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Oil Update—November 2018

Last month, I forecast that West Texas Intermediate would range between $65 and $75 for November. Nearing month end with WTI at about $50, I was wrong.

Some of the factors that led to the sharp oil price decline are as follows: unexpected waivers granted for purchase of Iranian crude; worries about global growth; continuing trade concerns between China and the United States; political pressure from President Trump, especially in light of the killing of Jamal Khashoggi; supply growth from the Permian basin; Russia and Saudi Arabia producing at near record volumes; and a strong US dollar. How much each of the factors contributed is unknown and open to debate.

On December 6, OPEC plus Russia will meet in Vienna to discuss the current situation and determine whether and how significant any cuts might be. A November 23 article in the Wall Street Journal titled “Saudis Mull Quiet Cuts to OPEC Production” (subscription required) lays out a possible scenario where cuts are made without drawing undue and unwanted attention.

Saudi Arabia and OPEC are inching toward a compromise between pleasing the U.S. with policies that won’t lead to price spikes and throttling back the flow of its oil to rebalance oversupplied global markets.

The solution the cartel is considering: A production cut that doesn’t look like a production cut.

Under such a scenario, the Organization of the Petroleum Exporting Countries would announce plans to retain current output targets, first set in 2016. That move would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day, according to people familiar with the matter.

Because oil prices have fallen so far, I am inclined to think that prices are at or very near the bottom. Therefore, I estimate that the WTI price over the next four weeks will range between $50 and $65. This range is wider than my usual ten dollars because there potentially could be a snapback resulting from the OPEC meeting and a general rally into yearend.

As an aside, for those who have been following horrific details surrounding the murder of Jamal Khashoggi, the following Wall Street Journal article is worth reading: “Saudi Arabia Accused of Torturing Women’s-Rights Activists in Widening Crackdown on Dissent” (subscription required).

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Oil Update—October 2018

My November oil price range forecast for West Texas Intermediate returns to where it was for July through September. That is to say, I expect that WTI will range between $65.00 and $75.00 per barrel, a decrease of $2.50 from October’s upper and lower range values. While oil prices might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

Given the ongoing market correction and the murder of Jamal Khashoggi, I expect OPEC and Russia to keep the oil market well supplied in the face of the Iranian sanctions while not letting oil prices fall much further. There are articles suggesting that OPEC might need to cut supplies again because too much oil will soon be available. Yet other articles highlight the lack of surplus capacity suggesting that higher prices are warranted.

A lengthy article titled “Saudi energy minister Al-Falih speaks to TASS on OPEC+, oil prices and Khashoggi” published in the Russian new agency TASS is worth reading.

For those who want to add oil exposure to their portfolios, this market correction might be providing an opportunity. Many of the major integrated oil companies can generate substantial profits in this price environment. As a bonus, many of those same companies pay attractive dividends.

November will be an important month because we will learn how the markets react to the current correction, US election results, fallout from the Khashoggi murder, and Iranian sanctions. As mentioned in prior articles, I am still waiting to see how the trade tensions play out and how Venezuela manages in the months ahead. I continue to expect substantial price uncertainty over the next several months.

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Oil Update—September 2018

My expected oil price range for October West Texas Intermediate is slightly higher than it was for September, August, and July. I expect that WTI will range between $67.50 and $77.50 per barrel, an increase of $2.50 on the upper and lower range values. While oil prices might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

The Iran sanctions, trade tensions and developments in Venezuela all continue to be important factors for determining oil prices. With the Iran sanctions officially starting in November, oil prices have begun to move upward. There are numerous articles stating that oil could reach over $100 per barrel by later this year or early next. While I am skeptical that an upward oil price move will extend that far, I want to wait to see how the market reacts in October to the looming November sanctions. In other words, I do not have strong a conviction on where the price range will be in several months.

On September 30, the Wall Street Journal article “Reignited Rally Sets Off Talk of $100 Oil” suggests that much higher prices are possible soon.

Oil prices are again marching higher, prompting talk that crude could reach $100 a barrel for the first time since 2015’s crash.

Brent crude, the global benchmark for oil prices, jumped 4.1% in the third quarter to $82.72 a barrel, the highest level in nearly four years. Brent’s fifth consecutive quarterly advance marks its longest such streak since 2008. U.S. crude edged down from its most recent multiyear high, falling 1.2% to $73.25 a barrel last quarter, though it has risen in five of the past six weeks. Investors have grown more bullish ahead of Nov. 4, the U.S. sanctions deadline for companies to stop buying Iranian oil.

Sentiment was bolstered, too, by the recent decision of the Organization of the Petroleum Exporting Countries and its allies to leave production steady. That move, analysts said, convinced investors that the removal of Iranian oil from the market, along with supply disruptions in places such as Venezuela, will lead to large crude shortages.

My October outlook is slightly higher than it was for the last three months. During October, we might gain a better appreciation of how the oil markets will react to the Iranian sanctions in November. Of course, I am still waiting to see how the trade tensions play out and how Venezuela manages in the months ahead. I continue to expect substantial price uncertainty over the next several months.

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Oil Update—August 2018

My expectation for the West Texas Intermediate oil price for September is the same as it was for July and August, namely WTI will range between $65 and $75 per barrel. While it might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

Although oil prices briefly fell below $65 in August, prices remained in the $65 to $75 range. September and October are considered shoulder months where oil demand is reduced because the driving season has passed and the winter heating season still lies ahead. This year, though, the Iran sanctions are making the situation more interesting.

There is still considerable uncertainty as to the timing and the quantity of the affected Iranian barrels. On August 28, the Wall Street Journal article “Iran’s Oil Exports Dropping Faster Than Expected Before U.S. Sanctions” (subscription required) suggested that reduced Iranian exports might have already taken place.

Iran oil shipments are declining at a faster-than-expected pace ahead of U.S. sanctions set to begin in November.

Iran expects crude exports to fall by a third in September, according to people familiar with purchasing plans, potentially posing an unforeseen supply risk to markets. Officials at the state-run National Iranian Oil Co. provisionally expect crude shipments to drop to about 1.5 million barrels a day next month, down from about 2.3 million barrels a day in June, say people familiar with the country’s ports loading program.

Many experts had expected oil shipments to decline by about 1 million barrels by year’s end. Now some of them say that fall may have already happened. Iran hasn’t yet announced its exports this month or its forecast for next month.

Furthermore, on August 29, the Wall Street Journal article “Oil Hits Four-Week High as U.S. Crude Inventories Fall” mentioned that Iranian production is projected to decrease by about 800 thousand barrels per day in September compared to June.

Wednesday’s price surge comes as oil market observers expect prices to remain buoyed in the coming months as the U.S. hits Iran with planned sanctions designed to prevent the country from exporting crude. The ban on Iranian oil exports officially starts in November, but signs are emerging that shipments are already being curtailed.

Officials at the state-run National Iranian Oil Co. provisionally expect crude shipments to drop to around 1.5 million barrels a day in September, down from around 2.3 million barrels a day in June, according to people familiar with the matter.

My outlook for September is the same as it was for August. I am still waiting to see how trade tensions play out over the fall, how Venezuela manages in the months ahead, and how oil markets react to Iran sanctions in November. I continue to expect substantial oil price uncertainty for the next several months.

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Oil Update—July 2018

My expectation for the West Texas Intermediate oil price for August is the same as it was for July, namely WTI will range between $65 and $75 per barrel. While it might deviate from that range for a few days, I expect that WTI prices will fall within that range for most of the month.

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

Brent crude oil spot prices averaged $74 per barrel (b) in June, a decrease of almost $3/b from the May average. EIA forecasts Brent spot prices will average $73/b in the second half of 2018 and will average $69/b in 2019. EIA expects West Texas Intermediate (WTI) crude oil prices will average $6/b lower than Brent prices in the second half of 2018 and $7/b lower in 2019. NYMEX WTI futures and options contract values for October 2018 delivery that traded during the five-day period ending July 5, 2018, suggest a range of $56/b to $87/b encompasses the market expectation for October WTI prices at the 95% confidence level.

Yet others believe that prices are on the cusp of a bull market. On July 28, the Wall Street Journal in an article titled “As Oil Industry Recovers From a Glut, a Supply Crunch Might Be Looming” (subscription required) stated the following:

“The years of underinvestment are setting the scene for a supply crunch,” said Virendra Chauhan, an oil industry analyst at consultancy Energy Aspects. He believes a production deficit could come as soon as the end of next year, potentially pushing oil above $100 a barrel.

. . .

Veteran oil investor Pierre Andurand is betting on a multiyear bull run in oil. Mr. Andurand said Brent could hit highs of $100 a barrel this year and top $150 by the early 2020s. Others forecast more modest price gains but still believe a supply deficit will raise prices.

Oil price uncertainty continues to rage on. I am waiting to see how trade tensions play out over the fall, how Venezuela manages in the months ahead, and how oil markets react to Iran sanctions in November. I expect substantial oil price uncertainty will remain for the next several months.

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