Energy Prospectus

Oil Stocks: Summer Outlook 2024
KEITH KOHL | JUN 04, 2024
Is the market changing its tune on its summer outlook for oil stocks?

We watched WTI crude drop nearly 4% to under $75 per barrel and Brent crude falling below $80 per barrel. This big hit oil took yesterday was a gift for some investors but a curse for others.

One thing is for certain, there weren’t too many people expecting such a steep sell-off just after the summer demand season officially began last week. We’ll see in a second why expectations were already high heading into Memorial Day weekend, and it’s important for us to understand the reasons why the market panicked.

So what exactly happened? And more importantly, where are we going from here?

As always, all oil roads lead through OPEC.

Oil Stocks Outlook Weighed Down by OPEC’s Latest Decision

The fear and loathing over crude oil recently all stems from the latest OPEC+ meeting. It was a bloodbath as the market was whipped into a selling frenzy thanks to OPEC and its allies' decision to wind down output cuts.

However, things may get a little confusing with what they did, so let’s break it down.

First, OPEC+ agreed that the original production cuts it set in place back in 2022 — which total around 2 million barrels per day — would be extended through December, 2025.

If you recall, there was a second round of voluntary cuts that were announced in April of 2023, totalling 1.65 million barrels per day. The group announced that these would also remain in place through 2025.

That brings us to the most recent cuts that were announced in November, 2023, when several members voluntarily cut output by another 2.2 million barrels per day. Now, these were originally supposed to be in effect until the end of March, 2024. It was decided to extend these cuts until the end of September, after which they would be gradually phased out over the next year.

The market took this as a sign that OPEC was tired of trying to push oil to $100 per barrel, and is finally capitulating.

Is OPEC finally giving up?

Well, not exactly... and there’s an even bigger force at play here.

The Demand Disconnect Decide the Fate for Oil Stocks

In the end, Saudi Arabia and friends effectively kicked the can down the road and essentially left the door open to act later this year. Remember, the cuts don’t start gradually phasing out until the end of September.

What it now comes down to is what I’ve been telling you all along — demand!

Just a week ago, the disconnect was very real. AAA was expecting a huge spike in travelers over Memorial Day weekend. Heading into the holiday weekend, U.S. petroleum demand was down just 0.1% year-over-year, with jet fuel demand up nearly 2% year-over-year.

Whether or not WTI prices rally back is going to depend on how demand trends this summer; so far it hasn’t been overwhelming, which is why a gradual phase-out of those production cuts starting in Q4 would tip the scales bearish.

The problem in that line of thinking, however, is assuming that OPEC+ follows through with boosting output again, especially if prices remain subdued this summer. The group has stated that any production increase can be paused or reversed subject to market conditions.

If you think that they’ll begin winding down voluntary production cuts while crude prices are low, then I have some bad news for you.

We may not see a $100/bbl oil anytime soon, but to me, this sell-off looks like a buying opportunity in disguise.

Until next time,

Keith Kohl
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MY TAKE: OPEC+ (controlled by Saudi Arabia) will not increase production if they believe it will drive the oil price lower. It makes no sense for them to do that.

Thoughts on the status-quo OPEC+ Meeting
DAVID BLACKMON on JUN 4

Markets have responded negatively to the status-quo outcome to Sunday’s meeting of the OPEC+ cartel. Prices for both Brent and WTI dropped more than 3% in Monday trading and were off another ~1.5% overnight. Obviously, traders were hoping the ministers would agree to deeper cuts in exports in light of apparent weakening in the global economy.

Here are some bullet points I put together for a client yesterday on what’s happening post-OPEC+:

> The OPEC+ meeting was a status quo outcome, extending the deep export cuts of about 3.6 million bopd agreed to by all members through 2025.
> Additional voluntary cuts initiated late 2023/early 2024 by Saudi Arabia, Russia and a couple of other countries of 2.2 mmbopd were extended through the end of Q3 2024.
> Starting in Q4 2024, these voluntary cuts will begin to be gradually rescinded, but only if market conditions allow for that. i.e., they may not change at all until later, possibly much later, depending on how the global economy goes for the rest of the year.
> Obviously, many oil traders had hoped for a longer firm extension of the voluntary cuts - or even deeper cuts - given that the markets responded Monday with a 3.5% drop in WTI and a 3% drop in Brent.
> OPEC+ controls a little over 40% of global crude supplies, but its ability to prop up crude prices depends in large part on the performance of the US industry.
> A significant boost in US production over the 2nd half of 2024 would force OPEC+ to either implement additional cuts or see prices drop.

The US may be in a stronger swing position than ever right now. Production has finally leveled off this year, but at record high levels, and only after dropping the rig count by 60% from 2019 levels, and 30% from late 2022 levels.

The US could still dramatically increase production in a short period of time if it were needed and profitable to do so. OPEC+ understands this, and it makes the cartel's job of propping up prices that much harder.

Current crude prices are too low for most of the OPEC+ countries to sustain healthy economies and their respective social safety net programs. None of these countries would gladly sustain further reductions in their expected export volumes.

Bottom line, crude markets are at a real tipping point right now, and could become quite volatile at the slightest hint of a global recession.

That is all.

>light of apparent weakening in the global economy.

Some people haven't accepted that thesis and major blood letting is the result
Some people say we have a glut due to weakening in the global economy

What gets lost in the weeds is not just the speculation of future supply- demand battles between OPEC+ and the U.S. but also the fight over dollar hegemony. At some time when our currency weakens ( and it will) this will have such an impact that we will wish for the past days of squabbling over production v demand.

The Keith Kohl note feels like a good grounded perspective.

I do wonder though: if we get decisively under $70 WTI, how long could we practically stay there?