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Oil Update—December 2023

I am lowering my prior forecast for December’s West Texas Intermediate (WTI) oil price to range between $65 to $85 per barrel. This range is $5 per barrel lower than last month’s. If asked to narrow the range, I would offer $70 to $80 per barrel.

On one hand, oil traders seemed to be in a pessimistic mood toward the end of the year. Oil prices in the first quarter are typically softer because of refinery maintenance. On the other hand, OPEC+ cuts take effect on the first day of January and may serve to buoy prices.

Those that are pessimistic on oil prices do not appear to believe that OPEC+ will cut as much as promised and that the global economy may not recover sufficiently to justify higher prices.

The Gaza-Israel conflict continues in the Gulf. Some who are bullish believe that this conflict will spiral out of control, and that will cause prices to rise. They point to the American Navy sinking Houthi boats in the Red Sea on December 31. The Wall Street Journal published an article “U.S. Navy Destroys Boats Controlled by Iran-Backed Militias in Red Sea” (subscription required) that stated:

The U.S. Navy destroyed three boats carrying militants supported by Iran after they attacked a containership in the Red Sea, while Iran-allied militias struck a U.S. base in Syria, raising the risk that the war in Gaza could drag the U.S. into broader tensions in the region.

On Saturday evening, the Maersk Hangzhou, a Singapore-flagged container vessel that operates between Europe and Asia, came under missile attack, the U.S. said. Four boats later approached the vessel, shot at it and attempted to board it, according to Danish shipping giant Moller-Maersk, which operates the containership.

Early Sunday, helicopters from nearby U.S. Navy vessels responded to fire coming from boats controlled by Houthis, an Iranian-backed rebel group in Yemen, sinking three of them and killing the crews, the U.S. said. The fourth boat fled. The Houthis later claimed the attack and said they lost 10 fighters in the encounter.

While the possibility that the conflict intensifies and spreads is certainly present, I am hopeful that progress will be made to reduce the conflict over time.

Absent some major development, I expect that oil prices will hover around $75 per barrel, bouncing up and down with the headlines and some random motion. Once New Year trading has begun in earnest, the price outlook may become clearer.

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