Specious Argument

I expect West Texas Intermediate oil prices to once again range between $52.50 and $62.50, which is the same range as my last month’s forecast.

August has been a difficult and volatile month for oil prices and equities. There were the US-China tariff flareups followed by the G7. Yet oil prices did not dip significantly. And this past inventory report from the EIA showed a much larger than expected withdrawal of about ten million barrels.

Of course, there are still concerns about a global recession damping oil demand. The US-Iran situation seems as though it is not going to be resolved soon. Many experts continue to believe that there will be more oil supply than demand for 2020. And, as we saw this month, the US-China negotiations are fraught with difficulties and uncertainties.

As an aside, on August 16, Barron’s published an article titled “Wall Street Has Abandoned Oil and Gas Stocks. You Shouldn’t.” (subscription required) by Andrew Bary. In my view, valuations for oil and gas companies with strong balance sheets are extraordinarily low. On August 30, the Wall Street Journal published an article titled “Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale” (subscription required) by Rebecca Elliot and Christopher M. Matthews. As the title suggests, this article discusses the challenges for shale companies, especially those lacking adequate resources to weather storms. Gary Ross, founder of PIRA Energy Group and current CEO of Black Gold Investors LLC, gave an excellent Bloomberg video interview where he stated that he expects oil demand to pick up in the fourth quarter.

Even with the ratcheting up of trade tensions in August that increased uncertainty and volatility, I expect WTI oil prices to remain between $52.50 and $62.50.

My August West Texas Intermediate oil price forecast ranges between $52.50 and $62.50 per barrel. The range is $2.50 lower than it was last month.

While my prior forecast was okay, WTI prices spent most of the time hugging the bottom end of the range. With this month’s forecast, I am anticipating that price weakness will continue, so I am allowing $2.50 more downside protection.

The pessimism surrounding oil seems extreme and is based on some identifiable factors. Many are fearful of a global recession damping oil demand even further. The US-Iran situation might be resolved sometime soon, allowing Iran to export more oil. More oil supply than demand is expected for 2020. Saudi Arabia and Kuwait are negotiating to resume production from jointly run oilfields Khafji and Wafra, which amounts to about a half million barrels per day. Oil companies might be aggressively hedging their future production at these prices. And the US-China negotiations, depending upon the substance of any interim announcements, may be viewed as negative or positive.

There is not much on the positive side of the ledger. The EIA oil inventory withdrawals have been substantial over the past few weeks for crude oil, but there have been some inventory builds relating to crude oil products that may suggest weakening demand because of a slowing global economy. The geopolitical situation in the Persian Gulf is lending some support but not as much as it would have in the past. Central banks are likely to lower rates in an attempt to help the global economy. I expect that a flood of liquidity will help inflate most risk assets, including oil.

The Financial Times has an interesting article “Why US bond yields could be going the way of Germany and Japan” (subscription required) where the author, Bob Michele who is global head of fixed-income at JPMorgan Asset Management, argues that the Fed must act aggressively to stave off the 10-year US Treasury heading toward zero.

Because of all the present uncertainties surrounding oil prices, they are extremely difficult to predict. We will need to take a wait and see approach to get more clarity. I continue to expect uncertainty and volatility.

My July West Texas Intermediate oil price forecast ranges between $55.00 and $65.00 per barrel. The range is the same as last month’s forecast.

My prior forecast was wrong. June oil prices were much lower than I expected. The US-China negotiations broke down, and the global economy appears to be decelerating, which raises demand concerns.

At the G20, Presidents Xi and Trump agreed to restart trade negotiations. And according to the Wall Street Journal article “Russia, Saudi Arabia Reach Oil Output Agreement Ahead of OPEC Talks,” (subscription required) Russian President Putin and Saudi Crown Prince Mohammed bin Salman agreed to extend the cuts of 1.2 million barrels per day for a further six to nine months. Those two developments should, but not necessarily will, help to buoy oil prices.

On Friday, June 28, Europe announced that Instex was operational. Instex is a company in Europe whose purpose is to help facilitate commercial transactions between Europe and Iran without the need for any direct financial flows. When that announcement was made oil prices, both Brent and WTI, plunged over a dollar per barrel in a very short time. I believe that movement was an overreaction because I expect that it will still be difficult to ship oil from Iran, difficult to insure ships carrying Iranian oil, and likely that no major oil company will want to purchase Iranian oil. If Iran is unable to freely export its oil, then it has little motivation to continue to comply with its current nuclear agreement.

For those wanting to know more about Instex, here are three articles:

1. “Europe Says Iran Trade Channel Operational: Statement” (article since removed)
2. “Europeans Plan to Inject Capital Into Iranian Trade Effort” (Wall Street Journal, subscription required)
3. “Iran Leaves Door Open to Pause in Its Nuclear Escalation as Europe Gears up Trade Mechanism” (Wall Street Journal, subscription required)

With the US sanctions applied to Iran, instability and unrest in the Middle East have increased, especially near the shipping channel by the Strait of Hormuz. Furthermore, drones have attacked infrastructure, an Iranian missile brought down a multimillion-dollar US drone, and mines or missiles have damaged some ships, too. This instability and unrest have led to a geopolitical premium being added to the price of oil. The exact amount of the premium is impossible to quantify.

As before, there continues to be considerable uncertainty about Libya’s and Venezuela’s future oil production.

Now that US-China negotiations have resumed and that OPEC+ appears to have a path forward regarding its cutbacks over the next six to nine months, I expect the price of oil to stabilize and, perhaps, move upward slightly. With the global economy still soft, oil demand may be subdued. Countering that argument, though, is that there is more hope for successful trade negotiations and more certainty regarding OPEC+ cutbacks.

I continue to expect uncertainty and volatility.

My June West Texas Intermediate oil price forecast ranges between $55 and $65 per barrel. The range is $7.50 lower than last month’s forecast.

Since last month’s forecast, analysts generally believe that OPEC+ can replace reduced Iranian oil output. Previously, some pundits were forecasting that the loss of Iranian production would lead to a price spike. Those fears appear to have dissipated.

The US and China had appeared to be making good progress toward finalizing a trade deal when the wheels fell off. Now, some are concerned that global trade will falter, creating less demand for oil. Obviously, without a trade deal, the imposition of punishing tariffs will introduce more uncertainty and hamper global trade. Because I believe that both countries realize the importance of a trade deal, one will eventually get done. My own belief is that it will happen prior to yearend. My own belief, however, is just an assumption and is not based on any hard-factual evidence.

There continues to be considerable uncertainty about Libya’s and Venezuela’s future production.

Because Saudi Arabia wants and needs higher prices to help balance its budget, I am assuming that the Brent oil price generally will remain between $70 and $75 per barrel. At above $75 per barrel, I expect that the US will exert political pressure to bring prices down. Although last month I estimated the Brent WTI spread to be about $8, a value of $10 is more realistic. Because I usually give a $10 spread, my expected range for next month for WTI is $55 to $65 per barrel.

During the latter part of June, OPEC+ will meet to decide what, if any, production changes should be made. And the G20 summit will also be held, where there will be an opportunity for the US and China to possibly reset their trade negotiations. Until then, though, I continue to expect considerable uncertainty and, possibly, volatility.