The Next Oil Price Spike

An oil rig in the marina after Hurricane Harvey hit Port Aransas, Texas
A recent post talked about how the oil price might collapse this year, and what factors would cause that. In this post, the potential for a price spike and what might be behind it will be enumerated. Because, as those involved in following oil markets have long known, almost any trend and price is possible—in the short run.

Several decades ago, a reporter from a Swedish business magazine asked me to participate in a contest to predict the oil price at year’s end. (Okay, he didn’t really call me, he called the group I worked for and nobody else was around.) I wound up winning the contest, received a nice sweatshirt and an interview in the magazine to explain my success. However, when I told the reporter that I had basically guessed, since the short-term market is quite volatile and predicting political elements that affect the price impossible. The magazine never called me again.

So, the market fundamentals suggest that prices will be tight this year, but a spike, that is, a sharp significant increase, rather than a gradual rise. Higher prices usually come from one of two sources: rapid demand growth in a tight market, or a significant disruption in supply.

Rapid demand growth could, theoretically, occur just as the result of a robust global economy, as in the rebound in 2010 (see figure) and the strong 2015 growth. Alternatively, there are a few short-term events that can cause demand to spike, as in 2004, when constraints on Chinese coal deliveries saw power companies rely on oil, sending that country’s demand up 1 mb/d for the year and reversing the bearish expectations for the year (double the previous trend). Few economies are large enough that an unusual event like that could affect the global market—unless it was very stressed already.

At present, however, there is about 1.6 mb/d of production shut in by OPEC and non-OPEC in support of stabilizing the market, but about 400 tb/d of that is shut-in involuntarily and should not be considered available. In addition, the Saudis have about 2 mb/d of ‘strategic surplus’ capacity, which they maintain in case of need. (See below on crude quality.)