Last month, we reported that commodity analysts at Standard Chartered have been bucking the overwhelmingly bearish sentiment pervading Wall Street, maintaining a decidedly bullish outlook even as oil prices continue trending lower. StanChart has acknowledged that U.S. oil output has continued taking out all-time highs in the current year, with June production climbing by 133000 barrels per day to an all-time high of 13.58 million bpd. However, the analysts have been betting that U.S. producers will eventually be forced to curtail production due to prevailing low oil prices. They have also predicted that the weakening global economic outlook is likely to trigger a raft of economic stimulus in the form of rate cuts in the United States and potential for China to respond with a package of measures.
However, StanChart has finally joined the bear camp, slashing its 2026 and 2027 oil price outlook by $15 per barrel, triggered by the significant rotation in the forward curve seen over the past year. StanChart has raised the average price of Brent crude in 2025 to $68.50/bbl from $61/bbl; however, the analysts have cut the 2026 target to $63.50/bbl from $78/bbl, and 2027 prices to $67/bbl from $83/bbl, noting that the futures curve is now in contango from early-2026 onwards. Contango occurs when the futures price is higher than the spot price, suggesting that people expect the price to rise or that storage costs are high, while backwardation occurs when the futures price is lower than the spot price, often indicating high immediate demand or expectations of a future price drop. StanChart’s latest revisions reflect near-term weakness, followed by a long-term steady but gradual increase. The commodity experts are now predicting near-term softness, reflected in overwhelmingly negative sentiment, driven by trade war and tariff uncertainty and oversupply fears. However, they have maintained their earlier prediction that low prices will start to depress U.S. shale output growth, and if
OPEC+’s return of barrels is sustained, this will highlight tightness and the geographic concentration of spare capacity, which should be supportive in the medium term.
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StanChart’s forecast of looming output cuts by U.S. producers is supported by the fact that U.S. shale production costs have been rising, driven by the depletion of prime resources and the need to drill in more speculative, complex areas and formations. Analysts at Enverus have predicted that the marginal cost to produce oil in the U.S. Shale Patch could increase from ~$70 per barrel to $95 per barrel by the mid-2030s. This shift is happening as the industry moves from easily accessible core inventory to less proven resources, leading to higher costs. Many U.S. oil producers, particularly smaller ones and those in regions like the Permian Basin, need oil prices above $65 a barrel to turn a profit on new drilling, a figure that has been rising due to inflation. Larger producers may have a lower breakeven point, sometimes in the high $50s, while older, existing wells can still be cash-flow positive at lower prices because initial drilling costs have already been covered.
Europe’s Gas Inventories Begin To Deplete
Meanwhile, Europe has now officially entered the season of heavy gas usage, with the last four days seeing withdrawals exceeding injections and gas volumes falling by 0.35 billion cubic metres (bcm) w/w to 96.78 bcm. The continent’s gas inventories peaked at 97.13 bcm, or 93.3% of max., on 12 October, with the maximum inventory fill occurring nine days earlier than last year, and 20 days earlier than the five-year average. Europe’s total technical capacity is ~104 bcm. The EU had already met its 90% target by mid-August 2024, and reached 95% of capacity by the end of October 2024.
Price action in European gas remains muted, with minor fluctuations in the low EUR 30s per megawatt hour (MWh) for the front-month Dutch Title Transfer Facility (TTF) contract over the past week. European natural gas futures climbed 2% to €32.4 per megawatt-hour on Thursday due to supply concerns stemming from recent Russian strikes on Ukrainian gas infrastructure, potentially increasing the need for EU gas and LNG imports, and a colder-than-expected winter that is depleting storage levels and raising heating demand. The situation is compounded by ongoing French LNG terminal strikes impacting supply and Ukraine seeking to boost its gas imports following infrastructure damage. Price volatility has been considerably greater in U.S. natural gas, with Henry Hub prices jumping 14.2% over the past week to 3.40/mmBtu on 23 October; a 15-day settlement high. However, forecasts of above-average temperatures across the majority of the Lower 48 states is likely to limit further gains. On the other hand, winter fundamentals appear to be strengthening, particularly around LNG export capacity builds, thus supporting prices despite currently high storage levels.
By Alex Kimani for Oilprice.com
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