Dennis Kissler, BOK Financial
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It’s been a wild, geopolitical-tension-fueled ride for crude oil since the beginning of the year. With WTI prices ranging from $70/bbl in January to as high as near $87/bbl in mid-April, you wouldn’t be alone in wondering if this ride will continue through the remainder of 2024. The answer, as always, is: it depends. Nevertheless, most signs point to calmer waters ahead.

For one, most of the risks have been more bark than bite, so far—at least as it pertains to oil. The Houthi attacks in the Red Sea shipping areas and Ukraine targeting and actually hitting Russian interior refineries received a lot of press and, of course, have drastic implications for those involved, as well as for the level of geopolitical tension.

However, the actual number of barrels taken off the global market due to these events has been minimal. The real trade, as is often the case, was to “sell the rumor and buy the fact.” Looking forward, while major supply disruptions caused by these conflicts remain a possibility, the energy market’s nervousness is easing.

OPEC+ production cuts

Still, there are other wild cards. For example, one factor that has been taking barrels off the global stage is OPEC+. In March, OPEC+ members agreed to extend their voluntary output cuts of 2.2 MMbbl/d until the end of June. Then, in early April, OPEC+ released a statement supporting member countries’ efforts to more fully conform with the cuts. Namely, Iraq and Kazakhstan pledged to achieve full conformity and compensate for overproduction, and Russia announced that its voluntary adjustments in second-quarter 2024 will be based on production instead of exports.

OPEC’s compliance with production cuts will most likely last through the remainder of the year. And so, that takes one wild card off the table—that is, unless OPEC+ ministers change their oil supply policy for the second half of the year or if the voluntary production cuts continue and there is less compliance.

Global economic growth

Another wild card is the strength of the global economy, which impacts oil demand. As I’ve written about previously, slower economic growth in Asia is a potential headwind for oil prices because of the volume of manufacturing in the region. That’s particularly the case regarding China, known as “the world’s factory.”

The Eurasia Group has estimated China’s oil demand growth in 2024 will drop substantially from what it was in 2019, prior to COVID. Moreover, the consultancy group anticipates China foregoing its model of oil-intensive economic growth, so we won’t see its demand return to the levels seen previously (1 MMbbl/d between 2015 and 2020). Meanwhile, the International Monetary Fund (IMF) expects China’s economic growth will fall from 5.2% in 2023 to 4.6% in 2024, with a further drop to 4.1% in 2025. However, the IMF projects that the broader world economy will continue growing at 3.2% this year and into 2025, which is the same pace as global growth in 2023.

So, what does all this mean for oil prices? Unless we see a weakening of the global economy or OPEC+ overproducing past their production quotas, crude prices should be in equilibrium at around the mid-$70s/bbl area (Nymex WTI). That said, the U.S. Dollar Index is also a wild card for crude exports. The stronger the dollar remains, the more exports could struggle, which could add more to storage.

A natural gas renaissance?

Lastly, natural gas seems to have found a floor in the $1.70/MMBtu to $1.80/MMBtu range, as prices that cheap are not normally sustainable, even with storage pushing more than 30% above the five-year average.

Natural gas will be the most prominent producing power source. This begs the question: We have seen prices bottom, but is the upside capped? I think so, until at least fall, and even then, only if temperatures for this summer average above normal. It would take some abnormal deviation of temperatures for us to see a major move up in prices before year-end. Nevertheless, the demand for natural gas is out there in a big way and the longer-term odds favor the upside as time passes.

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