Our assessment of various fundamental factors in 2020 resulted in a forecast for 2021 to see a record high inventory draw that would cause significant upward oil price pressure. Yes, it played out, but our projections also saw the oil balance tightening further during 2022. Our outlook stood in contrast to the consensus projection, which was and still is for the oil balance to loosen materially , that is, for inventories to build.

Our forecast for this year did not account for any unplanned supply outages. Basically, we forecast that global oil demand would normalize as the effects of the pandemic dissipated. World consumption was expected to revert to its secular growth pattern at about 50 percent of the rate of global GDP. Non-OPEC supply, on the other hand, was forecast to see a comparatively smaller rebound than demand owing to the accumulated effects of seven years of curtailed spending on production projects.

Our separate but related forecast from back in 2019, that US shale crude was entering its “twilight phase” buttressed prospects for non-OPEC producers to fall short of growing market needs over the medium term.

Most in the analyst community, and journalists who cover the energy sector, have asserted that oil prices were “high” over the past couple of months because of Russian forces’ build-up on Ukraine’s border. Those views failed to recognize that prices were rallying from the historically large drawdown of global petroleum inventories.

Before Russia’s foray, oil prices should have been about $105 per barrel based purely on the state of the physical oil balance. Crude rallying over $105 after the invasion reflected concerns about the Russian oil supply being impacted, adding a “risk premium” to oil prices for the first time in 14 years.

In our last column, we discussed a largely unexpected development, specifically buyers of Russian crude voluntarily stepping back from planned purchases — think of it as akin to a self-imposed embargo. It is still unclear how much Russian oil supply has been or will be affected, though last week’s US legislation to embargo Russian petroleum —crude and refined products — will affect about 750,000 barrels per day.

The US embargo aims to pressure the Putin regime, but the issue is not about those exports being diverted to other buyers who can use the oil, be it India, China, Korea, or France. Instead, it is the broader concern if any sanctioning negatively affects the planned volume of Russia’s exports this year that would cause the country to have to curtail its production.

We think there is a lesson to be learned from the 1973 Arab Oil Embargo. As a matter of record, OPEC cut oil exports to the US in reaction to the 6th Arab-Israeli War. The US was indeed a large net oil importer at the time — it still is today — but the embargo caused what we call a dislocation. Think of this as  a game of “musical chairs” but with a seat for everyone when the music stops.

Global oil inventories actually built during and after the embargo was effected, yet, oil prices rallied 500 percent and then continued to move higher until the next spike in prices came from the 1979 Iranian Oil Workers’ Strike. That oil price behavior stemmed from fears about a possible shortage that caused massive hoarding — essentially a self-reinforcing bullish behavior. The pattern is something we refer to as a “scarcity model” — prices rise, and inventories also rise instead of moving in the normal, opposite direction.

Unlike the period that followed the Arab Oil Embargo, we are not looking at prospects for a severe expansion in non-OPEC oil production (that supply grew dramatically between 1975 and 1985).

Unlike the period that followed the Arab Oil Embargo, we are not looking at prospects for a dramatic cut in oil demand — it fell 10 percent between 1979 and 1983 from coal, natural gas, and nuclear power displacing oil in the global energy mix.

And unlike the period that followed the Arab Oil Embargo, we are not facing a massive swell of OPEC’s spare oil production capacity which plagued the cartel for the better part of two decades.

None of those post-embargo effects actually apply today. What does apply are our analyses about the “oil burden” and prices having to reach levels that will create slack in the global oil balance, an analysis that most do not want to consider, much less embrace owing to its eventual implications for global economic growth. We can tell you that the notion of the oil cycle being regulated by demand rationing was met with equal discomfort during the 2003-2008 cycle.