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Oil Update—July 2019

My August West Texas Intermediate oil price forecast ranges between $52.50 and $62.50 per barrel. The range is $2.50 lower than it was last month.

While my prior forecast was okay, WTI prices spent most of the time hugging the bottom end of the range. With this month’s forecast, I am anticipating that price weakness will continue, so I am allowing $2.50 more downside protection.

The pessimism surrounding oil seems extreme and is based on some identifiable factors. Many are fearful of a global recession damping oil demand even further. The US-Iran situation might be resolved sometime soon, allowing Iran to export more oil. More oil supply than demand is expected for 2020. Saudi Arabia and Kuwait are negotiating to resume production from jointly run oilfields Khafji and Wafra, which amounts to about a half million barrels per day. Oil companies might be aggressively hedging their future production at these prices. And the US-China negotiations, depending upon the substance of any interim announcements, may be viewed as negative or positive.

There is not much on the positive side of the ledger. The EIA oil inventory withdrawals have been substantial over the past few weeks for crude oil, but there have been some inventory builds relating to crude oil products that may suggest weakening demand because of a slowing global economy. The geopolitical situation in the Persian Gulf is lending some support but not as much as it would have in the past. Central banks are likely to lower rates in an attempt to help the global economy. I expect that a flood of liquidity will help inflate most risk assets, including oil.

The Financial Times has an interesting article “Why US bond yields could be going the way of Germany and Japan” (subscription required) where the author, Bob Michele who is global head of fixed-income at JPMorgan Asset Management, argues that the Fed must act aggressively to stave off the 10-year US Treasury heading toward zero.

Because of all the present uncertainties surrounding oil prices, they are extremely difficult to predict. We will need to take a wait and see approach to get more clarity. I continue to expect uncertainty and volatility.

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