Specious Argument

For January 2023, I am forecasting that West Texas Intermediate (WTI) will range between $70 to $90 per barrel. Oil closed near $80 on Friday, December 30, 2022.

Pierre Andurand, a famous hedge fund manager who specializes in energy derivates, posted a bullish six-part thread on Twitter beginning with the following tweet:

What would a full China reopening mean for world oil demand growth?
Sometimes, I feel like it is important to zoom out in order to see the forest from the trees. Starting with a chart on oil demand since 1983, we can see that it has closely followed a trend line 1/6

— Pierre Andurand 🇺🇦🇫🇷🇪🇺🕊️ (@AndurandPierre) December 29, 2022

He then followed up with another shorter three-part thread starting here:

The news of a plane from China to Milan with 50% of passengers having covid worried the market yesterday. But most of them were asymptomatic. And Italy found no new variants in the tests on passengers. It is not a repeat of Feb-Mar 2020. 1/3

— Pierre Andurand 🇺🇦🇫🇷🇪🇺🕊️ (@AndurandPierre) December 29, 2022

Using these initial tweets, I encourage you to read his two threads.

While Andurand is relatively sanguine on COVID developments in China, others are less certain or even pessimistic.

On December 29, the New York Times featured an article “How Bad Is China’s Covid Outbreak? It’s a Scientific Guessing Game” (subscription required)

But in early December, the government abruptly abandoned “zero Covid,” leaving the scientific community largely in the dark.

“Nobody, nobody has a clue,” said Siddharth Sridhar, a clinical virologist with a focus on emerging infectious diseases.

Predicting the path of the pandemic has always been difficult. Even in places like Britain with reliable data, forecasts have often been far off the mark. But scientists have generally used reported Covid deaths as a dependable barometer to determine the potential size of an outbreak.

The best I can do is to monitor the situation and react accordingly.

I chose the range $70 to $90 because at $70, the US may begin to refill its strategic petroleum reserve and many may be fearful that OPEC+ will take corrective action to tighten the oil markets, and because oil demand does not appear strong enough in the first few months of 2023 to push oil prices much higher than current levels.

As we enter 2023, I will be watching closely developments in China, the Fed and the global economy, how Russia reacts to the cap on its oil prices, and how OPEC+ responds to either surpluses or shortages of oil.

I want to wish everyone a happy, healthy, and prosperous New Year!

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.

Mainland #China reports 3,648 local symptomatic cases and 35,858 asymptomatic cases for Nov 26.🔼Heading to 40k#Chongqing 194 + 8,667🔼#Guangdong 1,386 + 7,705🔼#Beijing 747 + 3,560🔼#Hebei 79 + 1,545🔽#Sichuan 117 + 1,512🔼#Xinjiang 20 + 972🔼#Henan 169 + 799🔽
—
NHC https://t.co/TcPhlboeoc pic.twitter.com/vXl38wbNNF

— CN Wire (@Sino_Market) November 27, 2022

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.

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.

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.