How high could the oil price go? | The Economist

When the crisis started, the world lost we think  now about 14 million barrels per day, which is. about 13% of its of global oil supply. And if you  calculate what the oil price should be getting to, it's it's much higher than anything we saw during  the crisis. What is the sort of ballpark dollar. figure that our viewers should expect the oil  price to go to to equilibrate supply and demand? Like what what are we looking at now? Uh well I I  should say this is not a forecast but you know I. love a rule of thumb and I've looked up the rule  rules of thumb based on the uh the estimated uh.

price increases you would need to destroy 13% of  demand for oil and the number you numbers you get. from the literature are a range of $167 to $460.  Now I'm not I'm not predicting anything like that. but it shows you that we are in a totally crazy  world. the oil price sort of fluctuated with hopes. and fears about an end to the war and President  Trump's truth uh social posts and that sort of. thing. So what traders were really thinking is we  don't think this crisis is going to last a long.

time. There's going to be a deal. Point one. Point  two, we think that deal is going to reopen the. Strait and reopen it in a meaningful, permanent  way. And point three, that once that happens, things will get back to normal quite quickly and  the oil price will come back down. But basically. what's been going on over the last few days is  that view has begun to collapse. There is no peace. deal. So the first leg's going down and I think  the whole lot is up for debate. Now traders, your. friends Matthieu, the people you know well either  have been assuming the war will end quickly,

the the strait will be open quickly and then we'll  get supply back to normal. And we on our cover. this week uh I'm afraid decided that they were in  La La Land. But I think all of your conclusion is. that oil prices are still not yet high enough to  balance supply and demand as you as you laid out. So Mattiue, do you think these oil traders are now  seriously nervous or will we go back to the more. sanguin view we had just a few weeks ago? I still  think they are uh to to to an extent in La La Land.

because you know you can take two the yard sticks  to to judge that. One is is to look at the past. Um look back at what happened after the Russian  invasion of Ukraine. Um where the fear was that. we would lose about 3 million barrels a day of  oil because western countries stopped buying it. Um we did not push that. Uh in the end it went  to China and India. But that still pushed the. price of oil to 100 near $130 a barrel. And today  we're we're we're well short of that. even though.

the deficit is real and it's much much larger like  four to five times that. So that's one. The second. one is is to look at how this deficit is being  um absorbed at the moment and it's mostly being. absorbed by uh dwindling stocks. So perhaps 8 to  10 million barrels a day um at the moment if you. count government stocks and and other types of  stock commercial stocks um that's far too fast. It's it's it's you know it's a record space. We've  never seen that which shows you that prices are.

not high enough to destroy demand. So when I speak  to traders that actually trade the physical stuff, they move barrels all around the world, they  agree with this analysis. They think the the. price has to rise uh much higher. Henry, one of  the reasons prices haven't shot up as much as we. had expected them to and one would expect given  the scale of supply that's locked inside the. straight is that production elsewhere has gone up.  Do you want to talk us through how much that has. helped the situation and can it continue? uh well  production elsewhere has gone up a bit but most.

of the additional production in the world that  can be brought online is in the Middle East so. it's also trapped uh you can get a bit from the  US uh you can get a bit uh from loosen loosening. sh sanctions on Russia you know these it's  totally different scale to the lost production so. uh it's it's it's really chalk and cheese here  so that can't that can't rescue the world from. the situation so you've had a bit from extra  production and you've had a lot Matier from. stocks both commercially held stocks and official  reserves and uh stocks at sea effectively. What's.

what's happening? Can you talk us through all of  those because part of the the fact that we're all. getting on planes and everything is still running  is because of that that supply that was kind of. sitting out there and is being drawn down. Yeah.  The biggest buffer really has been the oil that. was already at sea when the war started and home  is closed. And that was a result of of a couple. of things. One is that Middle Eastern countries,  the Gulf countries, they they heard the, you know,

the drums of war before it happened. They they saw  the American warships converge on the region. They. saw the tensions rise and so they they cranked  up exports uh before the war started. All these. tankers were already past the straits when uh when  uh the first strikes happened. Uh so that's one, there was a lot of that already at sea. And then  secondly uh sanctions before in the months before. the war western sanctions were tightened on  Russia and Iran which pushed uh Chinese buyers. Indian buyers to um to sh you know the tankers  that carry these barrels usually. So you had.

this excess of Russian Iranian crude and products  at sea and add all this together and it was quite. a big volume. What's happened to that? Has that  been drawn down completely? It's been drawn down. very significantly really fast. I mean if you  look at specific product like jet fuel we are. far below historical averages. Um it's the same  for diesel and we're pretty close to you know the. minimum level you need to just sustain trade  at sea. You know you need a certain number of. bowels for the transit to to be possible. Um  and then for crude you've got a bit more but.

uh also you need to make longer voyages these days  to to link the US to China for example because the. Gulf is no longer a source. Uh so even that is  not that reassuring. So what happens then? You're. reaching stock levels that are well below well or  minimal and you have demand that is much higher. than the sort of sustainable amount of supply.  So presumably prices have to absolutely shoot. up to reduce the demand as much as is necessary.  Yes, exactly. I mean there's basically two levels.

left. One is demand destriction. The second one  is is stocks, commercial stocks dwindling. Um and. what you're seeing now is mostly commercial stock  taking the brunt of it with some level of demand. destruction in Asia. Um and and that means  that commercial stocks will fall quite fast.