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Oil Update—September 2023

I am raising by ten dollars my September forecast for West Texas Intermediate (WTI) oil price to range between $80 to $100 per barrel.

A graph from the EIA showing West Texas Intermediate (WTI) crude oil and NYMEX confidence intervals from September 7, 2023.

Figure 1: WTI Confidence Intervals

To some people, my range might seem too wide. In reality, it is not. For example, on Thursday, September 28, WTI touched $95, which exceeded my prior range of $70 to $90 per barrel. We can also look at the latest price forecast from the U.S. Energy Information Administration’s “Short-Term Energy Outlook,” which is shown in figure 1. We see that prices often move significantly in a brief period and that the futures price range is wide. For those wanting to know how the upper and lower bounds were determined, please see the following EIA PDF document: “Short-Term Energy Outlook Supplement: Energy Price Volatility and Forecast Uncertainty.”

A screenshot from Sunday, August 27, 2023, of thinkorswim's WTI futures and options. The contracts are /CL, which is West Texas Intermediate Oil.

Figure 2: thinkorswim’s Quotes for WTI Futures and Options –August 27, 2023.

My main purpose for establishing ranges is to document my thinking for my own positions. I have options on a few oil equities, and forming an opinion on near-term oil prices allows me to create or adjust my positions as required.

I was surprised by the strength of oil during the last month. A month ago, I thought it was unlikely that oil would reach $100 per barrel this year. A screenshot from thinkorswim showed some option Greeks for WTI expiring in January and February. I have included that screenshot again in figure 2. Please see my prior post where I discussed how to interpret delta for assessing the likelihood of oil prices exceeding or touching a strike price.

A screenshot from Friday, September 29, 2023, of thinkorswim's WTI futures and options. The contracts are /CL, which is West Texas Intermediate Oil.

Figure 3: thinkorswim’s Quotes for WTI Futures and Options –September 30, 2023.

See figure 3 where I have included an updated screenshot taken on Friday, September 29, at about 12:11 p.m. Mountain Time. Note that the December $100 call price has increased from $0.33 to about $1.05. Similarly, the January $100 call price has increased from about $0.49 to about $1.25. Had a person been extremely bullish on oil, buying either of these calls would have been extremely profitable. Also, the January and February deltas are 0.1737 and 0.1834, respectively. That implies that the odds of WTI closing at or above $100 in January or February expiration is about 17 and 18 percent, respectively. Given that the spot price was $90.60, those odds seem low. Of course, the WTI is in backwardation, so the January and February futures oil prices were $86.89 and $85.21, respectively when the screenshot was taken.

Various pundits are now calling for high prices, though many seem to suggest that while $100 per barrel is possible or likely, going much higher would take some other extraordinary development. For those with a Bloomberg subscription, you can view Amrita Sen’s commentary on September 27 where she forecasts $100 by Halloween. Amrita Sen is the founder and director of research at Energy Aspects, a highly respected energy consulting firm.

A Bloomberg screenshot of Energy Aspect’s note says the following:

We do not see crude prices letting up in the near term, with $100 still in sight for Brent. Crude fundamentals have become strong enough that the macro story is no longer sufficient to drive price action. Instead, crude is starting to drive the macro view.

While she references Brent prices, WTI prices are currently two or three dollars less than Brent prices.

I hope oil prices do not go above $100 per barrel because it seems that whenever oil prices go too high, they come crashing down later. Oil prices above $100 per barrel will cause economies to slow and consumers to reduce consumption. Instead, I would prefer that oil prices stay in the high $80s to low $90s. My preference, however, means nothing.

The next few months in the oil markets will be interesting and challenging. Again, my forecast for October is for WTI oil price range to $80 to $100 per barrel.

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