Specious Argument

I am increasing my March West Texas Intermediate oil price forecast by $2.50 to range between $60 to $70 per barrel for April 2021.

Last month was a particularly volatile month. Oil prices fell below and rose above, at least on an intraday basis, my March forecast of $57.50 and $67.50. And in the last few days of trading, oil prices have been bouncing around between $57.50 to $61 per barrel. I would not be surprised if that pattern continues into early April.

But as time marches forward, I continue to expect that prices will move higher. As vaccinations increase and warmer weather encourages people to spend more time outdoors, the number of COVID-19 cases should at least stabilize, if not decrease, and people will likely grow increasingly confident of the future where they begin making plans to travel.

COVID-19 cases are still a concern. This past weekend, the Financial Times (subscription required) ran an article “Europe warns hospitals at ‘breaking point’ as third Covid wave hits” where several countries, including Germany, Poland, and France, are struggling to contain the latest outbreak.

European governments have warned that their hospitals are at risk of being overwhelmed by Covid-19 cases as leaders struggle to get a grip on the pandemic after a week of ill-conceived lockdown measures and recriminations over the EU’s slow vaccine rollout.

German health authorities on Friday warned that the third wave of coronavirus infections could be the worst, pushing intensive care units to “breaking point”.

Lothar Wieler, head of the Robert Koch Institute, the government agency leading the fight against the pandemic, said stopping the wave was impossible but he called on people to reduce contacts to prevent spiralling infection rates.

So the path forward will not be smooth sailing. Although progress will be made, setbacks are bound to occur. That notwithstanding, countries in the northern hemisphere are likely to be in a better position a month from now than they are today.

Do not forget, too, that the markets are forward looking. So even if the progress is marginal, the general public and investors will be looking toward summer when they expect people to be more active.

OPEC+ has its meeting on April Fool’s Day. While I expect it to roll over its current quotas, there is always the potential for a surprise.

Wrapping up, while I would not be shocked to see some weakness in prices in early April, I expect prices to firm as the month progresses. If countries make significant progress in vaccinating their populations, then higher prices may be warranted toward the end of April.

I am increasing my February West Texas Intermediate oil price forecast by $10 to $57.50 to $67.50 per barrel for March 2021.

I was too conservative in my prior estimate. Oil prices moved faster and more aggressively than I expected.

The reason for my latest increase is that COVID-19 cases are coming down quickly and warmer weather will mean that people will be spending more time outdoors where they are less likely to contract the illness.

A lot of forecasters have become bullish on oil and are now predicting strong prices for the remainder of the year. A good example is Simon Flower’s February 26 article “Will oil companies start spending again” posted on Wood Mackenzie’s site.

We think a fall below US$55/bbl is unlikely this year with the global economy recovering and oil market fundamentals continuing to improve.

I agree with his position that companies will be using surplus cash flow to pay down debt and strengthen their financial capacity. Companies know that the world has changed over this past year. More people will be working from home and there is a greater focus and emphasis on environmental, social, and governance measures.

Having said that, I expect that there is a lot of pent-up demand for traveling. People will want to visit those that they have not seen for a long time, venture out with family and friends as well as exploring new places. Even so, society has changed, and companies must adapt.

I am deliberately ignoring the chatter surrounding the potential Iranian negotiations. OPEC+ has the necessary flexibility to address the Iranian situation in whichever way it goes. Instead, I am more focused on the global recovery.

To reiterate, I forecast that WTI prices will range between $57.50 and $67.50 per barrel for March. If vaccinations go exceedingly well and the number of COVID-19 continues to diminish more quickly than expected, then there is some risk to the upside.

I am increasing my January West Texas Intermediate oil price forecast by $5 to $47.50 to $57.50 per barrel for February 2021.

Back in September of 2020, Prince Abdulaziz said that those who wanted to gamble on the direction of the oil market would be “ouching like hell.” Early this year when OPEC+ was expected to agree to a small increase in production, Saudi Arabia surprised the market by cutting output by a million barrels per day in February and March. That caught the oil market off guard and drove prices higher. Those that were short on oil learned what “ouching like hell” meant.

A Financial Times article “Saudis pledge to cut oil output despite Russian increases” (subscription required) captures the developments.

Saudi Arabia has pledged to slash an extra 1m barrels a day of oil output in February and March even as Russia moves to increase production, with the kingdom moving to keep the Opec+ group’s fragile alliance intact in the face of the coronavirus pandemic.

At the end of an extended two-day meeting, Saudi Arabia›s oil minister Prince Abdulaziz bin Salman announced the “voluntary” reduction after convincing most countries in the 23-member alliance to hold output steady, fearful of unleashing more barrels on to a crude market still roiled by travel restrictions and lockdowns.

Prince Abdulaziz said the unilateral cut was a “sovereign political decision” by his half brother Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler. It was taken with the purpose of “supporting our economy, the economies of our colleagues in Opec+ countries, to support the industry”, the Saudi oil minister said.

On the coronavirus front, we are witnessing more variants that appear to be capable of spreading more easily and that may or may not be more harmful. General comments in the media suggest that the variants can be treated with current vaccines, though the South African variant may be more resilient. While this development is worrisome, vaccination efforts around the globe are picking up steam and countries are imposing stricter measures to help combat the spread of the virus.

I expect that the pandemic will ease in the coming months as more people are vaccinated. As life slowly ebbs back toward normalcy over the next several months, oil prices will continue to firm. Some are calling for oil prices to hit much higher levels later this year, but before making such dramatic statements, I want to learn more how the combination of variants and the rollout of vaccinations plays out.

I am increasing my December West Texas Intermediate oil price forecast by $2.50 to $42.50 to $52.50 per barrel for January 2021.

Oil prices have been range bound in the upper $40s throughout December. OPEC+ has been cooperative, and many expect it to increase production by up to 500,000 barrel per day for February. The Financial Post has a Bloomberg article “Russia’s Novak Backs Further OPEC+ Oil-Output Hike in February” on December 25 by Olga Tanas (Twitter link) stating the following:

“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal,” Deputy Prime Minister Alexander Novak told reporters in Moscow. “Otherwise we’ll never restore production, others will restore it.”

…

“If the situation is normal, stable, we will support the increase,” Novak said, when asked if Russia wants a further hike of 500,000 barrels a day in February. “We must reach levels that were envisaged earlier, from Jan. 1, gradually, without pulling the market too much.”

Please note that Novak is referring to Brent prices in the above quote. Brent prices are typically about $3 higher than WTI prices.

While there is concern that rising COVID-19 cases in January and possibly February might damp oil prices, especially with the new UK strain, vaccinations should accelerate from their slow start, which ought to help support prices. As we roll further into 2021, I expect more progress in controlling the pandemic and more optimism toward higher oil prices.

Furthermore, I expect oil equities to move higher with rising oil prices, though not to the same levels they were at prior to the outbreak of COVID-19. With the worldwide movement to consume less fossil fuels, many investors will avoid the oil and gas sector.

I have not mentioned the change in the US administration in deliberating my forecast because I do not believe it will have any immediate effect. Further out in time, I will weigh its policies and how they may affect oil prices. One policy change, of course, that everyone is watching is how the US will address the Iranian situation. My intuitive guess is that, by the time the issues are resolved, the world may be able to accommodate the additional production. In general, though, until we learn more how the new administration repositions its policies, I am taking a wait-and-see approach.

I want to wish everyone a Happy, Healthy, and Prosperous New Year!