After a surprising rally this summer, investors have had a difficult time navigating the crude oil market since September. Many believed the summer surge in barrel prices would continue, given OPEC production cuts and the war in Israel. Instead, West Texas crude oil prices fell due to increased U.S. production and weaker demand after Labor Day, leaving many wondering what will happen next.
Longtime hedge fund manager Doug Kass has noted the recent drop in crude oil prices.
Kass, former director of research at Leon Cooperman's Omega Advisors, has navigated bull and bear markets since the 1970s. Each year he creates a list of market “surprises” for the coming year. This year, his list includes an outlook for crude oil prices that may surprise some.
Given Kass's long experience in money management, it may be worth considering what he thinks could happen to oil prices per barrel in 2024.
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Economic uncertainty remains high as US oil production increases
To prop 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 production by an additional million barrels per day starting in July, a decision that was extended in September until the end of 2023.
Those production cuts reduced OPEC output to a two-year low of 27 million barrels per day in August. It also reduced Saudi Arabia's oil production to 8.7 million barrels per day, the lowest since May 2021.
Related: Fund manager who predicted S&P 500 rally issues new 2024 target
The drop in oil production raised prices for a time when demand was high this summer. More recently, however, prices have fallen due to the seasonal slowdown in gasoline demand after Labor Day and the switch to winter gasoline, which uses less petroleum and cheaper butane.
Oil prices have also fallen due to soaring production in the resource-rich and highly profitable Permian Basin in West Texas and lackluster demand caused by slowing global economies, including Europe and China.
In September, U.S. oil and gas exploration and production companies pumped a record 13.2 million barrels a day, about 7% more than last year. Much of that growth came from the Permian Basin, whose daily production increased from about 1 million barrels to about 6 million barrels due to 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 keeps a diary of his trading activity for Professional with real money.
More from Wall Street analysts:
- The Analyst Who Correctly Predicted 8% Mortgage Rates Has a New Target
- The analyst who warned Google shares could fall has a new price target
- The analyst who predicted the S&P 500 rally has a new target for 2024
Recently, Kass released his annual list of “surprises” for 2024 to the readers of his newspaper. Underrated possibilities include information about what could happen next for stocks, bonds, interest rates and crude oil prices.
His forecast on stocks and bonds is pessimistic, but he thinks crude oil could be back on track in 2024.
“China's economy begins a surprising recovery, causing commodity prices to begin to rise, and oil begins a slow but persistent price recovery,” Kass predicts. “With polls tight and in an effort to influence the election, the Federal Reserve cuts rates twice before July. These measures and policy conditions cause a resurgence in headline inflation and… a further rise in the price of oil in late summer – complicating the Federal Reserve's desire to cut rates.”
Kass's outlook suggests that the United States will experience slow growth rather than a recession. If so, oil demand will stabilize, making the market more vulnerable to geopolitical uncertainty, including saber-rattling from North Korea, China and the Middle East in the year of the presidential election.
“With Russia and Saudi Arabia conspiring to reduce production, the price of oil exceeds $110 per barrel, and the price of a gallon of gasoline in the United States is approaching $6,” warns Kass.
A possible increase in the price of oil to $110 or more would not be good news for consumers' pockets, but oil companies would welcome it.
In 2023, the financial results of oil exploration and production companies were hampered by lower prices and tough year-over-year comparisons with 2022, when prices and profitability were high. If Kass is right, the opposite could happen in 2024. A resurgence in prices and easier comparisons to 2023 could make oil stocks big winners next year.
Kass speculates: “Shares of Exxon Mobil, Occidental Petroleum and Chevron will each rise by more than a third next year” due to the rebound in oil prices.
Of course, no one knows how next year will play out, and we'll only know if Kass' surprises pan out in hindsight. However, a possible rise in oil prices could be an underrated possibility that investors should consider.
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