It's possible that oil will see its biggest supply shock since 1973

 The global oil market was already tight before Russia's invasion of Ukraine, but Putin's conflict and its effects on Russian crude supply and energy prices have the potential to send the world into a severe supply shock akin to the Arab oil embargo of 1973. As demand recovers, oil stocks in key oil-consuming industrialized nations, particularly the United States, have been slowly declining for several months.

Commercial crude inventories in the United States are 411.6 million barrels, which is 13% lower than the five-year average for this time of year. According to the EIA's latest inventory report for the week ending March 4, gasoline inventories are 1% higher than the five-year average, but distillate fuel inventories are 18% lower, and propane/propylene inventories are 21% lower than the five-year average for this time of year.

As demand picks up, global oil supply has struggled to keep up, with OPEC+ adding only 400,000 barrels per day to its monthly output. Because many OPEC+ producers lack either the capacity or the investments to boost output to their quotas, the production increase has been less than 400,000 bpd—and at times half of that—for months.

Due to tight market balances, leading investment institutions began predicting that oil may surpass $100 per barrel this year as early as January.

It only took a month after Russia invaded Ukraine for prices to reach triple digits. Now, the question is whether oil may exceed $150 per barrel as European consumers flee Russian oil, and China alone may not be able to absorb all of the seaborne volumes that would otherwise have gone to Europe.

According to Standard Chartered, Russia will have to shut down some of its oil production since it will be unable to export all of the quantities shifted from European markets to other regions, with Russian crude production decreasing and remaining low for at least the next three years. Even before the United States imposed a ban on Russian energy imports, many global players had been wary of Russian commodities.

The conflict in Ukraine added a significant amount of geopolitical risk premium to an already tight oil market, resulting in a perfect storm for soaring oil prices.

"Nothing is crazy in this oil market anymore," Michael Tran, managing director of global energy strategy at RBC Capital Markets, told Bloomberg this week, referring to the huge swings in oil prices that saw Brent's trading range reach a new high of $33 per barrel.

According to observers such as Reuters market analyst John Kemp, the tight market and Russia's challenges to sell its oil are laying the stage for the worst supply shock since the Arab oil embargo of 1973-1974 and the Iranian revolution of 1979 in the 1970s.

Daniel Yergin, vice chairman of IHS Markit, addressed CNBC in early March about the ramifications of Russia's invasion of Ukraine:

"In terms of logistics, this is going to be a huge disturbance, and people are going to be scurrying for barrels."

"We're in the midst of a supply shortage." It's a logistical emergency. It's a payment problem, and it might be on par with the 1970s, according to Yergin.