I expect October West Texas Intermediate (WTI) prices to remain between $60 and $70 per barrel, which was also my forecast range for July through September. I had expected the prices in September to stay in the lower half of that range, which turned out to be accurate.
The pessimistic mood in oil is slowly shifting. On August 18, The New York Times featured an article “Will Oil Demand Peak Soon? Trump Administration Doesn’t Want to Hear It” (subscription required). In that article, it provided a graphic of differing opinions about peak oil.
Figure 1: The New York Times – Projecting Peak Oil
Many believed that OPEC and Exxon were wrong, and the others were right. Now, the tide is shifting.
On September 10, Javier Blas from Bloomberg wrote an article “The Myth of Peak Fossil-Fuel Demand Is Crumbling” (subscription required). In this article, he discussed the implications of a draft copy of the IEA’s upcoming annual report. The upshot is that peak oil is not happening as quickly as many expected.
Figure 2: Bloomberg – More Fossil Fuel Consumption Means More Pollution
And later in September, the IEA issued a release of its report “The Implications of Oil and Gas Field Decline Rates” (PDF, publicly available).
A key paragraph from the executive summary is as follows:
Alongside the observed rate declines that are derived from field production histories, it is possible to estimate the natural rate declines that would occur if all capital investment were to stop. These declines are even steeper. If all capital investment in existing sources of oil and gas production were to cease immediately, global oil production would fall by 8% per year on average over the next decade, or around 5.5 million barrels per day (mb/d) each year. This is equivalent to losing more than the annual output of Brazil and Norway each year. Natural gas production would fall by an average of 9%, or 270 bcm, each year, equivalent to total natural gas production from the whole of Africa today.
The annual report should be issued soon. I expected those who sided with Exxon and OPEC to be vindicated.
On September 19, the Financial Times published an article “Oil market brushes off predictions of supply glut” (subscription required).
Predictions that the world will soon be awash with oil are failing to dent crude prices, with some analysts saying China’s quiet stockpiling of reserves is staving off a major market downturn.
Big banks, energy agencies and analysts are almost universally forecasting that excess supply could push global crude prices towards $50 a barrel or lower next year.
But Brent crude, the international benchmark, is still trading at about $67 a barrel, little changed on where it was in late June, while futures markets are not pointing to a coming glut.
Although big banks and some analysts have been predicting lower prices, that has not happened yet, and it may not happen.
On September 24, the Financial Times also published an article “US shale bosses decry ‘chaos’ in Donald Trump’s energy policy” (subscription required).
Donald Trump’s tariffs and drive to slash oil prices are “kneecapping” the US shale sector, chilling investment and risking reprisal against the industry, executives have warned.
Immediately after entering the White House, the president declared a “national energy emergency”, pledging to “drill, baby, drill” and pass on lower energy costs for consumers.
But bosses told a survey by the Federal Reserve Bank of Dallas that the administration’s support for low prices, levies on crucial goods and chaotic decision-making is scaring off investors and increasing costs. The report is often a source of surprisingly frank assessments of US energy policy because executives are allowed to provide responses anonymously.
Then on September 27, The Wall Street Journal published an article “The Slow Demise of Russian Oil” (subscription required).
Since the start of the war in Ukraine, Moscow has kept oil production and exports relatively stable by focusing on the maintenance of existing fields rather than the exploration of new ones. But the longer-term outlook is bleak. Up to one-third of Russia’s budget revenue comes from the profits of the energy sector and that proportion is likely to shrink as production slows.
Even before the war, many of Russia’s Soviet-era fields, mainly in Western Siberia and the Volga-Urals region, were starting to run low, leaving oil companies to turn to the harder-to-recover crude in its Arctic and Siberian fields.
To improve their odds, Russian majors planned to tap shale formations in Siberia using techniques developed in Texas and North Dakota but the war prevented them. Sanctions prohibited access to the necessary extraction technology and the government raised taxes on oil companies to shore up its war effort. Workers were enticed to the front by lucrative packages for soldiers, while others of fighting age have died in battle or left the country, all factors creating shortages of skilled specialists in the industry.
In mid-September, Eric Nuttall created a new YouTube. You can hear his comments regarding the IEA.
And here is a recent X post:
Paul Sankey of Sankey Research created two new YouTubes in September. Even though I have been more bullish than Sankey, I have tremendous respect for him and appreciate his videos. His videos seem as though he is having a friendly conversation with his audience.
Even though I typically provide a one-month forecast, I expect WTI oil prices to largely remain above $60 per barrel throughout the rest of the year. If WTI oil prices do break $60, I expect it to be short lived with a minimum price of $57.50. Am I absolutely positive, no. There are too many variables that affect oil prices.
Last month, I mentioned that I was surprised by the strength of the equity prices of oil companies. As more investors come to believe that the oil price narrative is changing, they are placing a higher valuation on oil companies. Hence, oil company valuations have been increasing even though oil prices are relatively depressed.
In summary, I believe the bearish narrative on oil prices is changing from extreme bearishness to a holding pattern for the next several months. Even more importantly, peak oil demand has been pushed out from sometimes in the late 2020s to possibly 2050 or beyond. The change in the oil price outlook has affected oil companies’ equity valuations.
Disclosure: Short strangle (short calls and short puts) on WTI crude oil futures.