After another turbulent, challenging month for West Texas Intermediate (WTI), my expectations for WTI prices in June are reduced by $2.50 per barrel. I expect WTI to range between $57.50 to $67.50 per barrel.
Tariff and geopolitical issues as well as the “voluntary eight” of the OPEC+ reducing their production cutbacks continued to stress oil prices in April. These concerns will not be resolved in May. The voluntary eight OPEC+ countries that have reduced their production cutbacks are Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman. There remain concerns that Iraq and Kazakhstan are producing more than their quotas. As a consequence, in early June, many expect the voluntary eight members of OPEC+ to raise the production ceiling by another 411 thousand barrels per day. The reality is that because Middle East countries burn more oil to meet their cooling needs during the hot summer months, much of the increased production is never exported. In other words, OPEC+ exports during the hot summer months are largely unaffected by these production increases.
I do not have much confidence in my outlook because of the uncertainty surrounding the previously mentioned challenges. In this article, I will provide some of the sources that I relied upon to reach my outlook.
The Financial Times May 11 article “Saudi Aramco cuts its dividend by $10bn” (subscription required) gave me pause because oil companies are loathe to cut their dividends. When dividends are cut, it suggests an anticipation that current or worse conditions may exist for a while. Shareholders of companies rely upon dividends remaining the same or increasing and may flee from companies that reduce their dividends, thereby driving down share prices.
The world’s largest oil company’s net income dropped 5 per cent from a year earlier to $26bn. Its average realised oil price was $76.30 a barrel, compared with $83 a barrel in the same quarter last year.
While the performance was better than that of some of its peers, including BP and Shell, whose first-quarter profits halved and fell by 28 per cent respectively, Aramco cut its total dividend to $21.4bn from $31bn in the final quarter of last year.
There were two important articles regarding peak shale. The Wall Street Journal May 17 article “U.S. Drillers Say Peak Shale Has Arrived” (subscription required) suggests that shale production is challenged at these prices.
Drillers that made the U.S. the world’s top oil producer say they are hitting the brakes to weather a period of low crude prices and that the gusher has likely peaked. Some of the largest producers, including Diamondback Energy, recently told investors that they would be spending less this year and plan to drop rigs.
The U.S. is on track to see crude oil production modestly increase in 2025—in part because of growth in fields offshore—before declining next year by 1% to 13.33 million barrels a day, according to S&P Global Commodity Insights. That would mark the first year-on-year decrease in roughly a decade, outside the Covid-19 pandemic.
“We believe we are at a tipping point for U.S. oil production at current commodity prices,” Travis Stice, chief executive of Permian driller Diamondback, said in a letter to shareholders last week.
Next, the Financial Times May 25 article “Oil chiefs warn of end to US shale boom” (subscription required) also suggests shale production is challenged.
“We’re on high alert at this point,” Clay Gaspar, chief executive officer at Devon Energy in Oklahoma City, told investors this month. “Everything is on the table as we move into a more distressed environment.”
Oil output will fall by 1.1 per cent next year to 13.3mn barrels a day, according to S&P Global Commodity Insights, as prolific shale drillers that made the US the world’s biggest producer idle rigs in the face of prices driven lower by fears of oversupply and Trump’s trade war.
That would mark the first annual decline in a decade, excluding the 2020 pandemic when collapsing demand sent oil prices below zero and triggered widespread bankruptcies across states such as Texas and North Dakota.
If shale production plateaus or recedes slightly, then that is bullish for oil prices because there is less oil on the market.
With all turbulence, however, there are some economic concerns.
Rising delinquent credit card and car payments show that consumers are struggling. Once tariffs hit, consumers are likely to be even more stressed.
The Bloomberg May 22 article “OPEC+ Discusses Another Super-Sized Output Hike for July” (subscription required) suggests that another large increase in the production ceiling may be decided in early June.
OPEC+ members are discussing making a third consecutive oil production surge in July, to be decided at the group’s meeting in just over a week, delegates said.
An output hike of 411,000 barrels a day for July — triple the amount initially planned — is among options under discussion, although no final agreement has yet been reached, said the delegates, asking not to be named because the information is private. A final decision is due to be taken at a gathering on June 1.
The cartel has helped sink crude prices since announcing 411,000-barrel hikes for May and June — equivalent to about 1% of current OPEC+ output — in a historic break with years of defending oil markets. Oil made a fresh plunge on Thursday, dropping 0.9% to $64.31 a barrel as of 9:13 a.m. in London.
This is one of the rare times that I am more bullish on oil prices than is Eric Nuttall. Below is a thirteen-minute YouTube video by Nuttall.
Another fund manager that I follow is Josh Young. Below are two posts on X where he expresses his bullishness:
The short CNBC video is worth watching.
I am not as bullish as Josh because the economic backdrop is likely to contain any exuberance.
I follow people whose viewpoints are varied and keep an open mind because the oil price environment can be and often is extremely volatile.
Another person I like to follow on X is Dr. Anas Alhajji because he has an in-depth understanding of the oil market and is able to follow and correspond with folks in the Middle East. The following X post references a 90-minute YouTube video. If you want a deep dive into the crude markets, the video is worth watching.
The outlook is far from certain. There are well-respected fund managers who are either bearish or bullish. My own view tends to expect more of the same. While OPEC+ is unlikely to flood the oil market, Saudi Aramco’s dividend cut warrants attention. The global economy is constantly reacting to the latest developments by the US administration. And American consumers are showing signs of being stretched. All these factors lead me to believe that WTI prices are likely to remain with the range of $57.50 to $67.50 for the next month.
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