Vantage Point Advisors’ Energy Blog June 2021

Reduced Pipeline Capacity is Pushing Energy Prices Higher

As employers begin to encourage a return to the office and families plan road trips, the average price of a gallon of gasoline is at six-year highs. In 2020, the average price of a gallon of gasoline in the U.S. was around $2.15, according to GasBuddy.com.  Today, the average is around $3.04, a 41% increase.[1]  A review of gasoline futures prices, the “RBOB contract”, shows a year-to-date increase of 57%

RBOB Gasoline

One of President Joe Biden’s first acts in the White House was to cancel a permit for the Keystone XL pipeline. The pipeline would have connected oil fields in northern Canada to Nebraska, where an existing pipeline can carry oil to Texas refineries. Research by Robert McNally of the Rapidan Energy Group[2] suggests Biden’s energy policies could lower U.S. oil production by 1 million barrels per day by 2023.

Although the promise of electric vehicles sounds alluring, it is important to note that over half of the nation’s electricity is produced from natural gas and coal.[3]

Compounding this challenge is that with today’s technology, more than 60% of the energy from hydrocarbons is lost in converting it to electric energy.  In round numbers, it takes almost twice as much natural gas to move your EV down the road than it would for you to have driven a natural gas-powered vehicle.

Although we all look forward to the days of an inexpensive, clean EV-powered transportation system, current economical and physical realities should not be ignored by policymakers.

WTI Strip Prices Increase

Considering June 1st’s price increase, spot prices and near-term futures prices for the WTI contract increased by over $5.00 per barrel.

The oil price curve remains in “backwardation” reflecting the market’s expectation of lower future sport prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on June 1, 2021, as well as the predicted crude oil prices based on options and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

 

Based on these current prices, the markets indicate that there is a 68% chance that oil prices will range from $56.50 and $80.00 per barrel in mid-September 2021.  Likewise, there is about a 95% chance that prices will be between $41.00 and $102.00.  By mid-November 2021, the one standard deviation (1σ) price range is $53.00 to $82.50 per barrel, and the two standard deviation (2σ) range is $37.00 to $110.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful.  If someone asks you longingly if oil will be over $80 per barrel again soon, you now can respond with “the markets indicate there is a 16% probability that oil prices are expected to get to $80 per barrel by this September, so $80 oil is looking more attainable.”

 

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Energy Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092

214.254.4801

gscheig@vpadvisors.com

[1] Dallas Morning News Editorial, by Bill Godsey (Bill Godsey is owner and president of Geo Logic Environmental Services and a former geologist for the Texas Railroad Commission.) May 26, 2021

[2] https://www.cnn.com/2021/02/08/perspectives/keystone-cancel-biden/index.html

[3] https://www.eia.gov/energyexplained/electricity/electricity-in-the-us.php