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Oil Update—January 2024

For February, I expect West Texas Intermediate (WTI) oil prices to range between $65 to $85 per barrel. This is the same range I used last month. If asked to narrow the range, I would offer $72.50 to $82.50 per barrel. As I compose this blog entry, WTI is about $78 per barrel.

Last month, I expected prices to hover around $75, and bobble about with the news headlines. For most of January, oil prices were close to $75.

The news during last month has worsened. Middle East hostilities have increased with no clear signs of near-term optimism. Even though the geopolitical situation is deteriorating, oil is still flowing.

While there remains a lot of pessimism about strengthening oil prices, the pessimism is not as strong as before.

John Kemp, an excellent analyst with Reuters, wrote that short positions in US crude futures were reduced. See his article “Funds slash bearish positions in US crude as stocks drain.”

LONDON, Jan 29 (Reuters) – Portfolio investors recoiled from short positions in U.S. crude futures and options in the most recent week as depleting inventories around the NYMEX delivery point underscored the risk of a squeeze on deliverable barrels.

Hedge funds and other money managers purchased the equivalent of 46 million barrels across the six most important futures and options contracts over the seven days ending on Jan. 23.

Incidentally, I encourage you to subscribe to John Kemp’s energy mailing list. Every morning, he sends out links to interesting oil articles and often provides his research.

On January 30, the Financial Times published an article “Saudi Arabia ditches plan to raise oil production” (subscription required).

Saudi Arabia has dropped a plan to expand the kingdom’s daily oil production capacity, in a major policy reversal by the world’s largest oil exporter.

State-run Saudi Aramco on Tuesday said it had been asked by the energy ministry to abandon a plan to increase its maximum sustainable production capacity from 12mn barrels a day to 13mn b/d by 2027.

The multibillion-dollar investment programme had set the company apart from much of the industry, where spending on oil production is generally falling because of concerns about climate targets and future demand. Saudi Aramco accounts for about 10 per cent of the 100mn barrels of oil the world consumes every day.

Given that OPEC has been commenting during the past year on the lack of investment in oil, I am surprised by this development. Perhaps the outlook for oil demand is not as optimistic as originally thought.

Switching away from developments over the past month, I thought I would share with you a quick-and-dirty method of determining price ranges.

You can use the OVX, the Cboe Crude Oil ETF Volatility Index, to determine a price range. Right now, the price of oil is near $78 and the OVX is about 36. That implies that a year from now, a one standard deviation of crude oil movement, up or down, is about 36 percent. When considering different time periods, you need to use the square root of the time. For example, for one month, a one standard deviation move is calculated at the square root of 1/12 times 36 or 0.29 times 36 for 10.4 percent. In other words, a one standard deviation move one month from now means that WTI’s price will fall within $78 per barrel plus or minus times 10.4 percent or $8.11 per barrel. The plus or minus one standard deviation range is from $69.89 to $86.10 per barrel. Remember, though, that one standard deviation is 65 percent. So about one-third of the time, oil will close outside of the range. A two-standard deviation move is twice as wide and captures about a 95 percent probability.

If you want to determine a likely range for one day, follow the same procedure, except take the square root of 1/365 instead of 1/12. Some people use the number of trading days, roughly 252, instead of the number of days in a year. I prefer the number of days in a year.

Wrapping up, I expect WTI to range between $65 to $85 per barrel with the sweet spot being between $72.50 and $82.50 per barrel.

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