Specious Argument

I am keeping my October price forecast for West Texas intermediate oil to range between $35 and $45 per barrel for November.

Increasing COVID-19 cases throughout the world, increased production from Libya, and the upcoming US election have dominated the news recently. While increasing coronavirus cases are a definite negative, I am hoping that people take the necessary measures to help flatten the curve in the upcoming weeks and months. That said, I do expect more bad news in the next few weeks. Libya’s increased production has surprised some. When OPEC+ meets at the end of November and early December, the increased COVID-19 cases and increased Libyan production will most likely cause it to delay its tapering of planned production cuts, assuming there is agreement. The original plan was to increase production by about 2 million barrels per day starting in January. That date is likely to be pushed back. Once the US election has been decided, regardless of the outcome, investors will likely feel more comfortable making decisions with more certainty.

Regarding COVID-19, there is hope that vaccines will be available within a few months. Of course, it will take several months before vaccines are widely available to all. Albert Bourla, chief executive of Pfizer, was quoted in an online Wall Street Journal article dated October 27, 2020, “Pfizer Says Covid-19 Vaccine Late-Stage Trial Almost Fully Enrolled.”

“We have reached the last mile,” Pfizer Chief Executive Albert Bourla said on a conference with analysts discussing earnings. “Let’s all have the patience required for something so important for public health and the global economy.”

Mr. Bourla reiterated the time line he laid out earlier this month for the vaccine’s potential rollout. He said Pfizer could file for an emergency authorization to put the vaccine into initial public use in late November, assuming positive trial results—suggesting shots could be made available in the U.S. before the end of the year.

…

Mr. Bourla said that Pfizer, which is ramping up manufacturing capabilities, will be able to meet its commitment to provide 100 million doses in the U.S. by March, and to deliver about 40 million by the end of this year.

Other manufacturers, including AstraZeneca PLC, Moderna Inc., and Johnson and Johnson, are also in advanced development.

The good news is that it appears we are much closer to the end than we are to the beginning of the pandemic. When the pandemic broke out in March or April, many news reports suggested that no vaccines would be available for at least twelve-to-eighteen months. Now, we have hope that a few vaccines will be available within twelve months.

Because COVID-19 is a serious illness that can lead to serious complications and in some cases death, especially for those with compromised immune systems or advanced age, I encourage everyone to wash their hands frequently, wear a mask when in public, maintain a safe distance from others, and limit contact with others. Also, keep a record of activities and contacts over the past fourteen days, so that if you if you do fall victim to the coronavirus, you can provide contact tracers with good information. If we take those measures, then there is a greater likelihood that shutdowns will not be required.

I hope everyone remains safe and well.

I am lowering my price forecast for West Texas Intermediate oil to range between $35 and $45, a decrease of $2.50 per barrel from last month.

Just as I released my forecast last month, the bottom dropped out. Oil prices plunged into the high $30s. Rising COVID-19 cases, cheating by UAE and Iran, strengthening US dollar, British Petroleum’s bearish forecast, major traders growing more cautious, Libya resuming production, and a few other factors all contributed to oil weakness. The coronavirus situation, however, continues to weaken demand and hamper oil’s price recovery. That said, oil will continue to recover as the supply glut is exhausted and demand increases.

Even though I have reduced my forecast, I expect WTI to hover close to $40 throughout the next month. I do not think it will go much below $40 because of the Saudi threat to hurt those who short oil. Similarly, because of the rising number of coronavirus cases throughout the world, oil prices will have difficulty rising too much.

I am hoping that I will raise my range again soon.

For September, I am raising my forecast for West Texas Intermediate oil prices to range between $37.50 to $47.50 per barrel.

For the past two months, WTI prices have been stuck in the low $40s range. For the most part, I expect that range to continue for September. I do not expect WTI prices to stay below $40 for an extended period.

Many pundits and forecasters expect a continued strengthening of oil demand. In OPEC’s latest “Monthly Oil Market Report,” it expects oil demand to reach 90.6 million barrels per day in 2020 and 97.6 million barrels per day in 2021. Of course, these assumptions are predicated on COVID-19 not making a vigorous comeback.

The overall mood toward oil and oil stocks is pessimistic. The Wall Street Journal article “Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets” (subscription required) highlights how far energy companies have fallen out of favor.

It is also a reminder of Exxon’s fall from the top echelon of American industry. As recently as 2013, Exxon was the largest U.S. company with a market value above $415 billion. It has since shrunk to less than $180 billion and has been eclipsed by the technology giants such as Apple Inc., Amazon.com Inc. and Microsoft Corp. that now drive the American economy.

“Exxon, that used to be a behemoth in the U.S. markets, and now it’s dropped out of the Dow,” said Matt Hanna, portfolio manager at Summit Global Investments. “That just goes to show how quick things can change and how far energy has fallen as a sector.”

Usually, market contrarians say a sector that is so beaten down should be ripe for bargains. But many investors remain skeptical of an energy rebound, pointing to muted expectations for global growth and spotty earnings.

As oil prices creep up, oil stocks should begin to show some signs of life. Right now, however, technology stocks are sucking all of the oxygen out of the investment arena.

For those that are brave enough to invest in energy companies, I suggest sticking with strong, well-capitalized companies that can withstand lower prices for longer periods. If oil prices were to spike, then the higher leveraged oil companies would outperform, but with the present slow upward movement in oil prices, a more cautious approach may be more appropriate.

Regarding the upcoming US election, I believe it’s a nonissue. The economy will continue to recover over the next several months provided that there are no COVID-19 setbacks.

In summary, I expect slow, steady economic progress with WTI prices staying in the low- to mid-$40s price range for most of September.

For August, I am extending my July forecast for West Texas Intermediate of $35 to $45 per barrel.

I was hoping the world environment would encourage a higher forecast for August, but, with the increase in the number of new COVID-19 cases worldwide, I decided to be cautious. As stated last month, I expect governments and people will learn to cope with the coronavirus, numbers have increased faster than I expected. The question is whether people will adopt measures to help reduce the spread of the virus—such as social distancing and wearing masks. If so, I hope further lockdowns are unnecessary. According a Wall Street Journal article “U.S. Leads the Globe as Coronavirus Deaths Pass 150,000, Hospitalizations Rise” (subscription required), new cases might be declining.

“Where you limit transmission, you’re going to limit the death toll,” Dr. Fortune said Wednesday.

The U.S. seven-day average of deaths is about 1,019, according to the Journal’s analysis, but the 14-day average is lower, at around 914. For new cases, the seven-day average is about 64,684, less than the 14-day average of around 65,745, suggesting that new cases are on the decline.

The deaths haven’t mounted as quickly during the latest surge in cases as they did during the initial wave in the spring. The U.S. went from a handful of deaths to 100,000 deaths from late March to late May—and topped 125,000 (subscription required) a little over a month ago. The country ranks 10th in the world in deaths per 100,000 people, according to Johns Hopkins.

As an aside, I enjoy following the travails of Mark Wallace, an excellent photographer, as he treks about the world on his motorbike. In a recent blog post “Quarantined in Argentina,” he detailed how he was affected by their protocols. While I enjoyed reading about his experiences, I also enjoyed viewing his photography.

I hope that the worst of the coronavirus is behind us and that we can begin to meaningfully progress to bringing the number of cases down across the globe. If that situation occurs, then oil might continue its upward path.

To reiterate, I expect West Texas Intermediate oil prices to range between $35 and $45 per barrel for August.