With oil prices recently hitting a seven-year high, the energy market is in a starkly different position than at the outset of the pandemic. 

In April, 2020, oil futures turned negative for the first time as demand all but evaporated. Fast forward nearly two years, both West Texas Intermediate and Brent crude passed US$95 a barrel earlier this week, with nearly 30% of that increase taking place since the start of 2022.

What are the catalysts that have, and could continue to drive oil prices higher? Let take a look.

Geopolitical tension shaping the market

Since the start of the new year, expectations have grown about the prospect of a Russian invasion of Ukraine. To date, a number of countries have warned of potential sanctions on Russia if it were to go ahead with invading Ukraine.

Given Russia accounts for as much as 8.5% of global oil supply, or about 5 million barrels a day in exports, oil traders have been bidding crude prices higher in the wake of the geopolitical tension and uncertainty at hand. 

The risk of conflict is a direct influence on the price of oil as Ukraine connects many of Europe energy suppliers with oil (and natural gas) from Russia. In this respect, the region is a strategic hub for the energy industry, and a disruption' to supply out of Russia would squeeze global supply significantly.

With that said, some observers doubt whether the likes of the UK, Europe and US would be in a position to force aggressive sanctions on Russia as each of these regions is already battling sky-high inflation, and with Russia also being responsible for the production of 6% of the world gas, as well as 15% and 14% of thermal coal and coking coal supply, the impact would be far-reaching.

In the meantime, however, it is highly likely any supply dislocation' would temporarily unsettle the energy market and may further dictate oil prices. Saudi Arabia is one company that could fill the void, if it felt inclined to step in, whereas the US would not have spare production capacity to do so.

Rebounding demand has been met by tight supply

When Omicron first struck in November last year, many were expecting demand for oil would take a more prolific hit. 

Not only was the slump in demand less than expected, but the recovery has also been faster than imagined. The rebound has only gathered pace as a growing number of countries around the world gradually abandon most COVID restrictions, and mobility accelerates at the same time.

To date, OPEC+, the intergovernmental cartel that is tasked with ensuring the stabilisation of oil markets, has been unable to ramp up production to meet its own targets. Across OPEC members, the shortfall between actual and targeted output widened to 900,000 barrels a day in January. 

With spare capacity diminishing, the International Energy Agency expects this shortfall to deepen, downgrading OPEC capacity estimates by 300,000 barrels a day for February. Should this play out, it will only provide further impetus for high oil prices. One wildcard in the mid-term is whether the US is prepared to lift sanctions on the likes of Iran, while Venezuela ability to restore supply is another factor in the global equation.

In the meantime, inventory stockpiles among member countries recently hit a seven-year low, and the producer group is sticking by its planned increase in production of 400,000 barrels a day for 2022, despite pressure for the group to step up their quota.

US producers unable to meet the shortfall

Growth in shale oil production out of the US has hit a wall, with the tap now turned off. Limited well inventory is prompting most explorers to refrain from pursuing growth despite US oil production still being below pre-pandemic levels. It is currently running at approximately 11.5 million barrels a day versus 13 million barrels a day at the start of 2020. 

At the same time, many companies are also holding off from further drilling due to pressure from investors. On the one hand, shareholders are demanding returns at times when oil prices are through the roof. On the other hand, ESG scrutiny has been increasing as shareholders expect producers to reduce their carbon emissions.

Some companies, however, are bucking the trend and boosting production. Both Exxon and Chevron are looking to increase production out of the Permian basin, although this would not provide a near-term solution to the current market shortfall. 

The Baker Hughes rig count, which tracks oil rigs operating across the US industry, recently recorded its biggest increase in four years. This time last year there were 397 rigs operating across the US. Now there are 635 rigs, yet inventories are still 11% below seasonal averages. As an early indicator of future output, it is clear production hasn't yet caught up amid the above-mentioned factors, but preparations could be under way.

While the clamour might come down the track, for now, oil supply remains incredibly tight, and as Goldman Sachs put it, the industry is currently running with the tightest inventory levels in decades. 

Which stocks offer exposure to oil prices?

Whether oil can reach US$150 a barrel or not remains to be seen, however, it is clear there is more to the rally than the threat of war between Russia and Ukraine. There are a long list of companies across the energy industry currently benefiting from elevated oil prices, and which would continue to benefit if prices continue to soar. 

Earnings season has proven the tailwinds in effect for these stocks, and those results predate what has been an acceleration in momentum amid the most-recent rally. A selection of the most well-known energy stocks across the US and ASX includes: 

ASX-listed producers:

• Woodside Petroleum (ASX: WPL)

• Santos (ASX: STO)

• Beach Energy (ASX: BPT) 

• Ampol (ASX: ALD)

• Viva Energy Group (ASX: VEA)

US-listed oil multinationals:

• Exxon Mobil (NYSE: XOM)

• Chevron (NYSE: CVX)

• BP (NYSE: BP)

• Phillips 66 (NYSE: PSX)

• ConocoPhillips (NYSE: COP)

US-listed shale producers:

• Diamondback Energy (NASDAQ: FANG)

• Marathon Oil (NYSE: MRO)

• Devon Energy (NYSE: DVN)

• EOG Resources (NYSE: EOG)

• Continental Resources (NYSE: CLR)

• Occidental Petroleum (NYSE: OXY)