February 19, 2024

Hi, everyone. My name’s Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. Here on TrendsTalk, we’re your unbiased and apolitical source of economic intelligence, and today we’re going to discuss oil prices. It’s been a few months since we’ve chatted about oil prices and given a lot of the geopolitical concerns and happenings around the world, I wanted to detail our oil price forecast and some of the things that we’re thinking about, concerned about, as we look throughout these next four quarters. So for those of you that are Trends Report subscribers, you have access to our oil price forecast on a monthly basis or whenever you’d like to access our trends report and our oil price forecast for 2024, I’m quoting West Texas intermediate prices, by the way, is that we expect oil prices to remain in that mid $70 per barrel range as we move deeper into 2024.

So if we look at the number that was quoted in our recent trends report, which was in January, the three-month moving average for oil prices was about 74.58 per barrel. Now as we progress throughout ’24, as I mentioned, we expect that trend to remain relatively flat. Here’s a few things that we’re looking at. We’re looking at the world industrial economy. The pace of growth for world industrial production has been slowing, and we do anticipate that we’ll see some mild contraction in that global industrial production benchmark in 2024, which puts downward pressure on oil prices. However, even with the downward pressure on oil prices from the decreased demand coming from the global economy, we’ve continued to see OPEC cut production, which is part of the reason that prices have stabilized around the current level that we’re at here today. So let’s talk a little bit more about some of these oil fundamentals.

First of all, if we look at world oil supply versus demand, when I say supply versus demand, I’m talking about production versus consumption. And as we look at where we are today, based on the most recent reading from the EIA, world oil production is at 101.1 million barrels per day, while consumption is at 99.99 million barrels per day. So as we sit here today, production is outpacing consumption, which again could typically mean further decline in oil prices. It’s one of the variables, I should say, that would likely mean we’ll see some softening in oil prices. However, as I had mentioned, OPEC has been cutting production, which has been helping to keep these prices stable or elevated compared to what we might anticipate in an economic cycle where we’re seeing weakening demand. So as we sit here today, OPEC crude oil production is about 26.61 million barrels per day, and that’s down from the late 2022 peak that we saw, which was just north of 28 million barrels per day.

So OPEC has clearly been cutting and has continued to cut, which is helping keep these prices stabilized even in this weaker demand environment from the overall macroeconomies around the world. Now, here in the US, we continue to produce more oil. If we look at basically hitting a low in the production numbers in 2020, and we’ve been seeing US oil production steadily increasing from that point. As we sit here today, the US is producing 13.31 million barrels per day, and that’s using 499 active rigs. And so rigs have flattened off, even seen some mild decline, but we’re still producing more oil. Now, if you remember to some of our previous conversations like the conversation I had a few weeks back with our VP of economics, we talked about oil and gas extraction being one of the areas in 2024 that’s less negative than others.

Not that we won’t see some decline, it’s very mild, but compared to other manufacturing verticals in the US, looking much better when we’re focusing on the oil and gas extraction segment. And one of the reasons for that is we still see those break even prices for drilling new wells, being below where the current oil price is as we sit here today. So again, I mentioned our oil price forecast for the next four quarters being around that mid $70 per barrel range. If we look at breakeven prices here in the US, the Eagle Ford $56 per barrel, when we look at the Permian Basin in terms of the Midland, it’s $58 per barrel for that breakeven point. And so you can see that anything above that mid-fifties to low sixties range means we can drill new wells profitably and with oil prices projected to stay in that $70 per range, that’s good news for oil and gas in terms of being able to drill new wells profitably, even in a weaker macroeconomic environment.

This isn’t always the case for oil. If you think back to 2015 and 2016 when prices plummeted, that was an industrial recession that was really brought on by oil. This time in 2024, we’re seeing that oil is one of the bellwethers so far in terms of this downturn, and we’re hearing it anecdotally from our clients is that their operations in the oil and gas sector today, even though some other manufacturing verticals are weaker, oil and gas tends to be performing quite well. Now of course, we’re watching the situation, the geopolitical situation in the Middle East. I don’t have a comment either way on the situation in the Middle East. As for the sake of my role and the role of this podcast, we’re really evaluating the economic impact of these geopolitical actions in the Middle East, and we’re watching closely to see if there are supply disruptions as a result of the conflict, as we look at Israel, as we look at Gaza, as we look at some of the other regions in the Middle East in this conflict spreading further.

So it’s something to watch. It’s something that we’re watching, but so far we’ve seen very little disruption to oil prices as a result of this. Now, there’s certainly volatility in the oil markets. There always is. But we will continue to watch how this situation unfolds and what that might mean for oil prices. So, so far, so good with our forecast, so far so good with most of our macroeconomic forecast at this point, but it’s worth keeping a close eye on those oil price numbers as a result of that situation in the Middle East. We’ll keep you updated. That’s our job here on TrendsTalk. Thanks so much for joining. More exciting information coming your way as we navigate deeper into 2024. Please like and subscribe wherever you listen or watch your podcast, and I’m looking forward to seeing you on the next one. Thanks for tuning in.