Specious Argument

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!

When I announced my forecast last month, West Texas Intermediate was hovering close to $35 per barrel. As I prepare this post, WTI is slightly above $45 per barrel.

So what has changed? Pfizer’s and Moderna’s announcements of their vaccines changed the outlook for oil prices. Also, OPEC+ is expected to roll over its production quotas for another three months when concludes its meeting tomorrow, December 1.

Because of the vaccine announcements and the expected OPEC+ rollover, both of which will lead to an increased investor risk appetite for oil, I am increasing my WTI price forecast to range between $40 to $50 per barrel for December.

Cumulative Number of COVID-19 Cases in Alberta

On the negative side, COVID-19 will continue to spread. In my province of Alberta, cases are increasing at an alarming rate. The same applies for much of the United States and Europe. On the positive side, vaccinations should begin shortly. I hope by late summer or early fall, all those who want vaccines will have had an opportunity to be vaccinated. And as mentioned, I expect OPEC+ to roll over its production quota for another three months, which should provide support while COVID-19 continues to spread.

As seen during the past month, oil prices and oil equities have spiked. I expect further gains for equities in the months ahead. As investors become more comfortable that the pandemic will recede in the months ahead, I expect more confidence in oil equities. That said, the path forward may continue to be volatile. If you do plan to invest in oil equities, I encourage you to look at those equities with financial and managerial strength. Investors are still wrestling with how much society will change on the other side of the pandemic.

Number of COVID-19 Cases in Alberta per Day

Because of the surging number of COVID-19 cases, I will reiterate my advice from last month. 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 included two charts showing the number of cases of COVID-19 in Alberta.

I hope everyone remains safe and well.

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.