After a subdued winter and predictions of a relatively boring 2024 (compared to the rollercoaster of the past few years), oil markets are back in focus, with the International Energy Agency (IEA) and the US Energy Information Administration (US EIA) both revising up their forecasts for crude prices on higher demand and tighter supply.1,2
We at SS&C ALPS Advisors have been reserved in our own short-term energy outlook in recent months, given disappointing demand from China and eye-popping production from the US even as rig counts dropped. However, on the demand side, the US economy continues to impress, compensating for China’s lackluster performance. On the supply side, an OPEC price floor, warning signals from the Permian Basin and a shipping lane under fire indicate oil markets may have tailwinds heading into the summer driving season.
It’s no secret that US oil producers crushed expectations last year, cruising past their previous record set in 2019 even as active rig counts declined.3 This means that OPEC+, in its effort to keep prices elevated, had to cut its production even more to compensate for US output, and the US EIA recently noted in their Short-Term Energy Outlook that OPEC+ cuts announced in March were more severe than expected.2
While US efficiency is striking, it seems unlikely to continue at the recent pace, and a flattening off of US production could put upward pressure on prices in the near-term. The Permian Basin in particular has lost significant production in legacy wells (those over one month old) over the last year, and while new wells have recently been able to make up for the shortfall, ever-increasing productivity in new wells is not the norm.4
Finally, Houthi missiles, though nearly always intercepted mid-air (or sometimes on the ground), have still led to a jump in insurance premiums and a rerouting of significant volumes of oil.5 The IEA notes in its March Oil Market Report that oil on water climbed by 85 million barrels in February alone, as tankers elect for the much-longer route around the Cape of Good Hope over the direct route past Yemen’s shores.1
While we believe disruptions like these are normally short-term, it’s important to keep in mind that above-normal risks exist in the global oil supply chain that could escalate from minor to severe with little warning.
Supply-side dynamics in the oil market are putting strong upward pressure on prices, and upward revisions to demand estimates make us think the recent run up in oil prices may only be the first leg of a more durable trend.
Important Disclosures & Definitions
1 IEA (2024), Oil Market Report - March 2024, IEA, Paris
2 U.S. Energy Information Administration, Short-Term Energy Outlook, March 2024
3 Source: Bloomberg, US EIA, Baker Hughes. See chart “US production reached new highs even as rig counts dropped, forcing more OPEC+ cuts.”
4 U.S. Energy Information Administration, Drilling Productivity Report, March 2024
5 Saul, J., & Cohn, C. (2024, July 2). US, UK ship investors hit by Soaring Red Sea Insurance - sources ... Reuters.
AAI000651 03/26/2025
