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.

Things are changing daily within the financial world. Sign up for the SoFi Daily Newsletter to get the latest news updates in your inbox every weekday.

Sign up

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store SoFi Android App, Get it on Google Play

ABOUT Meg Richardson Meg Richardson is a writer specializing in markets, technology, and personal finance. She loves breaking down seemingly complex ideas and making them readable and interesting for everyone. She holds an MFA in writing from Columbia University. When she is not writing about finance, she enjoys running in Central Park and drawing cartoons.

TLS 1.2 Encrypted
Equal Housing Lender