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Oil Update—November 2022

Although I am tempted not to provide a forecast range for December because of the high uncertainties, I will forecast a range of $75 to $95 per barrel for West Texas Intermediate oil.

Regarding COVID, I had expected more progress in China. Instead, COVID cases are increasing, and this past weekend, there were a number of demonstrations in China regarding COVID lockdowns.

The above chart by CN Wire on Twitter shows how the number of COVID cases in China has grown during the month of November. The Wall Street Journal article “Chinese Protests Spread Over Government’s Covid Restrictions” (subscription required) provides a video and discussion of events unfolding in China. Below is an opening excerpt:

BEIJING—Protests are erupting in major cities in China over President Xi Jinping‘s zero-tolerance approach to Covid-19, an unusual show of defiance in the country as the economic and social costs from snap lockdowns and other strict restrictions escalate.

Demonstrations occurred throughout the weekend in both Beijing and Shanghai. According to eyewitness accounts, there were also protests in the eastern city of Nanjing and in Wuhan, the original epicenter of the pandemic. Video footage and photos circulating on social media, which The Wall Street Journal wasn’t able to independently verify, suggest protests broke out in several other cities, including Chengdu, capital of Sichuan province.

The protests followed demonstrations on Friday in Urumqi, capital of the remote region of Xinjiang, where a deadly fire enraged residents who had struggled with lockdowns of more than 100 days. Residents flooded social media with comments suggesting that Covid restrictions contributed to a delay in putting out the fire, in which officials said 10 people died.

In addition to China’s COVID concerns, OPEC+ is set to decide its next production limits and Europeans are grappling with the price cap for Russian oil. In another article from the Wall Street Journal “Oil Prices Face Fresh Volatility With New Russia Sanctions, OPEC Decision” (subscription required), it states that oil has been volatile during the past month.

Brent-crude futures have risen or fallen by at least 1% on all but three trading days in November while sliding 12% over the course of the month to $83.63 a barrel. The oil benchmark traded in a range of more than $5.50 a barrel on one day last week after The Wall Street Journal said that the Organization of the Petroleum Exporting Countries and its partners had discussed an increase in output—a report denied by Saudi Arabia.

The European Union is expected to ban most crude imports from Russia on Dec. 5. In tandem, the U.S., the EU and some of their allies are due to ban shipping, trading, insuring and funding Russian crude anywhere in the world unless the price is at or below a cap.

From Feb. 5, the same sanctions will hit Russian refined products, a move that traders say poses a bigger threat to Moscow’s oil industry and a greater challenge for Europe.

From Feb. 5, the same sanctions will hit Russian refined products, a move that traders say poses a bigger threat to Moscow’s oil industry and a greater challenge for Europe.

OPEC+ is set to choose its next production quotas with an impending European oil price cap, increasing COVID numbers in China, and slowing global economies as the Fed and other central bankers continue to raise rates.

A November 21 Wall Street Journal article “OPEC+ Eyes Output Increase Ahead of Restrictions on Russian Oil” (subscription required) caused oil prices to immediately fall about $5 per barrel. Saudi Arabia denied the reports in the article, and oil prices immediately recovered. So I doubt Saudi Arabia will now increase production because of the severe market reaction.

Depending on the oil price chosen for the Russian oil price cap, it may be completely meaningless. And some believe that, regardless of what price is chosen, the price cap will be completely ineffective. I do not have an opinion but will wait to see what develops instead.

Obviously with all the uncertainty, it is hard to have any confidence in any forecast. My range is premised on OPEC+ taking into consideration all these uncertainties and wanting to minimize volatility. In other words, I expect OPEC+ wants to attempt to keep Brent prices at or near $90 per barrel. WTI prices are about $7 per barrel less than Brent prices.

December promises to be an interesting month.

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Oil Update—October 2022

This month, I am increasing my West Texas Intermediate (WTI) oil price by $5 to range between $85 and $105 for November.

As we approach the end of 2022, I am becoming more accepting of more volatility. Many pundits have been discussing the merits of the Russian oil price cap. Some suggest that Russia will be forced to reduce its price. While many others—the majority of pundits that I follow—suggest that it will not work at all. Russian oil will find its way to market, one way or another.

Twitter has a lot of informed people commenting on oil. One person that I have great respect for, both as an oil expert and as a person, is Dr. Anas Alhajji. He provides a lot of commentary on Twitter, and he is one of the skeptics on the effectiveness on a price cap.

On October 28, the Wall Street Journal article “U.S.-Backed Plan to Cap Price of Russian Oil Hits Delays” (subscription required) stated the following:

That timeline is now slipping. Officials aren’t planning to set the level of the cap until after the U.S. midterm elections on Nov. 8, according to people familiar with the plans. The absence of the final details about how the cap will work has left the oil industry wondering whether Russian oil in transit on Dec. 5 will face new sanctions requirements when it arrives at its buyer.

“It’s roughly 40 days to December 5th, a typical voyage to the longer routes from Russia run 45 to 60 days. So we’re inside the window of a stranded cargo, there’s some risk that crude-oil prices could rise as buyers bid for alternative sources,” said Kevin Book, the managing director of ClearView Energy Partners.

The slower timeline comes as Biden administration officials are bracing for the possibility that announcement of the price cap would prompt Russia to threaten to cut off oil production and cause oil market volatility. Those developments could weigh on Democrats’ standing if they occurred before an election that has hinged in part on oil prices. During the campaign, President Biden has repeatedly pointed to gasoline prices that have fallen in recent months from a record high earlier this year.

Notice that the price cap may prompt Russia to reduce its oil production. Given all the uncertainty of the effectiveness surrounding the Russian price cap and potential Russian response, it is difficult, if not impossible, to make forecasts with any degree of certainty.

While I am inclined to be more bullish going into year end, I am also cautious. It seems as though most everyone seems bullish going into the final months of 2022, and it is unsettling when everyone has the same outlook.

I am also surprised by the overall strength of the market. Given all the economic uncertainty and rising interest rates, I expected the S&P 500 to be hovering around 3500 to 3700. On Friday October 28, the SPX closed at 3901.06.

The Wall Street Journal featured an article on October 29 “Where Are Markets Headed? Six Pros Take Their Best Guess” (subscription required). Even though I tend to be bearish at these levels, I enjoyed reading Lloyd Blankfein’s response as follows:

Mr. Blankfein said it’s worth remembering the challenges of the moment always seem worse than those of the past, if only because the past is resolved. And history, like the markets, has cycles.

“You think things have never been scarier?” said Mr. Blankfein, who retired from Goldman in 2018. “Really? We lived through the Cuban missile crisis when we were stopping Soviet ships in international waters. These are really the most polarized times? I was around in 1968 when there were assassinations of public figures, when kids were blowing up draft centers, and the National Guard was shooting on campuses. We got through that, we’ll get through this.

“It’s never as bad as your worst fears or as good as your best hopes,” he added.

If the markets do correct and go down somewhat, oil may go down along for the ride. So in looking at oil, we cannot simply look at oil supply and demand; we must also look at the market as a whole.

Before closing this post, I would like to highlight a recent YouTube by Dr. Anas Alhajji:

It is about the recent two-million-barrel production cut by OPEC+, the US administration’s response, and the actual reality of the cut.

November and December promise to be exciting months, as all recent months have been, in the oil markets.

In summary, I expect WTI to range between $85 and $105 for the month of November. Because of all the uncertainties, I would not be surprised to see oil outside of this range. And if I had to guess, I see more upside potential than downside. But the surprises may go either direction.

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Oil Update—September 2022

I am reducing my West Texas Intermediate oil price range by $10 to range between $80 to $100 per barrel for October.

A few days after my last forecast, the price fell through the floor. Russia’s war on Ukraine intensified, the Fed’s seeming determination to raise rates regardless of whether higher rates cause a recession, and Prime Minister Truss’s chaotic mini-budget sent markets reeling. As I write, the VIX is nearly 32, an unusually high value. The VIX is often referred to as a fear gauge because the higher it is, the more volatile markets are.

The reasons for my forecast are as follows: Oil prices are likely to rise from recent lows in the $70s as we approach the end of the SPR releases at the end of October. I expect OPEC+ to announce a cut in production of between five hundred thousand to one million barrels per day at its upcoming meeting in early October. Prices should rise as the September and October shoulder season passes and winter approaches. Russian production may begin to decline. And China may begin to open after its once-in-five-years congress in mid-October.

Given the extreme market volatility, there are certainly risks. The US dollar may keep rising until something breaks. The mini-budget problems in the UK may spiral out of control and affect financial markets around the world. Investors may become so risk averse that nothing rises, including oil. OPEC+, because of all the economic uncertainty, may decide not to cut. China may clamp down even tighter to control COVID-19. And major world economies may slide into a deeper recession than many forecast.

Regarding OPEC+, I believe that it will cut its production because it prefers oil price stability instead of wildly gyrating prices and it wants to encourage more energy development, both oil and gas as well as renewables.

As the VIX indicates, market volatility is very high because of a lot of uncertainty. It is impossible to be confident of any particular outcome. The scenario I where described prices rising because of OPEC+ cuts, passing of the shoulder season, potential Russian production declines, and increased China demand, however, is the one in which I have most confidence. In general, I am bullish on oil prices going higher into the end of the year.

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Oil Update—August 2022

I am keeping my West Texas intermediate Oil price range of $90 to $110 per barrel for September. There are lots of crosscurrents that could move prices beyond this range.

Without any regard to likelihood or severity, the following developments may dramatically affect oil prices: Iran negotiations, violence in Iraq, Saudi Arabia and OPEC+ making a dramatic shift in production, developments that may affect Russian oil exports, a weakening global economy, hurricanes in the Gulf of Mexico, and miscellaneous others. Let us look at a few of these items.

Negotiations have heated up once again with Iran. Although the participants are providing different signals, I tend to disregard most comments because even the participants themselves cannot predict how negotiations will unfold. Often negotiations follow an uncertain and unpredictable path. So it is best to wait and see.

Extreme violence has broken out in Iraq. The Wall Street Journal article “Violence Erupts in Baghdad After Iraqi Cleric Moqtada al-Sadr Quits Politics” (subscription required) on August 29, 2022, states the following:

BAGHDAD—Violent clashes gripped Iraq’s capital after an influential cleric said he was quitting politics, as protesters stormed government buildings and heavily armed militias flooded into the capital’s government center, setting off an intense urban battle that threatened the government’s stability.

At least 17 people were killed by gunfire and more than 90 were reported wounded in clashes in the Green Zone on Monday, turning the heavily fortified district of government offices, embassies and villas of senior Iraqi officials into a besieged zone.

The unrest was triggered when cleric Moqtada al-Sadr made his declaration. His supporters, who had been camped for nearly a month outside Parliament demanding new elections, overran the nearby government palace, setting off clashes with security forces.

At this point, I am uncertain if this development will affect Iraq’s oil production and exports.

On August 23, 2022, the Wall Street Journal article “Saudis, Allies Open Door to Oil-Output Cut to Keep Prices High” seemed to indicate that Saudi Arabia was frustrated by the low oil prices in light of a tight physical market.

The Saudi-led Organization of the Petroleum Exporting Countries and a coalition of producers led by Russia—collectively known as OPEC+—agreed to a smaller-than-expected production increase earlier in August.

Now, Saudi Arabia’s energy minister and some OPEC officials have suggested the alliance could extract fewer barrels of oil to stabilize a market buffeted by economic uncertainty, the risk of global recession and energy sanctions triggered by the war in Ukraine.

“OPEC+ has the commitment, the flexibility, and the means…to deal with such challenges and provide guidance including cutting production at any time and in different forms,” Saudi Energy Minister Prince Abdulaziz bin Salman said late Monday.

Oil traders and pundits will be watching what OPEC+ decides over the long weekend and how Saudi Arabia positions its oil selling prices.

Russian oil exports have proved more resilient than many expected. Whether Russian can continue its success remains to be seen.

With energy prices rising sharply in Europe, some expect that Europe’s recession may be sharper and may last longer than expected. Whether the recession is severe enough to curtail substantial demands for oil remains to be seen. My intuitive guess is that oil will be largely unaffected because some electrical producers are switching from gas to oil.

Hurricane season is beginning to heat up. The National Oceanic and Atmospheric Administration still expects an above normal hurricane season. Hurricanes can knock out production from the Gulf of Mexico and may affect refineries along the Gulf Coast. The frequency and severity of hurricanes remain a wildcard.

These are the bulk of the factors that I am watching, but there are some others too. For example, watch the strength of the US dollar and its effect upon other countries, especially poorer countries, and their abilities to service their US dominated debts.

The course that OPEC+ decides to follow and the Iranian negotiations are my primary focus. But that could change in heartbeat. If Iraq is unable to sustain its oil production or problems in the Gulf are more severe than expected, then I will switch my priorities.

To summarize: I expect oil prices to range between $90 and $110 per barrel for September.

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Oil Update—July 2022

Just like last month, I am again lowering my West Texas Oil (WTI) forecast for the upcoming month by ten dollars per barrel to range between $90 to $110. While the physical market remains tight, oil may be held in check by the approaching shoulder season and recessionary fears.

A recent article on July 20 in the Wall Street Journal “Saudi Arabia Nears Its Oil Pumping Limit” (subscription required) demonstrates that the oil markets are tight and that there is a lack of surplus capacity.

Saudi Arabia has limited additional capacity to ramp up oil production, according to people familiar with its pumping ability, a constraint that would make it difficult for Riyadh to increase global supply even if it were willing to do so.

President Biden recently wrapped up a high-profile trip to Saudi Arabia, saying he expected the kingdom to help the U.S. boost global supplies. The Organization of the Petroleum Exporting Countries, with Riyadh as its de facto leader, meets early next month to determine whether to lift its current quota for production. The group has been working in recent years with a parallel group of big producers headed by Russia.

If OPEC+, as the two groups are called collectively, moves to boost production, a key question is by how much. Saudi Arabia’s slim spare capacity—the amount it can quickly ramp up on top of what it is already pumping—raises the prospect that any boost won’t be enough to appreciably lower prices.

During June and July, oil seemed to be unusually volatile, having risen to about $120 per barrel, then fallen to about $90, and it is now near $100 again. The stock market was also very volatile during this period. Although stocks had a terrific July, many are cautious or even skeptical about the months ahead. A quote from a recent July 29 Wall Street Journal article “U.S. Stocks Rise, Giving S&P 500 Best Month Since 2020” (subscription required) shows the gains for the S&P 500 and Nasdaq and concerns about the market going forward.

The S&P 500 gained 9.1% in July, while the Dow Jones Industrial Average rose 6.7%, the strongest monthly showing for each index since November 2020. The tech-heavy Nasdaq Composite climbed 12% for its best month since April 2020.

Investors have taken comfort in recent days from the idea that slowing economic growth might encourage the Fed to raise rates at a slower clip. They also have been encouraged by positive signals during earnings season, as expectations for quarterly profit growth rose over the past month.

But money managers and strategists are also debating whether stocks can hold on to the recent gains in the face of continued monetary tightening and worrisome signals about the economy. Many are skeptical.

Because of the strong cross currents of tight physical oil markets and recessionary fears, along with a war in Europe, it is hard to have much confidence in any forecast. Everyone is watching to see if strong recession indicators appear and how that might affect oil.

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