The Perfect Storm In Oil Caught Markets Off Guard

Two years ago, at the height of the pandemic, BP wrote in its annual Energy Outlook that global oil demand had peaked at around 100 million bpd in 2019, and it was only going to go down from then on because of the effects of the pandemic and the accelerated energy transition. Just two years later, BP is admitting it may have underestimated the world’s thirst for oil, although it heroically stuck to its long-term forecast that the electrification of transport will eventually usher in the era of peak oil demand.

Investment banks, meanwhile, foresaw the rebound in demand because it was the natural thing to happen after the pandemic depression caused by all the lockdowns. What they did not foresee—because it is impossible to foresee—was the extent and speed of the rebound.

Goldman Sachs’ Jeffrey Currie recently acknowledged this gap between expectations and reality in an interview with Bloomberg, saying, “The markets moved faster and the fundamental tightness is deeper than what we would have thought three or six months ago.

“This is where we should be, but it is a lot deeper than we would have initially thought. Energy and food right now, as we go into the summer months, are severely skewed to the upside,” Currie added.

It may be interesting to note that even three to six months ago, long before Russian supply became a factor in the upward potential of oil prices, there were few but authoritative voices that argued the oil market is, in fact, in balance.

Citi’s Ed Morse was one of these voices. In February, he told Bloomberg’s Javier Blas he expected the oil market to move into surplus territory thanks to increased oil production from the United States—the Permian, specifically—Brazil, and Canada. 

Indeed, the Energy Information Administration recently forecast oil production in the Permian would hit a record high this month, but that does not appear enough to offset the global oil imbalance, with many U.S. producers signaling they are unwilling—or are unable because of shortages and delays—to boost production.

In Canada, production is rising, and according to Alberta’s Premier, Jason Kenney, the country’s total could rise by close to 1 million bpd, but this has yet to happen. In Brazil, production is also on the rise but has so far failed to make a difference in the price department.

Of course, the reasons for this price situation are first, the sanctions against Russia, which happens to be the world’s largest oil and fuel exporter, and second, OPEC’s inability to produce as much as it agreed to because of chronic problems with some members of the cartel. Meanwhile, the two OPEC members that have enough spare capacity to offset the loss of Russian barrels, Saudi Arabia and the UAE, are wary of tapping it.

Related: What Biden Is Getting Wrong About Big Oil’s Profits

Perhaps somewhere there is a genius oil analyst that foresaw this state of affairs. Perhaps it doesn’t take a genius to spot the patterns: those OPEC members that cannot hit their own production quotas have been finding it difficult to boost production for years; relations between the Middle Eastern oil states and the West have been…