• Oil at $200 is a possibility, although unlikely to happen.
• Possible scenarios include a major escalation in the Ukraine conflict or consistent underinvestment leading to a reduction in supply.
• Analysts love to say that the cure for high oil prices is high prices, and they are correct.

It was the talk of the town last year. Traders bet on oil hitting $200 by March this year. Hedge fund managers warned it could even reach $250 before 2022 was over. 

None of that happened, and in hindsight, it’s easy to see why: global oil markets have time and again proved they are a lot more resilient than traders give them credit for. But is oil at $200 still a possibility? It always is, under certain scenarios.

#1 Major Ukraine escalation

It was because of Russia’s invasion of Ukraine last year that people started talking about $200. Pierre Andurand went even further, warning that oil could rise to $250 because “I think we’re losing the Russian supply on the European side for ever.” 

Yet a major escalation in the conflict, possibly through more direct NATO involvement, could send prices flying high. It’s not certain they would reach $200 even in an escalation scenario because it’s highly unlikely the market could bear this price for any length of time, but it’s not impossible.

#2 More OPEC+ cuts

As far as chances go, this scenario is less likely than the first one. To get prices to $200, OPEC+ would need to cut much deeper, but more importantly, the group would have to want it. It doesn’t. Because $200 is way too high a price, and it would sap demand.

OPEC+ has suggested with its latest moves that its sweet price spot is around $80-90 per barrel, so it is trying to keep prices around that level.

Production outages could push oil prices higher, as they invariably do, even when the outage is as small as 400,000 bpd, as we recently saw with the Kurdistan-Iraq export dispute.

Yet outages do not move prices so radically as to take them from sub-$90 to $200, so this is an even less likely scenario. An attack on Saudi production facilities could do the trick if it’s very successful, but with the war in Yemen nearing its end after the Chinese-brokered thaw between Riyadh and Tehran, such an attack has become purely hypothetical.

#3 Russia production cuts

All the $200-per-barrel forecasts from last year had to do with Russian oil. Most forecasters who saw oil rising to $200 cited European and U.S. bans on Russian oil imports as the basis for their forecasts, and at the time, it did seem like a sound basis.

Of course, those forecasts never considered the option that Russia would simply switch buyers and Europe and the U.S. would switch sellers, which is exactly what happened. 

Another thing few considered was Russia cutting oil production in retaliation for Western sanctions. It already has announced certain cuts, but those, some commentators say, are a result of Russia’s inability to pump as much as before rather than deliberate action.

Whatever the case with those cuts, the simple fact is that Russia can reduce its production deliberately. And if it does, prices will jump. How high is anyone’s guess, and it would depend on the rate of cuts. As for how likely that is—not very.

#4 Underinvestment comes to bite

The scenarios outlined so far are more of a mental exercise than realistic scenarios. None of them are particularly likely, even though at least a couple seemed so likely they made traders buy $200 Brent options.

Yet there is one more scenario that is a realistic one. It’s not as bombastic as a war, but that makes it all the more dangerous. It is the scenario where consistent underinvestment shrinks supply so much, that prices have nowhere to go but up.

Saudi Arabia has been warning about it. U.S. shale producers have been warning about it. And the G7 just declared they would fight “unabated fossil fuels,” which essentially means discouraging more oil and gas production.

Of course, that declaration is worth little more than the paper it was written on, and that is the world’s greatest hope that oil will not hit $200 anytime soon, if ever. If those governments get serious about what they call unabated fossil fuels, the world’s oil supply will be at risk.

Analysts love to say that the cure for high oil prices is high prices, and they are correct. A very efficient way to control the price of a commodity is to let it rise so much it kills demand.

But what happens if that commodity is as essential as oil? Not using oil takes people back through the ages to a simpler but a lot less abundant, wealthy time. Just ask a Kenyan farmer how he likes that.

Luckily for all, even the consistent underinvestment in new oil and gas exploration may not be enough to take prices all the way to $200. Because the industry, with the help of technology, will always respond to demand by adjusting production. Underinvestment has made this harder but not impossible. And even the most ambitious G7 government is not ready to impose an outright ban on oil. That would be political and economic suicide.