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Oil Update—August 2022

I am keeping my West Texas Oil price range of $90 to $110 per barrel for September. There are lots of crosscurrents that could move prices beyond this range.

Without any regard to likelihood or severity, the following developments may dramatically affect oil prices: Iran negotiations, violence in Iraq, Saudi Arabia and OPEC+ making a dramatic shift in production, developments that may affect Russian oil exports, a weakening global economy, hurricanes in the Gulf of Mexico, and miscellaneous others. Let us look at a few of these items.

Negotiations have heated up once again with Iran. Although the participants are providing different signals, I tend to disregard most comments because even the participants themselves cannot predict how negotiations will unfold. Often negotiations follow an uncertain and unpredictable path. So it is best to wait and see.

Extreme violence has broken out in Iraq. The Wall Street Journal article “Violence Erupts in Baghdad After Iraqi Cleric Moqtada al-Sadr Quits Politics” (subscription required) on August 29, 2022, states the following:

BAGHDAD—Violent clashes gripped Iraq’s capital after an influential cleric said he was quitting politics, as protesters stormed government buildings and heavily armed militias flooded into the capital’s government center, setting off an intense urban battle that threatened the government’s stability.

At least 17 people were killed by gunfire and more than 90 were reported wounded in clashes in the Green Zone on Monday, turning the heavily fortified district of government offices, embassies and villas of senior Iraqi officials into a besieged zone.

The unrest was triggered when cleric Moqtada al-Sadr made his declaration. His supporters, who had been camped for nearly a month outside Parliament demanding new elections, overran the nearby government palace, setting off clashes with security forces.

At this point, I am uncertain if this development will affect Iraq’s oil production and exports.

On August 23, 2022, the Wall Street Journal article “Saudis, Allies Open Door to Oil-Output Cut to Keep Prices High” seemed to indicate that Saudi Arabia was frustrated by the low oil prices in light of a tight physical market.

The Saudi-led Organization of the Petroleum Exporting Countries and a coalition of producers led by Russia—collectively known as OPEC+—agreed to a smaller-than-expected production increase earlier in August.

Now, Saudi Arabia’s energy minister and some OPEC officials have suggested the alliance could extract fewer barrels of oil to stabilize a market buffeted by economic uncertainty, the risk of global recession and energy sanctions triggered by the war in Ukraine.

“OPEC+ has the commitment, the flexibility, and the means…to deal with such challenges and provide guidance including cutting production at any time and in different forms,” Saudi Energy Minister Prince Abdulaziz bin Salman said late Monday.

Oil traders and pundits will be watching what OPEC+ decides over the long weekend and how Saudi Arabia positions its oil selling prices.

Russian oil exports have proved more resilient than many expected. Whether Russian can continue its success remains to be seen.

With energy prices rising sharply in Europe, some expect that Europe’s recession may be sharper and may last longer than expected. Whether the recession is severe enough to curtail substantial demands for oil remains to be seen. My intuitive guess is that oil will be largely unaffected because some electrical producers are switching from gas to oil.

Hurricane season is beginning to heat up. The National Oceanic and Atmospheric Administration still expects an above normal hurricane season. Hurricanes can knock out production from the Gulf of Mexico and may affect refineries along the Gulf Coast. The frequency and severity of hurricanes remain a wildcard.

These are the bulk of the factors that I am watching, but there are some others too. For example, watch the strength of the US dollar and its effect upon other countries, especially poorer countries, and their abilities to service their US dominated debts.

The course that OPEC+ decides to follow and the Iranian negotiations are my primary focus. But that could change in heartbeat. If Iraq is unable to sustain its oil production or problems in the Gulf are more severe than expected, then I will switch my priorities.

To summarize: I expect oil prices to range between $90 and $110 per barrel for September.

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