Oil prices have oscillated in a relatively narrow range of $60 to $70 a barrel in recent months, reflecting both warnings over rising oil supplies as well as concerns about trade wars and geopolitical conflicts.
While this may be a sweet spot for US President Donald Trump, it is a “no man’s land” for oil producers.
Crude prices hit the low end of this range in mid-October, enabling Trump on October 22 to follow through on his threat to slap severe sanctions on Russia’s two oil giants Lukoil and Rosneft, which account for around five per cent of global output.
Trump likely calculated that the escalation of the economic warfare on Moscow would not lead to severe disruption and price spikes since the oil market is today oversupplied.
At the same time, with prices in the current range, the United States’ status as the world’s top oil producer remains unchallenged. The US Energy Information Administration in October boosted its forecasts for 2025 production by 100,000 barrels per day to 13.5 million bpd, while also increasing next year’s output forecasts.
Is the US president right to be optimistic that prices will remain rangebound?
It depends on who you ask.
The International Energy Agency is forecasting a huge oversupply of four million bpd next year, nearly four per cent of global demand, which could crush prices, forcing many producers to scale back output dramatically.
But the world’s energy leaders do not seem overly worried.
At an industry gathering in Abu Dhabi last week, heads of oil trading houses predicted that Brent oil prices would stay within the $60 to $70 range next year, with some suggesting that the feared oversupply may not be as large as the IEA predicts.
That is partly because of disagreements about demand. While the IEA expects consumption to grow by 700,000 bpd this year, OPEC analysts peg growth at nearly double that rate at 1.3 million bpd. China’s huge stockpiling this year, for which Beijing does not provide any data, has further confused the demand picture.
Meanwhile, lower visibility into a large portion of the oil market due to expanded use of sanctions-busting tankers to transport Russian, Iranian and Venezuelan oil has also blurred the assessment of supply.
The OPEC+ alliance is clearly hedging its bets. It called last week for a modest increase in its production target in December of 137,000 bpd followed by a pause through the first quarter of next year.
Most Western oil majors are signalling that they don’t expect to see a dramatic shift in prices in the near future.
Many big US shale oil producers, including Exxon Mobil, Chevron and ConocoPhillips, plan to continue growing output in the coming years.
Exxon, the largest US oil producer, last month increased its 2025 production forecast in the oil-rich Permian basin by 100,000 barrels of oil equivalent per day to 1.6 million boed, while maintaining 2027 output at two million boed.
Chevron also grew its Permian output in the third quarter and plans to maintain output at one million boed for years.
These firms have in recent years made deep cost cuts to allow them to generate profits and pay dividends even with crude prices around $60 a barrel. In fact, oil majors are even signalling they will be able to maintain share repurchases at current prices, though they may need to tap debt markets to do so.
Does this mean that everyone will be happy if prices remain within today’s narrow band? Hardly.
Many OPEC producers require oil prices far above the current range in order to balance their national finances. Saudi Arabia’s fiscal breakeven stands at $92 a barrel, according to the International Monetary Fund.
But the current price range is also problematic for the oil market as a whole. Until prices breach the floor of the current range, the supply-demand balance will remain in limbo, at risk of a violent correction if OPEC’s optimistic demand forecasts do not pan out.
That’s because swing producers, particularly US shale drillers, will not be forced to sharply scale back production unless prices fall below $60 per barrel for a significant period of time.
Existing wells in the big shale basins can generate profit at US oil prices of $26 to $45 a barrel, according to a recent survey by the Federal Reserve Bank of Dallas.
Moreover, companies will drill new wells at between $61 and $70 a barrel, according to the survey. And big offshore projects can generate profits at far lower prices of between $40 to $50 a barrel.
If these producers keep production steady, the potential oversupply risk will only continue to grow.
To be sure, there are signs of a slowdown in drilling activity in US shale. The number of onshore rigs in operation has dropped by around 10 per cent so far this year, according to data from services company Baker Hughes.
But if the IEA’s oversupply scenario materialises, a much bigger correction will be needed. Oil would likely need to drop to $50 a barrel for an extended period to force producers to sharply slow drilling activity and allow supply and demand to rebalance.
President Trump - and US consumers - might be fine with that, but US producers and many OPEC members certainly would not.
(By Ron Bousso; Editing by Joe Bavier)
