by Stecyk
on February 24, 2019
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.
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by Stecyk
on January 28, 2019
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:
- Global economy
- US shale production growth
- OPEC+ output reductions
- US sanctions on Iran
- 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.
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by Stecyk
on December 30, 2018
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.
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by Stecyk
on November 25, 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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by Stecyk
on October 29, 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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