Dennis Kissler, BOK Financial

Last month, Israel conducted an air strike on Iranian top military brass in Syria. Iran responded with a barrage of drones, cruise missiles and ballistic missiles—almost all of which were intercepted. These events could cause a spike in Brent and WTI prices—but the duration of such a spike may be short-lived.

If we do see a dramatic escalation in tensions resulting in either of those scenarios, a price spike as high as $100/bbl is very possible. For comparison’s sake, WTI was near $86/bbl and Brent was near $90/bbl in mid-April.

Is an oil price spike to three figures a barrel a good thing for producers? Not so, in my opinion, at least in the long term. Price spikes, such as WTI moving into the $100/bbl area, are normally short-lived from a demand perspective because global economies tend to contract very quickly in response to these higher prices. For example, travel demand tends to drop suddenly, and near-term inflationary cycles kick back in with higher interest rates, eventually leading to a hard-landing recession.

OPEC+ production

Another factor to consider is OPEC+. In March, OPEC+ said it would extend its output cuts of 2.2 MMbbl/d into the second quarter. Although that decision was widely expected, the announcement also included Russia’s decision to cut its oil production and exports by an extra 471,000 bbl/d in the second quarter, which was a surprise to many.

Given these production cuts, OPEC+’s spare capacity is nearly 20% above their normal average. This means they have 20% more production they could add to the market if they need to—that is, if they decide to eliminate these voluntary production cuts. Higher oil prices could very easily encourage them to make that decision, which would bring that spare capacity, totaling approximately 6 MMbbl, onto the market.

Follow natural gas?

There’s also the record production of U.S. and Canadian crude to consider versus the level of global demand. In 2023, the U.S. and Canada produced more oil and gas than any other region, including the Middle East. Then, in February of this year, U.S. crude oil exports reached an 11-month high. Some analysts believe the global spare capacity is somewhere near 6 MMbbl/d. If oil prices spike to triple digits, we probably will learn the accuracy of these estimates, as any spare capacity will show up very quickly. 

The old saying that the cure for high prices is much higher prices in the near term may ring true once again. Just look at natural gas. Two years ago, it traded near $10/MMBtu. In mid-April, that figure was $1.68/MMBtu. Is crude on the same path? Only time will tell, but producers should be aggressive in locking in desirable crude oil prices on this abnormal market strength.