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Oil Update–August 2024

For September, I am maintaining my August forecast for West Texas Intermediate (WTI) oil prices ranging between $70 and $90 per barrel.

OPEC+ will likely extend its production cut into October. Although It may reduce its cut somewhat, I expect that cut to remain at its current levels at roughly one million barrels per day from Saudia Arabia and five hundred thousand barrels per day from Russia.

Reuters’s August 25, 2023, article “Russia’s oil exports via western ports slightly up in August despite pledged cuts” questions whether Russia is completely adhering to their cuts.

MOSCOW, Aug 25 (Reuters) – Crude oil loadings from Russia’s western ports in August are seen slightly higher from July despite Moscow’s pledge to cut oil exports by 500,000 barrels per day, according to traders, shipping data and Reuters calculations.

The loadings remain well below a four-year export peak achieved in May, the data shows.

But as Russia has not provided the baseline for its supply reduction, the rise of loadings in August from July does not mean Moscow is not fulfilling its pledge.

Although the voluntary OPEC+ cuts by Saudi Arabia and Russia have tightened physical markets, oil prices have not moved very much at all. Some point to increased production by Iran and China tapping its strategic petroleum reserves. Others point to China’s and Europe’s weak economies with the threat that the American economy soon slows too. There is also the possibility that the American economy reaccelerates, and the Fed is forced to raise rates yet again, thereby cooling the global economy even further. Most point to all these factors as reasons for oil prices having remained range bound in August.

As I look back over the past several months, I notice that some prominent oil pundits have made very bullish claims that have failed to materialize. Coming into June, they blamed the debt ceiling crisis for prices remaining low. Then once the debt ceiling crisis was over, they forecasted that prices would work steadily higher, possibly hitting $100 by the third quarter. When that did not materialize, it was because higher interest rates caused destocking, meaning that higher interest rates made keeping inventory an expensive proposition. Then once OPEC+ made its announcement of curtailing production on a voluntary basis, that was a sure sign that prices would accelerate to the upside. As July and August have passed, many are still clinging to the idea that oil prices will still hit $100 by year end.

Stepping back from narratives from pundits, we can look to an options model to quantify the likelihood of WTI exceeding $100 in December or January.

A screenshot from Sunday, August 27, 2023, of thinkorswim's oil futures and options. The contracts are /CL, which is West Texas Intermediate Oil.

Figure 1: Screenshot of thinkorswim’s Quotes for Oil Futures and Options

Figure 1 shows thinkorswim’s option Greeks for /CL, which is WTI, for options expiration in December, even though it says January, and for options expiration in January, even though it says February.

The January 2024 oil futures expire 114 days from today, Sunday, August 27, 2023, on Tuesday December 19, 2023. The last day for trading options on thinkorswim is 109 days on Thursday, December 14, 2023.

And the February 2024 oil futures expire 148 days from today on Monday, January 22, 2024. The last day for trading options on thinkorswim is 143 days on Wednesday, January 17, 2024.

The CME Group provides an oil futures calendar as to when the futures expire. The brokerage thinkorswim indicates when the last date for options trades are allowed on its platform. As we saw, the last options trading date precedes the futures expiry date by a few days.

Looking at the options that expire on December 14, 2023, we note that the call delta is 0.0671. Delta can be used as a rough proxy for the probability that the underlying future will close at or above the strike price. In other words, the probability that WTI closes at or above the strike price of $100 by option expiration is about 6.7 percent. The probability of touching the strike price between now and option expiration is roughly twice the delta value. In other words, between August 27 and December 14, there is 13.4 percent probability that oil prices at least touch the strike price of $100.

Following the same logic and process, the probability that WTI closes at or above the strike price of $100 by option expiration on January 17, 2024, is about 8.7 percent. And between August 27 and January 17, there is a 17.3 percent probability that oil prices at least touch the strike price of $100.

It is important to note that looking at the oil prices, we need to reference the correct future price. For example, when I took this screenshot, the commonly quoted WTI price was 80.21, which is the October future that expires in 24 days on Wednesday, September 20, 2023. The January and February futures prices, however, were $79.02 and $78.40 respectively.

From this information, the odds of WTI surpassing $100 by year end do not look overwhelming. If one believes that oil prices will easily exceed a $100 per barrel by year end, then the call options are seemingly inexpensive.

Also, please note that this information is dynamic. If oil prices spike in September to $90, those January and February options will be more valuable then than they are today.

Although I have never traded options on oil, I have traded a lot of options on equities. There have been several times when I have had an equity blow through options that were initially at a 10 percent probability. These prices and probabilities are a snapshot in time; they can change dramatically in a heartbeat.

So when you listen to pundits opining on extreme price movements, ask yourself if the options markets agree. If the options markets do not agree, then you can either reassess the pundits’ opinions, or if you believe a pundit, then take action in the futures or options markets.

Having said taking action, I would caution those who are considering using futures or options in commodities. These contracts are often large, in that a lot of capital is at risk, and if you are not careful, you can lose a lot of money fast. Many commodities have mini and micro contracts. Those contracts are likely a better place to start until your understanding and risk tolerance increases to match that for larger-sized contracts. Caution is also warranted for equity options. It is easy to wrap your account around the proverbial pole. Before investing in options, make sure that you have sufficient knowledge and start small.

Wrapping up, I forecast September WTI oil prices to range between $70 and $90 per barrel.


Oil Update—July 2023

For August, I am raising my July forecast for West Texas Intermediate (WTI) oil by $5 per barrel to range between $70 and $90 per barrel.

The voluntary OPEC+ cuts by Saudi Arabia and Russia have tightened the physical markets and raised the price of oil. And, according to an article from Javias Blas of Bloomberg, “The Harsh Truth: We’re Using More Oil Than Ever” (subscription required), oil demand remains strong. A quote from his article is as follows:

So far, we have only partial numbers for May and June, and directional evidence for July. Extrapolating from earlier this year, the fresh information, including real-time traffic congestion in multiple countries and global airline travel, suggests that global oil demand went above the pre-Covid peak recently, even when considering the margin of error.

We do have much better information for the January-to-April period. Global oil demand averaged 100.8 million barrels a day during the first four months of 2023, above the same period in 2019, when the average was 99.9 million, according to my calculations based on monthly data from the IEA.

That said, according to the Patrick De Haan, the GasBuddyGuy on X, the peak gasoline demand for summer is likely behind us.

OPEC+ is meeting in early August. I anticipate Saudi Arabia will continue its voluntary cut into September and otherwise do not expect any changes. If it decides to maintain its cut, that should help support oil during the shoulder season. The oil shoulder season is typically from after Labor Day until the end of October.

The S&P 500 has been strong over the past few weeks, surprising a lot of stock market pundits. If the market should correct after this run, then I would expect oil to correct along with the market.

Although North American markets have been strong, Europe is weaker. And China has surprised many, including me, by having had a weak year so far.

The New York Times published an informative podcast on China titled “China’s Economic Rebound Hits a Wall.” I encourage you to listen to it: Apple Podcasts; Google Podcasts; and Spotify.

The Financial Times published an article “Work dries up for US consultancies in China after national security raids” (subscription required), which complements the New York Times podcast.

Top US consultancies are struggling to attract business in China as Beijing’s national security raids scare away local clients and global investors pull back from dealmaking in the country.

Management consultancy Bain is telling new China hires to wait until as late as 2025 to start their jobs, while roughly half of McKinsey staff do not have paid client projects to work on. Boston Consulting Group’s China team has been holding strategy sessions on how to revive its flagging business, according to half a dozen people close to the firms.

Just after publishing my blog entry last month, I watched a YouTube video titled “The Chinese Yuan ‘Doom Loop’ & The Oil-Dollar Wrecking Ball with Michaeal Kao and Alexander Stahel.” Watching my Twitter, now X, feed, these two individuals have been negative to flat on oil prices for at least the last six months. I always found their commentary frustrating because it was counter to my more bullish outlook. The reality is that they were correct. So it is always good to pay attention to those who espouse a different viewpoint or outlook. Even though this past month their ursine outlook has not proven itself correct, you should find value in their thinking. And I would encourage you to follow them on X: Michaeal Kao and Alexander Stahel.

In summary, although there remain lots of crosscurrents that are affecting oil, I am expecting WTI prices to range between $70 and $90 per barrel for August.


Oil Update—June 2023

For July, I am maintaining my June forecast for West Texas Intermediate (WTI) oil to range between $65 and $85 per barrel. As I write this blog entry on June 30, WTI is about $70.50 per barrel.

Once again, I had expected stronger prices. Some of the pundits that I follow expected that once the debt ceiling crisis was past, oil prices would rise. Some even stated that OPEC+ did not need to cut further at their early June meeting. Once the debt ceiling issue had passed and even though the Saudis announced a cut of a million barrels per day for July, oil prices still stagnated. One can only imagine prices if the Saudis had not cut.

The EIA revised its US demand for April upward based on monthly data. Below is a back-and-forth discussion between zerohedge and Javier Blas from Bloomberg.

Javier Blas wrote an article on May 16, 2023, “The Oil Market’s Real Weakness Is Supply, Not Demand” (subscription may be required), where he stated the following:

Is the extra supply from Russia, Venezuela and Iran a sign that the Western sanctions aren’t working? No. It’s a sign the sanctions prioritize keeping the oil market well supplied, even if that means that Moscow, Tehran and Caracas can sell oil. Ignore Western politicians talking about using sanctions to cripple rogue petro-dictators; what they want is to cripple inflation. For now, the strategy has worked. It remains to be seen if it will survive the summer, when oil demand growth is likely to accelerate.

Strong supply from Russia and Iran, China’s tepid recovery, and likely higher interest rates all weigh on oil prices. The US no longer tapping the strategic petroleum reserve and the Saudis seemingly determined to strengthen the physical market should, at a minimum, keep oil prices steady.

A June 29 Bloomberg article “Brent Oil Set for Record Run of Quarterly Losses on High Supply” (subscription may be required) states the following:

The outlook for the second half is mixed. Some analysts have forecast that the market will tighten, in part due to the end of seasonal maintenance. Yet US Federal Reserve Chair Jerome Powell and some of his peers have said more interest-rate increases are likely, which would drag on energy consumption.

“We fear that market apathy and lack of risk deployment will compound further if the global physical market does not tighten,” Royal Bank of Canada analysts Michael Tran and Helima Croft wrote in a note. “This could end up being a lost year for the oil market as risk remains on the sidelines.”

In the video accompanying the above article, Amrita Sen of Energy Aspects worries that sovereigns, perhaps PEMEX of Mexico, may hedge its output. When sovereigns go to the market to hedge, that puts downward pressure on oil prices.

Regarding the recent developments in Russia, I am ignoring them because I do not believe they will affect oil prices.

My own bias is that prices should stabilize or move higher from here. My bullishness has been wrong so far this year. So I look forward to seeing how July unfolds.

I hope everyone enjoys a great start to their summer vacation.


Oil Update—May 2023

For June, I am decreasing my May forecast by $5 per barrel for West Texas Intermediate (WTI) oil to range between $65 and $85 per barrel. Late Tuesday, May 30, WTI was about $69.50 per barrel.

I had expected stronger prices in May. The prices weakened because of numerous factors including strong Russian oil exports, continued uncertainty with the debt ceiling, fears of one or two more rate hikes further weakening the economy, weaker than hoped for gasoline consumption over the Memorial Day weekend, and uncertainty about the outcome of the OPEC+ meeting being held the first weekend in June.

The opening two paragraphs from the May 30 Bloomberg article “Russian Oil Flows Stay High Three Months Into Pledged Output Cut: Seaborne exports dip but remain 270,000 barrels a day higher than February, the baseline for output reduction,” states the following:

Russian crude oil flows to international markets are edging lower, but still show no substantive sign of the output cuts that the Kremlin insists the country is making.

Four-week average seaborne shipments, which smooth out some of the volatility in weekly numbers, fell for the first time in six weeks in the period to May 28, slipping to 3.64 million barrels a day. But crude flows to international markets remain elevated and are still more than 1.4 million barrels a day higher than they were at the end of last year and 270,000 barrels a day up on February, the baseline month for the pledged cut.

Even though a tentative agreement has been reached on the debt ceiling, there is still some uncertainty as outlined by the May 30 Reuters article “Oil slides 4% on worries about US debt ceiling, OPEC+ talks.”

NEW YORK, May 30 (Reuters) – Oil prices fell more than 4% on Tuesday on concerns about whether the U.S. Congress will pass the U.S. debt ceiling pact and as mixed messages from major producers clouded the supply outlook ahead of the OPEC+ meeting this weekend.

The Personal Consumption Expenditures (PCE), a favorite Fed inflation gauge was hotter than expected for April at 4.4 percent, up from 4.2 percent in March, which might cause the Fed to raise rates again. If the Fed raises rates again, that will likely slow the economy and likely further decrease oil demand.

The above tweet from Patrick De Haan shows that gasoline demand was down over this important holiday weekend and kickoff to the driving season.
As mentioned in the Reuters quote, there is uncertainty regarding the upcoming OPEC+ meeting.

The debt ceiling issue ought likely to be resolved this week, and the economy remains reasonably strong. Because historically OPEC+ does not like extreme oil price volatility, it likely will put measures in place to ensure that supply does not overwhelm demand at current prices. For these reasons, I am biased to oil going higher, especially as the driving season gets underway.

Last month, I provided a YouTube link to Paul Sankey giving his thoughts on oil. Here is another YouTube link where again he provides his views. Unlike me, he is less sanguine on oil prices for the rest of the year. Even though my outlook is different than his, it is good to consider opposing viewpoints.

Whether agreement on the debt ceiling passes both houses before the deadline of June 5 and what OPEC+ decides this coming weekend will strongly influence what happens to the price of oil for June. While I have a bullish bent for June, I certainly have no unique insights.


Oil Update—April 2023

For May, I am increasing my April forecast by $5 per barrel for West Texas Intermediate (WTI) oil to range between $70 and $90 per barrel. On Friday, April 28, WTI was about $76.50 per barrel.

The last two months have been tumultuous. Two months ago was the start of another banking crisis, and one month ago, OPEC+ announced production cuts to start in May. Both of those events affected WTI’s price. After OPEC+ announced its cuts, oil rallied, though much of that rally has been lost since mid-April.

I lean bullish because many oil pundits expect a strong second half to 2023 and the driving season is rapidly approaching.

Paul Sankey, who is often seen on CNBC and who now runs his own research company, produced a YouTube video while visiting Calgary, Canada in mid-April. In his video, he also expressed a bullish outlook for oil.

The banking crisis has not completely resolved itself. In fact, according to the Financial Times article “JPMorgan, Citizens and PNC submit bids for First Republic” (subscription required), US regulators are racing to sell all or part of First Republic before the markets open on Monday, May 1.

At least three large banks have submitted bids to buy all or part of First Republic, the embattled California lender that US regulators have been racing to save this weekend.

Among those that have put in offers are JPMorgan Chase, PNC and Citizens, according to three sources with knowledge of the situation.

Along with the banking crisis, many continue to worry about the health of the global economy.

Because OPEC+ will start its cuts in May, its effects have not yet been felt in the physical markets.

On balance, I continue to lean bullish. While the banking crisis and general state of the global economy remain a concern, the global economy should remain strong enough to continue to demand more oil and the oil cuts will likely create a floor for prices, if not strengthen prices.