In July 2020, just months after the COVID-19 pandemic began spiraling out of control, Shell CEO Ben van Beurden said global oil demand may have passed its peak – virtually dooming the core business of his business to possible obscurity.

“Demand will take a long time to recover if it recovers,” he told reporters after the Anglo-Dutch energy company reported a sharp drop in second-quarter profits.

Van Beurden was not alone in his dark vision. Like so much else during the pandemic, what was happening in fuel markets was unprecedented. Demand had fallen so sharply that people stopped travelling, the oil industry simply couldn’t cut production fast enough to match it.

Worse still, the fall in demand came as Russia and Saudi Arabia – the two most powerful members of the OPEC group – were locked in a supply war that flooded markets.

There was so much oil there was nowhere to put it, and in mid-April 2020 the price of a barrel of West Texas crude fell below $0 as sellers had to pay to get rid of it.

But less than two years later, the predictions of Van Beurden and others about the disappearance of oil seem premature.

Benchmark Brent crude futures hit $100 a barrel on Wednesday for the first time since 2014, when Russian President Vladimir Putin ordered military operations in Ukraine. The possibility of conflict interrupting supply has given more momentum to a recovery underpinned by a recovery in demand that has been faster than oil producers can match.

Global oil consumption last year exceeded supply by about 2.1 million bpd, according to the International Energy Agency, and will surpass 2019 levels this year.

Oil suppliers have had to deplete their stocks to meet demand, and consumer countries are asking companies like Shell to drill more.

Boom and bust

Such a cycle has been repeated often throughout the history of oil.

“If you go back to the days of whale oil, oil has been a boom and bust story,” said Phil Flynn, principal analyst at Price Futures Group in Chicago. “It’s a peak to valley cycle and usually when you get to the valley be prepared because the peak isn’t that far away.”

The low in oil prices at the start of 2020 sparked political movements that would otherwise have been unimaginable.

Donald Trump, the then US president, became so concerned about the potential collapse of domestic oil drillers that he gave Saudi Crown Prince Mohammed bin Salman an ultimatum in a phone call in April: cut off the production or risk the withdrawal of American troops from the kingdom. .

Pressure from investors and governments for oil producers to cut emissions has also increased.

In mid-May 2021, the International Energy Agency said there should be no new funding for major oil and gas projects if the world’s governments hoped to prevent the worst effects of global warming.

It was an about-face for an organization long considered a major fossil fuel cheerleader.

Political power

The politics of the transition made European oil majors reluctant to invest in increasing production, so their typical reaction to higher prices – to pump more – was slower than it could have been. be otherwise.

Several OPEC members simply didn’t have the cash to service the oil fields during the pandemic as their economies collapsed, and can no longer increase production until costly and time-consuming work is completed.

Those with spare capacity like Saudi Arabia and the United Arab Emirates are reluctant to override their OPEC supply-sharing agreements.

Even the US shale industry – the world’s most critical swing producer from 2009 to 2014 – has been slow to restore production under pressure from investors to increase their financial returns rather than spend.

All of this sowed the seeds of the current boom.

The Biden administration, which wants to fight climate change but also protect consumers from high prices at the pump, is now encouraging drillers to revive activity and calling on OPEC to produce more oil. The IEA too.

That could be difficult, according to Scott Sheffield, CEO of US shale producer Pioneer Natural Resources. He told investors last week that OPEC did not have enough spare capacity to meet growing global demand and that his own company would limit production growth to between zero and 5%.

RBC Capital’s Mike Tran said it will be high prices, not new supply, that will ultimately balance the market. “It just doesn’t get any more bullish than this,” he wrote in a note this month.

But others think the supply will eventually come. After all, a boom always precedes a bust.

“We think $100 crude is bringing in all the wrong things – too much supply, too fast,” said Bob Phillips, CEO of Crestwood Equity, a Houston-based midstream trader. “We don’t think it’s sustainable.”