≡ Menu

Oil Update—June 2019

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.

{ 0 comments… add one }

Leave a Reply

Previous post: