Oil Prices Expected to Remain Low Through 2025 Due to Global Oversupply Risk, According to Wells Fargo

Oil prices are projected to remain muted until 2025 due to a heightened risk of global oversupply, according to analysts at Wells Fargo.

This bearish outlook is influenced by a combination of weakening demand from major economies, particularly China, and ongoing growth in U.S. shale production. Despite currently tight inventories, expected reductions in OPEC+ production cuts by the end of 2024 further indicate the possibility of a supply surplus in the following year.

Wells Fargo highlighted that the oil market is nearing a critical juncture, transitioning from supply constraints in 2024 to a potential oversupply scenario in 2025. Both the U.S. and China, historically significant contributors to global oil demand, are experiencing decelerating growth. In the U.S., shale oil production has matured, with growth slowing despite continuous output from the prolific Permian Basin. Meanwhile, China’s economic deceleration has lessened its oil consumption, a key element influencing global oil price dynamics.

In 2025, global oil supply is expected to surpass demand by approximately 1 million barrels per day during peak production periods. This anticipated surplus is in part due to OPEC+ production increases that were previously constrained to maintain price stability. Wells Fargo forecasts that total oil supply will rise from 102.8 million barrels per day in 2024 to 104.8 million barrels per day in 2025, driven by contributions from non-OPEC producers like the U.S. and Brazil, alongside OPEC’s planned escalations.

Consequently, Wells Fargo has revised its short- to medium-term oil price estimates downward. The firm now expects oil prices to average $70 per barrel in 2025, a decrease from earlier predictions. Similarly, West Texas Intermediate (WTI) crude is expected to average $65 per barrel in 2025, down from the second quarter average of $80 per barrel for Brent and $75.25 for WTI in 2024.

While these levels remain lower than the peaks of 2022 when Brent nearly reached $100 per barrel, they are still above the values seen during historical demand declines. A significant factor preventing prices from dropping further is Saudi Arabia’s desire to keep prices above $70 per barrel to balance revenue generation and market share.

Wells Fargo also points out parallels between the current oil market conditions and the 1998 scenario, characterized by a global economic slowdown coupled with an influx of new supply that resulted in a significant price drop. While they do not predict a repeat of 1998 in 2025, they acknowledge the investor concerns stemming from economic uncertainties in China and OPEC+’s intentions to reverse production cutbacks.

Investor sentiment reflects this uncertainty, as speculative interest in crude oil futures has shifted to a net negative outlook, suggesting expectations of continued price weakness in the near term. U.S. shale production, a key driver of global oil supply growth over the past decade, is now showing signs of maturity. Although the Permian Basin remains productive, overall growth in U.S. oil production has slowed. As of the third quarter of 2024, U.S. oil output has increased by only 0.1 million barrels per day, a significant decline from the average increase of 0.6 million barrels per day seen in earlier years.

This slowdown is attributed to resource maturity and a strategic pivot by U.S. producers emphasizing capital discipline and focusing on returns over increasing production volume. Despite the overall slowing growth in crude oil, production of natural gas liquids (NGLs) continues to rise. NGL production has been on an upward trajectory since 2009 and constituted 56% of the growth in U.S. liquid production by 2024.

The shift towards NGLs, which are utilized in petrochemical production and various industries, signals a broader transformation within the U.S. energy sector that could have lasting effects on both global supply and price stability.

However, potential changes in the current oil price trajectory could arise from a quicker-than-anticipated recovery in global demand, particularly from China and OECD countries, which could tighten the market and drive prices up. Furthermore, geopolitical risks in oil-producing regions, such as the Middle East or Russia, could disrupt supply and trigger price increases.