Oil Price Outlook Through 2025

Oil prices are expected to stay low until 2025 due to risks of global oversupply, according to Wells Fargo analysts' note dated Tuesday.

Key Factors Impacting Prices

A slowing demand from key economies, particularly China, combined with the continuous growth of U.S. shale production, contributes to a pessimistic outlook for oil prices. Although current inventories are tight, easing of OPEC+ production cuts anticipated by the end of 2024 adds to the supply surplus risks into 2025.

Transition from Supply Tightness to Oversupply

Wells Fargo identifies a shift in the oil market, from supply tightness in 2024 to potential oversupply by 2025. Both the U.S. and China show signs of slowing economic growth, which typically drives global oil demand. In the U.S., shale oil production has matured, showing decelerating growth despite ongoing output from the Permian Basin.

On the demand front, China’s moderated economic growth reduces its appetite for oil, which is a significant driver of global oil price trends. By 2025, global oil supply is projected to exceed demand by about 1 million barrels per day (bpd) during peak production months.

Factors contributing to this include the expected increase in OPEC+ production, which had previously been restrained to stabilize prices.

Supply and Demand Forecasts

Wells Fargo predicts total oil supply to rise from 102.8 million bpd in 2024 to 104.8 million bpd in 2025. This increase will be driven by non-OPEC producers like the U.S. and Brazil in conjunction with OPEC's planned output boosts.

The firm has lowered its near- and medium-term oil price forecasts, now expecting Brent crude to average $70 per barrel in 2025, down from previous estimates. West Texas Intermediate (WTI) crude is expected to average $65 per barrel in 2025, decreased from the second quarter of 2024 when Brent averaged $80 and WTI $75.25.

Although these price levels are lower than the highs seen in 2022 when Brent nearly hit $100 per barrel, they remain above historical lows during demand slumps.

Price Stability Considerations

One major factor preventing prices from falling further is Saudi Arabia's objective to maintain prices above $70 per barrel, balancing the need for revenue with market share.

Wells Fargo highlights that the conditions resemble those of 1998, which saw a global economic slowdown coupled with an influx of supply leading to a drastic fall in oil prices. The firm does not predict a repeat of 1998 but acknowledges investor concerns due to uncertainties in China and OPEC+'s intent to scale back cuts.

Investor Sentiment and Market Trends

Investor sentiment reflects this uncertainty, with crude oil futures turning net negative, suggesting that market participants anticipate further price declines.

Despite the slow growth in crude oil, production of natural gas liquids (NGLs) continues to rise, accounting for 56% of U.S. liquid production growth by 2024.

This shift towards NGLs, crucial for petrochemical production, indicates a significant transformation in the U.S. energy landscape, potentially affecting global supply and price stability in the long term.

Potential Shifts in Price Trajectory

Several factors could change the current price trajectory. A quicker-than-anticipated recovery in global demand, especially from China and OECD countries, could tighten the market and elevate prices, while geopolitical risks in oil-producing zones like the Middle East or Russia could disrupt supply and spur price increases.