Key Takeaways
(Bloomberg) -- West Texas Intermediate crude held above $110 a barrel as global demand shows continued resilience despite an 80 percent price surge this year, straining a market already tight on supply and raising questions about how high prices can go before demand destruction kicks in.
"I would say it paints a mixed picture, but overall would still term it quite resilient," Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership, said, citing strong auto sales and credit growth in key economies like India.
Data shows global oil inventories are approaching an eight-year low, according to a recent Goldman Sachs report, a critical factor supporting prices. The supply side remains constrained as producers operate at or near maximum output. The last significant new refinery in the United States, for example, was built in 1977, limiting the capacity to process crude even if more were available.
The sustained high demand, with some analysts floating a potential for $200-a-barrel oil, is forcing a strategic rethink for energy security. With geopolitical tensions disrupting chokepoints like the Strait of Hormuz—through which roughly a quarter of global seaborne oil passes—and many US shale wells nearing peak production by 2027, major oil companies are looking further afield for growth.
All eyes are turning to Latin America to fill the supply gap. The region, which already accounts for 10 percent of the world's oil production, is expected to add 750,000 barrels of new crude production per day this year from Brazil, Guyana, and Argentina, according to Ehsan ul-Haq, an analyst at Petroleum Economist.
"The war on Iran is likely to prompt a rethink of the geopolitical value of production outside the Middle East," said Luisa Palacios, a managing director at Columbia University’s Center on Global Energy Policy.
Venezuela, home to some of the world's largest reserves, also presents an opportunity. While a return to its former peak of 3.5 million barrels per day is unlikely, an increase from below 1 million barrels per day to 1.5 million over the next two years is "within the realm of possibility," Palacios said. This comes as the world's 30 largest exploration companies face an average production decline of nearly 40 percent between 2025 and 2040, according to Wood Mackenzie.
However, the demand side is not without risk. In India, a key engine of global growth, economists are projecting a slowdown in GDP growth to around 6.8 percent, with inflation forecast to climb toward 4.8 percent. Weakening external indicators, such as a 9 percent decline in India's non-oil exports in March, suggest some sectors are feeling the pressure from higher energy costs.
The transition to clean energy, often cited as a long-term solution, presents its own set of challenges. The International Energy Agency (IEA) estimates that demand for critical minerals like lithium, cobalt, and nickel could more than triple by 2040, shifting dependency from oil to mineral supply chains that are highly concentrated. China, for instance, controls around 90 percent of the world's rare earth processing capacity.
For now, the market remains caught between stubbornly high demand and the long, expensive process of bringing new oil production online. Investment in new exploration fell to $16 billion last year, down from a yearly average of $19 billion between 2021 and 2024, highlighting the industry's caution despite high prices.
This article is for informational purposes only and does not constitute investment advice.
