Specious Argument

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.

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.