Low oil prices to persist through 2025 on oversupply risk, analysis shows

Business a.m.

Analysts from Wells Fargo have projected that oil prices will stay relatively low through 2025, citing an elevated risk of global oversupply.

A confluence of factors, including a decrease in demand from major economies, particularly China, and the persistent growth of U.S. shale production, have contributed to a bearish outlook for oil prices, according to the Wells Fargo note released on Tuesday.

Wells Fargo, in its note, states that while current inventories remain tight, the anticipated easing of OPEC+ production cuts by the end of 2024 boosts the probability of an oil supply surplus entering into the next year.

The note further highlighted that the oil market is at an inflection point, shifting from a state of supply tightness in 2024 to a potential oversupply situation in 2025, as the anticipated increase in oil production from OPEC+ is likely to outpace demand.

Wells Fargo’s analysts have observed that both the U.S. and China, historically robust contributors to global oil demand, are beginning to show signs of slower growth.

In the U.S., shale oil production has reached maturity and its rate of growth has tapered off, despite continuing output from the prolific Permian Basin.

Wells Fargo’s analysts have also cited China’s moderating economic growth as a key factor in the bearish outlook for oil prices.

This slowdown in China’s economy has resulted in a diminished demand for oil, which is considered a significant factor in determining global oil price trends.

In 2025, global oil supply is projected to outpace demand by about one million barrels per day (bpd) during peak production months, resulting in a potential oversupply in the market. This is partially attributed to the projected increase in OPEC+ production, which had been curtailed to stabilise prices.

According to Wells Fargo’s analysts, total oil supply is forecasted to rise from 102.8 million bpd in 2024 to 104.8 million bpd in 2025, driven by non-OPEC producers, such as the U.S. and Brazil, as well as OPEC’s planned production increases.

Wells Fargo, as a result of their bearish outlook, has adjusted their near- and medium-term oil price forecasts downward, with Brent crude now expected to average $70 per barrel in 2025, a reduction from earlier estimates.

While the predicted prices are lower than the highs experienced in 2022, when Brent reached close to $100 per barrel, they remain above the levels witnessed during historical periods of reduced demand.

A key factor that is expected to prevent prices from falling further is Saudi Arabia’s preference for maintaining prices above $70 per barrel. This is a result of the kingdom’s desire to strike a balance between generating revenue and maintaining market share, thus providing a critical support level for oil prices.

Wells Fargo has drawn parallels between the current oil market dynamics and those of 1998, when a combination of a global economic slowdown and an influx of new supply caused a dramatic collapse in oil prices.

However, the analysts at Wells Fargo caution that they are not expecting a repeat of the 1998 scenario in 2025, but they fully understand investors’ apprehensions, given the economic uncertainty in China, and OPEC+’s declared intention to roll back its production cuts.

In the third quarter of 2024, U.S. oil output growth slowed to a meager 0.1 million bpd, significantly lower than the average 0.6 million bpd seen in previous growth years.

This decline is due to a combination of resource maturity, with U.S. oil fields reaching their peak production levels, and a strategic shift by U.S. producers towards a more disciplined approach to capital allocation, prioritizing returns on investment over sheer production volume.

However, despite this slowdown in crude oil production, the production of natural gas liquids (NGLs) has been steadily rising since 2009.

According to the analysts, the shift towards NGLs indicates a broader transformation in the U.S. energy landscape that could have significant long-term implications for both global supply and price stability.

While the current outlook for oil prices is bearish, there are indications that several factors could alter this trajectory. This is as a faster-than-anticipated recovery in global demand, especially from China and OECD countries, could lead to a tighter oil market and push prices higher.

Geopolitical risks in oil-producing regions, such as the Middle East or Russia, are also believed to disrupt supply, leading to sudden price spikes.