Oil Update – August 2024

My expectation for September’s West Texas Intermediate (WTI) oil prices has changed. WTI should range from $70 to $90 per barrel. A narrower range is from $72.50 to $82.50 per barrel. The wider range has shifted downward by $5 per barrel. And the narrower range has also shifted down.

This past month has been eventful. After the monthly employment report where job growth was softer than expected, markets reacted by dropping a few percent and increasing volatility. Some option traders got hurt because of the increased volatility.

And then almost as fast as markets reacted to the downside, markets recovered with more market data that suggested the economy was not cooling as quickly as feared and employment was still at reasonable levels. Furthermore, according to the CME Fed Watch Tool, rates are expected to drop either 25 or 50 basis points at the next Fed meeting in mid-September. A basis point is one-hundredth of a percent. Nonetheless, many believe that the US economy is slowing.

September and October are typically shoulder months for oil demand. The summer driving season is over, and the winter heating season has yet to arrive. Furthermore, OPEC+ has discussed reducing its voluntary cuts.

John Kemp from Reuters wrote an insightful article “OPEC+ faces moment of truth on planned output increase.”

LONDON, Aug 22 (Reuters) – In the next few weeks, Saudi Arabia and its OPEC+ allies must take a delicate decision about whether to proceed with planned production increases from October, or postpone them because of an uncertain economic outlook.

The recent slides in front-month Brent futures prices, calendar spreads and refinery margins, amid concerns about the outlook for petroleum consumption, have dramatized the danger of getting it wrong.

Boosting production despite downward revisions to consumption growth and a continued output increases from rivals in the United States, Canada, Brazil and Guyana risks another accumulation of inventories and slump in prices.

In addition to his commentary, Kemp provides several graphs with his article.

Amena Bakr provided helpful commentary in a thread on X where she commented about OPEC+’s compliance.

Gary Ross also pointed out that some members, notably UAE, have been overproducing:

The New York Times reported in its article “In a Region on Edge, Israel and Hezbollah Launch Major Attacks on Each Other” (subscription required) that both sides were deescalating, at least for now.

Amid fears of an all-out war between Israel and Hezbollah forces in Lebanon, the two sides on Sunday mounted the biggest round of cross-border strikes since the war in Gaza began, with Israel bombing dozens of sites in a pre-emptive attack, and Hezbollah launching hundreds of rockets and drones.

Within hours, both sides appeared to de-escalate, at least temporarily, but signaled that the violence and dangerous tensions could continue. Hezbollah said its operation, vengeance for the Israeli assassination of a senior commander, had “finished for the day,” but left open the possibility of further action. Prime Minister Benjamin Netanyahu of Israel said that “what happened today is not the final word.”

For weeks, Israelis have waited in trepidation for a major attack promised by Hezbollah in retaliation for the airstrike last month in a suburb of Beirut that killed one of its leaders, Fuad Shukr. Iran, which backs both Hezbollah and Hamas, has also vowed retribution for the killing of Ismail Haniyeh, the Hamas political leader, on a visit to Tehran, hours after Mr. Shukr was killed, though it appears to have put that plan on hold.

While some believe the upcoming US election may be influencing prices, I am not among them. And once the election is over, I am not even certain how oil will react to a victory of either party.

As we can see, there are a lot of uncertainties, which are always true, and a lot of crosscurrents. My logic in lowering my price expectations is that the world seems adequately supplied with oil, oil prices did not spike in the latter part of summer as some suggested, and the oil market is entering into its shoulder season. I expect OPEC+ to moderate or delay its unwinding of voluntary cuts if Brent prices remain in the $70s per barrel.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.