Specious Argument

My forecast for February is that the West Texas Intermediate oil price will range between $50 and $60 per barrel. The lower end of the range is five dollars higher than last month’s forecast.

As outlined by John Kemp, Senior Market Analyst for Reuters, there are five central elements when considering oil prices for the next several months:

1. Global economy
2. US shale production growth
3. OPEC+ output reductions
4. US sanctions on Iran
5. US sanctions on Venezuela

I will provide a cursory comment on each item.

The outcome of the US China trade dispute will drive global growth. If trade talks fail, then global growth will obviously falter. If the trade talks make significant progress, then global growth is likely to at least muddle along. While some are pessimistic, I am optimistic that the two countries land on an agreement. Neither country wants a protracted trade war.

If WTI oil prices remain below $60 per barrel, US shale growth will be moderated because many companies have difficulty being profitable at those prices. OPEC+ output reductions will begin to bite more as time progresses. Because it takes time for reduced oil volumes to reach their destinations, the full impact of the reductions has yet to be realized.

Continued US sanctions against Iran and waivers for the sale of its oil are unknowable at this point. We will have to see how the world looks when it comes time to renew sanctions and waivers, including any possible further action against Iran.

Because Venezuela will have its own difficulties maintaining its production, I view any US sanctions against Venezuela as having minimal affect. Furthermore, there are always other potential buyers for Venezuela’s production. This evening, the US announced sanctions as outlined in the Wall Street Journal article “U.S. to Sanction Venezuela’s State-Owned Oil Giant” (subscription required). So far, the oil price reaction to those sanctions has been muted.

I believe the low oil price in December was an aberration. The oil supply and demand should be getting close to balancing. In my view, the top two items are most important. So, we need to watch to see how the US China trade talks develop and how US shale production performs.

December was a challenging month for the stock market and oil prices. The price of oil fell much further than I expected.

My forecast for the next four weeks is that the West Texas Intermediate price will range between $45 and $60 per barrel. In my view, the current price of about $45 per barrel is not sustainable.

There are three sources of information that are worth considering.

First, the US Energy Information Administration predicts lower prices in the months ahead. In its latest “Short-Term Energy Outlook” (PDF), it states the following:

EIA expects Brent spot prices will average $61 in 2019 and that West Texas Intermediate (WTI) crude oil prices will average about $7/b lower than Brent prices next year. NYMEX WTI futures and options contract values for March 2019 delivery that traded during the five-day period ending December 6, 2018, suggest a range of $36/b to $77/b encompasses the market expectation for March WTI prices at the 95% confidence level.

Second, a December 24 article from the Wall Street Journal titled “Banks Sharply Lower Oil-Price Forecasts” (subscription required) mentions the following:

Brent crude, the global oil benchmark, is now expected to average just over $69 a barrel next year, down from an estimate last month of roughly $77 a barrel, according to a poll of 13 investment banks conducted by The Wall Street Journal. West Texas Intermediate, the U.S. oil standard, should average just over $63 a barrel, compared with a November forecast of around $70 a barrel, the poll showed.

And third, Helima Croft on CNBC’s Fast Money stated that she believes Saudi Arabia will do whatever it takes to get oil on a firmer footing because it raised its budget spending by 7 percent recently and its budget is based on an $80 per barrel Brent price.

The markets are currently experiencing a high level of volatility. Once volatility recedes and the effects of OPEC’s reduced volumes becomes known, I expect that oil prices will be higher.

Last month, I forecast that West Texas Intermediate would range between $65 and $75 for November. Nearing month end with WTI at about $50, I was wrong.

Some of the factors that led to the sharp oil price decline are as follows: unexpected waivers granted for purchase of Iranian crude; worries about global growth; continuing trade concerns between China and the United States; political pressure from President Trump, especially in light of the killing of Jamal Khashoggi; supply growth from the Permian basin; Russia and Saudi Arabia producing at near record volumes; and a strong US dollar. How much each of the factors contributed is unknown and open to debate.

On December 6, OPEC plus Russia will meet in Vienna to discuss the current situation and determine whether and how significant any cuts might be. A November 23 article in the Wall Street Journal titled “Saudis Mull Quiet Cuts to OPEC Production” (subscription required) lays out a possible scenario where cuts are made without drawing undue and unwanted attention.

Saudi Arabia and OPEC are inching toward a compromise between pleasing the U.S. with policies that won’t lead to price spikes and throttling back the flow of its oil to rebalance oversupplied global markets.

The solution the cartel is considering: A production cut that doesn’t look like a production cut.

Under such a scenario, the Organization of the Petroleum Exporting Countries would announce plans to retain current output targets, first set in 2016. That move would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day, according to people familiar with the matter.

Because oil prices have fallen so far, I am inclined to think that prices are at or very near the bottom. Therefore, I estimate that the WTI price over the next four weeks will range between $50 and $65. This range is wider than my usual ten dollars because there potentially could be a snapback resulting from the OPEC meeting and a general rally into yearend.

As an aside, for those who have been following horrific details surrounding the murder of Jamal Khashoggi, the following Wall Street Journal article is worth reading: “Saudi Arabia Accused of Torturing Women’s-Rights Activists in Widening Crackdown on Dissent” (subscription required).

My November oil price range forecast for West Texas Intermediate returns to where it was for July through September. That is to say, I expect that WTI will range between $65.00 and $75.00 per barrel, a decrease of $2.50 from October’s upper and lower range values. While oil prices might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

Given the ongoing market correction and the murder of Jamal Khashoggi, I expect OPEC and Russia to keep the oil market well supplied in the face of the Iranian sanctions while not letting oil prices fall much further. There are articles suggesting that OPEC might need to cut supplies again because too much oil will soon be available. Yet other articles highlight the lack of surplus capacity suggesting that higher prices are warranted.

A lengthy article titled “Saudi energy minister Al-Falih speaks to TASS on OPEC+, oil prices and Khashoggi” published in the Russian new agency TASS is worth reading.

For those who want to add oil exposure to their portfolios, this market correction might be providing an opportunity. Many of the major integrated oil companies can generate substantial profits in this price environment. As a bonus, many of those same companies pay attractive dividends.

November will be an important month because we will learn how the markets react to the current correction, US election results, fallout from the Khashoggi murder, and Iranian sanctions. As mentioned in prior articles, I am still waiting to see how the trade tensions play out and how Venezuela manages in the months ahead. I continue to expect substantial price uncertainty over the next several months.

My expected oil price range for October West Texas Intermediate is slightly higher than it was for September, August, and July. I expect that WTI will range between $67.50 and $77.50 per barrel, an increase of $2.50 on the upper and lower range values. While oil prices might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

The Iran sanctions, trade tensions and developments in Venezuela all continue to be important factors for determining oil prices. With the Iran sanctions officially starting in November, oil prices have begun to move upward. There are numerous articles stating that oil could reach over $100 per barrel by later this year or early next. While I am skeptical that an upward oil price move will extend that far, I want to wait to see how the market reacts in October to the looming November sanctions. In other words, I do not have strong a conviction on where the price range will be in several months.

On September 30, the Wall Street Journal article “Reignited Rally Sets Off Talk of $100 Oil” suggests that much higher prices are possible soon.

Oil prices are again marching higher, prompting talk that crude could reach $100 a barrel for the first time since 2015’s crash.

Brent crude, the global benchmark for oil prices, jumped 4.1% in the third quarter to $82.72 a barrel, the highest level in nearly four years. Brent’s fifth consecutive quarterly advance marks its longest such streak since 2008. U.S. crude edged down from its most recent multiyear high, falling 1.2% to $73.25 a barrel last quarter, though it has risen in five of the past six weeks. Investors have grown more bullish ahead of Nov. 4, the U.S. sanctions deadline for companies to stop buying Iranian oil.

Sentiment was bolstered, too, by the recent decision of the Organization of the Petroleum Exporting Countries and its allies to leave production steady. That move, analysts said, convinced investors that the removal of Iranian oil from the market, along with supply disruptions in places such as Venezuela, will lead to large crude shortages.

My October outlook is slightly higher than it was for the last three months. During October, we might gain a better appreciation of how the oil markets will react to the Iranian sanctions in November. Of course, I am still waiting to see how the trade tensions play out and how Venezuela manages in the months ahead. I continue to expect substantial price uncertainty over the next several months.

My expectation for the West Texas Intermediate oil price for September is the same as it was for July and August, namely WTI will range between $65 and $75 per barrel. While it might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

Although oil prices briefly fell below $65 in August, prices remained in the $65 to $75 range. September and October are considered shoulder months where oil demand is reduced because the driving season has passed and the winter heating season still lies ahead. This year, though, the Iran sanctions are making the situation more interesting.

There is still considerable uncertainty as to the timing and the quantity of the affected Iranian barrels. On August 28, the Wall Street Journal article “Iran’s Oil Exports Dropping Faster Than Expected Before U.S. Sanctions” (subscription required) suggested that reduced Iranian exports might have already taken place.

Iran oil shipments are declining at a faster-than-expected pace ahead of U.S. sanctions set to begin in November.

Iran expects crude exports to fall by a third in September, according to people familiar with purchasing plans, potentially posing an unforeseen supply risk to markets. Officials at the state-run National Iranian Oil Co. provisionally expect crude shipments to drop to about 1.5 million barrels a day next month, down from about 2.3 million barrels a day in June, say people familiar with the country’s ports loading program.

Many experts had expected oil shipments to decline by about 1 million barrels by year’s end. Now some of them say that fall may have already happened. Iran hasn’t yet announced its exports this month or its forecast for next month.

Furthermore, on August 29, the Wall Street Journal article “Oil Hits Four-Week High as U.S. Crude Inventories Fall” mentioned that Iranian production is projected to decrease by about 800 thousand barrels per day in September compared to June.

Wednesday’s price surge comes as oil market observers expect prices to remain buoyed in the coming months as the U.S. hits Iran with planned sanctions designed to prevent the country from exporting crude. The ban on Iranian oil exports officially starts in November, but signs are emerging that shipments are already being curtailed.

Officials at the state-run National Iranian Oil Co. provisionally expect crude shipments to drop to around 1.5 million barrels a day in September, down from around 2.3 million barrels a day in June, according to people familiar with the matter.

My outlook for September is the same as it was for August. I am still waiting to see how trade tensions play out over the fall, how Venezuela manages in the months ahead, and how oil markets react to Iran sanctions in November. I continue to expect substantial oil price uncertainty for the next several months.

My expectation for the West Texas Intermediate oil price for August is the same as it was for July, namely WTI will range between $65 and $75 per barrel. While it might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

The US Energy Information Administration predicts lower prices in the months ahead. In its latest “Short-Term Energy Outlook” (PDF), it states the following:

Brent crude oil spot prices averaged $74 per barrel (b) in June, a decrease of almost $3/b from the May average. EIA forecasts Brent spot prices will average $73/b in the second half of 2018 and will average $69/b in 2019. EIA expects West Texas Intermediate (WTI) crude oil prices will average $6/b lower than Brent prices in the second half of 2018 and $7/b lower in 2019. NYMEX WTI futures and options contract values for October 2018 delivery that traded during the five-day period ending July 5, 2018, suggest a range of $56/b to $87/b encompasses the market expectation for October WTI prices at the 95% confidence level.

Yet others believe that prices are on the cusp of a bull market. On July 28, the Wall Street Journal in an article titled “As Oil Industry Recovers From a Glut, a Supply Crunch Might Be Looming” (subscription required) stated the following:

“The years of underinvestment are setting the scene for a supply crunch,” said Virendra Chauhan, an oil industry analyst at consultancy Energy Aspects. He believes a production deficit could come as soon as the end of next year, potentially pushing oil above $100 a barrel.

. . .

Veteran oil investor Pierre Andurand is betting on a multiyear bull run in oil. Mr. Andurand said Brent could hit highs of $100 a barrel this year and top $150 by the early 2020s. Others forecast more modest price gains but still believe a supply deficit will raise prices.

Oil price uncertainty continues to rage on. I am waiting to see how trade tensions play out over the fall, how Venezuela manages in the months ahead, and how oil markets react to Iran sanctions in November. I expect substantial oil price uncertainty will remain for the next several months.

While uncertainty surrounding oil prices remains, my expectation for July is that West Texas Intermediate will generally range between $65 and $75 per barrel. WTI prices might be up to five dollars per barrel outside of that range for a few days, but I expect that it should remain within that range for most of the month.

Reduced inventories and limited spare capacity in OPEC countries are helping to push prices higher. Part of the capacity problem is that countries such as Libya and Venezuela are having severe production problems while Iran is being affected by sanctions.

On June 24, Nick Butler wrote in the Financial Times article “Issues beyond Opec will drive oil prices in coming years” (subscription required) the following:

The first is the situation in Venezuela, which has gone from bad to worse over the past two months. In the short term, the situation remains the greatest uncertainty hanging over the oil market. The country’s production of crude oil fell to 1.36m barrels a day in May, 600,000 b/d down from its level a year ago. The International Energy Agency has raised the possibility that output could fall to 800,000 b/d next year. Given the dramatic collapse in Venezuelan living standards, it is hard to imagine that the government can remain in power. But so far predictions of political change have not been fulfilled.

On June 26, in an online article “U.S. Toughens Stance on Future Iran Oil Exports” (subscription required), Wall Street Journal reported the following:

WASHINGTON—The U.S. threatened to slap sanctions on countries that don’t cut oil imports from Iran to “zero” by Nov. 4, part of the Trump administration’s push to further isolate Tehran both politically and economically, a senior U.S. State Department official said.

Buyers of Iranian crude had expected the U.S. would allow them time to reduce their oil imports over a much longer period, by issuing sanctions waivers for nations that made significant efforts to cut their purchases. That expectation was partly based on previous comments from top Trump officials, as well as the Obama administration’s earlier effort to wean the world off Iranian oil over several years.

Demands from President Trump for Saudi Arabia to increase production might help to offset inventories and production. Just this morning, in fact, Trump tweeted:

Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!

— Donald J. Trump (@realDonaldTrump) June 30, 2018

How much Saudi Arabia actually increases production is anyone’s guess.

And, on June 27, John Kemp, an energy analyst with Reuters, tweeted:

WHITE HOUSE can push Iran’s crude exports to zero, or it can have moderate oil prices, but cannot have both. Saudi Arabia, UAE and Kuwait likely do not have enough spare capacity to offset loss of all Iran barrels as well as Venezuela and other losses. White House must choose …

— John Kemp (@JKempEnergy) June 27, 2018

There are competing forces. There are political forces that want to push prices down, and there are physical forces in the form of constraints that are limiting OPEC’s ability to react. On June 22, famous oil trader Pierre Andurand wrote the following in response to a prior Trump tweet for OPEC to reduce prices:

But they can’t! It is not like they have a lot of spare capacity. They cannot control the upside at the moment. Same as in early 2008

— Pierre Andurand (@AndurandPierre) June 22, 2018

In summary, political pressure is being applied in an attempt to keep oil prices moderated. Yet, as mentioned by Kemp and Andurand, there are physical forces in the form of constraints with regard to much lower inventories as a result of drawdowns and reduced surplus capacity. Because it is impossible to know how these competing forces will play out over the next several weeks, it is equally impossible to have a more definitive view on oil prices. With WTI prices near $74 per barrel on Friday and Trump tweeting to bring prices down, I am inclined to think that $74 is near the upper end. How far down can it go? I expect that OPEC wants prices as high as possible to maximize its own revenues as well as encourage new sources of production, but not so high that oil prices spike on a temporary shortage. With those thoughts in mind, I expect that $65 might be the lower end of the range. This is all guesswork, however.

As an aside, for those of you who like to follow oil developments closely, I urge you to sign up for John Kemp’s free energy news and research. Here is a tweet from Kemp:

SIGN UP for a free daily digest of best in energy news +my research notes by using this link: https://t.co/RjI6BA2HLA pic.twitter.com/ZdoRAwd2q5

— John Kemp (@JKempEnergy) June 29, 2018

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.