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Oil Update—January 2024

For February, I expect West Texas Intermediate (WTI) oil prices to range between $65 to $85 per barrel. This is the same range I used last month. If asked to narrow the range, I would offer $72.50 to $82.50 per barrel. As I compose this blog entry, WTI is about $78 per barrel.

Last month, I expected prices to hover around $75, and bobble about with the news headlines. For most of January, oil prices were close to $75.

The news during last month has worsened. Middle East hostilities have increased with no clear signs of near-term optimism. Even though the geopolitical situation is deteriorating, oil is still flowing.

While there remains a lot of pessimism about strengthening oil prices, the pessimism is not as strong as before.

John Kemp, an excellent analyst with Reuters, wrote that short positions in US crude futures were reduced. See his article “Funds slash bearish positions in US crude as stocks drain.”

LONDON, Jan 29 (Reuters) – Portfolio investors recoiled from short positions in U.S. crude futures and options in the most recent week as depleting inventories around the NYMEX delivery point underscored the risk of a squeeze on deliverable barrels.

Hedge funds and other money managers purchased the equivalent of 46 million barrels across the six most important futures and options contracts over the seven days ending on Jan. 23.

Incidentally, I encourage you to subscribe to John Kemp’s energy mailing list. Every morning, he sends out links to interesting oil articles and often provides his research.

On January 30, the Financial Times published an article “Saudi Arabia ditches plan to raise oil production” (subscription required).

Saudi Arabia has dropped a plan to expand the kingdom’s daily oil production capacity, in a major policy reversal by the world’s largest oil exporter.

State-run Saudi Aramco on Tuesday said it had been asked by the energy ministry to abandon a plan to increase its maximum sustainable production capacity from 12mn barrels a day to 13mn b/d by 2027.

The multibillion-dollar investment programme had set the company apart from much of the industry, where spending on oil production is generally falling because of concerns about climate targets and future demand. Saudi Aramco accounts for about 10 per cent of the 100mn barrels of oil the world consumes every day.

Given that OPEC has been commenting during the past year on the lack of investment in oil, I am surprised by this development. Perhaps the outlook for oil demand is not as optimistic as originally thought.

Switching away from developments over the past month, I thought I would share with you a quick-and-dirty method of determining price ranges.

You can use the OVX, the Cboe Crude Oil ETF Volatility Index, to determine a price range. Right now, the price of oil is near $78 and the OVX is about 36. That implies that a year from now, a one standard deviation of crude oil movement, up or down, is about 36 percent. When considering different time periods, you need to use the square root of the time. For example, for one month, a one standard deviation move is calculated at the square root of 1/12 times 36 or 0.29 times 36 for 10.4 percent. In other words, a one standard deviation move one month from now means that WTI’s price will fall within $78 per barrel plus or minus times 10.4 percent or $8.11 per barrel. The plus or minus one standard deviation range is from $69.89 to $86.10 per barrel. Remember, though, that one standard deviation is 65 percent. So about one-third of the time, oil will close outside of the range. A two-standard deviation move is twice as wide and captures about a 95 percent probability.

If you want to determine a likely range for one day, follow the same procedure, except take the square root of 1/365 instead of 1/12. Some people use the number of trading days, roughly 252, instead of the number of days in a year. I prefer the number of days in a year.

Wrapping up, I expect WTI to range between $65 to $85 per barrel with the sweet spot being between $72.50 and $82.50 per barrel.

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Oil Update—December 2023

I am lowering my prior forecast for December’s West Texas Intermediate (WTI) oil price to range between $65 to $85 per barrel. This range is $5 per barrel lower than last month’s. If asked to narrow the range, I would offer $70 to $80 per barrel.

On one hand, oil traders seemed to be in a pessimistic mood toward the end of the year. Oil prices in the first quarter are typically softer because of refinery maintenance. On the other hand, OPEC+ cuts take effect on the first day of January and may serve to buoy prices.

Those that are pessimistic on oil prices do not appear to believe that OPEC+ will cut as much as promised and that the global economy may not recover sufficiently to justify higher prices.

The Gaza-Israel conflict continues in the Gulf. Some who are bullish believe that this conflict will spiral out of control, and that will cause prices to rise. They point to the American Navy sinking Houthi boats in the Red Sea on December 31. The Wall Street Journal published an article “U.S. Navy Destroys Boats Controlled by Iran-Backed Militias in Red Sea” (subscription required) that stated:

The U.S. Navy destroyed three boats carrying militants supported by Iran after they attacked a containership in the Red Sea, while Iran-allied militias struck a U.S. base in Syria, raising the risk that the war in Gaza could drag the U.S. into broader tensions in the region.

On Saturday evening, the Maersk Hangzhou, a Singapore-flagged container vessel that operates between Europe and Asia, came under missile attack, the U.S. said. Four boats later approached the vessel, shot at it and attempted to board it, according to Danish shipping giant Moller-Maersk, which operates the containership.

Early Sunday, helicopters from nearby U.S. Navy vessels responded to fire coming from boats controlled by Houthis, an Iranian-backed rebel group in Yemen, sinking three of them and killing the crews, the U.S. said. The fourth boat fled. The Houthis later claimed the attack and said they lost 10 fighters in the encounter.

While the possibility that the conflict intensifies and spreads is certainly present, I am hopeful that progress will be made to reduce the conflict over time.

Absent some major development, I expect that oil prices will hover around $75 per barrel, bouncing up and down with the headlines and some random motion. Once New Year trading has begun in earnest, the price outlook may become clearer.

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Oil Update—November 2023

My forecast last month was too optimistic. I am lowering my prior forecast for West Texas Intermediate (WTI) oil price to range between $70 to $90 per barrel for December. This is a drop of $10 per barrel from last month. My typical monthly range is $20 wide. Although that range seems wide, sometimes it is not wide enough. If I were asked to narrow the range, I would provide a range of $70 to $80 per barrel. Because the oil prices did not jump after the announcement by OPEC+, I am less optimistic about much higher prices in December.

Earlier in the day, the Wall Street Journal featured an article “OPEC+ Agrees to Significant Oil-Production Cut” (subscription required).

OPEC+ agreed to a significant production cut of an additional million barrels a day, delegates said, in a move that will likely keep prices elevated amid the continuing conflict in the Middle East.

As part of the deal reached Thursday, Saudi Arabia also agreed to extend its cut of 1 million barrels a day that it announced in June.

Taken together, the moves are expected to stabilize prices at a moment when geopolitical tensions are high around the world and economic growth is slowing.

As I look back over the past year, I, along with many others, have been too optimistic. In early 2023, many thought that once the market got past the refinery maintenance season, prices would firm. That did not happen.

Then, as we approached the debt ceiling in June, many thought that once the debt ceiling issue was resolved, prices would go much higher. In fact, many were certain that oil prices in the second half of the year were going to go much higher. After the debt ceiling issue was resolved, oil prices continued to languish. The excuse then was that there was a lot of destocking because of higher interest rates.

Saudi Arabia and Russia cut production in the summer. Surely, that was a strong signal that any excesses in the market would be addressed, and oil prices were bound to go much higher. Oil prices did rise substantially into September and then drifted lower. In September, many thought oil prices would soon hit a $100 and stay at about that level or higher regardless of any macroeconomic concerns.

Now in late November, WTI prices are hovering around the mid $70s. There is no longer any talk of oil prices hitting $100 per barrel this year.

After OPEC+ made its announcement, oil prices fell. The oil market appears to be waiting to see proof that the voluntary cuts are made and that those cuts are having their intended effects upon inventory levels before boosting oil prices.

I am going to close this post with comments on X by Eric Nuttall, whom I greatly respect. If you click through to his comments on X, you will find a video link to his appearance on BNN Bloomberg.

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Oil Update—October 2023

I am keeping with my prior forecast for West Texas Intermediate (WTI) oil price to range between $80 to $100 per barrel for November.

When I provided an update last month, the price of WTI was hovering in the low-to-mid-$90s per barrel. As indicated in last month’s update, some pundits were calling for $100 Brent, which is about four dollars greater than WTI prices, by Halloween because crude fundamentals were strong enough to withstand macro headwinds. Since that time, however, macro headwinds have reduced oil prices.

During the past week, WTI prices were hovering in the low-to-mid-$80s even though, paradoxically, some pundits argue that the recent Israel-Hamas war has added a war premium of three-to-seven dollars per barrel. Yet some argue that the war has taken risk out of the market.

Please see Amrita Sen’s interview on Bloomberg Market Surveillance on October 30, starting with the lead-in at about 2:20:35 of the video.

So it appears that crude fundaments are not immune from macro headwinds. That said, I expect the WTI price of $80 per barrel to hold. With shoulder season just ending, refineries will demand more oil in the next two-to-three weeks. And some believe that oil prices are still headed higher. In its October 24 article “Andurand Says Oil Must Hit $110 Before Saudi Arabia Eases Supply Curbs,” Bloomberg quoted a well-known oil trader:

Oil trader Pierre Andurand said he expects Saudi Arabia to keep its current supply curbs in place until prices reach at least $110 a barrel.

As inventories decline in the coming months, “the market will have to beg for more supply at some point,” the founder of Andurand Capital Management LLP said during a question-and-answer session at Saudi Arabia’s Future Investment Initiative in Riyadh.

“The Saudis will have to decide when and at what price to bring supply back,” he added. “For me, an adjustment likely will come around $110 a barrel. So there’s room to the upside for prices.”

Of course, if the Israel-Hamas war were to spread and intensify, then oil prices could easily exceed the top of my range. There are many active efforts, however, attempting to keep this dangerous situation from becoming even more dangerous.

I hope in November that equity and oil markets stabilize and that the end of the Israel-Hamas war is within sight.

To summarize: my WTI oil price forecast for November is $80 to $100 per barrel.

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Oil Update—September 2023

I am raising by ten dollars my September forecast for West Texas Intermediate (WTI) oil price to range between $80 to $100 per barrel.

A graph from the EIA showing West Texas Intermediate (WTI) crude oil and NYMEX confidence intervals from September 7, 2023.

Figure 1: WTI Confidence Intervals

To some people, my range might seem too wide. In reality, it is not. For example, on Thursday, September 28, WTI touched $95, which exceeded my prior range of $70 to $90 per barrel. We can also look at the latest price forecast from the U.S. Energy Information Administration’s “Short-Term Energy Outlook,” which is shown in figure 1. We see that prices often move significantly in a brief period and that the futures price range is wide. For those wanting to know how the upper and lower bounds were determined, please see the following EIA PDF document: “Short-Term Energy Outlook Supplement: Energy Price Volatility and Forecast Uncertainty.”

A screenshot from Sunday, August 27, 2023, of thinkorswim's WTI futures and options. The contracts are /CL, which is West Texas Intermediate Oil.

Figure 2: thinkorswim’s Quotes for WTI Futures and Options –August 27, 2023.

My main purpose for establishing ranges is to document my thinking for my own positions. I have options on a few oil equities, and forming an opinion on near-term oil prices allows me to create or adjust my positions as required.

I was surprised by the strength of oil during the last month. A month ago, I thought it was unlikely that oil would reach $100 per barrel this year. A screenshot from thinkorswim showed some option Greeks for WTI expiring in January and February. I have included that screenshot again in figure 2. Please see my prior post where I discussed how to interpret delta for assessing the likelihood of oil prices exceeding or touching a strike price.

A screenshot from Friday, September 29, 2023, of thinkorswim's WTI futures and options. The contracts are /CL, which is West Texas Intermediate Oil.

Figure 3: thinkorswim’s Quotes for WTI Futures and Options –September 30, 2023.

See figure 3 where I have included an updated screenshot taken on Friday, September 29, at about 12:11 p.m. Mountain Time. Note that the December $100 call price has increased from $0.33 to about $1.05. Similarly, the January $100 call price has increased from about $0.49 to about $1.25. Had a person been extremely bullish on oil, buying either of these calls would have been extremely profitable. Also, the January and February deltas are 0.1737 and 0.1834, respectively. That implies that the odds of WTI closing at or above $100 in January or February expiration is about 17 and 18 percent, respectively. Given that the spot price was $90.60, those odds seem low. Of course, the WTI is in backwardation, so the January and February futures oil prices were $86.89 and $85.21, respectively when the screenshot was taken.

Various pundits are now calling for high prices, though many seem to suggest that while $100 per barrel is possible or likely, going much higher would take some other extraordinary development. For those with a Bloomberg subscription, you can view Amrita Sen’s commentary on September 27 where she forecasts $100 by Halloween. Amrita Sen is the founder and director of research at Energy Aspects, a highly respected energy consulting firm.

A Bloomberg screenshot of Energy Aspect’s note says the following:

We do not see crude prices letting up in the near term, with $100 still in sight for Brent. Crude fundamentals have become strong enough that the macro story is no longer sufficient to drive price action. Instead, crude is starting to drive the macro view.

While she references Brent prices, WTI prices are currently two or three dollars less than Brent prices.

I hope oil prices do not go above $100 per barrel because it seems that whenever oil prices go too high, they come crashing down later. Oil prices above $100 per barrel will cause economies to slow and consumers to reduce consumption. Instead, I would prefer that oil prices stay in the high $80s to low $90s. My preference, however, means nothing.

The next few months in the oil markets will be interesting and challenging. Again, my forecast for October is for WTI oil price range to $80 to $100 per barrel.

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