Specious Argument

I am repeating my forecast from last month: I expect West Texas intermediate oil to range between $67.50 and $77.50 per barrel for August.

There was one brief spell where oil prices dipped below my expected range in July. The failure of OPEC+ to agree, the concomitant plunge in US 10-year bond yield and rise in the US dollar, and the rise in Delta variant cases all conspired against oil prices in early July.

OPEC+ appears to have settled their differences. Macro factors continue to be a concern. And I am hoping that the Delta variant will soon be brought under control.

The following article offers some optimism on the horizon: “Something strange is happening in Britain. Covid cases are plummeting instead of soaring.”

Neil Ferguson, an epidemiologist at Imperial College London whose models have shaped government policy in Britain and the United States, said it now appears possible that the pandemic could be in the rearview mirror.

…

“We’re not completely out of the woods,” he said. “But the equation has fundamentally changed. The effect of vaccines has been huge in reducing the risk of hospitalizations and death. And I’m positive that by late September or October…we will be looking back at most of the pandemic.”

I expect that we are going to be learning that many, perhaps even the majority, of the new COVID cases will come from fully vaccinated people. The Financial Times article on July 23 “Why are fully vaccinated people testing positive for Covid?” (subscription required) provides an excellent explanation with some graphics.

Anthony Masters, a member of the UK’s Royal Statistical Society, said fully vaccinated people were likely to make up a “bigger proportion” of cases as vaccine coverage was extended, particularly in younger groups who face a higher exposure risk because of greater social mixing.

“If you get extremely high coverage across the different ages, it’ss plausible that cases could become [in] majority among fully vaccinated people,” he said. About 55 per cent of the UK population had received both doses by July 21.

In Israel, where nearly 60 per cent of the population are fully vaccinated and coverage is spread more evenly across age cohorts, 52 per cent of about 6,000 people who tested positive in the week to July 21 were fully vaccinated.

If we had a population where everyone was fully vaccinated, then all new cases would be from vaccinated people. That does not mean that the vaccines do not work. Instead, it is just a reflection of the vaccination status of the population. To judge the efficacy of the vaccines, we would need to compare with a population that was completely unvaccinated.

I also expect that in most circumstances where people are mixing, people may need to wear a mask again until the COVID numbers come down. In some respects, this is like using your seatbelts and having airbags in your car: you should rely upon both to reduce injuries and death.

A Wall Street Journal article on July 31 “Rise in Car Crash Deaths Prompts New Seat-Belt Push” (subscription required) stated the following:

More drivers have engaged in risky behaviors, like speeding and driving under the influence, during the Covid-19 pandemic. Compounding the problem, safety officials say, these drivers often leave their seat belts unbuckled, raising the potential for deadly consequences.

More than half of all crash fatalities last year involved unbelted drivers or occupants, according to the National Highway Traffic Safety Administration’ss preliminary data on cases where seat-belt use is known. That is the highest level since 2012.

An estimated 38,680 people died in car crashes last year, 7% more than in 2019, even though total miles driven dropped 13% as many Americans stayed home, federal data show. The number of unbuckled vehicle occupants killed in crashes jumped an estimated 15% from 2019, NHTSA figures show.

As the percentage of our populations who are vaccinated increase and as we take more precautions, such as wearing masks, I am hopeful that our COVID numbers will decrease and we will gain more normalcy in our lives. Furthermore, I do not expect governments to enact harsh restrictive measures.

Last month, I mentioned that I was surprised by the low valuation of oil equities. I am even more surprised now that they have sold off 15 percent or more in the last month. Many oil equities are generating tremendous free cash flow with oil prices above $70 per barrel.

I remain positive on oil and oil equities and on our progress against COVID.

I expect West Texas intermediate oil to range between $67.50 and $77.50 per barrel for July. My June forecast range was five dollars per barrel lower. As we have seen, prices have gone higher than I anticipated.

The world economy continues to grow, and there is growing optimism for the rest of the year. On the other hand, the Delta variant warrants careful monitoring because it has the potential to slow the progress. Because Iran is building its inventories on the expectation that a deal will eventually be reached, investors and traders need to monitor the nuclear negotiations. And with price of oil above $70 per barrel, there may be some investors with large gains who may choose to sell their positions.

John Kemp, a Senior Market Analyst for Reuters, wrote in an article titled “COLUMN-Falling U.S. crude stocks draw hedge fund attention: Kemp – Reuters News” the following:

Investors have not been this bullish since before the coronavirus outbreak spread worldwide in early 2020 and prior to that when the U.S./China trade war intensified in late 2018.

Last week saw small sales of NYMEX and ICE WTI (-6 million barrels), Brent (-3 million) and European gas oil (-8 million) but purchases of U.S. gasoline (+8 million) and U.S. diesel (+6 million).

In WTI, bullish long positions outnumbered bearish shorts by a ratio of more than 11:1, compared with a ratio of 4:1 in Brent (https://tmsnrt.rs/2SDhzLO).

I encourage you to view Kemp’s information referenced by the prior link.

As I write this article, WTI is trading at $73.46, and I believe there is more risk to the upside of my range than to the downside. That said, as prices rise, there will be more pressure on OPEC+ to increase exports.

On Thursday, July 1, there will be several meetings between OPEC+ countries and their technical committees. Investors and traders will gain more clarity in a few days.

With oil prices well above $60 per barrel, I am surprised by the low prices of oil equities. Even with ESG concerns, I would have expected higher prices by now.

In general, I remain bullish on oil and oil equities as the world continues to make progress against COVID-19.

I am increasing my West Texas Intermediate oil forecast for June by $2.50 per barrel to range between $62.50 to $72.50. My May forecast was $60 to $70 per barrel.

Although US vaccinations have slowed, people continue to receive vaccinations, the US will be providing unneeded vaccines to global regions, and more regions are reopening. As I stated last month, as we emerge from the pandemic with the easing of curbs and restrictions, people are going to consume more oil by traveling and meeting with friends and family. People are anxious to resume a more normal lifestyle.

There have been a lot of crosscurrents recently with court decisions and shareholder activists. I expect more of the same as the ESG movement gathers even more strength. My own view is that the ESG movement will damp needed investment and may result in higher oil prices over the short term of the next few years. Furthermore, analysts are trying to gauge when Iran may legitimately reenter the market and its effect. While no one knows with certainty what the resultant effects may be, my intuitive guess is that OPEC+ will help moderate the effects of its reentry and the market will be able to accommodate the extra supply.

Just like last month, I continue to expect that prices should continue to strengthen as countries around the globe make progress against COVID-19.

I am keeping my April West Texas Intermediate oil price forecast to range between $60 to $70 per barrel for May 2021.

As I expected, oil prices rose throughout April. As I am composing this post, WTI is near $65 per barrel.

Although the US is doing well with its vaccination program, some other countries are still struggling. I hope, though, that they will make considerable progress soon. None of us is safe until all of us are safe.

As we emerge from the pandemic with the easing of curbs and restrictions, people are going to consume more oil by traveling and meeting with friends and family. People are anxious to resume a more normal lifestyle.

The Financial Post article “Goldman sees commodities rallying over next six months on strong demand” suggests that Brent and WTI may hit $80 and $77, respectively, within six months. While I am bullish on oil prices, I am not sure if I am that bullish. Six months, however, is a long time, and I may increase my forecasts as we progress through the summer months.

U.S. bank Goldman Sachs expects commodities to rally another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar, its commodities research team said on Wednesday.

The bank now sees Brent prices rising to $80 a barrel and U.S. West Texas Intermediate (WTI) prices to $77 a barrel over the six month period.

“We expect the biggest jump in oil demand ever, a 5.2 million barrels per day (bpd) rise over the next six months,” Goldman said, citing acceleration of vaccinations in Europe and an unleashing of pent-up travel demand.

OPEC+ has shown strong cohesion and discipline, and I expect that behavior to continue. Its next meeting is in early June.

In summary, prices should continue to strengthen as countries around the globe make progress against COVID-19. Goldman Sachs believes that Brent may reach $80 within six months. While I am optimistic that oil prices will go higher, I will reassess my forecast each month.

I hope everyone remains safe and well.

I am increasing my March West Texas Intermediate oil price forecast by $2.50 to range between $60 to $70 per barrel for April 2021.

Last month was a particularly volatile month. Oil prices fell below and rose above, at least on an intraday basis, my March forecast of $57.50 and $67.50. And in the last few days of trading, oil prices have been bouncing around between $57.50 to $61 per barrel. I would not be surprised if that pattern continues into early April.

But as time marches forward, I continue to expect that prices will move higher. As vaccinations increase and warmer weather encourages people to spend more time outdoors, the number of COVID-19 cases should at least stabilize, if not decrease, and people will likely grow increasingly confident of the future where they begin making plans to travel.

COVID-19 cases are still a concern. This past weekend, the Financial Times (subscription required) ran an article “Europe warns hospitals at ‘breaking point’ as third Covid wave hits” where several countries, including Germany, Poland, and France, are struggling to contain the latest outbreak.

European governments have warned that their hospitals are at risk of being overwhelmed by Covid-19 cases as leaders struggle to get a grip on the pandemic after a week of ill-conceived lockdown measures and recriminations over the EU’s slow vaccine rollout.

German health authorities on Friday warned that the third wave of coronavirus infections could be the worst, pushing intensive care units to “breaking point”.

Lothar Wieler, head of the Robert Koch Institute, the government agency leading the fight against the pandemic, said stopping the wave was impossible but he called on people to reduce contacts to prevent spiralling infection rates.

So the path forward will not be smooth sailing. Although progress will be made, setbacks are bound to occur. That notwithstanding, countries in the northern hemisphere are likely to be in a better position a month from now than they are today.

Do not forget, too, that the markets are forward looking. So even if the progress is marginal, the general public and investors will be looking toward summer when they expect people to be more active.

OPEC+ has its meeting on April Fool’s Day. While I expect it to roll over its current quotas, there is always the potential for a surprise.

Wrapping up, while I would not be shocked to see some weakness in prices in early April, I expect prices to firm as the month progresses. If countries make significant progress in vaccinating their populations, then higher prices may be warranted toward the end of April.

I am increasing my February West Texas Intermediate oil price forecast by $10 to $57.50 to $67.50 per barrel for March 2021.

I was too conservative in my prior estimate. Oil prices moved faster and more aggressively than I expected.

The reason for my latest increase is that COVID-19 cases are coming down quickly and warmer weather will mean that people will be spending more time outdoors where they are less likely to contract the illness.

A lot of forecasters have become bullish on oil and are now predicting strong prices for the remainder of the year. A good example is Simon Flower’s February 26 article “Will oil companies start spending again” posted on Wood Mackenzie’s site.

We think a fall below US$55/bbl is unlikely this year with the global economy recovering and oil market fundamentals continuing to improve.

I agree with his position that companies will be using surplus cash flow to pay down debt and strengthen their financial capacity. Companies know that the world has changed over this past year. More people will be working from home and there is a greater focus and emphasis on environmental, social, and governance measures.

Having said that, I expect that there is a lot of pent-up demand for traveling. People will want to visit those that they have not seen for a long time, venture out with family and friends as well as exploring new places. Even so, society has changed, and companies must adapt.

I am deliberately ignoring the chatter surrounding the potential Iranian negotiations. OPEC+ has the necessary flexibility to address the Iranian situation in whichever way it goes. Instead, I am more focused on the global recovery.

To reiterate, I forecast that WTI prices will range between $57.50 and $67.50 per barrel for March. If vaccinations go exceedingly well and the number of COVID-19 continues to diminish more quickly than expected, then there is some risk to the upside.

I am increasing my January West Texas Intermediate oil price forecast by $5 to $47.50 to $57.50 per barrel for February 2021.

Back in September of 2020, Prince Abdulaziz said that those who wanted to gamble on the direction of the oil market would be “ouching like hell.” Early this year when OPEC+ was expected to agree to a small increase in production, Saudi Arabia surprised the market by cutting output by a million barrels per day in February and March. That caught the oil market off guard and drove prices higher. Those that were short on oil learned what “ouching like hell” meant.

A Financial Times article “Saudis pledge to cut oil output despite Russian increases” (subscription required) captures the developments.

Saudi Arabia has pledged to slash an extra 1m barrels a day of oil output in February and March even as Russia moves to increase production, with the kingdom moving to keep the Opec+ group’s fragile alliance intact in the face of the coronavirus pandemic.

At the end of an extended two-day meeting, Saudi Arabia›s oil minister Prince Abdulaziz bin Salman announced the “voluntary” reduction after convincing most countries in the 23-member alliance to hold output steady, fearful of unleashing more barrels on to a crude market still roiled by travel restrictions and lockdowns.

Prince Abdulaziz said the unilateral cut was a “sovereign political decision” by his half brother Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler. It was taken with the purpose of “supporting our economy, the economies of our colleagues in Opec+ countries, to support the industry”, the Saudi oil minister said.

On the coronavirus front, we are witnessing more variants that appear to be capable of spreading more easily and that may or may not be more harmful. General comments in the media suggest that the variants can be treated with current vaccines, though the South African variant may be more resilient. While this development is worrisome, vaccination efforts around the globe are picking up steam and countries are imposing stricter measures to help combat the spread of the virus.

I expect that the pandemic will ease in the coming months as more people are vaccinated. As life slowly ebbs back toward normalcy over the next several months, oil prices will continue to firm. Some are calling for oil prices to hit much higher levels later this year, but before making such dramatic statements, I want to learn more how the combination of variants and the rollout of vaccinations plays out.

I am increasing my December West Texas Intermediate oil price forecast by $2.50 to $42.50 to $52.50 per barrel for January 2021.

Oil prices have been range bound in the upper $40s throughout December. OPEC+ has been cooperative, and many expect it to increase production by up to 500,000 barrel per day for February. The Financial Post has a Bloomberg article “Russia’s Novak Backs Further OPEC+ Oil-Output Hike in February” on December 25 by Olga Tanas (Twitter link) stating the following:

“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal,” Deputy Prime Minister Alexander Novak told reporters in Moscow. “Otherwise we’ll never restore production, others will restore it.”

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“If the situation is normal, stable, we will support the increase,” Novak said, when asked if Russia wants a further hike of 500,000 barrels a day in February. “We must reach levels that were envisaged earlier, from Jan. 1, gradually, without pulling the market too much.”

Please note that Novak is referring to Brent prices in the above quote. Brent prices are typically about $3 higher than WTI prices.

While there is concern that rising COVID-19 cases in January and possibly February might damp oil prices, especially with the new UK strain, vaccinations should accelerate from their slow start, which ought to help support prices. As we roll further into 2021, I expect more progress in controlling the pandemic and more optimism toward higher oil prices.

Furthermore, I expect oil equities to move higher with rising oil prices, though not to the same levels they were at prior to the outbreak of COVID-19. With the worldwide movement to consume less fossil fuels, many investors will avoid the oil and gas sector.

I have not mentioned the change in the US administration in deliberating my forecast because I do not believe it will have any immediate effect. Further out in time, I will weigh its policies and how they may affect oil prices. One policy change, of course, that everyone is watching is how the US will address the Iranian situation. My intuitive guess is that, by the time the issues are resolved, the world may be able to accommodate the additional production. In general, though, until we learn more how the new administration repositions its policies, I am taking a wait-and-see approach.

I want to wish everyone a Happy, Healthy, and Prosperous New Year!

When I announced my forecast last month, West Texas Intermediate was hovering close to $35 per barrel. As I prepare this post, WTI is slightly above $45 per barrel.

So what has changed? Pfizer’s and Moderna’s announcements of their vaccines changed the outlook for oil prices. Also, OPEC+ is expected to roll over its production quotas for another three months when concludes its meeting tomorrow, December 1.

Because of the vaccine announcements and the expected OPEC+ rollover, both of which will lead to an increased investor risk appetite for oil, I am increasing my WTI price forecast to range between $40 to $50 per barrel for December.

Cumulative Number of COVID-19 Cases in Alberta

On the negative side, COVID-19 will continue to spread. In my province of Alberta, cases are increasing at an alarming rate. The same applies for much of the United States and Europe. On the positive side, vaccinations should begin shortly. I hope by late summer or early fall, all those who want vaccines will have had an opportunity to be vaccinated. And as mentioned, I expect OPEC+ to roll over its production quota for another three months, which should provide support while COVID-19 continues to spread.

As seen during the past month, oil prices and oil equities have spiked. I expect further gains for equities in the months ahead. As investors become more comfortable that the pandemic will recede in the months ahead, I expect more confidence in oil equities. That said, the path forward may continue to be volatile. If you do plan to invest in oil equities, I encourage you to look at those equities with financial and managerial strength. Investors are still wrestling with how much society will change on the other side of the pandemic.

Number of COVID-19 Cases in Alberta per Day

Because of the surging number of COVID-19 cases, I will reiterate my advice from last month. Because COVID-19 is a serious illness that can lead to serious complications and in some cases death, especially for those with compromised immune systems or advanced age, I encourage everyone to wash their hands frequently, wear a mask when in public, maintain a safe distance from others, and limit contact with others. Also, keep a record of activities and contacts over the past fourteen days, so that if you if you do fall victim to the coronavirus, you can provide contact tracers with good information. If we take those measures, then there is a greater likelihood that shutdowns will not be required.

I included two charts showing the number of cases of COVID-19 in Alberta.

I hope everyone remains safe and well.