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Crude oil price most sensitive variable Department of Revenue price forecast group finds FY 2014 consensus in $100-$110 per barrel range, but not for FY 2015 and beyond Kristen Nelson Petroleum News
A changed forecast for the price of Alaska North Slope crude oil is the most “influential contributor” to changes in forecast unrestricted revenue between its spring and fall forecasts, the Alaska Department of Revenue said in its Fall 2013 Revenue Sources Book.
“The future price of crude oil is the most sensitive variable in the revenue forecast and is also the most prone to uncertainty,” the department said.
The spring 2013 forecast had pegged the Alaska North Slope crude oil price at $109.61 per barrel for the current fiscal year, FY 2014, which ends June 30. But the fall forecast, issued in December, reduced the ANS forecast for FY ’14 to $105.68, which the department said was less than the forecast for the last several years.
How is the price forecast? The department said in the Revenue Sources Book, or RSB, that by regulation it uses several different reporting and assessment services to estimate the “prevailing value” for ANS crude oil. There is no spot market for ANS crude oil and it is not traded on an exchange, so it is assessed “based on purchases of crude oil in the West Coast markets, where it is sold primarily to Washington State and California refiners,” the department said.
In fiscal year 2013 the average prevailing value was $107.57 per barrel.
Change in valuation ANS crude oil was formerly valued against West Texas Intermediate, the department said, but “since the WTI benchmark has decoupled from ANS and other crude markers,” ANS is now more comparable to waterborne crude oil such as Brent.
Since 2012, the department has forecast the ANS crude oil price directly, rather than forecasting WTI and then creating an ANS-WTI differential.
For the fall 2013 ANS price forecast the department “considered various oil price forecasts of WTI and Brent oil … and relied on a panel of experts in determining the price path expectations for ANS.”
Short-term variables The department said several short-term variables influence oil prices, including: inventory levels; infrastructure; geopolitics; natural disasters; warfare; action by OPEC, the Organization of the Petroleum Exporting Countries; and financial market trends and speculation.
These factors have all influenced the price of oil over the last 10 years.
“Without knowledge of when and if these events will occur, it is not possible to forecast a particular path for oil prices with any certainty. Furthermore, the system is dynamic and the impact of the same event can bring about different outcomes at different times,” the department said.
In the longer term the oil price is driven by supply and demand.
“Ultimately,” the department said, “predicting future price requires an understanding of demand growth and the available future supply of petroleum products.”
Forecasting methodology The department uses a day-long price forecasting session held in early October with participants from state government, the private sector and academia. In 2013 there were 39 participants, each of whom was asked to forecast the price of ANS crude oil at the end of the session. The department said it used the median price for each time period for its fall 2013 forecast.
There was consensus at the October forecasting session that the average ANS price for FY 2014 would be in the $100 to $110 per barrel range, the department said, but “there was lack of consensus among oil price forecasts in the long term.”
Some experts believe the oil price will rise, but the department said there isn’t widespread support of much higher prices, but a view that much higher prices would make new resources economic and result in fuel switching.
The department said that in the future it “plans to incorporate probability and statistical confidence in its price forecast.”
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