Specious Argument

Unlike my typical practice of giving my monthly oil price range forecast for West Texas Intermediate, for the coming month, I am not providing a range because the uncertainty is too great.

There are at least three major factors underlying the uncertainty. First, the magnitude of the decrease in Iranian oil exports due to new sanctions is unknown. I have read articles that suggest as little as two hundred thousand barrels per day and as much as one million five hundred thousand barrels per day. Second, Venezuela’s future oil production volumes remain uncertain. On May 23, the online Wall Street Journal article “Keep Your Eye on Venezuela’s Oil—Energy Journal” (subscription might be required) stated as follows:

Due to political and social unrest, Venezuela’s oil output slid around 23% over the course of last year, according to International Energy Agency figures.

And the collapse is picking up steam. Venezuelan crude output has dropped by an additional 200,000 barrels a day this year to stand at 1.42 million barrels a day, a 15-year low and a striking reversal of fortune for a country with the world’s largest oil reserves.

And third, OPEC and Russia have indicated that they plan to agree to increase production at their June 22 meeting. The volume and duration of their increase is unknown.

Because there are too many significant unknowns to make a reasonable estimate, I am taking a wait-and-see approach.

After celebrating his eighteenth birthday in March, Cazador passed away on April 11, 2018.

In the photograph, taken a day before he passed away, you can see the intravenous line that went into his back for his subcutaneous fluids. He had kidney disease, high blood pressure, arthritis, and possibly pancreatitis and cancer. And because he had been receiving fluids for so long, we were concerned about his heart toward the latter part of his life.

About four years ago, Cazador’s appetite was weak and he was vomiting frequently. Along with his usual physical examination and blood work, Cazador had undergone an ultrasound test. Although the results were not conclusive or specific, his veterinarian at that time, now retired, believed that steroids, subcutaneous fluids, and other medications might alleviate his symptoms without necessarily treating the root cause of his gastrointestinal problems. She also mentioned that the root cause might be cancer, but without exploratory surgery, we would never know.

Cazador’s picture taken during his morning fluids treatment. This picture was taken the morning before he passed away.

Long-term use of steroids might cause other problems, and long-term subcutaneous fluids stresses a cat’s heart. Wanting to avoid surgery, I chose to proceed with fluids, steroids, and other medications. The surgery option was not appealing because, at fourteen years of age, he was already considered an older cat and because surgery might reveal a problem that had no solution. I wanted the remainder of his life to be as comfortable as possible.

When the veterinarian gave Cazador his first fluids at the clinic, he put up a mighty struggle because he was unfamiliar with the setting and he was separated from me. His struggle and my squeamishness about medical procedures led the veterinarian to say that Cazador might not be a good candidate for subcutaneous fluids. Reading between the lines, I also took that to mean that she thought I might not be able to muster up the courage to give him fluids on a regular basis, especially considering how difficult he was in the clinic. Initially, my mother came over every other day to give him his fluids while I kept Cazador calm. And although I am very squeamish when it comes to anything medical, I eventually took over and quickly learned and modified her method. Much to my surprise, Cazador liked receiving fluids from me. When he saw me entering his bedroom and hanging the bag of fluids on the intravenous pole, he, too, entered his bedroom and climbed up onto his pillow “nest” on his bed using the steps that I provided. He then stretched out and waited for me to get everything arranged. When I pinched his skin in preparation for the needle, he stretched out even further and often began to purr. It was a well-choreographed dance. On occasions when my mother was present during his fluids treatment, she always marveled at Cazador’s tranquility.

As mentioned, his subcutaneous fluids began as an every-other-day procedure. Then it progressed to a daily routine, and during about the last three months, I gave him fluids twice a day.

In recent months Cazador had lost a lot of weight. When examining Cazador at his last visit, his veterinarian felt a blockage in his upper chest at the transverse colon area that she thought might be preventing him from eating. Without invasive surgery and a hospital stay, there was simply nothing more that could be done. Because of his age, frailty, and other ongoing conditions and because he and I were so attached, I, with the support of his veterinarian, made the humane decision to allow him to slip away gracefully and peacefully to the great beyond.

I am slowly adjusting to not having Cazador around. During the latter part of his life, he needed a lot of care. Every four to six hours he required some form of medical treatment, such as needles for pain medication, various pills, and fluid injections. We had developed an elaborate routine where we each knew what to expect and when. Now, of course, our routine has ended abruptly.

Throughout his life, he was very happy and easy-going. He always enjoyed playing games. One of his favorite tricks, for example, was to wake me at three o’clock in the morning for a brushing. He had me well trained. And right up to the end of his life, his mind and his sense of humor were as sharp as ever. I miss him terribly.

Switching topics, if any of you need to give your cat subcutaneous fluid at some point, I have a couple of recommendations. First, place the fluid bag in a sink filled with warm to hot water before giving your cat its fluids. That will allow the fluid to be warm when it enters your cat. Your cat will appreciate your thoughtfulness. And second, provide your cat with a warm bed to receive the fluids.

I recommend this heated blanket (Amazon affiliate link). It comes in different sizes. I had three of them for Cazador. I have one on my bed, one where he got his fluids, and another in my office. I put blankets or cat beds over top of the heating pads and allowed him to come and go as he pleased. He absolutely loved his heated spots. For other options, you can go this page on Amazon (affiliate link).

My expectation over the next few weeks for West Texas Intermediate oil prices is that they will be bound between $60 and $70. As compared to my last month’s forecast, I increased the upper end from $67.50 to $70. My reasons for the increase are changes in the Trump administration, namely the announcements of Mike Pompeo and John Bolton for the positions of secretary of state and national security advisor, and the approaching driving season. The changes in the administration suggest a more hawkish stance on foreign affairs. And the driving season increases gasoline demand. Otherwise, there has not much been much change since last month.

Last month, I stated that I expected that West Texas Intermediate oil prices would be bound between $60 to $67.50 for the next few weeks. With a brief exception, WTI prices have been stayed within that range. I am reiterating that same expectation for the next few weeks because nothing has changed.

The ongoing geopolitical uncertainties remain. And the ongoing debate whether the increase in shale oil production will cause oil prices to recede again has yet to be resolved. Many believe that increasing demand is too great for shale to overcome, while others believe that current high prices will encourage too much production.

Today’s Wall Street Journal article “Forecasts for Oil Prices Rise for Fifth-Straight Month” states that investment banks have raised their price forecasts yet again (subscription might be required).

LONDON—Banks raised their forecasts for oil prices for the fifth month in a row in February, signaling continued confidence that prices will continue to recover as the global supply glut drains due to production cuts.

Brent crude—the global benchmark—is now expected to average $62 a barrel this year, while West Texas Intermediate, the U.S. standard, should average $58 a barrel, according to a poll of 15 investment banks surveyed by The Wall Street Journal toward the end of February. Both predictions are up roughly $1 from the January survey.

Even investment banks are having a difficult time trying to forecast oil prices.

On an investment site, one person commented that my forecasts were effectively useless because they stated the obvious. It was almost as though I was saying that there will be snow in Calgary in March, and it will be warm in Florida. There’s a certain amount of truth to this commenter’s complaint. The range is reasonably wide, and the forecasts do tend to mirror the latest prices.

The challenge, though, is that if I were to make the range narrower, then I would be much more likely to be wrong, in large part because I have no hard data for increased specificity. If I were to attempt to provide a forecast for a period further into the future, I would be truly guessing. Even those with access to far better information and statistics are not able to provide accurate longer-range forecasts. So instead, I focus on the next few weeks. I attempt to provide my reasoning based on information gained from the articles that I have read.

In summary, I expect that WTI oil prices will be bound between $60 to $67.50 for the next few weeks.

With West Texas Intermediate hitting $66.66 a barrel last Thursday, my forecast of between $50 and $60 a barrel for January was too pessimistic. There were a number of factors that led to higher oil prices, including uncertainty regarding potential new sanctions against Iran, international oil inventories depleting faster than expected, hedge funds’ extreme positioning in oil futures, solid cooperation amongst OPEC members with the possibility that Russia might work cooperatively with OPEC for many years, a depreciation of the US dollar, strong economic global growth, declining oil production from Venezuela, and a buoyant stock market where the S&P 500 has appreciated roughly 7 percent so far this year. All these factors have led to optimism that oil prices will remain strong this year.

I am always cautious about large price moves. Although the prior and other factors might propel oil prices even higher, I expect that prices will be bound between $60 to $67.50 for the next few weeks. While there is some room to the upside, I anticipate that the prior factors will likely prevent oil prices from falling too far in the near term.

Because I have been surprised by the strength of both oil prices and the stock market during the first few weeks of this year, I do not have much conviction in my oil price forecast. I am taking a wait and see approach for February and will reassess toward the end of the month.

Back in August, I quoted Dan Dicker saying that oil prices were likely to rise to $60 per barrel by year end, perhaps even $70. At the end of the last trading day of the year and after normal oil trading hours, West Texas Intermediate closed at about $60.10, after hitting a high of $60.51 near the end of the normal trading session.

I had predicted that WTI oil would remain below $60. And perhaps if there had not been a series of exogenous events such as the Kurdish Iraqui conflict, the Forties Pipeline System outage, and the extreme cold snap into the end of the year, prices might have remained below $60 per barrel. Exogenous events, of course, do happen with unpredictable regularity.

On Saturday, a Wall Street Journal article “Oil Prices Expected to Keep Rising in 2018, but It Could Be a Rocky Ride” (subscription required) quote indicated that Brent prices are forecast to average $58 per barrel.

A survey of 15 investment banks by The Wall Street Journal estimates that Brent crude, the international oil-price gauge, will average $58 a barrel in 2018, up from an average of $54 in 2017. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $54 a barrel in 2018, up from $51 in 2017.

As noted at the outset of this article, WTI closed above $60. I expect that once some of the exogenous issues subside, oil prices will retreat. Furthermore, these high oil prices might attract some short sellers to drive prices lower. On the other hand, some argue that world inventories are depleting faster than expected, world economic growth remains strong, and shale oil growth alone will not be sufficient to keep a lid on prices below $60. We will need to watch to see how the oil story unfolds.

My expectation for the next few weeks is that WTI prices remain bound by $50 to $60 a barrel.

With WTI prices at about $58.00 per barrel, I am updating my WTI oil price forecast upward over the next several weeks to range between $50.00 and $60.00 per barrel. As mentioned last month, geopolitical uncertainties are likely to have created a floor near $50 per barrel. Aside from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal, the arrests in Saudi Arabia have added to the list of geopolitical uncertainties.

In its latest monthly report, the International Energy Agency lowered its global crude demand growth outlook by 100,000 barrels per day for 2017 and 2018. The reduction in demand growth was in direct opposition to the Organization of Petroleum Exporting Countrie’ report that raised demand growth. If the IEA is correct in its forecast, current prices might not be sustainable.

On November 30, OPEC and Russia are scheduled to announce their decision whether they will extend their oil production cuts past March of 2018. Most, including me, expect that the cuts will be extended to the end of the year. Even if the cuts are extended, the bulls might declare victory and reduce their long positions. On the other hand, prices might rise even further with decreased uncertainty.

Because of the extended rally in oil prices and because of IEA’s reduced growth demand, I am cautious about oil prices escalating much further in the near future. I do appreciate, however, that global oil inventories are falling, and that might cause prices to spike higher. We should gain more insight after the market’s reaction to OPEC’s decision.

I am updating my WTI oil price expectations for the next several weeks to range between $50.00–$57.50 per barrel. The bottom oil-price limit is higher because geopolitical uncertainties have likely created a floor near $50 per barrel. The geopolitical uncertainties stem from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal. Another positive factor is the upcoming OPEC meeting at the end of November where many expect the agreement limiting crude-oil output to be extended beyond March 2018. The top oil-price limit has been raised because, with recent WTI prices being near $54 per barrel, it leaves further room to the upside. At current prices, producers are hedging their future production and will, therefore, produce additional volumes that should damp further increases in oil prices. With oil prices near $54 per barrel, I expect that WTI is near the higher end of its near-term range.

A good friend Paul Precht recommended that I view a YouTube video “Tony Seba: Clean Disruption – Energy & Transportation.” Seba offers a fascinating presentation of how he sees the future of energy and transportation unfolding. Even if he is only half correct, there will be dramatic changes for society and especially Alberta. After viewing fifteen minutes of this hour-long video, you will be hooked. I urge you, though, to set aside an entire hour—you’ll not be disappointed.

Precht and I met during the 1990s when we worked together to create a new fiscal framework for the oil sands industry. At that time, he was working at Alberta Energy, a ministry of the Government of Alberta, and I was working at Syncrude. We have remained in touch throughout the years and have collaborated on several projects as consultants.

On the topic of energy, my WTI oil price expectations for the next several weeks to range between $45–$55 per barrel, a slight increase from my expectations of last month. After reading a few articles—for example, “Mission Accomplished? OPEC banishes contango: John Kemp”—that claimed reduced oil inventory levels in advanced economies, I am slightly more bullish.

The next few weeks will be interesting because this is typically a shoulder period between high demand from summer driving and high demand for winter heating. Refineries are often shut down for maintenance to take advantage of this slow time. With the recent storms in the Gulf Coast, I am curious to see how this year’s shoulder period evolves. Also higher prices may provide incentive for drilled but uncompleted wells (DUCs) to be brought on stream, not to mention that higher prices might inspire new drilling. Unless there is a spike in demand, these events ought to have a moderating effect on a steep oil price rise. Given this backdrop, I am have raised my expectations from last month.