Specious Argument

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.

My forecast for February is that the West Texas Intermediate oil price will range between $50 and $60 per barrel. The lower end of the range is five dollars higher than last month’s forecast.

As outlined by John Kemp, Senior Market Analyst for Reuters, there are five central elements when considering oil prices for the next several months:

1. Global economy
2. US shale production growth
3. OPEC+ output reductions
4. US sanctions on Iran
5. US sanctions on Venezuela

I will provide a cursory comment on each item.

The outcome of the US China trade dispute will drive global growth. If trade talks fail, then global growth will obviously falter. If the trade talks make significant progress, then global growth is likely to at least muddle along. While some are pessimistic, I am optimistic that the two countries land on an agreement. Neither country wants a protracted trade war.

If WTI oil prices remain below $60 per barrel, US shale growth will be moderated because many companies have difficulty being profitable at those prices. OPEC+ output reductions will begin to bite more as time progresses. Because it takes time for reduced oil volumes to reach their destinations, the full impact of the reductions has yet to be realized.

Continued US sanctions against Iran and waivers for the sale of its oil are unknowable at this point. We will have to see how the world looks when it comes time to renew sanctions and waivers, including any possible further action against Iran.

Because Venezuela will have its own difficulties maintaining its production, I view any US sanctions against Venezuela as having minimal affect. Furthermore, there are always other potential buyers for Venezuela’s production. This evening, the US announced sanctions as outlined in the Wall Street Journal article “U.S. to Sanction Venezuela’s State-Owned Oil Giant” (subscription required). So far, the oil price reaction to those sanctions has been muted.

I believe the low oil price in December was an aberration. The oil supply and demand should be getting close to balancing. In my view, the top two items are most important. So, we need to watch to see how the US China trade talks develop and how US shale production performs.

December was a challenging month for the stock market and oil prices. The price of oil fell much further than I expected.

My forecast for the next four weeks is that the West Texas Intermediate price will range between $45 and $60 per barrel. In my view, the current price of about $45 per barrel is not sustainable.

There are three sources of information that are worth considering.

First, the US Energy Information Administration predicts lower prices in the months ahead. In its latest “Short-Term Energy Outlook” (PDF), it states the following:

EIA expects Brent spot prices will average $61 in 2019 and that West Texas Intermediate (WTI) crude oil prices will average about $7/b lower than Brent prices next year. NYMEX WTI futures and options contract values for March 2019 delivery that traded during the five-day period ending December 6, 2018, suggest a range of $36/b to $77/b encompasses the market expectation for March WTI prices at the 95% confidence level.

Second, a December 24 article from the Wall Street Journal titled “Banks Sharply Lower Oil-Price Forecasts” (subscription required) mentions the following:

Brent crude, the global oil benchmark, is now expected to average just over $69 a barrel next year, down from an estimate last month of roughly $77 a barrel, according to a poll of 13 investment banks conducted by The Wall Street Journal. West Texas Intermediate, the U.S. oil standard, should average just over $63 a barrel, compared with a November forecast of around $70 a barrel, the poll showed.

And third, Helima Croft on CNBC’s Fast Money stated that she believes Saudi Arabia will do whatever it takes to get oil on a firmer footing because it raised its budget spending by 7 percent recently and its budget is based on an $80 per barrel Brent price.

The markets are currently experiencing a high level of volatility. Once volatility recedes and the effects of OPEC’s reduced volumes becomes known, I expect that oil prices will be higher.