Major Upset in Global Oil Market

Clear Facts

• Saudi Arabia and Russia have lost the ability to set global oil prices due to the increasing production of oil in the U.S., Canada, Guyana, and Brazil.
• Technological advances have allowed U.S. oil production to consistently surprise to the upside, with production per foot of drilling increasing by 200% since 2014.
• Non-OPEC production in 2024 is expected to increase by over 1.4 million barrels a day, while global oil demand is projected to increase by just 1 million barrels a day.

Saudi Arabia and Russia, once the dominant forces in setting global oil prices, have lost their grip on the market. The U.S. now produces over 13 million barrels a day, a million more than just a year ago, while Saudi Arabia produces about 10 million barrels a day and Russia is at about 9 million a day. As a result, speculators and investors increasingly ignore the price noise from these two countries, the largest oil producers after the United States.

The Organization of Petroleum Exporting Countries (OPEC) announced that it was delaying its next meeting from this week to next. This led oil traders to realize that Saudi Arabia and Russia are now price takers, not price setters. Following the announcement, the price of U.S. West Texas Intermediate fell by almost 5% to under $74 a barrel.

Russia is in desperate need of funds to fight its war of aggression against Ukraine while keeping its citizens quiescent as the West’s economic sanctions bite. To deceive the oil market, Russia tells Saudi Arabia that it will cut production, but in truth, just keeps pumping oil. Oil experts say it costs Russia more than $36 a barrel of oil sold to evade Western sanctions, netting under $46 a barrel. Saudi Arabia also faces fiscal challenges, requiring $88 oil to balance its generous welfare budget and necessary economic diversification program.

The global price of oil in 2024 will be determined by new supply coming upstream in the Western Hemisphere and by the economic fortunes of China. However, China is stuck in the middle-income trap, and its Communist Party Chairman Xi Jinping values internal security and State Owned Enterprises more than economic dynamism. China’s growth rate and its demand for oil are slowing dramatically. New oil supply from the U.S., Canada, Guyana, and Brazil will keep global oil prices subdued throughout 2024.

Technological advances have allowed U.S. oil production to consistently surprise to the upside. Since 2014, production per foot of drilling has increased by 200%, with most of that improvement coming since 2020. The all-in cost to bring on new production from domestic fields is under $70, significantly lower than existing wells where “the last drop” of oil can be extracted through lateral drilling.

Canada is also expected to increase production by up to 500,000 barrels a day in 2024. Production from Guyana is rising dramatically; just a few years ago, Guyana produced no oil. By 2027, daily production in Guyana will reach 700,000 barrels a day. Brazil is also ramping up production, with its daily output up to 2.7 million barrels a day, and that production level will increase in 2024. Production from both Guyana and Brazil will increase by 400,000 barrels a day in 2024. Conservatively, non-OPEC production in 2024 will increase by over 1.4 million barrels a day, while global oil demand is projected to increase by just 1 million barrels a day.

As the price of oil rises, U.S. production will increase. It is all a matter of price, and as the price increases, demand will fall. The market, not Saudi Arabia and Russia, sets the price of oil. Ignore the noise and focus on the supply and demand data.

Clear Thoughts

Saudi Arabia and Russia’s stranglehold on global oil prices is slipping, as the U.S., Canada, Guyana, and Brazil surge ahead in production. U.S. oil production has been boosted by technological advances, increasing 200% per foot of drilling since 2014. Non-OPEC production in 2024 is set to outpace global oil demand, with an additional 1.4 million barrels a day.

As the market, not Saudi Arabia and Russia, now dictates oil prices, speculators and investors should disregard their price noise. Instead, focus on supply and demand data, as new Western Hemisphere supply and China’s economic fortunes will determine oil prices in 2024.

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