Specious Argument

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,” 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” (New York Times, subscription required)
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.

My June West Texas Intermediate oil price forecast ranges between $55 and $65 per barrel. The range is $7.50 lower than last month’s forecast.

Since last month’s forecast, analysts generally believe that OPEC+ can replace reduced Iranian oil output. Previously, some pundits were forecasting that the loss of Iranian production would lead to a price spike. Those fears appear to have dissipated.

The US and China had appeared to be making good progress toward finalizing a trade deal when the wheels fell off. Now, some are concerned that global trade will falter, creating less demand for oil. Obviously, without a trade deal, the imposition of punishing tariffs will introduce more uncertainty and hamper global trade. Because I believe that both countries realize the importance of a trade deal, one will eventually get done. My own belief is that it will happen prior to yearend. My own belief, however, is just an assumption and is not based on any hard-factual evidence.

There continues to be considerable uncertainty about Libya’s and Venezuela’s future production.

Because Saudi Arabia wants and needs higher prices to help balance its budget, I am assuming that the Brent oil price generally will remain between $70 and $75 per barrel. At above $75 per barrel, I expect that the US will exert political pressure to bring prices down. Although last month I estimated the Brent WTI spread to be about $8, a value of $10 is more realistic. Because I usually give a $10 spread, my expected range for next month for WTI is $55 to $65 per barrel.

During the latter part of June, OPEC+ will meet to decide what, if any, production changes should be made. And the G20 summit will also be held, where there will be an opportunity for the US and China to possibly reset their trade negotiations. Until then, though, I continue to expect considerable uncertainty and, possibly, volatility.

My forecast for May is that the West Texas Intermediate oil price will range between $62.50 and $72.50 per barrel. The range is $5.00 higher than last month’s forecast.

After the US administration began the process of ending waivers on the Iran sanctions, prominent pundits have had a difficult time assessing the effect of the resulting loss of Iranian production. Part of the challenge is that no one knows with certainty just how much production will be lost.

A Wall Street Journal article titled “Oil Volatility Picks Up, Putting 2019 Rally Under Scrutiny” (subscription required) highlights the uncertainty.

Prices had climbed early last week after the Trump administration surprised some market participants by ending waivers on Iran sanctions that allowed some buyers to continue purchases from the Islamic Republic. Last week marked the first time in nearly two months that oil logged multiple moves of at least 2.5% in either direction.

The moves are putting investors on edge because of the narrow supply-demand balance heading into the U.S. summer driving season. The decision to end the sanctions waivers threatens to remove even more oil from global markets at a time when U.S. sanctions against Venezuela and a continuing conflict in Libya have already resulted in lower supply from those countries.

Even with the U.S. producing record amounts of oil, many investors remain unsure how quickly OPEC and its allies would fill any impending production gaps, opening the door to large price swings in either direction.

Because Saudi Arabia wants and needs higher prices to help balance its budget, I am assuming that the Brent oil price remains between $70 and $80 per barrel. Estimating that WTI prices are about $8 dollars lower, I arrived at my range for May of $62.50 and $72.50 per barrel.

Because the uncertainty surrounding production from Iran, Libya, and Venezuela is particularly high, I do not have great confidence in my range. Furthermore, the US China trade deal, with implications for global growth, has yet to be resolved. So, I would not be surprised if prices declined below or rose above my forecast.

Perhaps once the OPEC+ meeting in June has concluded and the driving season is in full swing, the outlook for oil prices will become clearer. Until then, though, I expect considerable uncertainty and, possibly, volatility.

My forecast for April is that the West Texas Intermediate oil price will range between $57.50 and $67.50 per barrel. The range is $2.50 higher than last month’s forecast.

The price has been slowly creeping up as OPEC+’s cutbacks take effect. Saudi Arabia, in particular, is driving prices higher according to a Reuters article “More shale, who cares? Saudi Arabia pushes for at least $70 oil” where it states the following:

DUBAI/LONDON (Reuters) – Budget needs are forcing Saudi Arabia to push for oil prices of at least $70 per barrel this year, industry sources say, even though U.S. shale oil producers could benefit and Riyadh’s share of global crude markets might be further eroded.

Riyadh, OPEC’s de facto leader, said it was steeply cutting exports to its main customers in March and April despite refiners asking for more of its oil. The move defies U.S. President Donald Trump’s demands for OPEC to help reduce prices while he toughens sanctions on oil producers Iran and Venezuela.

A Brent price of $70 translates into a low $60s WTI price.

Of course, the US China trade negotiations are still important for global growth. My assumption is that both sides will continue working toward or will successfully conclude a deal. And there are still concerns with Iran and Venezuela as well as other OPEC members. In other words, there are still a lot of moving parts that can drive oil higher or lower. My expectation, though, is that oil will continue to rise in April.

My forecast for March is that the West Texas Intermediate oil price will range between $55 and $65 per barrel. The range is five dollars higher than last month’s forecast.

I have raised my target range because of the ongoing problems in Venezuela, the progress that US and China are making toward some sort of a deal, and OPEC+’s determination to reduce oil exports. An excerpt from the February 12 Financial Times article “Saudi Arabia goes on the hunt for global oil and gas” states the following:

The kingdom and Russia are leading global producers to curb supply to support oil prices after they fell by 40 per cent in late 2018. Crude is now hovering near $60 a barrel, while Saudi Arabia’s budget requires levels closer to $80.

Mr Falih said in March the kingdom would reduce production to near 9.8m barrels a day, from above 11m b/d in November. Exports would also fall to near 6.9m b/d, down from 8.2m b/d three months ago.

Brent crude, the international benchmark, rose $1.82 a barrel to $63.34 after the FT reported the minister’s production outlook, though prices came off their highs later in the trading day.

As we constantly see in the news, Venezuela is going through a very difficult time. Putting oil aside for a moment, I hope that a new government can quickly stabilize and then improve the situation. So far, the US and China appear to be making progress. And the rising oil prices throughout February and OPEC+’s determination to reduce output should lead to higher prices.

Of course, the questions then become how far and how fast? Before making a new assessment, I want to see how the market reacts to these changes over the next month.

Global growth, US shale production response, and Iranian sanctions are also factors that will play important roles in the months ahead.

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.