Specious Argument

With WTI prices at about $58.00 per barrel, I am updating my WTI oil price forecast upward over the next several weeks to range between $50.00 and $60.00 per barrel. As mentioned last month, geopolitical uncertainties are likely to have created a floor near $50 per barrel. Aside from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal, the arrests in Saudi Arabia have added to the list of geopolitical uncertainties.

In its latest monthly report, the International Energy Agency lowered its global crude demand growth outlook by 100,000 barrels per day for 2017 and 2018. The reduction in demand growth was in direct opposition to the Organization of Petroleum Exporting Countrie’ report that raised demand growth. If the IEA is correct in its forecast, current prices might not be sustainable.

On November 30, OPEC and Russia are scheduled to announce their decision whether they will extend their oil production cuts past March of 2018. Most, including me, expect that the cuts will be extended to the end of the year. Even if the cuts are extended, the bulls might declare victory and reduce their long positions. On the other hand, prices might rise even further with decreased uncertainty.

Because of the extended rally in oil prices and because of IEA’s reduced growth demand, I am cautious about oil prices escalating much further in the near future. I do appreciate, however, that global oil inventories are falling, and that might cause prices to spike higher. We should gain more insight after the market’s reaction to OPEC’s decision.

I am updating my WTI oil price expectations for the next several weeks to range between $50.00–$57.50 per barrel. The bottom oil-price limit is higher because geopolitical uncertainties have likely created a floor near $50 per barrel. The geopolitical uncertainties stem from the conflict between the Kurds and Iraqis, North Korea’s nuclear ambitions, and the potential for President Trump to decertify the Iran nuclear deal. Another positive factor is the upcoming OPEC meeting at the end of November where many expect the agreement limiting crude-oil output to be extended beyond March 2018. The top oil-price limit has been raised because, with recent WTI prices being near $54 per barrel, it leaves further room to the upside. At current prices, producers are hedging their future production and will, therefore, produce additional volumes that should damp further increases in oil prices. With oil prices near $54 per barrel, I expect that WTI is near the higher end of its near-term range.

A good friend Paul Precht recommended that I view a YouTube video “Tony Seba: Clean Disruption – Energy & Transportation.” Seba offers a fascinating presentation of how he sees the future of energy and transportation unfolding. Even if he is only half correct, there will be dramatic changes for society and especially Alberta. After viewing fifteen minutes of this hour-long video, you will be hooked. I urge you, though, to set aside an entire hour—you’ll not be disappointed.

Precht and I met during the 1990s when we worked together to create a new fiscal framework for the oil sands industry. At that time, he was working at Alberta Energy, a ministry of the Government of Alberta, and I was working at Syncrude. We have remained in touch throughout the years and have collaborated on several projects as consultants.

On the topic of energy, my WTI oil price expectations for the next several weeks to range between $45–$55 per barrel, a slight increase from my expectations of last month. After reading a few articles—for example, “Mission Accomplished? OPEC banishes contango: John Kemp”—that claimed reduced oil inventory levels in advanced economies, I am slightly more bullish.

The next few weeks will be interesting because this is typically a shoulder period between high demand from summer driving and high demand for winter heating. Refineries are often shut down for maintenance to take advantage of this slow time. With the recent storms in the Gulf Coast, I am curious to see how this year’s shoulder period evolves. Also higher prices may provide incentive for drilled but uncompleted wells (DUCs) to be brought on stream, not to mention that higher prices might inspire new drilling. Unless there is a spike in demand, these events ought to have a moderating effect on a steep oil price rise. Given this backdrop, I am have raised my expectations from last month.

I am staying with my WTI oil price expectations for the next several weeks to range between $43–$53 per barrel. With the continuing fallout from the tropical storm Harvey, I expect increased volatility in oil prices.

I have updated my graph. As a refresher, one of the benchmarks that I track is the US Energy Information Administration’s Short Term Energy Outlook data for US crude oil and liquid fuels production as shown in the next graph, which is an updated version from the prior month. Every month the EIA releases a new forecast. The January forecast is the lowest line along the horizontal axis, and the August forecast is near the top for much, but not all, of the graph. Solid-line portions represent historical data, and the dotted-line portions are forecasts. Because of data revisions, not all months start from the same point. Please note that liquid fuels include ethanol, natural gas plant liquids, and biodiesel.

EIA Short Term Energy Outlook Forecasts

Looking at the updated graph, we note that the last four months—May, June, July, and August—seem to be clustered together. In other words, the forecasts seem to be converging.

Dan Dicker in his article “It’s Finally Time to Look at Oil Stocks” (subscription might be required) states that oil prices are likely to rise by year-end.

The trend for oil is finally about to change. Oil has been range-bound for all of 2017, with rigs continuing to increase and stockpiles continuing to swell. But rigs are beginning to roll over and are, I believe, going to decrease through the rest of the year. And more importantly, stockpiles are beginning to sink, finally going under the 10-year average for the first time in 4 years. That trend is going to continue as well.

Oil is about to break out of its range — to the upside.

Of course, the oil companies deciding to cut production and capex will accelerate both of these trends, making oil even more likely to rise to $60 by year end — maybe even $70.

In a subsequent article “Oil Will Turn Soon, But Not All Oil Companies Will Follow,” (again, subscription might be required) Dicker states the following:

I believe oil prices will get constructive soon, overcoming their year-long range between $43 and $54 dollars a barrel. We can see three factors that are going to push oil out of this range to the upside. First, we see oil stockpiles falling under the 5-year average, signifying the rebalancing is coming. Second, we see rig counts beginning to roll over, making the projections for increased production in 2018 far too optimistic. And third, major rollbacks of capex from oil producers, announced in their second-quarter reports, are going to accelerate both of these trends.

I disagree with Dicker. We have just examined the graph for expected production. As discussed, recent forecasts have converged. There is a time lag between drilling and production. So, I expect that much of the remaining production for 2017 is already set in the forecast. According to a Wall Street Journal article “Investors Eager to Hear Shale Companies’ Plans for Rest of 2017,” (subscription required) many oil companies have already hedging contracts in place, and there are many drilled-but-uncompleted wells waiting to be connected to pipelines. Furthermore, a Financial Times article “Oil Traders grapple with US crude conundrum” (subscription required) suggests that prices are likely to stay low.

Behind this, analysts and traders say, is seemingly unstoppable US oil production. Those betting the industry will continue ramping up output are — for now — firmly winning the biggest debate in the oil sector regarding just how much production, led by the shale revolution, can grow despite prices languishing below $50 a barrel.

“The train has left the station in terms of shale,” said Gary Ross, head of Pira Energy, a unit of S&P Global Platts.

The so-called Brent-WTI spread, which measures the price difference between the two big crude markers, is just one indicator that points to traders betting that US shale output will grow in excess of 1m barrels a day next year, or enough to meet about 75 per cent of anticipated global demand growth.

And just today, the Wall Street Journal published an article “Saudi Arabia, Russia Pushing for Three-Month Extension to Oil Cut Deal” (subscription required). If these two countries expected prices to recover above $60 by year-end, they likely would not have called for an extension.

The end of 2017 is only a few short months away. We will soon learn if $60 per barrel has been achieved. My expectation is that, with already anticipated increased production, oil prices will remain below $60 per barrel.