Surging Oil Prices Could Complicate Things for Producers

High Demand and Geopolitical Tensions Factor In

Global oil prices have been on the rise in recent months due to high levels of demand and geopolitical tensions. The threat of war between Ukraine and Russia is a major concern, especially considering Russia provides around 10% of the world’s oil supply. In addition, oil prices typically rise ahead of the summer months as more people get ready to hit the road.

The price increases led to major profits for many oil producers during the fourth quarter of 2021. Analysts note this allowed companies to both reduce their debt and pay off past capital investments. Still, the oil market’s delicate balance between under- and over-supply puts producers in a precarious spot when it comes to ramping up production.

The Difficulty of Forecasting the Inelastic Oil Market

Examining the tight nature of the oil market helps explain why oil producers face a potential downside amid rising prices. It’s difficult for executives to predict the likelihood of war, or what might result from sanctions on Russia. Many US shale companies say they’re remaining disciplined and resisting the urge to grow. Deciding when to expand production isn’t easy, especially because it could result in lower prices as supply increases.

Many analysts say rising prices will help insulate international oil companies from the potential unrest in Russia and Ukraine. Still, BP (BP), Shell (SHEL), and ExxonMobil (XOM) have projects in Russia that could face trouble if sanctions are enacted.

Anticipating Investment and Growth in the Market

Analysts note if oil prices continue to rise, producers will be encouraged to invest into finding new reserves and drilling. That would in turn boost supply and bring prices down. There are mixed levels of activity on that front.

Chevron (CVX) and ExxonMobil recently announced plans to increase their drilling goals, and there are reports Russian and Saudi producers are spending more in the search for new reserves. Analysts also note US shale wells deliver volume more quickly than other methods of oil production, suggesting they could rapidly pivot and ramp things up if oil hits $100 a barrel. For now demand remains high, and there’s concern supply could tighten ever further, pushing oil prices up and forcing producers to make decisions.

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