After a surprising run higher this summer, investors have struggled to navigate the crude oil market since September. Many believed the summertime surge in per barrel prices would continue, given OPEC production cuts and War in Israel. Instead, West Texas Crude oil prices tumbled because of rising U.S. production and lower post-Labor Day driving demand, leaving many wondering what happens next.
Doug Kass, a long-time hedge fund manager, has noticed the recent decline in crude oil prices.
Kass, the former Director of Research for Leon Cooperman's Omega Advisors, has navigated bull and bear markets since the 1970s. He creates a list of market "surprises" for the upcoming year every year. This year, his list includes an outlook for crude oil prices that may raise some eyebrows.
Given Kass's long experience managing money, it may be worthwhile to consider what he thinks could happen to per-barrel oil prices in 2024.
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Economic uncertainty remains high as U.S. oil production jumps
To shore up prices, OPEC+, which includes Russia, has cut 3.66 million barrels per day of production from the global oil market. Saudi Arabia, the second-largest producer behind the United States, reduced output by an additional one million barrels per day beginning in July, a decision extended in September through the end of 2023.
Those production cuts reduced OPEC production to a two-year low of 27 million barrels per day in August. It also lowered Saudi Arabia's oil output to 8.7 million barrels daily, the least since May 2021.
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The decline in oil production lifted prices for a while when driving demand was high this summer. More recently, however, prices have fallen because of the seasonal slowdown in gasoline demand after Labor Day and the swap to winter-grade gasoline, which uses less oil and more inexpensive butane.
Oil prices have also fallen because of skyrocketing production in the resource-rich and highly profitable Permian Basin in West Texas and lackluster demand caused by slowing global economies, including in Europe and China.
In September, oil and gas exploration and production companies in the U.S. pumped a record 13.2 million barrels daily, about 7% more than last year. Much of that growth has come from the Permian Basin, which has seen daily production climb from about 1 million barrels to about 6 million barrels because of advances in horizontal shale drilling technology.
While U.S. production and slowing demand offset OPEC's efforts, that may not continue for much longer.
Oil prices could be about to make a big move
Doug Kass is one of the few hedge fund managers with decades of experience who regularly shares his buying and selling activity with Main Street investors.
In addition to managing money at his hedge fund, Seabreeze Partners, Kass also pens a daily diary of his trading activity for Real Money Pro.
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Recently, Kass released his annual "surprises" list for 2024 to readers of his diary. The underappreciated possibilities include insight into what could be next for stocks, bonds, interest rates, and crude oil prices.
His stocks and bonds forecast is downbeat, but he thinks crude oil could re-exert itself in 2024.
"China's economy starts a surprising recovery, causing commodity prices to begin to inflect higher, and oil begins a slow but persistent recovery in price," predicts Kass. "With the polls tight and in an effort to influence the election, the Federal Reserve cuts rates twice before July. These policy moves and conditions prompt a resurgence in headline inflation and... a further spike in the price of oil in late summer -- complicating the Fed's desire to cut rates."
Kass's outlook suggests that the U.S. will experience sluggish growth rather than a recession. If so, oil demand will stabilize, making the market more vulnerable to geopolitical uncertainty, including Presidential election-year saber-rattling by North Korea, China, and the Middle East.
"With Russia and Saudi Arabia conspiring on production cuts, the price of oil exceeds $110/barrel, and the price of a gallon of gasoline in the U.S. approaches $6," warns Kass.
A possible oil price increase to $110 or more wouldn't be good news for consumers' wallets, but oil companies would welcome it.
In 2023, oil exploration and production companies' financial results were hampered by lower prices and tough year-over-year comparisons to 2022, when prices and profitability were high. If Kass is correct, the opposite could be true in 2024. A resurgence in prices and easier 2023 comparisons could make oil stocks big winners next year.
Kass speculates, "Shares of Exxon Mobil, Occidental Petroleum, and Chevron each rise by over one-third next year" because of rebounding oil prices.
Of course, nobody knows how next year will unfold, and we'll only know if Kass's surprises pan out in hindsight. Nevertheless, a potential surge in oil prices could be an underappreciated possibility that investors should consider.
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