OPEC has decided that the current global economic recovery is very fragile and that the smart course is to raise production only gradually. The Organization of Petroleum Exporting Countries said the global oil market will switch from being under-supplied to over-supplied as early as next month.
Which would certainly imply that oil prices are set to fall from today’s (November 16) close of $80.79 a barrel for U.S. benchmark West Texas Intermediate and $82.52 a barrel for international benchmark Brent.
Oil hit a 7-year high of $85 a barrel in October.
But you don’t have to look far to find those who don’t see oil falling from today’s levels–and who in fact see oil staying at elevated levels into 2022 or 2023. At the end of October Goldman Sachs forecast $85 for 2023. BNP Paribas sees crude at almost $80 in 2023. Other banks including RBC Capital Markets have talked up the prospect of oil being at the start of a structural bull run.
My view? There’s just too much noise pointing in competing directions to feel certain about any trend.
But, if I had to pick a side, Id go with the “oil will move lower from here” crowd.
How much noise?
The Biden administration is said to be considering a release from the U.S. emergency crude reserves. (Funny how falling poll ratings bring out the desire to fight higher prices at the gas pump.) But the U.S. the Energy Information Administration says that the impact on oil prices would only be temporary.
Delays on a Russian natural gas pipeline have sent natural gas prices soaring and that raises the possibility of some power plants moving to oil from natural gas.
Oil production is recovering, according to the International Energy Agency, and is catching up with demand. “The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon,” the IEA said in its monthly report. “Production in the U.S. is ramping up in tandem with stronger oil prices.” Global oil output increased by 1.4 million barrels a day last month, and will add as much again over November and December as the Gulf of Mexico restores supplies halted by Hurricane Ida. American shale drillers are also taking advantage of higher prices to bolster drilling.
And speaking of U.S. oil shale producers, crude oil output from the Permian Basin of the United States is set to reach record levels in the month of December. The rig count has climbed in the largest U.S. oil shale production basin, and production is projected to hit 4,953 thousand barrels per day in December, up from 4,886 thousand barrels a day in November, according to the U.S. Energy Information Administration. The December projection would be slightly above the 4,913 thousand barrels a day record set in March 2020 just before the Pandemic took a big bite out of economic activity and oil demand.
If you want to trade in oil stocks, my suggestion would be to stick with producers from the Permian Basin. Low break-even costs for production in that Permian Basin will make this the global swing producer. Pioneer Natural Resources (PXD) is the biggest producer in the Permian.