Despite a late rally in the oil market this week, there is growing recognition that the oil sector is approaching a reset in expectations, particularly in anticipation of the likely 2024 price environment for WTI (West Texas Intermediate) and Brent crude.
The prevailing sentiment suggests that with one more inventory build, there is a possibility of WTI dropping back into the $60s and Brent into the low $70s. While these levels may not be sustained for an extended period, there are factors contributing to this potential shift.
The article aims to explore the most probable scenario for the oil sector in 2024, taking into account the current dynamics and factors influencing the pricing environment. It acknowledges the potential for a reset in expectations and delves into the reasons behind the anticipated price adjustments.
The most probable scenario in my book is that lower prices bring about a sharp curtailment of drilling and a moderate reduction in completion activity in shale. the oil sector
Most of the shale drillers have a strong inventory of drilling locations where capex is funded with WTI at $40. But that’s a rainy day…or “rainy year” scenario, and doesn’t mean the CEO’s of these companies won’t pull back funds if the current weakness is sustained.
In my view, if there’s any significant time in the $60’s for WTI, capex budgets are going to start being trimmed. Sub-sixty, they will be slashed. Investors who have gotten used to hefty dividends and massive debt and share count reductions over the past couple of years will demand it. The old saying the “Cure for low prices, is Low prices,” is still true.
I discussed some of the challenges facing the U.S. shale industry in an OilPrice article at mid-year. Thus far improvements in technology and efficiency have kept this from occurring, but investors should regard this roll-over as being delayed rather than cancelled.
Industry sources tell me that we are just about in balance with legacy shale declines, drilling just enough to move production higher incrementally higher. We’ve seen that over the past few months, with only the Permian and the Bakken adding net barrels incrementally.