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To Begin
Oil remains the world’s leading energy source, as has been the case for several decades (Figure 1). While the long-term role of oil in energy transitions remains uncertain, oil market developments will continue to have profound economic and geopolitical impacts for the U.S. and around the world in the near-term. As the U.S. election season ramps up, prices at the pump will remain a bellwether for consumer and business confidence and politicians’ approval ratings. Accordingly, crude oil and refined products will remain in the eyes of consumers, companies, and policymakers, even amid the long-term transition of the U.S. and global energy system.
Figure 1 — World Energy Consumption by Fuel, 2023
What To Watch
That is easy! When it comes to the oil market, it is important to watch global trends in supply, demand, and inventories.
Demand: Controversy or Hype?
As of mid-June 2024, there is an unusually large disagreement among the major forecasters over the pace of global demand growth this year, as well as into the more distant future. The year 2023 saw continued strong growth — the tail end of the COVID-19 pandemic demand recovery. Most forecasters expect a marked deceleration of demand this year, with the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) projecting growth of 1.1 million barrels per day (bpd) and 1 million bpd, respectively.[1] In contrast, the Organization of the Petroleum Exporting Countries (OPEC) maintains a very bullish view, projecting growth this year of 2.2 million bpd.[2]
The path of global demand over the course of 2024–25 will play a critical role in determining oil prices. In particular, China’s economic activity and the risk of a recession in countries around the world will impact the demand outlook.
Finally, looking beyond considerations of economic growth and price, much of the debate around demand is centered on the pace of electric vehicle (EV) uptake and efficiency improvements. Will we begin to see a material slowing of oil demand in road transport, or will peak oil demand continue to be just out of reach?
Refining: Regional Shifts and Balances
In addition to demand growth, the ability of the global refining system to keep pace with demand is something to watch. Most obviously, recent drone attacks by Ukraine on Russian refineries could impact fuel exports with Russia playing a particularly important role as an exporter of diesel fuel. Elsewhere, while new refineries in Asia, the Middle East, and Latin America should keep pace with regional demand, ongoing rationalization of refinery capacity in Europe and Organization for Economic Co-operation and Development (OECD) Asia — and repurposing of refineries to biorefineries — could help to support regional refining margins and impact global refined product flows. Sophisticated U.S. refineries appear well-suited to remain competitive, with the U.S. having replaced Russia in recent years as the world’s largest exporter of refined products.
US Production: To Grow or Not To Grow?
Over the past decade, the U.S. has accounted for an astounding 90% of global oil supply growth, driven by the shale revolution. But is that about to change? After yet another year of surprisingly strong growth — 1.5 million bpd for crude and natural gas liquids (NGLs) — U.S. oil production is expected to slow dramatically this year. EIA is currently projecting growth this year and next of just 0.4 million bpd and 0.6 million bpd, respectively. Ongoing pressure from financial investors to prioritize cash flow over drilling, industrial consolidation, and maturing of the shale resource all point to a slower growth trajectory. Yet, U.S. producers have continued to surprise analysts with their ingenuity. Better drilling and hydraulic fracturing techniques, application of data analytics, and longer lateral wells have contributed to U.S. supply consistently exceeding expectations.[3] Going forward, how will the balance of these forces play out? Has upstream ingenuity reached a point of diminishing returns, or are there still technical and operational gains to be made?
OPEC+: Back in the Saddle Again?
The large group of oil-producing countries in the OPEC+ group — including OPEC and ten other producers led by Russia — has instated a series of large production cuts in recent years to support prices in the face of strong supply growth in the U.S. and elsewhere. Most recently, members including Saudi Arabia and Russia have added so-called voluntary cuts in addition to official quota reductions, with the current plan calling for those cuts to remain in place through September 2024, then being very gradually eased as market circumstances allow. Recent market dynamics have seen the group continually deepening and lengthening the duration of their production restraint.[4] These cuts have created tensions within the group, albeit manageable ones.[5] OPEC heavyweight Saudi Arabia has so far chosen to deal with occasional overproduction among group members — most notably by Russia and Iraq — with a mix of negotiating carrots and sticks, but has not opted to trigger a price war by increasing its own production.
From an energy security perspective, the upside of aggressive OPEC+ production cuts is a large buffer of spare production capacity, which the IEA estimates is, as of May, nearly 6 million bpd, largely held in Saudi Arabia, the United Arab Emirates (UAE), and other Arabian Gulf producers. In a supply disruption, spare capacity represents the market’s first line of defense, if producers elect to use it.
For the near term, a couple of key questions exist, connecting market balance and OPEC+ decision-making. Will trends in global demand and non-OPEC supply finally allow the group to relax their production restraint? If market conditions do tighten, will the group choose to increase output, or let prices rise? Alternatively, if the market becomes increasingly over-supplied, as recently noted in the IEA’s outlook to 2030, will OPEC+ members continue to restrain production in an effort to support prices, or trigger a price war to expand market share?[6]
A Key Geopolitical Risk: Heightened Middle East Tensions
Fifty years after the Arab Oil Embargo, the Hamas attacks in Israel on Oct. 7, 2023, and resulting Israeli invasion of Gaza stoked fears of a broader regional conflict.[7] So far, we have not seen material disruptions to regional oil production, although Houthi attacks on shipping in the Red Sea have resulting in significant diversions of cargoes, increasing sailing times and adding incrementally to transport costs. If the conflict spreads — or threatens to spread — to oil-producing countries or threatens oil flows through the strategic Strait of Hormuz through which over 20 million bpd of crude and refined products flow, the impact on prices would be significant.[8] The mere threat of such a disruption raises the stakes, especially if actors capitalize on that threat for geopolitical gain. Importantly, key regional producers have so far avoided any discussion of using oil as a political weapon.
As always, geopolitical issues more broadly will continue to loom large for the oil market. Among factors currently in play are Western sanctions on Russia — including the G7 price cap — Ukrainian attacks on Russian energy infrastructure, and the status of U.S. sanctions on Venezuela and Iran, each of which can disrupt production and flows of both crude oil and refined products.[9] Similarly, domestic policy choices in China regarding export quotas for refined products, with China now the world’s largest oil refining nation and a significant exporter of refined products, can have far-reaching implications for global market balance.
US Policy: Few Levers With Short-Term Impact, but the Long Term Is Different
While U.S. domestic policy has the potential to evolve significantly over the next few years, options for materially impacting the market are very limited. Simply put, there is not much a U.S. president can do to influence prices of crude oil or refined products in the near term.
The key exception to this is the use of the Strategic Petroleum Reserve (SPR). Even after the large release following the Russian invasion of Ukraine — the largest SPR withdrawal on record — the U.S. stockpile still holds some 360 million barrels of crude oil. Including other IEA member countries, strategic stocks of crude oil and refined products exceed 1.2 billion barrels — a formidable tool along with OPEC spare capacity for managing any future supply disruptions.[10] The U.S. president has broad authority to decide whether to release crude oil from the SPR, either unilaterally or in coordination with other countries. Additionally, the president has authority to manage the pace of already-funded purchases of crude for the stockpile, as seen by the on-again, off-again nature of modest SPR purchases as oil prices have fluctuated.[11]
Beyond the SPR, the pace of federal permitting for drilling and regulation of methane and other drilling-related emissions remains contentious. Of course, the pace of U.S. upstream investment has been constrained by a host of economic, financial, and technical factors, with federal policy far from presenting the most challenging obstacle for U.S. drillers. With the heavy majority of onshore domestic oil production taking place on private land, policy changes regarding the development of federal lands are unlikely to present a significant hurdle for upstream investment across the entirety of production opportunities in the U.S. Moreover, the lags between issuing permits and developing and implementing drilling programs mean that the impact of any such change is unlikely to significantly impact the trajectory of U.S. production over the next year or so, even on federal lands.[12]
Conclusion: Never a Dull Moment for the Oil Market
Oil is the single most strategic commodity in the world, and by far the largest source of energy for the U.S. and global economies. This fact will remain true, at least into the medium term. Even amid a growing focus on long-term transitions of the U.S. and global energy systems, industry, governments, and analysts will continue to track oil market developments and their impacts on producers and consumers. The slate of issues currently in play, coupled with the ongoing importance of oil in the domestic and global energy mix, as well as an election in the U.S. that could change the view of the investment landscape for oil, makes tracking the development of 2024–25 interesting, at the very least, and certainly not boring.
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Notes
[1] U.S. Energy Information Administration (EIA), Short-Term Energy Outlook, July 9, 2024, https://www.eia.gov/outlooks/steo/; International Energy Agency (EIA), Oil Market Report — June 2024, 2024, https://www.iea.org/reports/oil-market-report-june-2024.
[2] Organization of the Petroleum Exporting Countries (OPEC), “Monthly Oil Market Report,” https://www.opec.org/opec_web/en/publications/338.htm. These differences extend to the groups’ 2025 outlooks, with OPEC projecting continued strong demand growth of 1.8 million bpd, while the EIA and IEA are projecting growth of 1.5 million bpd and 1 million bpd, respectively.
[3] Claudio Galimberti and Mark Finley, “OPEC+ Cuts Should Tighten the Market,” Rystad Energy, January 22, 2024, https://www.rystadenergy.com/insights/opec-cuts-should-tighten-the-market. For a version of this piece published with the Baker Institute, see https://www.bakerinstitute.org/research/opec-cuts-should-tighten-market.
[4] Finley, “OPEC+ Agrees to Additional Production Cuts: Market Responds With a Shrug” (Houston: Rice University’s Baker Institute for Public Policy, December 6, 2023), https://doi.org/10.25613/0DQK-6847.
[5] Jim Krane, Kristian Coates Ulrichsen, and Finley, “Should Abu Dhabi Quit OPEC? Reconsidering the UAE’s Membership” (Houston: Rice University’s Baker Institute for Public Policy, June 1, 2023), https://doi.org/10.25613/dt16-5153.
[6] IEA, “Slowing Demand Growth and Surging Supply Put Global Oil Markets on Course for Major Surplus This Decade,” June 12, 2024, https://www.iea.org/news/slowing-demand-growth-and-surging-supply-put-global-oil-markets-on-course-for-major-surplus-this-decade.
[7] Krane and Finley, “Rising Oil Prices, Surging Inflation: The Arab Embargo 50 Years Ago Weaponized Oil to Inflict Economic Trauma,” The Conversation, October 11, 2023, https://theconversation.com/rising-oil-prices-surging-inflation-the-arab-embargo-50-years-ago-weaponized-oil-to-inflict-economic-trauma-214670. For a version of this piece published with the Baker Institute, see https://www.bakerinstitute.org/research/arab-embargo-50-years-ago-weaponized-oil-inflict-economic-trauma-sound-familiar.
[8] EIA, “The Strait of Hormuz Is the World’s Most Important Oil Transit Chokepoint,” November 21, 2023, https://www.eia.gov/todayinenergy/detail.php?id=61002.
[9] Finley and Anna Mikulska, “Wielding the Energy Weapon: Differences Between Oil and Natural Gas” (Houston: Rice University’s Baker Institute for Public Policy, June 26, 2023), https://doi.org/10.25613/G9P2-3F78.
[10] This figure is for IEA member countries only and excludes strategic stockpiles in China and several other oil-importing countries. The size of China’s stockpile is not publicly available.
[11] Timothy Gardner, “US Speeds Up Purchasing for Strategic Petroleum Reserve as Oil Prices Dip,” Reuters, June 7, 2024, https://www.reuters.com/business/energy/us-seeks-6-million-barrels-oil-strategic-petroleum-reserve-2024-06-07/; Shelby Webb, “DOE Cancels Purchases for Strategic Oil Reserve,” E&E News, Politico, April 4, 2024, https://www.eenews.net/articles/doe-cancels-purchases-for-strategic-oil-reserve/.
[12] In addition to federal lands, oil production in federal waters in the Gulf of Mexico is significant — currently roughly 1.8 million bpd — but the lead times for deepwater projects means that changes to offshore leasing policy are unlikely to materially impact domestic production over the next several years.
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