Here’s How Crude Oil Prices Could Rise – Insights from Wells Fargo

Crude oil prices have recently decreased, but this trend may soon reverse as U.S. oil production starts to decline, according to Wells Fargo.

After showing positive returns for most of 2024, year-to-date crude oil returns have dipped into negative territory. The main global benchmark, Brent, is down 3.5%, while the U.S. benchmark, West Texas Intermediate (WTI), has fallen 0.4% this year.

The decline in crude oil prices can be attributed to a combination of demand and supply factors, as noted by analysts at Wells Fargo in a report dated September 23.

On the demand side, the global economy has been experiencing a gradual slowdown. Meanwhile, supply concerns have arisen regarding the potential for increased production from the world’s two largest producers, OPEC+ and the United States.

Wells Fargo acknowledges the market’s concerns about demand and supply but believes these factors are already reflected in current oil prices.

“While it is true that global crude oil demand has been soft through much of 2024, the weakness does not appear to be intensifying. This is significant because global liquidity is beginning to improve, as indicated by central banks starting to lower interest rates,” the bank stated.

On the supply front, both OPEC+ and the U.S. are more likely to reduce production rather than increase it, particularly with crude oil prices hovering in the $60s and $70s per barrel. OPEC+ has already indicated that it will maintain the planned production cuts set to commence in October 2024.

For the United States, Wells Fargo predicts that production growth will soon decelerate, given that the average cost to drill a new shale well is approximately $64 per barrel.

In conclusion, while crude oil prices have softened in recent months, there is a likelihood that they will stabilize soon. The largest oil producers, OPEC+ and the U.S., have little motivation to increase production at current prices, suggesting a potential shift in the market.