Oil prices have experienced surprising shifts. WTI is currently priced at $57 a barrel, which some analysts call “shockingly low” in real terms. To understand the current situation, it’s essential to understand what’s happening in the oil market and what factors drive prices.
The Current State of Oil Demand
Despite economic slowdowns, particularly in areas outside data centers and specific sectors, the U.S. has seen growth in oil demand. Interestingly, the oil demand is at an all-time high in the U.S. and globally. So, why are oil prices still so low? The disconnect between what people expect in the oil market and what is happening is striking.
A Year of Oil Surprises
Josh Young, founder of Bison Interests and Bison Insights, has analyzed the oil industry for years. He reflects on how he would have never predicted oil prices to be where they are today. The price drop from the market peak has left many analysts scratching their heads. The only thing more surprising than the current oil prices is that many bearish analysts still believe the price will collapse further.
Inflation-Adjusted Oil Prices: Surprisingly Low
In an inflation-adjusted context, oil prices have lagged behind other costs. The discrepancy is glaring when comparing oil prices to housing or grocery bills. For example, today’s gas prices—$2.40 per gallon in Houston—are incredibly low compared to what many expect, considering inflation. In real terms, oil is “shockingly low.”
What Went Wrong in 2023?
The oil market’s drop since 2023 has been unexpected. A year ago, many industry professionals were confident that the price would climb. But now, with prices dropping, many in the industry are reassessing their forecasts. The significant production surge from countries like Guyana, Brazil, Kazakhstan, Iran, and Libya has helped counteract the flatlining U.S. production, keeping the market in a delicate balance.
The U.S. Oil Supply Flattening
The U.S. oil production, particularly onshore, has plateaued and may even start to decline. Over the last decade, U.S. onshore production has been the main driver of global oil growth, but that trend is reaching its peak. Meanwhile, countries like Iran, Brazil, and Kazakhstan have steadily increased their oil output, adding pressure to global supply levels.
Geopolitical Tension and Its Impact
While oil supply from the U.S. flattens, geopolitical tension in regions like the Middle East, Russia, and Venezuela looms large. Despite this, there has been a strange lull in geopolitical supply disruptions. Historically, these tensions have caused significant price hikes, but the impact has been much lower than expected in recent months.
Oil Supply and Demand Going Forward
Looking forward, Young believes there are three key drivers of oil prices:
Oil Supply:
Global oil production is not declining as expected. While U.S. output has flattened, countries like Guyana, Brazil, and Kazakhstan have increased production. Iran and Libya have also added substantial barrels to the global market. However, these increases are insufficient to offset the decline in U.S. production.
Economic Slowdown:
While there’s talk of a potential global recession, U.S. oil demand continues to rise, with the country seeing record-high levels in recent months. If global supply can’t keep up, this demand could create a bullish scenario for oil prices.
Geopolitical Tensions:
Rising geopolitical tensions could disrupt oil supplies, especially in the Middle East, Russia, and Venezuela. But these disruptions have been minimal in the past year, leaving many questioning how long this lull will last.
The Risk of Supply Disruptions
Young points out that geopolitical tensions may have subsided recently, but could quickly escalate. Events like attacks on oil tankers or military strikes could significantly disrupt oil supplies, creating price volatility. As tensions rise in regions like Russia, Israel, and Iran, these disruptions could trigger significant oil price spikes.
OPEC’s Role in the Oil Market
OPEC’s actions also significantly affect oil prices. The organization has been pressured to increase production to meet growing demand, but Young believes there is a discrepancy in OPEC’s claimed spare capacity. OPEC tests which countries can deliver on their promises by increasing production quotas.
Despite this, the potential for price spikes due to OPEC’s moves remains high. If demand continues to rise while supply remains relatively flat, oil prices could rise much higher than expected, potentially reaching the $80–$100 per barrel range.
The Future of Oil Prices: A Bullish Outlook
Looking ahead, Young sees the potential for much higher oil prices. While it’s difficult to predict when these spikes will happen, it’s clear that the market is heading toward a shortage. Oil production in the U.S. is expected to decline by 500,000 to 1 million barrels per day over the next few years, further tightening supply.
Additionally, the rise of mining demand—primarily driven by the surging prices of commodities like gold and silver—could put even more pressure on oil supplies. As more mining operations require vast amounts of diesel and oil, this could lead to further price increases.
Conclusion: The Oil Market’s Path Forward
In conclusion, while the oil market is experiencing uncertainty, it’s clear that we could be heading into a period of supply shortages and price spikes. The recent lull in geopolitical tensions and flatlining U.S. oil production are deceptive. As demand continues to climb and supply struggles to keep up, the oil market could soon see a significant price surge.
Josh Young’s analysis suggests that oil prices may rise rapidly in the coming years, with a path toward $80 or even $100 per barrel as the market tightens. Investors and oil companies must closely monitor these developments, as the next 12 months could prove pivotal for the oil market’s future.
