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:
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— John Kemp (@JKempEnergy) June 29, 2018