Oil: 'Biggest Supply Crisis In Decades' Warns Of Higher Prices Ahead (Part II)

In order to fully unleash their full production capacity, it’s likely that both countries would need to boost drilling activity. That means even if a decision is made to max out production, it could take 6–12 months to fully ramp output.

Finally, there’s the fact that both countries producing flat out would erase virtually all spare capacity from the market. Without this critical supply buffer, the market would likely build in a supply risk premium, keeping prices elevated. In that case, the extra output from Saudi and UAE could become self-defeating.

Given all of these headwinds, it’s no surprise that the Biden administration is scouring the globe for any extra barrels they can get their hands on—including from Iran and Venezuela.

U.S. sanctions on both Iran and Venezuela have kept oil production running below capacity in each country. The Biden administration is now pursuing negotiations with both countries to potentially lift sanctions and get this lost production back onto market.

By far, Iran is the best bet here—with roughly 1 million bbl/d in incremental new supply that could come online within 6–12 months. Iran also has about 100 million barrels of oil in storage ready for immediate sale if sanctions get lifted. Recent reports indicate progress on Iran negotiations , suggesting ongoing potential for a deal soon.

The immediate release of 100 million stored barrels could provide some near-term relief to the market. But longer term, the additional Iranian volumes won’t fully offset the disrupted Russian barrels. Meanwhile, lifting sanctions on Iran and potentially allowing the country to progress further with its nuclear program is a big concern to regional rivals Saudi Arabia and the UAE.

Meaning, a successful deal with Iran might end up reducing the odds of getting more barrels from the two largest sources of global spare capacity. In the miracle scenario where all three countries simultaneously max out their productive capacity, this could theoretically offset the full impact of expected supply losses from Russia. But again, this would wipe out virtually all global spare capacity—not exactly a recipe for low prices.

Meanwhile, potential relief from Venezuela looks a lot less promising. The country’s oil industry is in total shambles after years of dysfunction. Even if sanctions were lifted tomorrow, Venezuela would struggle to add a few hundred thousand bbl/d over the next 12 months. Over a long time horizon, Venezuela could become a meaningful part of the global supply solution…but this is not a game changer in the near term.

That leaves one remaining source of meaningful supply growth—U.S. shale.

The latest weekly data from the EIA shows that U.S. oil production remains stalled out at 11.6 million bbl/d: