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Macro Analysis

2021 Oil Crisis: A peak behind the corporate curtain

September 29, 2021
BY Paul Reid

The world is pushing for green energy, and the global transition is gaining momentum, but traders are wondering why oil companies such as Exxon Mobil Corporation (XOM) are enjoying stock price rallies.

Moreover, crude in the barrel has risen above $80 for the first time in three years and now the international media are talking about global oil shortages. So, what’s going on? And, is there a trading opportunity buried in the chaos?

Scarcity pricing

Many analysts believe oil could reach as high as $100 per barrel in the coming months. This is because of the scarcity pricing model. The less there is, the more expensive. Before you go panic buying petrol, you should know that the shortage is not because the world is running out of oil… yet. Today’s global oil shortage is because the oil companies are capping rig production.

The orders to hang up the hardhats come from the very top, from the corporate shareholders, and as fewer barrels are in circulation to feed the fossil need, the higher the prices go. In the 2010s, hundreds of billions of dollars were put into the oil and gas industries, only to return negative results for investors, but it seems the new business model is changing all that.

Oil on the rise

The oil sector has gone from one of the worst performers in the S&P500 to one of the best in less than a year. Such an irony. Oil companies are more profitable when they produce less oil, and since inflated oil prices will stimulate more green energy solutions, the big oil companies are aligned with the best interests of the planet. This could suggest that the only future price direction for oil is up.

The future of oil

The whole world is boarding the energy transition train. And, when oil company business models promote a continued withholding of oil, they will likely squeeze even harder, which will further inflate prices and prompt a global double down on decarbonization solutions.

Long-term projection specialists say this pricing model will eventually lead to demand destruction. Consumers or businesses that require oil-based products are going to push back on higher prices and either fold or find alternatives, but that revolution is not exactly around the corner.

Coming out of the pandemic, we see a tremendous demand for oil-related products and it’s likely just the beginning. If the energy companies continue this pricing tactic, then oil most certainly belongs on your watchlist.

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