Specious Argument

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.

My forecast for April is that the West Texas Intermediate oil price will range between $57.50 and $67.50 per barrel. The range is $2.50 higher than last month’s forecast.

The price has been slowly creeping up as OPEC+’s cutbacks take effect. Saudi Arabia, in particular, is driving prices higher according to a Reuters article “More shale, who cares? Saudi Arabia pushes for at least $70 oil” where it states the following:

DUBAI/LONDON (Reuters) – Budget needs are forcing Saudi Arabia to push for oil prices of at least $70 per barrel this year, industry sources say, even though U.S. shale oil producers could benefit and Riyadh’s share of global crude markets might be further eroded.

Riyadh, OPEC’s de facto leader, said it was steeply cutting exports to its main customers in March and April despite refiners asking for more of its oil. The move defies U.S. President Donald Trump’s demands for OPEC to help reduce prices while he toughens sanctions on oil producers Iran and Venezuela.

A Brent price of $70 translates into a low $60s WTI price.

Of course, the US China trade negotiations are still important for global growth. My assumption is that both sides will continue working toward or will successfully conclude a deal. And there are still concerns with Iran and Venezuela as well as other OPEC members. In other words, there are still a lot of moving parts that can drive oil higher or lower. My expectation, though, is that oil will continue to rise in April.

My forecast for March is that the West Texas Intermediate oil price will range between $55 and $65 per barrel. The range is five dollars higher than last month’s forecast.

I have raised my target range because of the ongoing problems in Venezuela, the progress that US and China are making toward some sort of a deal, and OPEC+’s determination to reduce oil exports. An excerpt from the February 12 Financial Times article “Saudi Arabia goes on the hunt for global oil and gas” states the following:

The kingdom and Russia are leading global producers to curb supply to support oil prices after they fell by 40 per cent in late 2018. Crude is now hovering near $60 a barrel, while Saudi Arabia’s budget requires levels closer to $80.

Mr Falih said in March the kingdom would reduce production to near 9.8m barrels a day, from above 11m b/d in November. Exports would also fall to near 6.9m b/d, down from 8.2m b/d three months ago.

Brent crude, the international benchmark, rose $1.82 a barrel to $63.34 after the FT reported the minister’s production outlook, though prices came off their highs later in the trading day.

As we constantly see in the news, Venezuela is going through a very difficult time. Putting oil aside for a moment, I hope that a new government can quickly stabilize and then improve the situation. So far, the US and China appear to be making progress. And the rising oil prices throughout February and OPEC+’s determination to reduce output should lead to higher prices.

Of course, the questions then become how far and how fast? Before making a new assessment, I want to see how the market reacts to these changes over the next month.

Global growth, US shale production response, and Iranian sanctions are also factors that will play important roles in the months ahead.