According to Societe Generale analysts Michael Haigh and Jeremy Sellem, oil prices have not responded as sharply as historical precedent would suggest, despite a significant 14% reduction in global crude supply—double the 7% disruption experienced during the 1973 Arab embargo. While prices have risen 30% from their lows, this is markedly less than the 134% surge seen during the 1973 shock and even below the 60% increase observed at the end of March [1].
The analysts identify ten offsetting factors that have muted the price response, including Chinese demand destruction, structural changes that reduce the perceived pain of higher prices, ongoing inventory drawdowns, reassuring messaging from Washington, and a soft forward curve. They note that physical oil markets are tightening, with falling inventories and increasing prompt supply strain, but prices remain subdued relative to these fundamentals. This is partly because consumers are drawing down cheaper inventories instead of purchasing expensive spot cargoes—a strategy they describe as temporary, as stocks will eventually decline to uncomfortable levels [1].
Societe Generale also highlights that the forward curve is sending a misleadingly stable long-term signal, with deferred prices too low to incentivize the investment needed for sustained non-OPEC supply growth. Producer hedging at current elevated prices is reinforcing this softness, anchoring long-dated prices and creating a perception that current price levels are justified by fundamentals. However, the analysts argue that this is not sustainable, as strategic reserves will need to be rebuilt, inventories cannot remain comfortable without additional supply, and new production requires stronger returns [1].
Ultimately, Societe Generale concludes that higher oil prices will be necessary to restore market balance. The continued drawdown in inventories is expected to force a reassessment of the price level required to keep the market adequately supplied in the longer term [1].
CONCLUSION
Societe Generale asserts that current oil prices understate the severity of the ongoing supply shock and are unlikely to remain at these levels. The bank expects that as inventories continue to decline, the market will be forced to adjust to higher prices to ensure adequate supply.