Is Another Oil Price Spike Likely Soon?

Is Another Oil Price Spike Likely Soon?

A picture taken on December 16, 2020 shows newly constructed towers in Ryadh, the Saudi Arabian ... [+] capital and main financial hub. (Photo by FAYEZ NURELDINE/AFP via Getty Images)



AFP via Getty Images

A number of analysts have been warning that the double-barreled price shock in 2020 which sent prices to historic lows (negative $37 a barrel, albeit only paper trades) drastically reduced upstream investment and delayed development of new oil production capacity, which could set the stage for a new oil price shock. Demand recovery coupled with slow production growth would cause a new spike, since upstream activity is significantly lagged to price moves given physical constraints. 

The price drop was followed by a partial recovery to just over $50/barrel for WTI, half the pre-2015 price and well below prices in the past two decades. Regardless of the breakeven price for new supply, the physical constraints on upstream activity—finding skilled personnel and reactivating equipment, implies that a price shock is largely unavoidable.

As the figure below shows, the number of rigs active (outside of North America) has rarely increased by 10% per year, but last year's drop was 25%. After the