Specious Argument

For the fourth straight month, I expect West Texas Intermediate oil prices to range between $52.50 and $62.50.

With all the uncertainties surrounding trade, global growth, and future oil supply and demand, oil prices remain reasonably volatile. The US-China trade war should become less severe after the mid-November meeting where both countries are expected to sign the first phase of a trade deal. With a little luck, there might be a resolution, or perhaps just more clarity, of the ongoing Brexit saga early in January. With reduced trade frictions, global growth should tick higher. Oil supply and demand, however, are extraordinarily difficult to predict.

The Financial Times article “Investors starve US shale drillers of capital” (subscription required) shows the difficulty shale companies face.

The money pipeline is running dry for large portions of the US shale oil sector, tipping drillers into bankruptcy and threatening the industry”s breathtaking growth in oil production.

Spooked by lower oil prices, equity and bond investors are now shunning the smaller, independent shale explorers that lifted the US to the top rank of global oil producers. Meanwhile, say analysts, banks have pulled in their horns, and are likely to further restrict companies’ capacity to borrow when they begin their twice-annual reviews of loans secured by oil and gas reserves.

Last Friday, Baker Hughes indicated that there were 17 fewer oil rigs operating in the US, supporting the thesis that money is now tight. The capital starvation and reduced number of rigs might damp the expected supply of oil for next year.

Interestingly, Saudi Arabia is going forward with its IPO. That has led to speculation that there might be deeper production cuts announced at OPEC+’s meeting in December.

As mentioned, if trade friction is substantially reduced, demand might be higher than expected.

There are a lot of uncertainties. Those who are bearish will find ample arguments to support their thesis. And similarly for the bulls, they, too, will find ample arguments.

All that said, my price forecast remains at $52.50 to $62.50 for October.

I expect West Texas Intermediate oil prices to range between $52.50 and $62.50, consistent with the range in my last two months’ forecast.

There was a lot of volatility in oil prices in September. There was an attack on Saudi Arabia’s infrastructure, and although Saudi Arabia’s exports have recovered to near prior levels, there are still questions remaining as to how quickly Saudi Arabia’s infrastructure can be fully repaired. Adding to the uncertainty is the impeachment investigation in the US. My own view is that one should largely tune out the political noise until such time as there are consequences that affect supply and demand.

On October 27, the Wall Street Journal published an article “Banks Stay Gloomy on Oil, Shrugging Off Attacks” (subscription required). While I am not gloomy, I am certainly not a raving optimist either. Instead, I expect more range-bound to slightly higher oil prices.

Oil prices have shed the roughly 15% gains they notched on Sept. 16, in the aftermath of the attacks on Saudi Arabia’s energy infrastructure. Among the factors pressuring prices are an increase in U.S. inventories, a backdrop of deepening political and economic uncertainty, and reassurances from Saudi officials that crude exports won’t be interrupted.

“The level of Saudi Arabia’s domestic inventories and production spare capacity both suggest that maintaining export levels is achievable,” said Damien Courvalin, head of energy research at Goldman Sachs.

The incident is likely to have “a negligible impact” on commercial inventories held by Organization for Economic Cooperation and Development nations, Mr. Courvalin said.

Every month seems to bring a new source of volatility. Now, there is the fallout from the attack on Saudi Arabia and the impeachment investigation in the US. In mid-October, the China-US negotiations are scheduled to resume in earnest. So, October promises to be an interesting month.

All that said, my price forecast remains at $52.50 to $62.50 for October.

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.