Ukraine is One Risk, Saudi Another

Global oil consumption is back to pre-pandemic levels, led by China, implying its “zero Covid” policy is not holding back growth. OPEC has the capacity to accommodate a complete restoration of demand, but Saudi is sending a signal that it will now tolerate pricing in the 80s, as opposed to the 70s last year. Production risks beset many cartel producers, and Saudi has done nothing recently to make up for their quota shortfalls. US production is coming back slowly, but the drawdown of most DUCs means that further growth will require levels of CAPEX growth not seen in recent years. The industry faces both regulatory and capital-access headwinds. The risk of a bargaining failure between Russia and NATO raises the risk of embargoes and boycotts leading to a crude price spike, which would equilibrate over time. The modest premium in prices today implies a low probability of failure.