Predicting or even trying to predict oil prices is a nightmare for experts. Oil prices are interesting values that incorporate numerous information in a single, mostly two digit number. The compression of various geopolitical, economic, technical developments and expectations to such a number is chaotic, but predicting it is beyond chaos.
US elections are important. Some parts of Gallup polls are available online. The recent surveys show that Americans those “very satisfied” (%13) and “somewhat satisfied” (%31) are the highest since 2004. This is with a Trump administration. One other important source was Dallas Fed’s energy surveys and studies. The number of “bankruptcies in the oil patch” is lower than 2019 2nd half and 2020 1st half. These two different numbers give us a different feeling of what has been going on.
The Dallas Fed survey is interesting. I personally enjoy comments at the end of each section. There are around 66% of the respondents believing that US oil production has peaked. The top 3 biggest concerns from E&P firms maintain production, grow production and reduce debt. Then on the fourth one, we see “find additional sources of capital.”
On the comment side, 50$/barrel looks like the new shale environment. The main theme is with these prices, supply can not grow, and if demand recovers, there will be some kind of problem with supply-demand balance.
There are political comments and expectations. But you can feel that the oil sector in Texas is in pains, and prospects are not the brightest. But in the background, there are cost cutting-lean management going on. The shale is just like any other technology and has the potential to improve its cost curve. The biggest problem is the decline rate.
Therefore the election is not a done deal, and cost-cutting measures are working on the shale part. For the last two weeks, we see positive signs from rig numbers.
On the OPEC side, there is some kind of a settled balance between Russia and Saudi Arabia. This is assumed to last until mid-2021. But again, OPEC is full of surprises. The developments in Nigeria can be important. There is an increased fragility in OPEC countries with low oil prices. Adding to the injury, world food prices are expected to increase. This will lead us to another chaos in the making.
However, there are technical ways to provide some insight. Oil prices in the short term were hoovering around “magnetic 40$/bbl”. If you remember, the forward curves generally point to 60$/bbl in the long term, but for the last weeks, 40 was the game in town. Now, this has been changed.
The seasonality of the oil prices points to a downward spiral in the fourth quarter. The prices may at least lose 5$/bbl in the short term absent geopolitical turmoils. From 2021 January to 2021 June, a positive trend is to be expected, depending on Covid19 developments. The main question is how steep will be this upward trend.
For Brent, 38$/bbl is a safe bet for the 4th quarter of 2020. If Biden is elected, we may see a recovery in oil prices. But for 2021 April-August, there are no safe bets. My biggest concern is food prices. With growing food prices and diminished financing capacity, the Middle East and Africa may attract more of our attention.