Analysis

Pricing philosophy

Deloitte is realistic

Financial futures markets are the main influence on REA's price forecast. We look to both the futures and the past when we create our forecasts.

Price forecasting takes into account many variables that can influence future prices. Our experience tells us that we must continually review the forecasting tools we use to predict where oil and gas prices are heading. However, one constant is the influence the geo-political landscape has on oil and gas pricing. This impact is most accurately reflected in the financial industry's futures market for commodities, a main influence in the creation of Deloitte's price forecast. In other words, Deloitte looks to both the futures and the past when we create our forecasts.

This pricing philosophy bucks traditional thinking among our peers. The traditional view is based on the mean-reversion view of commodities presented by economists. Following this model, industry forecasts from 2000 to 2006 reflected a drop in prices over the long term from the current prices of the day – even though the futures market indicated otherwise. While the mean-reversion approach has definite merit, history has tended to reflect that the futures market is a more accurate barometer.

Client focused

At Deloitte, we believe it is part of our role to help our clients in the oil and gas and investment communities make better long term business decisions by providing them with the most accurate and realistic information. We understand that sound analysis of changing trends can influence the decisions made about mergers, acquisitions, divestitures and investments. One way we ensure our price forecasts are as accurate as possible, given the continuing impact of near term volatility, is to review our pricing assumptions on a quarterly basis.

Our process

In preparing the price forecast, Deloitte considers the current monthly trends, the actual and trends for the year to date and the prior year actuals in determining the forecast. The base forecast for both oil and gas is based on NYMEX futures in US dollars.

The crude oil and natural gas forecasts are based on yearly variable factors weighted to a higher percent for the current data and then reflect a higher percent to prior year historical data for the later years. Gas prices have been determined independently from oil prices but still reflect the current competitive nature of the two fuels and reflect historical oil to gas ratios for the latter years of the gas forecast.

Deloitte prepares our price and market forecasts based on information we collect from numerous government agencies, industry publications, oil refineries, natural gas marketers and industry trends. Inflation forecasts and exchange rates, an integral part of the forecast, are also considered.

These forecasts are Deloitte's best estimate of how the future will look, and while they are considered reasonable, changing market conditions or additional information may require alteration from the indicated effective date.

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