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Oil Update—July 2022

Just like last month, I am again lowering my West Texas Oil (WTI) forecast for the upcoming month by ten dollars per barrel to range between $90 to $110. While the physical market remains tight, oil may be held in check by the approaching shoulder season and recessionary fears.

A recent article on July 20 in the Wall Street Journal “Saudi Arabia Nears Its Oil Pumping Limit” (subscription required) demonstrates that the oil markets are tight and that there is a lack of surplus capacity.

Saudi Arabia has limited additional capacity to ramp up oil production, according to people familiar with its pumping ability, a constraint that would make it difficult for Riyadh to increase global supply even if it were willing to do so.

President Biden recently wrapped up a high-profile trip to Saudi Arabia, saying he expected the kingdom to help the U.S. boost global supplies. The Organization of the Petroleum Exporting Countries, with Riyadh as its de facto leader, meets early next month to determine whether to lift its current quota for production. The group has been working in recent years with a parallel group of big producers headed by Russia.

If OPEC+, as the two groups are called collectively, moves to boost production, a key question is by how much. Saudi Arabia’s slim spare capacity—the amount it can quickly ramp up on top of what it is already pumping—raises the prospect that any boost won’t be enough to appreciably lower prices.

During June and July, oil seemed to be unusually volatile, having risen to about $120 per barrel, then fallen to about $90, and it is now near $100 again. The stock market was also very volatile during this period. Although stocks had a terrific July, many are cautious or even skeptical about the months ahead. A quote from a recent July 29 Wall Street Journal article “U.S. Stocks Rise, Giving S&P 500 Best Month Since 2020” (subscription required) shows the gains for the S&P 500 and Nasdaq and concerns about the market going forward.

The S&P 500 gained 9.1% in July, while the Dow Jones Industrial Average rose 6.7%, the strongest monthly showing for each index since November 2020. The tech-heavy Nasdaq Composite climbed 12% for its best month since April 2020.

Investors have taken comfort in recent days from the idea that slowing economic growth might encourage the Fed to raise rates at a slower clip. They also have been encouraged by positive signals during earnings season, as expectations for quarterly profit growth rose over the past month.

But money managers and strategists are also debating whether stocks can hold on to the recent gains in the face of continued monetary tightening and worrisome signals about the economy. Many are skeptical.

Because of the strong cross currents of tight physical oil markets and recessionary fears, along with a war in Europe, it is hard to have much confidence in any forecast. Everyone is watching to see if strong recession indicators appear and how that might affect oil.

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