In the past six months, oil has been one commodity that has been criticised by the government and at the same time facing a shortage of decades. The price of oil is back to the pre-war level and lower by $30/bbl from its peak. But it is still above $20-25/bbl from its average price.
There are several reasons for the premium to continue to be at this level or increase soon as producers communicate capacity constraints. But the consuming nations are finding it difficult to get enough supply to fulfil the demand even if the economy is said to enter a slowdown or even a recession.
In such a macro environment, the oil industry has been making profits that have not been witnessed in a long time. This has resulted in these companies announcing large buybacks along with dividends. These profits have also provided Middle East countries to splurge on the massive next-generation projects that were paused for a few years. It is estimated that these nations will have an extra 7% of GDP income due to the price premium.
This also has been noticed by the consuming nations and nations that have fiscal constraints. To ease the supply and fiscal situations there has been the introduction of windfall taxes on profits and exports. Whether these actions have benefited us is yet to be seen but brings another level of volatility to business.
The next event that the industry will be eying is the price cap on oil from Russia. This is been lobbied so that insurance and shadow exports can be stopped but Russia has already said that they will not supply to nations that apply such caps. This action will put further pressure on the supply and raise prices furthermore and for a longer period.