Specious Argument

For June, I expect West Texas Intermediate oil prices to range between $30 to $40 per barrel. If oil prices go below $30, I do not expect them to stay there long. Furthermore, I expect oil prices to drift upward over time. So if oil prices surpasses $40, they might stick. I am not overly confident of my forecast, even though it covers a wide range.

The Financial Times article “US shale industry braces for wave of bankruptcies” (subscription required) suggests hard times remain for the shale industry.

Analysts predict 250 companies could go bust before the end of next year unless oil prices rise fast enough to start generating cash for producers wilting under punishing debt loads.

A recent rally has taken the price of West Texas Intermediate, the US marker, back above $30 a barrel, having traded in negative territory last month. But it remains down by half since January — and well beneath average break-even oil prices in the shale patch — leaving many more producers teetering on the brink of bankruptcy.

The Wall Street Journal article “Coronavirus Threatens to Hobble the U.S. Shale-Oil Boom for Years” (subscription required) continues with that same theme.

While oil prices have rebounded in recent days and are above $33 a barrel, U.S. output is still poised to fall because companies aren’t drilling enough wells to make up for production declines from existing wells. Shale wells produce a lot of oil and gas early on, but quickly lose steam. Without investing in new wells, many companies’ output would decline by 30% to 50% in just a year, research firm Wood Mackenzie says.

In a recent Bloomberg article “Global Oil Demand Has Yet to Peak, Energy Watchdog Predicts,” (subscription might be required) IEA’s Faith Birol suggests that new demand from India and Africa will not offset potential reduction in consumption from the US.

“If there’s a strong economic recovery, American business consultants using Zoom will not compensate for 150 million new urban residents in India and Africa traveling, working in factories and buying products transported by trucks,” Birol said.

With most regions within the US now opening up and social distancing decreasing, oil demand and consumption are picking up. For those interested, the Federal Reserve Bank of Dallas provided an interesting article “New Dallas Fed Social Distancing Index Gives Insight into COVID-19’s Economic Impact.” The article states that its index is tightly correlated with Google COVID-19 Mobility. I would assume that it also correlates well with Apple Maps Mobility Trend Reports.

While I believe that the oil industry still faces a challenging period, market forces along with OPEC+ are helping to bring the supply-demand dynamic into balance. Furthermore, once we are past COVID-19, the demand for oil may surpass prior levels.

For these reasons, I still maintain that buying well-managed and capitalized oil companies may be a prudent investment decision for those with a long-term horizon. And as stated last month, I am not providing any investment advice or guidance, and you and your adviser are responsible for your investments.

Given the extreme oil price volatility these past few months, I am glad that I did not forecast any price ranges. There are way too many fast-moving parts that are poorly understood. I do not know that anyone can provide any guidance at this point with any confidence. That said, I do expect volatility to subside somewhat.

I am not providing any investment advice or guidance. You and your financial adviser are responsible for your own investment decisions and actions. That said, I encourage you to consider oil companies that possess financial and managerial strength to weather the current storm.

With the benefit of hindsight, I expect that the prices of many oil stocks bottomed in March. But I am not ruling out further downside or a new bottom in the coming months. In the short- to medium-term, however, increased testing and better treatment are likely to damp the negative effects of COVID-19 before a final vaccine is available for everyone. And in two, three, or four years, I expect that we will look back at this period and wish we had increased our exposure to the oil sector.

This downturn in the oil industry is the most severe that I have ever seen. Many companies simply will not survive. So again, I want to stress that long-term investors should pay attention to those companies that can withstand an extended period of low oil prices.

Although we are at midmonth with a very volatile oil environment, I want to bring to your attention an excellent podcast that I listened to this weekend.

Columbia Center on Global Energy Policy produced a podcast titled “Why This Crash is Different” featuring guests Helima Croft, Amy Myers Jaffe, and Bob McNally. I found this nearly hour-long podcast to be one of the best sources of information. Because the guests are knowledgeable and experienced, they were able to provide a great synopsis of what has taken place and provide their thoughts and opinions on future developments. I encourage you to listen.

Markets are extremely volatile and unpredictable with the unfolding of the COVID-19 crisis and the OPEC+ brouhaha. For those reasons, I will not be providing an oil price forecast at the end of this month and possibly for several more months. There is simply too much uncertainty.

I am not providing a forecast for next month.

As we have seen during the past month, the coronavirus, or COVID-19 as it is officially named, is the major factor for determining the reduced oil demand for the next several weeks or months. Many of us have become amateur epidemiologists trying to understand all the data. Although I have read and watched as much as possible on this subject, I believe that most of us are still learning a lot about the virus and what its effects may be. While I have formed some opinions, I do not have much confidence in those opinions and will change them in a heartbeat when new and better information comes along. So, for those reasons, I am declining to provide a forecast for next month.

On March 5 and 6, OPEC+ is planning to meet and agree on new oil production cuts in response to reduced demand from the effects of coronavirus. I hope that this meeting goes better than their earlier meeting in February where they did not agree on any cuts.

One last thought: be careful when reading expert opinions about the coronavirus and its effects. Many of the opinions that I have read are extreme in either direction. The reality is that future is uncertain. Of course, I hope that the coronavirus is mild and that it remains largely contained.