Interview, Conference Presentation
How high could the oil price go? | The Economist
- Global oil supply dropped by approximately 14 million barrels per day (13% of global supply) at the crisis onset, a deficit requiring significantly higher prices than observed during the event to reach equilibrium.
- Literature-derived "rule of thumb" estimates suggest a price range of $167 to $460 per barrel would be necessary to destroy the 13% of demand required to balance the market.
- Market sentiment has shifted from assuming a quick peace deal and restored strait access to a consensus that these expectations are collapsing.
- Traders previously assumed the crisis was temporary and prices would revert quickly, but this "sanguine" view has eroded due to the absence of a peace deal.
- Current oil prices remain structurally insufficient to balance supply and demand, evidenced by two key indicators:
- Historical comparison: Following the Russian invasion of Ukraine, a 3 million bpd supply fear pushed prices near $130/bbl, whereas current deficits are four to five times larger yet prices remain lower.
- Inventory drawdown: The market is absorbing 8–10 million barrels per day of deficit from global stocks (government and commercial), a rate described as "record fast" and unsustainable.
- Increased production in non-conflicted regions is insufficient to offset the loss.
- Most available additional global production is trapped in the Middle East or limited in scale.
- Marginal gains from US production and loosened Russian sanctions are negligible compared to the locked-in supply volume.
- Global oil trade is being sustained primarily by the rapid drawdown of pre-war inventory buffers.
- Tankers at sea: Middle Eastern exporters accelerated shipments before the crisis to bypass the strait, leaving a significant volume of oil already in transit when hostilities began.
- Sanctions-driven displacement: Prior tightening of Western sanctions on Russia and Iran forced Chinese and Indian buyers to retain crude and products at sea rather than delivering them to destinations.
- Inventory levels are approaching critical thresholds, with specific impacts on product categories and logistics.
- Jet fuel and diesel inventories are far below historical averages and near minimum levels required to sustain maritime trade.
- Crude oil stocks have some remaining buffer, but logistical constraints are increasing; the Gulf is no longer a reliable source, forcing longer voyages (e.g., US to China).
- Future market mechanics will likely rely on two remaining adjustment mechanisms:
- Further destruction of commercial stock levels, which are currently taking the brunt of the deficit.
- Active demand restriction in regions such as Asia, necessitating a sharper price increase to align consumption with the reduced supply capacity.