Europe may be catching a break in gas prices, but the story on the oil front—especially for U.S. shale producers—is less fortunate. While gas prices have eased, providing Europe with a window to restock depleted reserves, Saudi Arabia’s aggressive move to increase oil supply is reshaping global energy dynamics and squeezing American oil producers near their breakeven thresholds.
OPEC+ Pushes Supply Despite Falling Prices
In an assertive attempt to regain market share and rein in members ignoring output quotas, Saudi Arabia has led OPEC+ to ramp up production by 411,000 barrels per day (bpd) in June alone. This comes even as oil prices hover near $60 per barrel—well below Saudi Arabia’s fiscal breakeven of $90 per barrel.
Meanwhile, U.S. shale producers are feeling the heat. The low prices have pushed many Permian Basin operators dangerously close to breakeven points, forcing them to cut back on drilling activity and investment. Allianz Trade now expects U.S. production in 2025 to be 100,000 bpd lower than previously forecasted.
Despite these production struggles, Allianz Trade projects oil prices to hover between $65 and $70 per barrel through the remainder of 2025. The same weak demand that has fueled the oil surplus is giving Europe breathing room on the natural gas front.
Europe Rebuilds Gas Reserves – But at a Cost
Natural gas prices in Europe have dropped 25% from their February highs, creating an opportunity to refill storage after a colder-than-average winter. Should storage proceed smoothly and mild weather persist into summer, prices may drop even further.
However, even at current levels, Europe is set to pay around €10 billion more for gas compared to 2024.
Saudi Arabia’s Oil Gambit: Supply First, Prices Later
Entering 2025 with weakening global demand and slowing economic activity, oil markets were already under pressure. Saudi Arabia, however, is accelerating the unwinding of OPEC+ cuts initiated in 2022. By mid-year, the group is set to restore about 1 million bpd of supply—around 40% of the earlier reductions—with full removal expected by October.
This policy marks a clear pivot: abandoning the informal $100 price target and instead signaling a tolerance for prolonged low prices. The strategy aims to reclaim lost market share and pressure OPEC+ members like Iraq and Kazakhstan to stick to production quotas. Additionally, it’s likely intended as a goodwill gesture to the White House, which has asked Riyadh to boost output ahead of President Trump’s planned visit.
Still, the cost is steep. With oil prices well below the fiscal breakeven point for many producers, OPEC nations are bracing for budget pain, raising debt, and cutting expenditures to offset lost revenue.
Allianz Trade forecast: Oil prices between $65 and $70/barrel throughout 2025. Positive demand shocks or geopolitical flare-ups could push them higher—but a sustained drop is unlikely.
“Drill, Baby, Drill”? Not Anymore in U.S. Shale Country
Despite oil production in the U.S. remaining near record levels (~13.7 million bpd), the Energy Information Administration (EIA) has scaled back its 2025 output forecast by 100,000 bpd.
U.S. shale producers—responsible for over two-thirds of domestic output—are under immense pressure. Breakeven prices in the Permian Basin range from $61 to $65 per barrel. With West Texas Intermediate (WTI) trading in the low $60s, margins are razor-thin. Outside core areas, the picture is even worse: in Wyoming’s Powder River Basin, the breakeven sits at $58.
On top of this, costs are rising. Tariffs on steel pipes and equipment have pushed drilling costs up by 10%, further eroding profitability. As a result, many smaller producers are pausing operations, shelving new projects, and cutting back on drilling. Major service companies like Halliburton and Baker Hughes are bracing for revenue hits due to reduced activity. Capital expenditure is expected to fall by double digits in 2025, and merger activity is also slowing due to price uncertainty.
Outlook: 2025 may become the toughest year for U.S. shale since the 2020 oil crash.
Europe’s Strategic Opportunity in Gas Storage
After two years of extreme volatility, Europe’s natural gas market is enjoying a brief calm. Prices have fallen sharply from winter highs as mild spring weather and recovering renewable energy output reduce demand.
Winter 2024/25 was colder and less windy than the previous year, leading to faster depletion of reserves. By early spring, EU storage levels had fallen to 34%—the lowest post-winter level since 2022.
Summer gas futures are currently trading around €40/MWh. While not cheap by historical standards, this is a welcome relief and presents a strategic window to refill reserves. The EU aims to reach 90% storage by November 1, requiring 57.7 billion cubic meters of gas to be injected—about 25.8 billion m³ more than in 2024.
At current prices, the extra cost amounts to approximately €10 billion. Traders remain cautious, expecting prices to fall further amid subdued demand. However, policymakers must avoid delaying purchases for too long to prevent a late-summer price surge.
If smooth storage coincides with continued low demand from a mild spring, European gas prices could fall even further before summer.
Conclusion: Demand Weakness Hurts Oil, Helps European Gas
While the global economy continues to drag on oil demand—putting pressure on producers like Saudi Arabia and U.S. shale—Europe finds itself in a position to benefit. The same forces weighing on crude are offering the EU a rare opportunity to restock natural gas reserves at less painful prices.
Lower gas prices, even if driven by economic weakness, are a relief after last year’s price spikes. As Europe prepares for another winter, the current market offers a chance to avoid the frantic energy scramble that defined 2024.
By Allianz Research | Source: CEO.com.pl
