【Oil Price Trends】Schroders predicts high oil prices will persist longer, but the pain will only be half of the peak during the 2007 crisis

Oil prices have surged past $100 amid the conflict in the Middle East. Matthew Michael, the Director of Emerging Markets Bonds and Commodities Investment at Schroders, stated in an exclusive interview that the blockade of the Strait of Hormuz has led to a shortage of crude oil supply. Coupled with damage to oil facilities and logistical delays, it is expected that oil and gas prices will remain elevated for a longer period. However, the current $100 oil price is only about half as painful as the peak prices seen in 2007.

Michael noted that there has been no significant change in the situation in the Middle East, but market sentiment is leaning toward the belief that “the crisis may last longer.” This implies that everyone expects the U.S.-Iran conflict to drag on, and the oil market is likely to experience severe supply shortages. Therefore, preparations must be made, not only in oil but also in some fuels or commodities, which will remain at high levels for an extended period, ultimately leading to increased inflation.

Many crude oil products face the risk of depletion

“Even if the crisis is resolved, there will be a certain lag time before oil production fully normalizes. Moreover, strategic petroleum reserves and conventional inventories typically only cover a few weeks, with some areas possibly extending to several months. However, overall, the market is unlikely to cope with such a long cycle, and many crude oil products face the risk of depletion.”

To alleviate pressure on oil prices, many countries are considering tapping into their strategic petroleum reserves. He stated that utilizing reserves is a correct and important decision, but logistical bottlenecks prevent it from resolving the issue in the short term. Transporting oil reserves to refineries and then to the market has limited pipeline capacity. “This is not like pouring water from one cup to another; it’s more like using a thin straw to suck up water.”

The high oil prices of 2007 were quite painful for the economy

However, he believes that global oil resources are still sufficient; the issue lies in the cost, profit, and motivation for extracting oil. “If oil prices are very high, they will likely find some oil resources that were previously uneconomical to extract, such as oil sands or deepwater oil fields,” and this will encourage the market to increase investments in renewable energy to reduce reliance on fossil fuels.

Even though oil prices are currently hovering above $100, Michael believes that today’s $100 is very different from the $100 in 2007, or even in 1972 or 1978, due to changes in inflation and purchasing power over time.

“If we adjust commodity prices based on inflation and the GDP deflator, the oil prices before the financial crisis would be close to $200 per barrel in today’s prices. Therefore, the high oil prices of 2007 were quite painful for the economy, but we are not at that level today.”