Oil Update—December 2021

Although I was bullish last month, I did not provide a forecast for the month of December. And I am glad that I remained silent. Even though oil prices are up now, I was surprised that West Texas Intermediate (WTI) oil prices hit the low $60s last month.

Looking forward to January, I am expecting that WTI oil prices will range between $72.50 and $82.50. There are still several unknowns and critical developments waiting to be resolved in the near future.

OPEC+ is scheduled to meet in early January. Given that prices are relatively strong, I expect OPEC+ to maintain its schedule of an increase of 400 thousand barrels per day in February. There are three major issues, however, that have the potential to affect the price of oil. First, Omicron is still surging across the world. From my reading, some expect the Omicron wave to crest in early January, and others expect, mid- to late-February. Second, Russia and the US and NATO allies are scheduled to meet in early January to hold talks. While I hold some personal opinions, I do not think the general public, including myself, has sufficient information to render an informed opinion. Both sides are engaged in propaganda efforts to sway their public to their side. I just hope that the outcome does not result in a further escalation. And third, the Iran negotiations are ongoing. Just like the Russia and US and NATO negotiations, I do not think the general public has sufficient information. Given that any of these three major issues has the potential to affect oil prices, I am going to be cautious and wait until there is more clarity.

During the past month, I found it interesting watching experts opine on the effects of Omicron. Generally speaking, I noticed that those who began with a negative outlook never deviated from their negativity. Similarly, those who began with a positive outlook never deviated. Although I should not be surprised, I am. I believe that these various experts wanted and believed that they were providing the most realistic and unbiased information available. Yet they always seemed to find and circulate evidence that supported their initial positions, which is, of course, a demonstration of confirmation bias. Because Omicron is so transmissible and information is evolving quickly, I tend to be more uncertain. I would not be surprised if something were released tomorrow that refutes my prior position.

What I just wrote about Omicron applies equally to negotiations, generally. Major negotiations are always difficult and are fraught with high degrees of uncertainty. The participants of those negotiations struggle to corral all the issues and data and present an acceptable solution to their respective leaderships. If even they are uncertain how the future will unfold, how can someone far removed be certain of an outcome?

Of course, once a resolution has been reached in any negotiation, pundits will claim that it was all foreseeable. They will point to the breadcrumbs that led to this obvious outcome. The reality is that the breadcrumbs can be rearranged to suit any outcome that develops. Looking back, pundits and historians will always find a path through the chaos that seems logical and deterministic—as if someone who applied themselves could have accurately predicted the outcome. I believe that narrative is false.

I am reminded of a passage in Michael Lewis’s book (Amazon affiliate link) The Undoing Project: A Friendship That Changed Our Minds where he wrote the following:

It wasn’t just sports announcers and political pundits who radically revised their narratives, or shifted focus, so that their stories seemed to fit whatever had just happened in a game or an election. Historians imposed false order upon random events, too, probably without even realizing what they were doing. Amos had a phrase for this. “Creeping determinism,” he called it—and jotted in his notes one of its many costs: “He who sees the past as surprise-free is bound to have a future full of surprises.”

A false view of what has happened in the past makes it harder to see what might occur in the future. The historians in his audience of course prided themselves on their “ability” to construct, out of fragments of some past reality, explanatory narratives of events which made them seem, in retrospect, almost predictable. The only question that remained, once the historian had explained how and why some event had occurred, was why the people in his narrative had not seen what the historian could now see. “All the historians attended Amos’s talk,” recalled Biederman, “and they left ashen-faced.”¹

For those unfamiliar with the book, the friendship is between Amos Tversky and Daniel Kahneman, who won a Nobel Prize “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” If you have not read the book, I highly recommend it.

The key point is that the future is too uncertain to predict with certainty.

As mentioned, there is no consensus on what to expect regarding Omicron. On December 28, 2021, the New York Times featured a hopeful article “Omicron Variant Might Help Defend Against Delta, Lab Study Suggests” (subscription required).

If further experiments confirm these findings, they could suggest a less dire future for the pandemic. In the short term, Omicron is expected to create a surge of cases that will put a massive strain on economies and health care systems around the world. But in the longer term, the new research suggests that an Omicron-dominated world might experience fewer hospitalizations and deaths than one in which Delta continues to rage.

“Omicron is likely to push Delta out,” said Alex Sigal, a virologist at the Africa Health Research Institute in Durban, South Africa, who led the new study. “Maybe pushing Delta out is actually a good thing, and we’re looking at something we can live with more easily and that will disrupt us less than the previous variants.”

At present, my biggest concern is how Omicron will play out over the next several weeks. Even so, I expect that the price of oil has already discounted much of the bad news from Omicron. So now we need to wait to see if the future unfolds as some of the more optimistic pundits hope.

Again, I expect WTI to range between $72.50 and $82.50 for January 2022.

I wish you a Happy New Year, good health, and safe travels if you are traveling.