofanimpactonproductioncomparedto lastyear,ismakingitswaytoCushing.ThediscountofBakkenoiltoWTIrepresentsasecond transportationconstraintforminginPADD2,asthisspreadhaswidenedfromunder$5per barrelinearlyJanuaryto$11perbarrelforthefivedaysendingApril5.

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Crudeoilandequities:TheS&P500isanindexofstockpricesofthe500largestcompaniesin theUnitedStates,measuredbymarketcapitalization,andtendstorisewithexpectationsfor futureeconomicgrowth.CrudeoilisanimportantpartoftheU.S.economyaspetroleum productsmakeupalargecomponentoftheenergynecessarytotransportgoodsandprovide services.Astheeconomystartedgrowingfollowingthefinancialcrisisin2008andearly2009, thepriceofcrudeoilrelativetothevalueofU.S.equitiesremainednearlyconstant,withthe ratiooftheS&P500dividedbythepriceofBrenthoveringjustunder14(Figure4).In2011and 2012,thepriceofoilmovedhighercomparedtootherassetclasses,includingstocks,inlarge partduetoactualoranticipatedsupplydisruptions.Theaveragefortheratiointhemonthof Marchwas11.1,onlyslightlyabovethelowsetinJulyof2008of9.3.

OpenInterest:Afterincreasingtobegintheyear2012toahighof228thousandcontractson February28,thenetopeninterestformoneymanagershasbeendecreasingoverthelastfive weeks.Initially,thedeclineinnetpositionswasduetoanincreaseofshortpositionsheldby tradersclassifiedasmoneymanagersaccordingtotheCFTC.Subsequently,longpositions werealsoreducedandcontributedtothedeclineinnetopeninterest.AsofApril2,money managersheld180thousandWTIfuturescontractstradedonNYMEX(Figure5).

Volatility:TheVIX,ameasureofimpliedvolatilityfortheS&P500calculatedfromoptions expiringwithinthenext30days,andtheOVX,asimilarmeasureforWTIcrudeoil,both movedlowerinthemonthofMarch.TheOVXindexsettledat28percentonApril5,4 percentagepointsbelowitsvalueonFebruary1,andremainshighlycorrelatedwiththeVIX

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(Figure6).ImprovingeconomicdatafromtheU.S.overthelastfewmonthshaspusheddown themarketsexpectationsforpricevolatilityinthenearfutureascontinuedeconomicgrowth canprovidesupportforpotentialfuturereturnsforU.S.companiesaswellasdemandforcrude oil.

Anotherwaytolookatimpliedvolatilityforcrudeoilfuturesisthevolatilityskew,whichis constructedbygraphingimpliedvolatilityforoutofthemoneycallandputoptioncontracts bytheirstrikeprice.Impliedvolatilityforputs,aswellasformostoutofthemoneycalls, droppedoverthelasttwomonthsbyasimilaramounttowhatwasseeninthebroaderOVX index(Figure7).However,calloptionswithstrikegreaterthan$135forJune2012,whichwill onlyhavevalueifthepriceofcrudeoilincreasestoover$135perbarrelbyexpirationofthe Junecontracts,havehadincreasingimpliedvolatility.Thissuggeststhatthemarkets perceptionofriskssurroundingeventsthatcouldleadtolargeupwardpricemovementshave notabatedoverthelasttwomonths.

MarketDerivedProbabilities:TheaveragepriceofWTIcrudeoilforJunedeliveryforthefive daysendingApril5hasincreasedby$4perbarrelsinceFebruary1andimpliedvolatilityfor thatfuturescontracthasmovedlowerby6percentagepointsoverthesametimeperiod.Even thoughtherewasanincreaseinprice,thelesstimeuntilthecontractexpiresresultedina decreasedprobabilityforpricestosettlehighercomparedtomarketconditionsonFebruary1. TheprobabilityoftheJune2012futurescontractexpiringabove$120perbarrelisnow6 percent,a7percentagepointdecreasefromthefivedayperiodendingFebruary1(Figure8).It

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shouldbenotedthattheseprobabilitiesdonotreflectthefuturepricedistributionofworld waterbornecrudeoil.Theseprobabilitiesarebasedonthecumulativenormaldensitiesderived frommarketexpectationsusingfuturesandoptionsprices.(SeeAppendicesIandIIofEIAs October2009EnergyPriceVolatilityandForecastUncertaintyarticlefordiscussiononhowthese probabilitiesarederived.)

Gasoline Prices:NewYorkHarborReformulatedBlendstockforOxygenateBlending(RBOB)prices increasedduringthemonthofMarchbutataslowerpacecomparedtoJanuaryandFebruary (Figure9).TheaveragefrontmonthpricefromMarch30throughApril5was$3.36pergallon, upfromanaverageof$2.88pergallonforthefivedaysendingFebruary1.The$0.48increasein monthlyRBOBpricesbetweenFebruaryandAprilcamefromacombinationofcrudeoilprice increases,thechangeovertosummergradegasolineasoftheAprilcontract(thefrontmonth contractduringMarch),andincreasesinthegasolinecrackspread.Crudeoilpricechanges contributedthemosttotheincreaseingasolineprices,withBrentincreasingbyabout$12.50 perbarrel,or$0.30pergallon.

TheaveragepricedifferentialbetweenthewintergradeMarchcontractandthesummergrade AprilcontractforthemonthofFebruarywas$0.16pergallon,whichisindicativeofthehigher costofproducing,andhigherdemandfor,summergradegasoline.Thegasolinecrackspread increasedbyanadditional7centspergallonbetweenJanuaryandMarchbeyondthecontract specificationchanges(Figure10).Thehistoricalcrackspreadfuturescurveshowstheseasonal

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backwardationintheRBOBcurve,whichhasbecomeincreasinglysteepasofApril5(Figure 11).PricesfortheMaycontractareconsiderablyhigherthantheAugustcontract,which indicatestightnessinthecurrentmarket.

MarketDerivedProbabilities:TheJune2012RBOBfuturescontractaveraged$3.28forthefive tradingdaysendingApril5andhasaprobabilityofexceeding$3.35pergallon($4.00retail)at expirationofapproximately40percent,andaprobabilityofexceeding$3.85pergallon($4.50 retail)ofabout5percent.ThesamecontractasofthefivetradingdaysendingFebruary1hada probabilityofexceeding$4.00retailof23percent,andaprobabilityofexceeding$4.50retailof6 percent.Acombinationofhighercrudeoilprices,increasedcrackspreads,andrelatively unchangedimpliedvolatilitycontributedtoahigherprobabilityoftheJunecontractexceeding $3.35pergallon,whilethelesstimetoexpirationwasresponsibleforkeepingtheprobabilityof exceeding$3.85pergallonconstant(Figure12).

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HeatingOil
Prices:HeatingoilpricesfluctuatedslightlyoverthemonthofMarch,afterincreasingthrough February.TheaveragepromptmonthpriceforMarch1throughApril5was$3.22,upfrom $3.19inFebruaryand$3.05inJanuary(Figure13).Thepricedifferentialbetweencontracts withdifferentmaturitieshasdisappearedwiththeapproachoftheendoftheheatingseason. OnApril5,thepricesforheatingoildeliveryinMay,JuneandAugustwere$3.17,$3.18and $3.20,respectively,indicatingaflatfuturescurve.

AccordingtotheEIAWeeklyProductSupplieddata,the4weekaverageofheatingoilanddiesel fuelimpliedconsumptioninU.S.marketswasdown5percentinMarchfromthecomparable weeklyaverageoneyearago.This,combinedwithgenerallywarmerweather,ledtoa decreasingcrackspread(promptheatingoilminuspromptBrent)overthemonthofMarch (Figure14).TheaveragecrackspreadforMarchwas$0.26centspergallon,downfrom$0.36in February.

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NaturalGas
Prices:Naturalgasstockssawtheirfirstbuildof2012ontheweekendingMarch16when57 bcfwasaddedtoU.S.inventories.Typically,theinjectionseasonfornaturalgasdoesnotstart untilthefirstweekinAprilandwithinventoriesalreadybeingnearly1000bcfhigherthantheir fiveyearaverages,naturalgaspriceshavemovedlowerinresponsetoamplesupplies.The frontmonthcontractfordeliveryofnaturalgastoHenryHubwas$2.08permmBtuonApril5, adropof$0.38permmBtusinceMarch1(Figures15and16).Adjustedforinflation,the averagepriceforthemonthofMarchwasthelowestsinceSeptember2001.

Volatility:Warmerthanusualtemperaturesduringthewinterheatingseasonwerelargely responsibleforincreasesinpricevolatilityduringthemonthsofJanuaryandFebruaryasthe
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marketpricedinnewinformationaffectingexpectationsfornaturalgasdemand.Comingto theendoftheheatingseasoninMarch,withdemandtypicallybeinglessvolatileandaclearer pictureoftheamountofnaturalgasinU.S.inventories,volatility,alongwithprices,declined. Historical30dayrealizedvolatilityisnow35percent,areturntolevelsseenatthebeginningof thisyear,andfrontmonthimpliedvolatilityisnow44percent(Figure17).

MarketDerivedProbabilities:TheaveragepriceoverthefivetradingdaysendingonApril5 fortheJune2012naturalgasfuturescontracthasfallenby$0.66perMMBtusinceFebruary1. Eventhoughtherewasanincreaseinimpliedvolatilityof5percentagepointsforthatcontract, thelowerpriceswereresponsibleforalargedecreaseintheprobabilityofnaturalgasprices exceedingdifferentpricelevelscomparedtomarketconditionsacouplemonthsago.The probabilitythattheJunecontractwillsettlehigherthan$3.00perMMBtufellby37percentage pointsfrom43to6percentwhencomparedtomarketconditionsonthefivetradingdays endingFebruary1(Figure18).Thesenaturalgasprobabilitiesarecumulativenormaldensities generatedusingmarketbasedinputsprovidedbyfuturesandoptionsmarkets,i.e.,futures pricesandimpliedvolatilities.(SeeAppendicesIandIIofEIAsOctober2009EnergyPrice VolatilityandForecastUncertaintyarticleforadditionaldiscussion).

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