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Oil Update—June 2020

I expect West Texas Intermediate oil prices to range between $35 to $45 per barrel for July. If oil prices go below $35, I do not expect them to stay there for long. If, however, prices surpass $45, they might stay at that level.

Although I gave a range of between $30 and $40 per barrel for June, prices have stayed about $35 so far, with prices even slightly exceeding $40 for a brief period. Even with the current outbreaks of COVID-19 in a few states, I believe this upward trend will continue. I expect governments and people will learn how to cope with the coronavirus. When the number of new cases spike up, more preventative measures will be reinstated. And given the current environment, OPEC+ might continue their cuts into August. Both actions will continue to reduce the glut of stored oil.

I also mentioned that investors with longer-term horizons consider the stocks of well-managed and well-capitalized oil companies. In early June, the stock prices of oil companies in general lifted, but then fell back down even as oil prices remained relatively firm. Although I am unable to explain why stock prices drifted back down, I continue to believe that good quality oil companies have attractive stock prices at these current levels.

Display a Graph of Cumulative Number of COVID-19 Cases in Alberta from the blog.

Cumulative Number of COVID-19 Cases in Alberta

Some might point to the increased nervousness because of the coronavirus outbreaks as the reason for softening stock prices. If we look at Alberta’s number of COVID-19 cases, we see that the cases have leveled off. Should the numbers begin to spike upward again, I expect the government to roll back some of the opening measures. For example, perhaps bars will close or have more restrictions placed upon them.

I am going to take a slight detour to discuss semi-log graphs.

Some might have noticed that I used a semi-log graph to provide the Alberta coronavirus case numbers. The reason for using semi-log graphs is to show better the rate of increase. By using a traditional graph, it is difficult to detect changes in rates of growth.

Display a traditional graph of three curves of different growth rates.

Traditional Chart of Percentage Increases

For example, I created a sample graph where there are three curves: one, the green curve that starts with a growth rate of 15 percent and ends with a growth rate of 30 percent; two, a blue curve that grows at a constant 15 percent throughout; and a red curve that starts with a growth rate of 15 percent and ends with a growth rate of zero percent. By looking at the graph with its three curves, we know that the green curve is growing rapidly because it goes parabolic and it completely overwhelms the other two curves. Furthermore, because the end value is so large for the green curve, it is hard to discern any data or trends in the first half of the period for any of the curves.

Next, I created a semi-log chart using the exact same data. The green curve is slightly convex because its growth rate increases throughout from 15 percent to 30 percent. The blue curve is linear throughout because it grows at a constant 15 percent. And the red curve is concave because its growth decelerates from 15 percent to zero percent.

Display a semi-log graph of three curves of different growth rates.

Semi-log Chart of Percentage Increases

If you are interested, you can download the Excel spreadsheet and play with the values yourself.

When we look at graphs showing the number of coronavirus cases, steeper curves show faster growth rates, linear curves show constant growth rates, and flatter curves show almost no growth rate. Going back to the first graph with the number of Alberta COVID-19 cases, we note that the growth rates was high in first week or so. That is expected because of the low base values. Then the growth rate decelerated from mid-March to early May. From early May onwards, the growth rate has plateaued. When I look at the numerical data, the growth rate for about the last month is roughly 0.5 to 1 percent per day.

Returning back to the topic of July’s oil prices, I expect that Alberta will watch the number of coronavirus cases and will, if necessary, adjust the preventative measures to keep the growth rate at a low value so that our social infrastructure can cope and to save and protect the health of Albertans. I further expect most jurisdictions to follow this same path.

Wrapping up, I expect WTI prices to range between $35 to $45 per barrel for July. Most jurisdictions will manage their policies so that the coronavirus growth rates moderate or stay low. OPEC+ might prolong their production cuts into August. Both measures are likely to reduce the glut of stored oil and push prices higher. And I continue to believe that stocks of well-managed and well-capitalized oil companies represent good value, but you and your financial adviser are responsible for your investment decisions.

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Oil Update—May 2020

For June, I expect West Texas Intermediate oil prices to range between $30 to $40 per barrel. If oil prices go below $30, I do not expect them to stay there long. Furthermore, I expect oil prices to drift upward over time. So if oil prices surpasses $40, they might stick. I am not overly confident of my forecast, even though it covers a wide range.

The Financial Times article “US shale industry braces for wave of bankruptcies” (subscription required) suggests hard times remain for the shale industry.

Analysts predict 250 companies could go bust before the end of next year unless oil prices rise fast enough to start generating cash for producers wilting under punishing debt loads.

A recent rally has taken the price of West Texas Intermediate, the US marker, back above $30 a barrel, having traded in negative territory last month. But it remains down by half since January — and well beneath average break-even oil prices in the shale patch — leaving many more producers teetering on the brink of bankruptcy.

The Wall Street Journal article “Coronavirus Threatens to Hobble the U.S. Shale-Oil Boom for Years” (subscription required) continues with that same theme.

While oil prices have rebounded in recent days and are above $33 a barrel, U.S. output is still poised to fall because companies aren’t drilling enough wells to make up for production declines from existing wells. Shale wells produce a lot of oil and gas early on, but quickly lose steam. Without investing in new wells, many companies’ output would decline by 30% to 50% in just a year, research firm Wood Mackenzie says.

In a recent Bloomberg article “Global Oil Demand Has Yet to Peak, Energy Watchdog Predicts,” (subscription might be required) IEA’s Faith Birol suggests that new demand from India and Africa will not offset potential reduction in consumption from the US.

“If there’s a strong economic recovery, American business consultants using Zoom will not compensate for 150 million new urban residents in India and Africa traveling, working in factories and buying products transported by trucks,” Birol said.

With most regions within the US now opening up and social distancing decreasing, oil demand and consumption are picking up. For those interested, the Federal Reserve Bank of Dallas provided an interesting article “New Dallas Fed Social Distancing Index Gives Insight into COVID-19’s Economic Impact.” The article states that its index is tightly correlated with Google COVID-19 Mobility. I would assume that it also correlates well with Apple Maps Mobility Trend Reports.

While I believe that the oil industry still faces a challenging period, market forces along with OPEC+ are helping to bring the supply-demand dynamic into balance. Furthermore, once we are past COVID-19, the demand for oil may surpass prior levels.

For these reasons, I still maintain that buying well-managed and capitalized oil companies may be a prudent investment decision for those with a long-term horizon. And as stated last month, I am not providing any investment advice or guidance, and you and your adviser are responsible for your investments.

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Oil Update—April 2020

Given the extreme oil price volatility these past few months, I am glad that I did not forecast any price ranges. There are way too many fast-moving parts that are poorly understood. I do not know that anyone can provide any guidance at this point with any confidence. That said, I do expect volatility to subside somewhat.

I am not providing any investment advice or guidance. You and your financial adviser are responsible for your own investment decisions and actions. That said, I encourage you to consider oil companies that possess financial and managerial strength to weather the current storm.

With the benefit of hindsight, I expect that the prices of many oil stocks bottomed in March. But I am not ruling out further downside or a new bottom in the coming months. In the short- to medium-term, however, increased testing and better treatment are likely to damp the negative effects of COVID-19 before a final vaccine is available for everyone. And in two, three, or four years, I expect that we will look back at this period and wish we had increased our exposure to the oil sector.

This downturn in the oil industry is the most severe that I have ever seen. Many companies simply will not survive. So again, I want to stress that long-term investors should pay attention to those companies that can withstand an extended period of low oil prices.

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Oil Update—March 2020

Although we are at midmonth with a very volatile oil environment, I want to bring to your attention an excellent podcast that I listened to this weekend.

Columbia Center on Global Energy Policy produced a podcast titled “Why This Crash is Different” featuring guests Helima Croft, Amy Myers Jaffe, and Bob McNally. I found this nearly hour-long podcast to be one of the best sources of information. Because the guests are knowledgeable and experienced, they were able to provide a great synopsis of what has taken place and provide their thoughts and opinions on future developments. I encourage you to listen.

Markets are extremely volatile and unpredictable with the unfolding of the COVID-19 crisis and the OPEC+ brouhaha. For those reasons, I will not be providing an oil price forecast at the end of this month and possibly for several more months. There is simply too much uncertainty.

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Oil Update—February 2020

I am not providing a forecast for next month.

As we have seen during the past month, the coronavirus, or COVID-19 as it is officially named, is the major factor for determining the reduced oil demand for the next several weeks or months. Many of us have become amateur epidemiologists trying to understand all the data. Although I have read and watched as much as possible on this subject, I believe that most of us are still learning a lot about the virus and what its effects may be. While I have formed some opinions, I do not have much confidence in those opinions and will change them in a heartbeat when new and better information comes along. So, for those reasons, I am declining to provide a forecast for next month.

On March 5 and 6, OPEC+ is planning to meet and agree on new oil production cuts in response to reduced demand from the effects of coronavirus. I hope that this meeting goes better than their earlier meeting in February where they did not agree on any cuts.

One last thought: be careful when reading expert opinions about the coronavirus and its effects. Many of the opinions that I have read are extreme in either direction. The reality is that future is uncertain. Of course, I hope that the coronavirus is mild and that it remains largely contained.

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Oil Update—January 2020

My last month’s forecast of $55 to $65 a barrel was violated on both ends. The upper end was pierced during the US-Iran conflict. And, as we are currently experiencing, oil prices have fallen through the lower end because of the coronavirus, 2019-nCoV.

Offsetting the coronavirus is the Libyan situation where oil exports have fallen tremendously. But the coronavirus situation is affecting economic activity, especially in China, and therefore adversely affecting confidence in oil prices. OPEC+ may be moving its early March meeting to sometime in February to address the coronavirus concerns.

My forecast is for West Texas Intermediate to range between $50 and $60 a barrel. Because of these strong crosscurrents, I do not have a strong opinion on oil prices. Assuming OPEC+ meets in February, I anticipate that it will adopt measures to prevent a larger glut of oil and therefore oil prices from falling too far. At the higher end, the coronavirus will keep a lid on prices—baring any exogeneous events—until it is brought under control.

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Oil Update—December 2019

For the next month, I have increased my West Texas Intermediate oil price forecast by $2.50 to range between $55 to $65 a barrel.

With phase one of the US-China trade deal now out of the way and OPEC+ announcing a cutback to production, oil prices rose slightly more than I expected, though still within the range I had set out last month. Throughout December, both the stock market and oil prices climbed higher. The question now is have equity and oil prices advanced too far, too fast. While I tend to think that both are ahead of themselves, I also realize that price momentum can go on for longer than most may anticipate. Now, I would like to see how the markets in general react in the New Year, especially after the strong 2019 stock market.

Overall, I expect WTI oil prices to range between $57.50 and $62.50 a barrel, though I have allowed more room on both ends to provide a $10 range.

To investors and traders, I extend my best wishes that this coming year and decade treat you well.

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Oil Update—November 2019

For the fifth straight month, I continue to expect West Texas Intermediate oil prices to range between $52.50 and $62.50.

With the expected announcement of the US-China phase-one trade deal and with the upcoming OPEC+ meeting on December 5 and 6, there is no point commenting on November’s events. These two upcoming events overshadow most everything else. Of course, the trade deal is not a sure thing, but recent comments in the press suggest that the two sides are very close. Various officials from OPEC+ keep shifting their positions, often day-by-day. I suspect that much of the recent commentary is posturing for negotiating leverage during the official meetings.

My general expectation is that oil will remain range bound between $52.50 and $62.50 for a while, with oil prices usually avoiding the top quartile of that range.

I am hoping that the phase-one trade deal is announced soon and that the OPEC+ meeting goes well without any negative surprises.

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Oil Update—October 2019

For the fourth straight month, I expect West Texas Intermediate oil prices to range between $52.50 and $62.50.

With all the uncertainties surrounding trade, global growth, and future oil supply and demand, oil prices remain reasonably volatile. The US-China trade war should become less severe after the mid-November meeting where both countries are expected to sign the first phase of a trade deal. With a little luck, there might be a resolution, or perhaps just more clarity, of the ongoing Brexit saga early in January. With reduced trade frictions, global growth should tick higher. Oil supply and demand, however, are extraordinarily difficult to predict.

The Financial Times article “Investors starve US shale drillers of capital” (subscription required) shows the difficulty shale companies face.

The money pipeline is running dry for large portions of the US shale oil sector, tipping drillers into bankruptcy and threatening the industry”s breathtaking growth in oil production.

Spooked by lower oil prices, equity and bond investors are now shunning the smaller, independent shale explorers that lifted the US to the top rank of global oil producers. Meanwhile, say analysts, banks have pulled in their horns, and are likely to further restrict companies’ capacity to borrow when they begin their twice-annual reviews of loans secured by oil and gas reserves.

Last Friday, Baker Hughes indicated that there were 17 fewer oil rigs operating in the US, supporting the thesis that money is now tight. The capital starvation and reduced number of rigs might damp the expected supply of oil for next year.

Interestingly, Saudi Arabia is going forward with its IPO. That has led to speculation that there might be deeper production cuts announced at OPEC+’s meeting in December.

As mentioned, if trade friction is substantially reduced, demand might be higher than expected.

There are a lot of uncertainties. Those who are bearish will find ample arguments to support their thesis. And similarly for the bulls, they, too, will find ample arguments.

All that said, my price forecast remains at $52.50 to $62.50 for October.

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Oil Update—September 2019

I expect West Texas Intermediate oil prices to range between $52.50 and $62.50, consistent with the range in my last two months’ forecast.

There was a lot of volatility in oil prices in September. There was an attack on Saudi Arabia’s infrastructure, and although Saudi Arabia’s exports have recovered to near prior levels, there are still questions remaining as to how quickly Saudi Arabia’s infrastructure can be fully repaired. Adding to the uncertainty is the impeachment investigation in the US. My own view is that one should largely tune out the political noise until such time as there are consequences that affect supply and demand.

On October 27, the Wall Street Journal published an article “Banks Stay Gloomy on Oil, Shrugging Off Attacks” (subscription required). While I am not gloomy, I am certainly not a raving optimist either. Instead, I expect more range-bound to slightly higher oil prices.

Oil prices have shed the roughly 15% gains they notched on Sept. 16, in the aftermath of the attacks on Saudi Arabia’s energy infrastructure. Among the factors pressuring prices are an increase in U.S. inventories, a backdrop of deepening political and economic uncertainty, and reassurances from Saudi officials that crude exports won’t be interrupted.

“The level of Saudi Arabia’s domestic inventories and production spare capacity both suggest that maintaining export levels is achievable,” said Damien Courvalin, head of energy research at Goldman Sachs.

The incident is likely to have “a negligible impact” on commercial inventories held by Organization for Economic Cooperation and Development nations, Mr. Courvalin said.

Every month seems to bring a new source of volatility. Now, there is the fallout from the attack on Saudi Arabia and the impeachment investigation in the US. In mid-October, the China-US negotiations are scheduled to resume in earnest. So, October promises to be an interesting month.

All that said, my price forecast remains at $52.50 to $62.50 for October.

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