EIA raises oil price and demand forecast, positive for energy stocks and ETFs
Every month, a US government agency called the Energy Information Administration (EIA) releases a report called the “Short Term Energy Outlook” in which it explains its forecasts for energy production, prices, and trends over the next two years. Many market participants read the report to get a feel for what is happening with the energy market, therefore the report sometimes affects market sentiment.
On February 12, the EIA stated that it increased its forecasts for 2013 West Texas Intermediate or “WTI” (the US benchmark) oil prices from $89.54/barrel to $92.81/barrel, and that it increased its forecasts for 2013 Brent crude (the international benchmark) prices from $105.17/barrel to $109.33/barrel. The increase in estimated oil prices is a bullish indicator for energy stocks such as Exxon Mobil (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), and Hess Corporation (HES) as well as energy ETFs such as the Energy Select Sector SPDR (XLE). This is because all else equal, higher oil prices result in higher revenues and earnings for energy companies.
The below graph shows the changes in the EIA’s Brent crude forecast over time. The EIA has increased Brent price forecasts over the past several reports given stronger economic signals, particularly from China and expected cutbacks in Saudi Arabian production.
The below graph shows the changes in the EIA’s WTI forecast over time. The EIA had lowered price forecasts in November on beliefs of increasing US supply pushing the spread between Brent crude prices and WTI crude prices higher. The recent increase in forecasted WTI price is also because of economic signals from China and cutbacks in Saudi Production.
The report overall is a positive signal for oil producers such as XOM, CVX, COP, and HES and for energy ETFs such as the XLE. However, investors should note that commodity price forecasts are highly uncertain. This is due to several reasons such as inherently high volatility in commodity prices and the inability to predict certain happenings (such as geopolitical events, natural disasters, etc.) that could cause sudden and severe price movements. Nevertheless, the EIA report is a useful data point that many market participants track.
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