Oil Stocks: Summer Outlook 2024

Is the market changing its tune on its summer outlook for oil stocks? 

We watched WTI crude drop nearly 4% to under $75 per barrel and Brent crude falling below $80 per barrel. This big hit oil took yesterday was a gift for some investors but a curse for others. 

One thing is for certain, there weren’t too many people expecting such a steep sell-off just after the summer demand season officially began last week. We’ll see in a second why expectations were already high heading into Memorial Day weekend, and it’s important for us to understand the reasons why the market panicked.  

So what exactly happened? And more importantly, where are we going from here?

As always, all oil roads lead through OPEC.

Oil Stocks Outlook Weighed Down by OPEC’s Latest Decision

The fear and loathing over crude oil recently all stems from the latest OPEC+ meeting. It was a bloodbath as the market was whipped into a selling frenzy thanks to OPEC and its allies’ decision to wind down output cuts. 

However, things may get a little confusing with what they did, so let’s break it down. 

First, OPEC+ agreed that the original production cuts it set in place back in 2022  — which total around 2 million barrels per day — would be extended through December, 2025. 

If you recall, there was a second round of voluntary cuts that were announced in April of 2023, totalling 1.65 million barrels per day. The group announced that these would also remain in place through 2025. 

That brings us to the most recent cuts that were announced in November, 2023, when several members voluntarily cut output by another 2.2 million barrels per day. Now, these were originally supposed to be in effect until the end of March, 2024. It was decided to extend these cuts until the end of September, after which they would be gradually phased out over the next year. 

The market took this as a sign that OPEC was tired of trying to push oil to $100 per barrel, and is finally capitulating.

Is OPEC finally giving up?

Well, not exactly… and there’s an even bigger force at play here.

The Demand Disconnect Decide the Fate for Oil Stocks

In the end, Saudi Arabia and friends effectively kicked the can down the road and essentially left the door open to act later this year. Remember, the cuts don’t start gradually phasing out until the end of September. 

What it now comes down to is what I’ve been telling you all along — demand!

Just a week ago, the disconnect was very real. AAA was expecting a huge spike in travelers over Memorial Day weekend. Heading into the holiday weekend, U.S. petroleum demand was down just 0.1% year-over-year, with jet fuel demand up nearly 2% year-over-year. 

Whether or not WTI prices rally back is going to depend on how demand trends this summer; so far it hasn’t been overwhelming, which is why a gradual phase-out of those production cuts starting in Q4 would tip the scales bearish. 

The problem in that line of thinking, however, is assuming that OPEC+ follows through with boosting output again, especially if prices remain subdued this summer. The group has stated that any production increase can be paused or reversed subject to market conditions. 

If you think that they’ll begin winding down voluntary production cuts while crude prices are low, then I have some bad news for you. 

We may not see a $100/bbl oil anytime soon, but to me, this sell-off looks like a buying opportunity in disguise. 

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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