Geopolitical tensions will be an ongoing wildcard for oil prices over the near-term, making them hard to predict, according to Dennis Kissler, BOK Financial Securities’ senior vice president trading division manager.
Oil prices are feeling pressure from all sides. Wars in Ukraine and Gaza are applying upward pressure at the same time as slow economic growth in the U.S. and China do the opposite.
U.S. producers are having to confront the recent volatility head-on in their drilling capex allocations and pivot from a “drill, baby, drill” mentality, even from producers with low breakevens.
“With the latest inflation causing higher costs and higher operating rates, along with a more cost-conscious producer, profitability is the name of the game instead of just adding barrels,” Kissler said.
“The U.S. producer in my opinion now uses the $70/bbl or higher [price] area as an all-hands-on deck [signal] to drill,” Kissler told Hart Energy Oct. 14, referring to the West Texas Intermediate (WTI) benchmark price.
Oil prices north of $75/bbl should keep drilling activity elevated, Kissler said, but production remains stagnant at prices between $65/bbl to $70/bbl.
Geopolitical tensions in Ukraine, beginning in early 2022 with Russia’s invasion of Ukraine, continue. Additionally, tensions in the Middle East continue to ratchet up as Israel remains on the defensive after Hamas’ initial deadly attack on Israeli citizens on Oct. 7, 2023, in Israeli territory. Tensions in the Middle East have spread to Iran and Lebanon as Israel and surrounding countries start to trade punches more directly.
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Curtailments continue below $62/bbl
Saudi Arabia, the world’s largest oil exporter, has signaled an interest in boosting production as part of a plan to uphold its market share. But, it’s not just the Kingdom looking to boost production.
Saudi Arabia will be joined by seven other members of OPEC+—Algeria, Iraq, Kuwait, the UAE, Kazakhstan, Oman and Russia, according to a September report released by OPEC. Combined, the eight countries could boost production by 2.5 MMbbl/d by year-end 2025 compared to expected production levels in November 2024.
At a WTI crude price of $62/bbl or below, U.S. producers will continue to curtail drilling progress, Oklahoma City-based Kissler said.
“Even though we have seen falling prices along with falling rig counts, I believe we are close to the inflection point where further declines in rigs will eventually lead to decreasing production,” Kissler said.
Current U.S. production is around 13.2 MMbbl/d—down from 13.4 MMbbl/d on Oct. 4, Kissler said, citing data from the U.S. Energy Information Administration’s Weekly Production Status Report.
“I believe WTI prices sustained below $62/bbl would eventually pull production back to 2023 levels of 12.5 MMbbl/d to 12.8 MMbbl/d,” Kissler said.
But, he also said to be mindful of other factors at play as well. “We’re cutting hairs here, as demand will also be a key factor.”