Specious Argument

I am lowering my forecast from last month by $2.50 per barrel; West Texas Intermediate oil should range between $65 and $75 per barrel for September.

Oil prices went much lower than I expected in August, especially during the middle of the month when WTI was around $63 per barrel. Since then, WTI has rebounded considerably, but many are still cautious given that COVID-19 still is strong.

Having been overly bullish in August, I am more inclined to wait to see how September plays out before getting too bullish again. On September 1, OPEC+ will be meeting. Some believe that because of the latest variant of COVID, Mexico’s production issues, and Hurricane Ida, that OPEC+ will hold off on their 400 thousand barrel per day increase, while others believe that demand remains sufficiently strong and that the US administration wants more production, so the 400 thousand barrel per day increase will proceed as planned. I do not favor one argument or the other.

I remain optimistic that fourth quarter oil prices will be higher than they are today. By then, I hope that COVID cases will have peaked in many countries.

I am repeating my forecast from last month: I expect West Texas intermediate oil to range between $67.50 and $77.50 per barrel for August.

There was one brief spell where oil prices dipped below my expected range in July. The failure of OPEC+ to agree, the concomitant plunge in US 10-year bond yield and rise in the US dollar, and the rise in Delta variant cases all conspired against oil prices in early July.

OPEC+ appears to have settled their differences. Macro factors continue to be a concern. And I am hoping that the Delta variant will soon be brought under control.

The following article offers some optimism on the horizon: “Something strange is happening in Britain. Covid cases are plummeting instead of soaring.”

Neil Ferguson, an epidemiologist at Imperial College London whose models have shaped government policy in Britain and the United States, said it now appears possible that the pandemic could be in the rearview mirror.

…

“We’re not completely out of the woods,” he said. “But the equation has fundamentally changed. The effect of vaccines has been huge in reducing the risk of hospitalizations and death. And I’m positive that by late September or October…we will be looking back at most of the pandemic.”

I expect that we are going to be learning that many, perhaps even the majority, of the new COVID cases will come from fully vaccinated people. The Financial Times article on July 23 “Why are fully vaccinated people testing positive for Covid?” (subscription required) provides an excellent explanation with some graphics.

Anthony Masters, a member of the UK’s Royal Statistical Society, said fully vaccinated people were likely to make up a “bigger proportion” of cases as vaccine coverage was extended, particularly in younger groups who face a higher exposure risk because of greater social mixing.

“If you get extremely high coverage across the different ages, it’ss plausible that cases could become [in] majority among fully vaccinated people,” he said. About 55 per cent of the UK population had received both doses by July 21.

In Israel, where nearly 60 per cent of the population are fully vaccinated and coverage is spread more evenly across age cohorts, 52 per cent of about 6,000 people who tested positive in the week to July 21 were fully vaccinated.

If we had a population where everyone was fully vaccinated, then all new cases would be from vaccinated people. That does not mean that the vaccines do not work. Instead, it is just a reflection of the vaccination status of the population. To judge the efficacy of the vaccines, we would need to compare with a population that was completely unvaccinated.

I also expect that in most circumstances where people are mixing, people may need to wear a mask again until the COVID numbers come down. In some respects, this is like using your seatbelts and having airbags in your car: you should rely upon both to reduce injuries and death.

A Wall Street Journal article on July 31 “Rise in Car Crash Deaths Prompts New Seat-Belt Push” (subscription required) stated the following:

More drivers have engaged in risky behaviors, like speeding and driving under the influence, during the Covid-19 pandemic. Compounding the problem, safety officials say, these drivers often leave their seat belts unbuckled, raising the potential for deadly consequences.

More than half of all crash fatalities last year involved unbelted drivers or occupants, according to the National Highway Traffic Safety Administration’ss preliminary data on cases where seat-belt use is known. That is the highest level since 2012.

An estimated 38,680 people died in car crashes last year, 7% more than in 2019, even though total miles driven dropped 13% as many Americans stayed home, federal data show. The number of unbuckled vehicle occupants killed in crashes jumped an estimated 15% from 2019, NHTSA figures show.

As the percentage of our populations who are vaccinated increase and as we take more precautions, such as wearing masks, I am hopeful that our COVID numbers will decrease and we will gain more normalcy in our lives. Furthermore, I do not expect governments to enact harsh restrictive measures.

Last month, I mentioned that I was surprised by the low valuation of oil equities. I am even more surprised now that they have sold off 15 percent or more in the last month. Many oil equities are generating tremendous free cash flow with oil prices above $70 per barrel.

I remain positive on oil and oil equities and on our progress against COVID.

I expect West Texas intermediate oil to range between $67.50 and $77.50 per barrel for July. My June forecast range was five dollars per barrel lower. As we have seen, prices have gone higher than I anticipated.

The world economy continues to grow, and there is growing optimism for the rest of the year. On the other hand, the Delta variant warrants careful monitoring because it has the potential to slow the progress. Because Iran is building its inventories on the expectation that a deal will eventually be reached, investors and traders need to monitor the nuclear negotiations. And with price of oil above $70 per barrel, there may be some investors with large gains who may choose to sell their positions.

John Kemp, a Senior Market Analyst for Reuters, wrote in an article titled “COLUMN-Falling U.S. crude stocks draw hedge fund attention: Kemp – Reuters News” the following:

Investors have not been this bullish since before the coronavirus outbreak spread worldwide in early 2020 and prior to that when the U.S./China trade war intensified in late 2018.

Last week saw small sales of NYMEX and ICE WTI (-6 million barrels), Brent (-3 million) and European gas oil (-8 million) but purchases of U.S. gasoline (+8 million) and U.S. diesel (+6 million).

In WTI, bullish long positions outnumbered bearish shorts by a ratio of more than 11:1, compared with a ratio of 4:1 in Brent (https://tmsnrt.rs/2SDhzLO).

I encourage you to view Kemp’s information referenced by the prior link.

As I write this article, WTI is trading at $73.46, and I believe there is more risk to the upside of my range than to the downside. That said, as prices rise, there will be more pressure on OPEC+ to increase exports.

On Thursday, July 1, there will be several meetings between OPEC+ countries and their technical committees. Investors and traders will gain more clarity in a few days.

With oil prices well above $60 per barrel, I am surprised by the low prices of oil equities. Even with ESG concerns, I would have expected higher prices by now.

In general, I remain bullish on oil and oil equities as the world continues to make progress against COVID-19.

I am increasing my West Texas Intermediate oil forecast for June by $2.50 per barrel to range between $62.50 to $72.50. My May forecast was $60 to $70 per barrel.

Although US vaccinations have slowed, people continue to receive vaccinations, the US will be providing unneeded vaccines to global regions, and more regions are reopening. As I stated last month, as we emerge from the pandemic with the easing of curbs and restrictions, people are going to consume more oil by traveling and meeting with friends and family. People are anxious to resume a more normal lifestyle.

There have been a lot of crosscurrents recently with court decisions and shareholder activists. I expect more of the same as the ESG movement gathers even more strength. My own view is that the ESG movement will damp needed investment and may result in higher oil prices over the short term of the next few years. Furthermore, analysts are trying to gauge when Iran may legitimately reenter the market and its effect. While no one knows with certainty what the resultant effects may be, my intuitive guess is that OPEC+ will help moderate the effects of its reentry and the market will be able to accommodate the extra supply.

Just like last month, I continue to expect that prices should continue to strengthen as countries around the globe make progress against COVID-19.