Specious Argument

I expect October West Texas Intermediate (WTI) prices to remain between $60 and $70 per barrel, which was also my forecast range for July through September. I had expected the prices in September to stay in the lower half of that range, which turned out to be accurate.

The pessimistic mood in oil is slowly shifting. On August 18, The New York Times featured an article “Will Oil Demand Peak Soon? Trump Administration Doesn’t Want to Hear It” (subscription required). In that article, it provided a graphic of differing opinions about peak oil.

Many believed that OPEC and Exxon were wrong, and the others were right. Now, the tide is shifting.

On September 10, Javier Blas from Bloomberg wrote an article “The Myth of Peak Fossil-Fuel Demand Is Crumbling” (subscription required). In this article, he discussed the implications of a draft copy of the IEA’s upcoming annual report. The upshot is that peak oil is not happening as quickly as many expected.

And later in September, the IEA issued a release of its report “The Implications of Oil and Gas Field Decline Rates” (PDF, publicly available).

A key paragraph from the executive summary is as follows:

Alongside the observed rate declines that are derived from field production histories, it is possible to estimate the natural rate declines that would occur if all capital investment were to stop. These declines are even steeper. If all capital investment in existing sources of oil and gas production were to cease immediately, global oil production would fall by 8% per year on average over the next decade, or around 5.5 million barrels per day (mb/d) each year. This is equivalent to losing more than the annual output of Brazil and Norway each year. Natural gas production would fall by an average of 9%, or 270 bcm, each year, equivalent to total natural gas production from the whole of Africa today.

The annual report should be issued soon. I expected those who sided with Exxon and OPEC to be vindicated.

On September 19, the Financial Times published an article “Oil market brushes off predictions of supply glut” (subscription required).

Predictions that the world will soon be awash with oil are failing to dent crude prices, with some analysts saying China’s quiet stockpiling of reserves is staving off a major market downturn.

Big banks, energy agencies and analysts are almost universally forecasting that excess supply could push global crude prices towards $50 a barrel or lower next year.

But Brent crude, the international benchmark, is still trading at about $67 a barrel, little changed on where it was in late June, while futures markets are not pointing to a coming glut.

Although big banks and some analysts have been predicting lower prices, that has not happened yet, and it may not happen.

On September 24, the Financial Times also published an article “US shale bosses decry ‘chaos’ in Donald Trump’s energy policy” (subscription required).

Donald Trump’s tariffs and drive to slash oil prices are “kneecapping” the US shale sector, chilling investment and risking reprisal against the industry, executives have warned.

Immediately after entering the White House, the president declared a “national energy emergency”, pledging to “drill, baby, drill” and pass on lower energy costs for consumers.

But bosses told a survey by the Federal Reserve Bank of Dallas that the administration’s support for low prices, levies on crucial goods and chaotic decision-making is scaring off investors and increasing costs. The report is often a source of surprisingly frank assessments of US energy policy because executives are allowed to provide responses anonymously.

Then on September 27, The Wall Street Journal published an article “The Slow Demise of Russian Oil” (subscription required).

Since the start of the war in Ukraine, Moscow has kept oil production and exports relatively stable by focusing on the maintenance of existing fields rather than the exploration of new ones. But the longer-term outlook is bleak. Up to one-third of Russia’s budget revenue comes from the profits of the energy sector and that proportion is likely to shrink as production slows.

Even before the war, many of Russia’s Soviet-era fields, mainly in Western Siberia and the Volga-Urals region, were starting to run low, leaving oil companies to turn to the harder-to-recover crude in its Arctic and Siberian fields.

To improve their odds, Russian majors planned to tap shale formations in Siberia using techniques developed in Texas and North Dakota but the war prevented them. Sanctions prohibited access to the necessary extraction technology and the government raised taxes on oil companies to shore up its war effort. Workers were enticed to the front by lucrative packages for soldiers, while others of fighting age have died in battle or left the country, all factors creating shortages of skilled specialists in the industry.

In mid-September, Eric Nuttall created a new YouTube. You can hear his comments regarding the IEA.

And here is a recent X post:

Paul Sankey of Sankey Research created two new YouTubes in September. Even though I have been more bullish than Sankey, I have tremendous respect for him and appreciate his videos. His videos seem as though he is having a friendly conversation with his audience.

Even though I typically provide a one-month forecast, I expect WTI oil prices to largely remain above $60 per barrel throughout the rest of the year. If WTI oil prices do break $60, I expect it to be short lived with a minimum price of $57.50. Am I absolutely positive, no. There are too many variables that affect oil prices.

Last month, I mentioned that I was surprised by the strength of the equity prices of oil companies. As more investors come to believe that the oil price narrative is changing, they are placing a higher valuation on oil companies. Hence, oil company valuations have been increasing even though oil prices are relatively depressed.

In summary, I believe the bearish narrative on oil prices is changing from extreme bearishness to a holding pattern for the next several months. Even more importantly, peak oil demand has been pushed out from sometimes in the late 2020s to possibly 2050 or beyond. The change in the oil price outlook has affected oil companies’ equity valuations.

Disclosure: Short strangle (short calls and short puts) on WTI crude oil futures.

I expect September West Texas Intermediate (WTI) prices to remain between $60 and $70 per barrel, which was the expected range for July and August as well. I had expected the prices in August to stay in the upper half of that range; instead, prices tended toward the bottom half of the range. For September, I expect oil prices to remain in the bottom half of the range.

The WTI oil price sentiment is extraordinarily bearish. Everywhere I look, I just see more bearish indications. So let me show you what I have been seeing recently.

On August 28, John Kemp of JKempEnergy.com published “Plentiful U.S. crude inventories signal well-supplied market” that contained the graphic “Money Managers’ total long and short positions in WTI.” As you can see from figure 1, the net position has not been lower than it is now in the last five years.

Eric Nuttall posted on X some bearish graphics regarding oil inventories.

HFI Research also published some bearish graphs on X.

HFI also published a screenshot of a Goldman Sachs report that suggests Brent oil prices will decline to the low $50s by late 2026. Brent oil prices are typically $2 to $4 higher than WTI oil prices.

And Paul Sankey of Sankey Research published two YouTube videos.

Although I do not always share his viewpoint, I quite enjoy Sankey’s videos because he delivers great content in a fun and informative manner.
Now, you would think with that bearish oil price backdrop, oil stocks would be languishing. And you would be wrong. Some oil stocks are near their 52-week highs—for example, Imperial Oil (IMO) hit its 52-week high on Friday.

During the recent war in Iran when oil prices were in the low $70s and there was fear of much higher prices, these same oil stocks were trading for less than they are today.

Oil stocks are not overly expensive compared to other stocks. Eric Nuttall provided a helpful graphic on X:

Oil stocks, however, typically trade at a significantly lower multiple than other stocks.

I wish I could provide an explanation as to why oil stocks are doing so well. From watching the markets, once the Fed Chair signaled potential lower rates at the Jackson Hole conference, all stocks, including oil stocks, rallied higher. Perhaps with lower rates and expectations of a stronger global economy, oil stocks ran higher. Even so, there are several oil stocks doing exceptionally well with oil prices at around $65.

In summary, even with the oil bearishness, my expectation is for September WTI prices remaining between $60 and $70 per barrel.

Disclosure: Short strangle (short calls and short puts) on WTI crude oil.

After a volatile June, July brought calmer oil markets, with West Texas Intermediate (WTI) prices holding between $60 and $70 per barrel—my expected range for August as well. In early July, the eight voluntary OPEC+ members increased their production limits by roughly 550,000 barrels per day. I expect these members to announce another 550,000 barrels per day increase in early August.

I am curious how oil markets will react after Labor Day, when the US driving season and Middle East air conditioning demand taper off. Recent production increases by the voluntary OPEC+ nations were partially absorbed by their heightened air conditioning needs. Eric Nuttall and Paul Sankey, in recent YouTube videos, express caution about oil’s fourth-quarter outlook.

On July 21, The Wall Street Journal published “How China Curbed Its Oil Addiction—and Blunted a U.S. Pressure Point.”

BEIJING—China’s thirst for oil drove global demand for decades. Now a government campaign to curb that addiction is nearing a milestone, with national consumption expected to peak by 2027, then begin to fall.

Chinese officials have long worried that the U.S. and its allies could hamstring the nation’s economy by choking off its supply of foreign oil. So China has poured hundreds of billions of dollars into weaning itself off the imported stuff by reviving domestic production and swiftly building the world’s leading electric-vehicle industry.

…

Across China, fleets of gas-guzzling Volkswagen and Hyundai taxicabs are being replaced by electric models designed and produced locally. Last year, nearly half of passenger vehicles sold in the country were either all-electrics or plug-in hybrids, compared with 6% in 2020.

I am skeptical of China’s oil demand peaking by 2027. Its weakened economy over recent years has curbed consumption, with renewables also displacing oil. As China’s economy recovers, I expect rising energy needs to drive increased oil use. China’s trajectory is key to oil’s long-term outlook, but traders do not expect a major impact this year.

Disclosure: Short strangle (short calls and short puts) on WTI futures.

June was an especially challenging and turbulent month with the twelve-day war in Iran. Because of the war, West Texas Intermediate (WTI) oil prices for June exceeded the high end of my target range of $67.50. Now that the war is behind us, I expect WTI to range between $60 to $70 per barrel for July.

I will share some of the news items during the past month that have influenced my thinking. On May 31, the Financial Times published “Opec+ to boost oil output for third consecutive month” (subscription required).

Opec+ announced another large increase in oil output for July in the latest sign that the cartel was intent on unwinding the first tranche of its long-standing production cuts as quickly as possible.

Eight members of the oil-producing group, including Saudi Arabia and Russia, said on Saturday that they would increase headline production in July by a combined 411,000 b/d.

The decision to fast-track the return of idled capacity for the third consecutive month means the group could add as much as 1.4mn b/d to the global market between April and the end of July.

Like many others, I expect another headline in early July saying that production will be increased by another 411 kbd for August.

Another article by the Financial Times on June 2 “Saudi Aramco raises $5bn in bond sale as it grapples with lower oil prices” (subscription required) hints that lower prices might be here to stay for a while.

Saudi Aramco, the world’s largest oil company, said on Monday it had raised $5bn in a bond sale as it positions for a downturn in oil prices and prepares for further borrowing.

Aramco said demand for the three sets of bonds it issued in London had been “strong”, with coupons ranging from 4.75 per cent to 6.375 per cent.

The issuance was one of the largest in London so far this year, after the Public Investment Fund, the Saudi sovereign wealth fund, tapped the debt market for $4bn in January, and UK building society Nationwide sold €3.25bn and £1bn of bonds during the first quarter.

One of the many people that I admire and follow on X is Gary Ross.

He was more bullish than I was prior to the war.

On June 4, Bloomberg published a short article “Saudi Arabia Wants More Super-Size OPEC+ Hikes” (subscription required).

Saudi Arabia wants OPEC+ to continue with accelerated oil supply hikes in the coming months as it puts greater importance on regaining lost market share, according to people familiar with the matter.

The kingdom, which holds an increasingly dominant position within OPEC+, wants the group to add at least 411,000 barrels a day in August and potentially September, the people said, asking not to be named because the information was private. Riyadh is keen to unwind its cuts as quickly as possible to take advantage of peak demand during the northern hemisphere summer, one person said.

Although I agree with the 411 kbd increase, I am less confident of the rationale.

On June 10, the Financial Times published “US oil output set for first annual drop since pandemic” (subscription required).

US oil production will fall next year for the first time since the Covid-19 pandemic, according to a government forecast that will cast new doubt on Donald Trump’s “energy dominance” agenda.

The Energy Information Administration, a division of the energy department, on Tuesday said US oil production would drop from a record high of 13.5mn barrels a day now to about 13.3mn barrels by the end of next year, as slumping oil prices rattle the sector.

“With fewer active drilling rigs, we forecast US operators will drill and complete fewer wells through 2026,” the EIA said in a monthly report published on Tuesday. Active rigs had “decreased by much more” than expected in a previous report, it said.

This development adds to the bullish sentiment.

Another June 10 article, this one from the CBC “OPEC boss slams net-zero targets, promotes big future for oil in Calgary speech” (free access) suggests that demand for oil and gas has a long horizon.

“Simply put, ladies and gentlemen, there is no peak in oil demand on the horizon. The fact that oil demand keeps rising, hitting new records year on year, is a clear example of what I’m saying,” he said in his speech.

Primary energy demand is forecast to rise by 24 per cent between now and 2050, he said, surpassing 120 million barrels of oil a day. Currently, oil demand is around 103 million barrels per day.

“Meeting this ever-rising demand will only be possible with adequate and timely and necessary investments in the oil industry,” he said, pointing to the need for $17.4 trillion US in investment over the next 25 years.

In contrast to the CBC article, the Financial Times published “Big Oil faces up to its sunset era” (free access) where the title suggests that the industry is dying.

Oil majors are no strangers to boom-and-bust cycles. But now the challenge may be structural. The rapid adoption of electric vehicles, especially in China, has surprised the industry. Many oil majors now concede that their production will probably peak within the next decade.

“There’s no doubt that in the grand scheme of things, this is a sunset industry,” says Paul Gooden, head of natural resources at asset manager Ninety One. “We can debate how far the sunset is away, but companies need to recognise that — and increasingly they are recognising that.”

László Varró, Shell’s head of scenario planning, echoes the sentiment. “There is very little doubt that peak oil demand is coming,” he says.

The US Commercial Crude Oil Inventories (MB) chart comes from Dr. Anas Alhajji’s subscription-based Daily Energy Report.

Because oil inventories have broken below their five-year range, I am moderately supportive of oil prices. The macroenvironment still looks challenging; however, oil inventories are low and trending lower.

I deliberately avoided discussing the war in Iran. Numerous media organizations covered it extensively, and I am hoping that because the war is behind us, we are back to normal oil markets.

Switching topics, I want return to an earlier period in June when there were a lot of pessimistic price outlooks. Some investment banks were calling for Brent prices to remain in the low $60s for the remainder of the year.

I am going to mention two individuals that have been or are bearish, comparatively speaking, on the oil price outlook. Even though their views are different than mine, I have great respect for both individuals. If I mention someone in my articles who takes an opposing view to mine, it is usually because I respect their viewpoints and want to allow others to consider those viewpoints. If I do not have respect for someone’s outlook, I simply do not mention them, regardless of whether I agree with them.

As I mentioned last week, it is rare that I have a more bullish outlook than Eric Nuttall. Here is his latest YouTube which was published on June 5 before the war in Iran:

On June 2, Paul Sankey from Sankey Research provided some bearish comments on CNBC. You can follow through his X post to CNBC to watch the video:

And then on June 11, Sankey provides more context to his CNBC comments in a YouTube video:

I found his YouTube presentation quite interesting and informative.

Overall, I am moderately supportive of slightly higher prices for July. As mentioned at the outset, I expect WTI to range between $60 to $70 per barrel for July. Although I am moderately supportive of oil prices for July, I am less sanguine about oil prices in the fourth quarter. As we get close to the fourth quarter, I may revise my outlook.

Disclosure: Short strangle (short calls and short puts) on WTI futures.