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Oil Update—September 2022

I am reducing my West Texas Intermediate oil price range by $10 to range between $80 to $100 per barrel for October.

A few days after my last forecast, the price fell through the floor. Russia’s war on Ukraine intensified, the Fed’s seeming determination to raise rates regardless of whether higher rates cause a recession, and Prime Minister Truss’s chaotic mini-budget sent markets reeling. As I write, the VIX is nearly 32, an unusually high value. The VIX is often referred to as a fear gauge because the higher it is, the more volatile markets are.

The reasons for my forecast are as follows: Oil prices are likely to rise from recent lows in the $70s as we approach the end of the SPR releases at the end of October. I expect OPEC+ to announce a cut in production of between five hundred thousand to one million barrels per day at its upcoming meeting in early October. Prices should rise as the September and October shoulder season passes and winter approaches. Russian production may begin to decline. And China may begin to open after its once-in-five-years congress in mid-October.

Given the extreme market volatility, there are certainly risks. The US dollar may keep rising until something breaks. The mini-budget problems in the UK may spiral out of control and affect financial markets around the world. Investors may become so risk averse that nothing rises, including oil. OPEC+, because of all the economic uncertainty, may decide not to cut. China may clamp down even tighter to control COVID-19. And major world economies may slide into a deeper recession than many forecast.

Regarding OPEC+, I believe that it will cut its production because it prefers oil price stability instead of wildly gyrating prices and it wants to encourage more energy development, both oil and gas as well as renewables.

As the VIX indicates, market volatility is very high because of a lot of uncertainty. It is impossible to be confident of any particular outcome. The scenario I where described prices rising because of OPEC+ cuts, passing of the shoulder season, potential Russian production declines, and increased China demand, however, is the one in which I have most confidence. In general, I am bullish on oil prices going higher into the end of the year.

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