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Oil Update—February 2024

For March, West Texas Intermediate (WTI) oil prices should range between $70 and $90 per barrel. This is an increase of $5 per barrel from last month. A narrower range is between $75 and $85 per barrel.

For most of last month, prices were tightly packed between the low- and high $70s. As the month wore on, prices crept higher. For March, I expect more of the same, just slightly higher prices.

Because of my prior work experience with Syncrude many years ago when I was part of the team that created the oil sands generic fiscal regime and because I invest in oil equities, I have always have an active interest in oil sands developments. One article that caught my attention last month was a Bloomberg article “The $10 Billion Mistake That Will Revive Canadian Oil” (subscription required) by Javier Blas. One paragraph in particular stood out:

Despite its colossal cost, TMX had two advantages that may compensate for the financial folly. One is that it’s likely to narrow the differential between Canadian and US crude, leading to higher revenue for everyone involved in the petroleum industry — and that includes provincial governments which take royalties. How much the discount would narrow is hotly debated. On average, it has averaged minus $17 a barrel between 2010 and 2024. The consensus is, that’s going to trend now toward minus $10 a barrel. Crucially, TMX probably means that the differential will no longer suffer from its perennial blowouts, when it has widened to as much as minus $40 and even minus $50 a barrel. Second, it should facilitate investment in new production, leading to higher tax revenue.

Canadian heavy oil, known as Western Canadian Select (WCS), sells at a discount to WTI. As seen from the quoted paragraph, this differential can vary widely over time.

Intuitively, higher WCS prices for producers is a good thing. But what if that producer is an integrated producer?

Integrated producers upgrade their crude bitumen to synthetic crude oil (SCO), which typically trades at or near the same prices as WTI. Alberta royalties are assessed against bitumen prices. If bitumen prices rise, then so, too, do royalties. An integrated producer, however, does not enjoy increased revenues because its revenues are dependent upon its final product, SCO. In other words, its intermediate product, crude bitumen, has increased in value and requires a higher royalty payment, while its final product still sells for WTI prices.

For those wanting more information on oil sands royalty framework, I refer you to the Alberta government website: “Oil sands royalties – Overview.”

WCS is different from crude bitumen in that diluent has been added to crude bitumen. The end result, though, is that bitumen is more valuable than it was before the change in differentials.

A non-integrated producer or bitumen only producer will have higher revenues, royalties, and profits. Integrated operations, though, will have higher royalties, same revenues, and thus lower profits.

Returning to the main topic, I expect WTI prices to stay generally within $75 to $85 per barrel, with an additional $5 on either side for any minor excursions.

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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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