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Oil Update—November 2022

Although I am tempted not to provide a forecast range for December because of the high uncertainties, I will forecast a range of $75 to $95 per barrel for West Texas Intermediate oil.

Regarding COVID, I had expected more progress in China. Instead, COVID cases are increasing, and this past weekend, there were a number of demonstrations in China regarding COVID lockdowns.

The above chart by CN Wire on Twitter shows how the number of COVID cases in China has grown during the month of November. The Wall Street Journal article “Chinese Protests Spread Over Government’s Covid Restrictions” (subscription required) provides a video and discussion of events unfolding in China. Below is an opening excerpt:

BEIJING—Protests are erupting in major cities in China over President Xi Jinping‘s zero-tolerance approach to Covid-19, an unusual show of defiance in the country as the economic and social costs from snap lockdowns and other strict restrictions escalate.

Demonstrations occurred throughout the weekend in both Beijing and Shanghai. According to eyewitness accounts, there were also protests in the eastern city of Nanjing and in Wuhan, the original epicenter of the pandemic. Video footage and photos circulating on social media, which The Wall Street Journal wasn’t able to independently verify, suggest protests broke out in several other cities, including Chengdu, capital of Sichuan province.

The protests followed demonstrations on Friday in Urumqi, capital of the remote region of Xinjiang, where a deadly fire enraged residents who had struggled with lockdowns of more than 100 days. Residents flooded social media with comments suggesting that Covid restrictions contributed to a delay in putting out the fire, in which officials said 10 people died.

In addition to China’s COVID concerns, OPEC+ is set to decide its next production limits and Europeans are grappling with the price cap for Russian oil. In another article from the Wall Street Journal “Oil Prices Face Fresh Volatility With New Russia Sanctions, OPEC Decision” (subscription required), it states that oil has been volatile during the past month.

Brent-crude futures have risen or fallen by at least 1% on all but three trading days in November while sliding 12% over the course of the month to $83.63 a barrel. The oil benchmark traded in a range of more than $5.50 a barrel on one day last week after The Wall Street Journal said that the Organization of the Petroleum Exporting Countries and its partners had discussed an increase in output—a report denied by Saudi Arabia.

The European Union is expected to ban most crude imports from Russia on Dec. 5. In tandem, the U.S., the EU and some of their allies are due to ban shipping, trading, insuring and funding Russian crude anywhere in the world unless the price is at or below a cap.

From Feb. 5, the same sanctions will hit Russian refined products, a move that traders say poses a bigger threat to Moscow’s oil industry and a greater challenge for Europe.

From Feb. 5, the same sanctions will hit Russian refined products, a move that traders say poses a bigger threat to Moscow’s oil industry and a greater challenge for Europe.

OPEC+ is set to choose its next production quotas with an impending European oil price cap, increasing COVID numbers in China, and slowing global economies as the Fed and other central bankers continue to raise rates.

A November 21 Wall Street Journal article “OPEC+ Eyes Output Increase Ahead of Restrictions on Russian Oil” (subscription required) caused oil prices to immediately fall about $5 per barrel. Saudi Arabia denied the reports in the article, and oil prices immediately recovered. So I doubt Saudi Arabia will now increase production because of the severe market reaction.

Depending on the oil price chosen for the Russian oil price cap, it may be completely meaningless. And some believe that, regardless of what price is chosen, the price cap will be completely ineffective. I do not have an opinion but will wait to see what develops instead.

Obviously with all the uncertainty, it is hard to have any confidence in any forecast. My range is premised on OPEC+ taking into consideration all these uncertainties and wanting to minimize volatility. In other words, I expect OPEC+ wants to attempt to keep Brent prices at or near $90 per barrel. WTI prices are about $7 per barrel less than Brent prices.

December promises to be an interesting month.

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