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Oil Update—December 2018

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.

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