Specious Argument

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.

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.