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Oil Update—October 2022

This month, I am increasing my West Texas Intermediate (WTI) oil price by $5 to range between $85 and $105 for November.

As we approach the end of 2022, I am becoming more accepting of more volatility. Many pundits have been discussing the merits of the Russian oil price cap. Some suggest that Russia will be forced to reduce its price. While many others—the majority of pundits that I follow—suggest that it will not work at all. Russian oil will find its way to market, one way or another.

Twitter has a lot of informed people commenting on oil. One person that I have great respect for, both as an oil expert and as a person, is Dr. Anas Alhajji. He provides a lot of commentary on Twitter, and he is one of the skeptics on the effectiveness on a price cap.

On October 28, the Wall Street Journal article “U.S.-Backed Plan to Cap Price of Russian Oil Hits Delays” (subscription required) stated the following:

That timeline is now slipping. Officials aren’t planning to set the level of the cap until after the U.S. midterm elections on Nov. 8, according to people familiar with the plans. The absence of the final details about how the cap will work has left the oil industry wondering whether Russian oil in transit on Dec. 5 will face new sanctions requirements when it arrives at its buyer.

“It’s roughly 40 days to December 5th, a typical voyage to the longer routes from Russia run 45 to 60 days. So we’re inside the window of a stranded cargo, there’s some risk that crude-oil prices could rise as buyers bid for alternative sources,” said Kevin Book, the managing director of ClearView Energy Partners.

The slower timeline comes as Biden administration officials are bracing for the possibility that announcement of the price cap would prompt Russia to threaten to cut off oil production and cause oil market volatility. Those developments could weigh on Democrats’ standing if they occurred before an election that has hinged in part on oil prices. During the campaign, President Biden has repeatedly pointed to gasoline prices that have fallen in recent months from a record high earlier this year.

Notice that the price cap may prompt Russia to reduce its oil production. Given all the uncertainty of the effectiveness surrounding the Russian price cap and potential Russian response, it is difficult, if not impossible, to make forecasts with any degree of certainty.

While I am inclined to be more bullish going into year end, I am also cautious. It seems as though most everyone seems bullish going into the final months of 2022, and it is unsettling when everyone has the same outlook.

I am also surprised by the overall strength of the market. Given all the economic uncertainty and rising interest rates, I expected the S&P 500 to be hovering around 3500 to 3700. On Friday October 28, the SPX closed at 3901.06.

The Wall Street Journal featured an article on October 29 “Where Are Markets Headed? Six Pros Take Their Best Guess” (subscription required). Even though I tend to be bearish at these levels, I enjoyed reading Lloyd Blankfein’s response as follows:

Mr. Blankfein said it’s worth remembering the challenges of the moment always seem worse than those of the past, if only because the past is resolved. And history, like the markets, has cycles.

“You think things have never been scarier?” said Mr. Blankfein, who retired from Goldman in 2018. “Really? We lived through the Cuban missile crisis when we were stopping Soviet ships in international waters. These are really the most polarized times? I was around in 1968 when there were assassinations of public figures, when kids were blowing up draft centers, and the National Guard was shooting on campuses. We got through that, we’ll get through this.

“It’s never as bad as your worst fears or as good as your best hopes,” he added.

If the markets do correct and go down somewhat, oil may go down along for the ride. So in looking at oil, we cannot simply look at oil supply and demand; we must also look at the market as a whole.

Before closing this post, I would like to highlight a recent YouTube by Dr. Anas Alhajji:

It is about the recent two-million-barrel production cut by OPEC+, the US administration’s response, and the actual reality of the cut.

November and December promise to be exciting months, as all recent months have been, in the oil markets.

In summary, I expect WTI to range between $85 and $105 for the month of November. Because of all the uncertainties, I would not be surprised to see oil outside of this range. And if I had to guess, I see more upside potential than downside. But the surprises may go either direction.

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