Societe Generale analysis says oil has reacted less forcefully than the scale of the disruption would suggest, even as global crude supply is down about 14%. That compares with a 7% interruption during the 1973 Arab embargo, yet prices have risen about 30% rather than the 60% level seen at the end of March, and remain well below the 134% surge recorded in 1973. The note points to ten countervailing factors discussed with clients, including Chinese demand destruction, structural changes that dull the perceived impact of higher prices, inventory drawdowns, supportive messaging from Washington, and a forward curve that appears reassuring.
The bank argues physical markets are tightening as inventories fall and prompt supply becomes more strained, but that consumers have been meeting needs by running down cheaper stocks instead of competing for costly spot cargoes, a dynamic it frames as temporary. It adds that deferred pricing is too soft to justify the investment needed for sustained non-OPEC supply growth, while producer hedging further out the curve helps anchor long-dated prices. As strategic reserves are rebuilt and inventories become less comfortable, the bank expects the market to require higher prices to rebalance.
Disconnect Between Physical Market and Prices
We are seeing a significant disconnect between the physical oil market and current prices, which presents an opportunity. Despite major supply disruptions, WTI crude is lingering around $85 a barrel, a level we believe does not reflect the underlying tightness. The latest Energy Information Administration (EIA) data supports this, showing a surprise inventory draw of 4.2 million barrels last week when a small build was expected.
This situation is being masked by consumers drawing down their existing, cheaper inventories rather than buying on the pricier spot market. This is a short-term solution that cannot last, as stockpiles are finite and now sit at a five-year low for this time of year. We anticipate that as these inventories are depleted over the coming weeks, buyers will be forced back into the market, creating upward pressure on prompt prices.
Implications of the Forward Curve and Underlying Demand
The forward curve is sending a misleading signal of long-term stability that traders should look to exploit. For instance, the December 2026 futures contract is trading near $79, a price insufficient to incentivize the capital investment needed for new, non-OPEC production. This suggests that longer-dated call options are currently underpriced relative to the inevitable need for higher prices to balance the market in the future.
Recent economic signals, such as China’s Caixin Manufacturing PMI for May beating expectations at 51.9, indicate that concerns about demand destruction may be overstated. We have seen in the past, such as the period following the 1973 shock or the rapid price surge in 2022, how quickly markets can reprice when temporary headwinds fade. The eventual need to refill strategic petroleum reserves will also add another layer of future demand, reinforcing our view that current prices are unsustainably low.
