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Oil Update—August 2020

For September, I am raising my forecast for West Texas Intermediate oil prices to range between $37.50 to $47.50 per barrel.

For the past two months, WTI prices have been stuck in the low $40s range. For the most part, I expect that range to continue for September. I do not expect WTI prices to stay below $40 for an extended period.

Many pundits and forecasters expect a continued strengthening of oil demand. In OPEC’s latest “Monthly Oil Market Report,” it expects oil demand to reach 90.6 million barrels per day in 2020 and 97.6 million barrels per day in 2021. Of course, these assumptions are predicated on COVID-19 not making a vigorous comeback.

The overall mood toward oil and oil stocks is pessimistic. The Wall Street Journal article “Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets” (subscription required) highlights how far energy companies have fallen out of favor.

It is also a reminder of Exxon’s fall from the top echelon of American industry. As recently as 2013, Exxon was the largest U.S. company with a market value above $415 billion. It has since shrunk to less than $180 billion and has been eclipsed by the technology giants such as Apple Inc., Amazon.com Inc. and Microsoft Corp. that now drive the American economy.

“Exxon, that used to be a behemoth in the U.S. markets, and now it’s dropped out of the Dow,” said Matt Hanna, portfolio manager at Summit Global Investments. “That just goes to show how quick things can change and how far energy has fallen as a sector.”

Usually, market contrarians say a sector that is so beaten down should be ripe for bargains. But many investors remain skeptical of an energy rebound, pointing to muted expectations for global growth and spotty earnings.

As oil prices creep up, oil stocks should begin to show some signs of life. Right now, however, technology stocks are sucking all of the oxygen out of the investment arena.

For those that are brave enough to invest in energy companies, I suggest sticking with strong, well-capitalized companies that can withstand lower prices for longer periods. If oil prices were to spike, then the higher leveraged oil companies would outperform, but with the present slow upward movement in oil prices, a more cautious approach may be more appropriate.

Regarding the upcoming US election, I believe it’s a nonissue. The economy will continue to recover over the next several months provided that there are no COVID-19 setbacks.

In summary, I expect slow, steady economic progress with WTI prices staying in the low- to mid-$40s price range for most of September.

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