Rolling Dice to Predict Crude Oil’s Price (Commodity:CL1:COM)

It seems that the number and variety of opinions on the future prices for crude oil (CL1:COM) is similar to the number of analysts. It is more like a crap shoot for investors to figure out. In our view, a few key fundamentals drive and will continue to drive the price of oil. For a better view, shall we cross the isle and peer at the players rolling the dice. We might find that pattern containing the critical answers. Perhaps one of the players understands better, the game.

The Useless EIA Report

After reviewing January 6th EIA report, investors might become confused. In essence, the weather-dominated numbers seem to hide real markets with its 19 million barrel week-over-week crude build. The numbers could con watchers into believing all is well. But when the weather shutdowns for both Americans and refiners happened near the end of December, a better light shining on the table is needed. Continuing, products supplied actually fell 3 million barrels per day, about 15%, during that period.

Future Crude Oil Prices

With the fake demand and supply ID’ed, let’s inspect further from the isle, the kaleidoscope of players. First, one bearing bear news begins with Barclays,

“Given the challenging macroeconomic backdrop [we] highlight $15-25/barrel of downside to our forecast if the slump in global manufacturing activity worsens similar to the 2008-09 episode,” . . . adding that it “would imply 1-2 million barrels per day downside to our demand estimates.”

The Barclays’ bearish change of $15-$25/barrel was from its previous of $98, thus predicting prices most likely under $80.

Next, the bears continue. From Simon Watkins, a respected author at OilPrice, who quotes from Rory Green, chief China economist for TS Lombard, in London:

“The certain outcome is an increase in oil demand – we estimate a 5-8 percent increase in net import volumes – but this is unlikely to cause oil prices to surge, especially as China is buying at a discount from Russia.”

Next, a large group seems stuck in la-la land. A recent poll of energy experts found “most . . . polled, more than 90%, see Brent averaging between $70 and $105” through the rest of the decade. $87 a barrel for 2023 increasing to $90 by 2027 through 2030. What seems important is the range, $70-$100 plus. The message from this group, in our view, reflects nothing more than the fight between economic beliefs making the range irrelevant.

A look at the bulls comes next. First IEA changed roles from bear to bull recently:

“China’s reopening is set to drive global oil demand to a record high of 101.7 million barrels per day (bpd) this year, up by 1.9 million bpd from 2022, . . . raising its demand growth estimate for 2023 by 200,000 bpd from 1.7 million bpd growth expected in December.”

The bull, Goldman Sachs, predicts $100 plus by years end primarily driven by crude uptake in China:

“World oil demand is set to increase by 2.7 million barrels per day (bpd) in 2023 and the market would return to deficit in the second half of the year, the U.S. investment bank said in a note . . .”

But even Goldman isn’t the most optimistic. Hedge fund manager, Pierre Andurand writes,

“I think oil will go upwards of $140 a barrel once Asia fully reopens, assuming there will be no more lockdowns, . . . market is underestimating the scale of the demand boost that it will bring.”

Continuing and perhaps the most important comment. From OPEC Expands Control Of Oil Markets As Shale Growth Stalls are two statements, ““The shale model definitely is no longer a swing producer,” [Scott] Sheffield,” CEO of Pioneer Natural Resources. Followed by this statement from Sheffield, “They need oil to be at $100 a barrel or higher in my opinion.”

Notice the expected timing, second half of the year.

Heading to the Charts

Now on to the charts. The following five-year chart for crude oil from MacroTrends shows the volatility being experienced.

With volatility so vividly present, our view is that pricing won’t remain quiet. It will move one way or the other. One side of the group mentioned above will be mostly correct, the other likely very, very wrong.

Goldman added an interesting prediction,

“Commodities are set to be the best-performing asset class in 2023, the bank’s strategists said. The first quarter of 2023 could be more underwhelming than the rest of the year due to the expected slowdown in economies, but the low levels of investment in oil, gas, and key metals will continue to underpin what Goldman has called a new super-cycle in commodities.”

Our Observation From the Isle

Is there a double six being rolled by one of the players? In our view, there is. One six is found in the comments from Scott Sheffield, CEO of Pioneer Natural Resources’ CEO, one the most respected in the market. It opens with, “shale is no longer a swing producer.” This comment is bolstered by a general lack of investment going forward for crude oil production in those regions. The second six comes again from Sheffield, when he stated that OPEC needs $100 plus in prices in his opinion. A lack of swing management coupled with price control power held by those unfriendly to the west equals a formula for higher prices. Only a deep world recession trumps this scenario. The player rolling double sixes always seems to be the one holding the trump cards in this case, OPEC.

Any risk, in our view, comes with being on the wrong side. Higher prices of crude oil at $100 plus still seem to be rolling in the dice.