Specious Argument

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.

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.

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.

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.

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.

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.

I expect West Texas Intermediate oil prices to once again range between $52.50 and $62.50, which is the same range as my last month’s forecast.

August has been a difficult and volatile month for oil prices and equities. There were the US-China tariff flareups followed by the G7. Yet oil prices did not dip significantly. And this past inventory report from the EIA showed a much larger than expected withdrawal of about ten million barrels.

Of course, there are still concerns about a global recession damping oil demand. The US-Iran situation seems as though it is not going to be resolved soon. Many experts continue to believe that there will be more oil supply than demand for 2020. And, as we saw this month, the US-China negotiations are fraught with difficulties and uncertainties.

As an aside, on August 16, Barron’s published an article titled “Wall Street Has Abandoned Oil and Gas Stocks. You Shouldn’t.” (subscription required) by Andrew Bary. In my view, valuations for oil and gas companies with strong balance sheets are extraordinarily low. On August 30, the Wall Street Journal published an article titled “Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale” (subscription required) by Rebecca Elliot and Christopher M. Matthews. As the title suggests, this article discusses the challenges for shale companies, especially those lacking adequate resources to weather storms. Gary Ross, founder of PIRA Energy Group and current CEO of Black Gold Investors LLC, gave an excellent Bloomberg video interview where he stated that he expects oil demand to pick up in the fourth quarter.

Even with the ratcheting up of trade tensions in August that increased uncertainty and volatility, I expect WTI oil prices to remain between $52.50 and $62.50.

My August West Texas Intermediate oil price forecast ranges between $52.50 and $62.50 per barrel. The range is $2.50 lower than it was last month.

While my prior forecast was okay, WTI prices spent most of the time hugging the bottom end of the range. With this month’s forecast, I am anticipating that price weakness will continue, so I am allowing $2.50 more downside protection.

The pessimism surrounding oil seems extreme and is based on some identifiable factors. Many are fearful of a global recession damping oil demand even further. The US-Iran situation might be resolved sometime soon, allowing Iran to export more oil. More oil supply than demand is expected for 2020. Saudi Arabia and Kuwait are negotiating to resume production from jointly run oilfields Khafji and Wafra, which amounts to about a half million barrels per day. Oil companies might be aggressively hedging their future production at these prices. And the US-China negotiations, depending upon the substance of any interim announcements, may be viewed as negative or positive.

There is not much on the positive side of the ledger. The EIA oil inventory withdrawals have been substantial over the past few weeks for crude oil, but there have been some inventory builds relating to crude oil products that may suggest weakening demand because of a slowing global economy. The geopolitical situation in the Persian Gulf is lending some support but not as much as it would have in the past. Central banks are likely to lower rates in an attempt to help the global economy. I expect that a flood of liquidity will help inflate most risk assets, including oil.

The Financial Times has an interesting article “Why US bond yields could be going the way of Germany and Japan” (subscription required) where the author, Bob Michele who is global head of fixed-income at JPMorgan Asset Management, argues that the Fed must act aggressively to stave off the 10-year US Treasury heading toward zero.

Because of all the present uncertainties surrounding oil prices, they are extremely difficult to predict. We will need to take a wait and see approach to get more clarity. I continue to expect uncertainty and volatility.

My July West Texas Intermediate oil price forecast ranges between $55.00 and $65.00 per barrel. The range is the same as last month’s forecast.

My prior forecast was wrong. June oil prices were much lower than I expected. The US-China negotiations broke down, and the global economy appears to be decelerating, which raises demand concerns.

At the G20, Presidents Xi and Trump agreed to restart trade negotiations. And according to the Wall Street Journal article “Russia, Saudi Arabia Reach Oil Output Agreement Ahead of OPEC Talks,” (subscription required) Russian President Putin and Saudi Crown Prince Mohammed bin Salman agreed to extend the cuts of 1.2 million barrels per day for a further six to nine months. Those two developments should, but not necessarily will, help to buoy oil prices.

On Friday, June 28, Europe announced that Instex was operational. Instex is a company in Europe whose purpose is to help facilitate commercial transactions between Europe and Iran without the need for any direct financial flows. When that announcement was made oil prices, both Brent and WTI, plunged over a dollar per barrel in a very short time. I believe that movement was an overreaction because I expect that it will still be difficult to ship oil from Iran, difficult to insure ships carrying Iranian oil, and likely that no major oil company will want to purchase Iranian oil. If Iran is unable to freely export its oil, then it has little motivation to continue to comply with its current nuclear agreement.

For those wanting to know more about Instex, here are three articles:

1. “Europe Says Iran Trade Channel Operational: Statement” (article since removed)
2. “Europeans Plan to Inject Capital Into Iranian Trade Effort” (Wall Street Journal, subscription required)
3. “Iran Leaves Door Open to Pause in Its Nuclear Escalation as Europe Gears up Trade Mechanism” (Wall Street Journal, subscription required)

With the US sanctions applied to Iran, instability and unrest in the Middle East have increased, especially near the shipping channel by the Strait of Hormuz. Furthermore, drones have attacked infrastructure, an Iranian missile brought down a multimillion-dollar US drone, and mines or missiles have damaged some ships, too. This instability and unrest have led to a geopolitical premium being added to the price of oil. The exact amount of the premium is impossible to quantify.

As before, there continues to be considerable uncertainty about Libya’s and Venezuela’s future oil production.

Now that US-China negotiations have resumed and that OPEC+ appears to have a path forward regarding its cutbacks over the next six to nine months, I expect the price of oil to stabilize and, perhaps, move upward slightly. With the global economy still soft, oil demand may be subdued. Countering that argument, though, is that there is more hope for successful trade negotiations and more certainty regarding OPEC+ cutbacks.

I continue to expect uncertainty and volatility.