Specious Argument

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.

My forecast for May is that the West Texas Intermediate oil price will range between $62.50 and $72.50 per barrel. The range is $5.00 higher than last month’s forecast.

After the US administration began the process of ending waivers on the Iran sanctions, prominent pundits have had a difficult time assessing the effect of the resulting loss of Iranian production. Part of the challenge is that no one knows with certainty just how much production will be lost.

A Wall Street Journal article titled “Oil Volatility Picks Up, Putting 2019 Rally Under Scrutiny” (subscription required) highlights the uncertainty.

Prices had climbed early last week after the Trump administration surprised some market participants by ending waivers on Iran sanctions that allowed some buyers to continue purchases from the Islamic Republic. Last week marked the first time in nearly two months that oil logged multiple moves of at least 2.5% in either direction.

The moves are putting investors on edge because of the narrow supply-demand balance heading into the U.S. summer driving season. The decision to end the sanctions waivers threatens to remove even more oil from global markets at a time when U.S. sanctions against Venezuela and a continuing conflict in Libya have already resulted in lower supply from those countries.

Even with the U.S. producing record amounts of oil, many investors remain unsure how quickly OPEC and its allies would fill any impending production gaps, opening the door to large price swings in either direction.

Because Saudi Arabia wants and needs higher prices to help balance its budget, I am assuming that the Brent oil price remains between $70 and $80 per barrel. Estimating that WTI prices are about $8 dollars lower, I arrived at my range for May of $62.50 and $72.50 per barrel.

Because the uncertainty surrounding production from Iran, Libya, and Venezuela is particularly high, I do not have great confidence in my range. Furthermore, the US China trade deal, with implications for global growth, has yet to be resolved. So, I would not be surprised if prices declined below or rose above my forecast.

Perhaps once the OPEC+ meeting in June has concluded and the driving season is in full swing, the outlook for oil prices will become clearer. Until then, though, I expect considerable uncertainty and, possibly, volatility.