What Next for Crude Oil?

Dr. Ken Rietz

The price of crude oil has been chaotic lately. One newsletter, FXstreet, has a section called Oil Big Picture, which lists 26 topics, split evenly between Oil Bullish Themes and Oil Bearish Themes. That is how the overall market is acting, with no consensus on the direction for crude oil. In this commentary, we will examine a few of those themes in some detail and see if we can come to a less nuanced sense of direction. But first, here are the graphs of WTI and Brent crude August futures. (Note that the scales are different. WTI crude is not more expensive than Brent crude.)

Figure 1: NYMEX WTI and ICE Brent Aug crude oil futures in USD, for the last six years

Over the past two years, crude oil price has been steady, and mostly reverting to slightly higher than the steady values prior to the effects of the Russian invasion of Ukraine. Regardless, there are no clear long-term trends.

That, of course, is only the net result of some fierce battles that are going on under the surface. Neither side is winning enough to more than cause ripples in the price of crude oil. Any legitimate analysis will require diving into the subject and examining the forces trying to push prices one way or the other. Ultimately, it is supply and demand. Bullish forces reduce supply and/or increase demand. Bearish forces increase supply and/or reduce demand. Let’s look at some of these.

First the main bullish force. OPEC+ controls roughly 40% of global crude oil production and 60% of crude oil international shipments. However, the price of Brent crude, lately in the neighborhood of US$80 per barrel, is too low for several OPEC+ members to balance their budgets. Output cuts are the traditional approach to decreasing supply and raising prices. There are currently two levels of output restrictions that OPEC+ has, totaling 5.86 million barrels per day (MMb/d), or 5.7% of global production. One production cut is 2.2 MMb/d, which was to expire at the end of this month, but, according to the Wall Street Journal, is now extended to start to phase out in three months and gradually finish in September 2025. The other cut is 3.66 MMb/d, which was to expire at the end of 2024, but has been extended through all of 2025. Since the market is always looking to the future, the effect of extending the cuts is definitely bullish.

Another major bullish factor is economic growth. China, in particular, has recently shown signs of pulling out of its recent decline. As it did before, China might be able to hold out while the rest of the world recovers, assuming that the recent numbers from China are reliable. Similarly, The US Bureau of Economic Analysis has recently emphasized that real GDP of the US was still growing.

It might not be as high as we would like, but it still is positive. And that means that demand for crude oil could still increase a bit.

There are ambivalent factors also, that could cause the price of crude oil to go ether way. Examples are media stories, policy changes, politics in general, reports (from academia, company statements, or governmental), and even survey results. But the nature of each of these is that their timing is difficult to predict. The most inscrutable of them all is the crude oil market. There are times that the market goes either up or down with no clear external catalyst. It is often driven by speculation, and that has no pattern, by its nature.

The factors that could push crude oil prices down are equally diverse. The one that is (I hope) the most prominent here is the reduction of tension in the Middle East. The recent events in the Middle East have been responsible for oil tankers having to go around the Cape of Good Hope, increasing the cost of shipping and the time spent in delivery. Should the Suez Canal again become available, costs of crude oil would certainly drop.

There is one other, and much more likely, factor that could cause an increase in supply of crude oil. The OPEC+ oil cuts were not presented as set in stone. There was a clear sense that these are the current plans, but they could change as global data shifts. A reversal of the cut extensions would then imply a future increase in crude oil production, and therefore a decrease in the price of crude oil.

A final factor is difficult to predict but can have extraordinary effect: technological improvements. The recent discovery of horizontal drilling has allowed the US to produce very much more crude oil with fewer drilling rigs. Not long ago, the technique of fracking did the same. With a dramatically larger supply, the price would go down.

So, where are crude oil prices going to go? Examining the arguments, the stronger ones seem to be for decreasing the prices. OPEC+ production cuts are already priced into crude oil; they will have little further effect. Economic growth, either in China or the US, seems more hazy than real. If US economic growth does begin to stall—and it looks like it could easily stall, given the trajectory of the GDP—that could cause OPEC+ to consider increasing production to increase their revenue. So, I expect that crude oil prices will continue their recent pattern to drift lower.