“In every sustained commodity price rally, there’s a moment when fundamentals — supply, demand, inventories — no longer matter,” Javier Blas writes. “It’s clear that moment has arrived for cocoa.”

Economists like to say that the cure for high prices is high prices, since they can reduce demand, spur increases in supply, or both.¹⁾

A database of illiquid prices for unusual products can be invaluable for traders and originators seeking to price customer-facing transactions, as end-user needs are rarely expressed at the liquid trading hubs and resident in the front of the curve.¹⁾

It also comes from the political awareness that rising oil prices cause gasoline prices to rise as well, and this directly affects a sitting U.S. president’s chances of re-election, as analysed in full in my new book on the new global oil market order.²⁾

In periods of rising oil and natural gas prices, firms tend to first increase drilling activ- ity at existing sites to maximize production and profits. In periods of declining oil and natural gas prices, firms tend to reduce drilling activity and focus more on acquisitions and developing new reserves. ²⁾

In the last several years, continued high oil prices have allowed firms to allocate more capital to all three segments, though the vast majority of capital expenditures in general continue to go to increasing current production. ³⁾

Due to the tighter supply conditions of oil, swings in oil prices tend to not affect drilling demand in the short term. Because natural gas is relatively more plenti- ful, natural gas drilling activity is more sensitive to price swings. ⁴⁾

For example, due to North America’s abundant onshore natural gas reserves, higher natural gas prices tend to benefit US and Canadian land rig operators. In contrast, higher oil prices tend to benefit rig operators with presence in international regions with more oil sup- plies, such as rigs in the Middle East, Russia, or offshore West Africa. ⁵⁾

At first, high commodity prices will increase drilling demand at sites already in production as oil firms hope to extract as much oil and gas as possible. Should prices stay high, firms may wish to also increase exploration for new supplies. ⁶⁾

• intended price?

Falling oil and natural gas prices affect the highest cost producers the most since they have the slimmest profit margins. ⁷⁾

When crude oil prices rise, the upstream division makes tremendous profits while the downstream division faces higher costs. In periods of falling crude prices, the opposite is true. ⁸⁾

For example, while commodity prices affect all Energy firms to some degree, upstream firms are more directly affected than others. ⁹⁾

• rising commodity prices mostly benefit upstream firms while hurting downstream firms. ¹⁰⁾
• Integrated Oil & Gas firms have less earnings variability, as one division’s results can offset the other ¹¹⁾

The most important drivers for firms engaged in upstream and downstream segments of the industry are: ¹²⁾

• Oil and natural gas prices ¹³⁾
• Oil and gas production growth ¹⁴⁾
• Finding and development costs ¹⁵⁾
• Exploration and production capital expenditures ¹⁶⁾
• Share buybacks and mergers and acquisitions (M&A) activity ¹⁷⁾
• Regulatory environment ¹⁸⁾
• Refining margins ¹⁹⁾
• Light/heavy spreads ²⁰⁾

In general, E&P firms are influenced more by natural gas than oil prices, mostly because the majority of E&Ps produce more natural gas than oil, especially in North America. ²¹⁾

On the flip side, downstream R&M firms tend to be negatively affected by rising oil and natural gas prices. Because refiners’ main input is oil, rising oil prices can negatively affect margins to the extent those costs cannot be passed on via higher petroleum product prices. This happens because product prices can be sticky—some estimate it takes three to six months for higher oil prices to work their way through to product prices. Moreover, many refineries use natural gas as their main power source. The higher the natural gas price, the higher the operating cost. ²²⁾

It might sound crazy, but in a market-based capitalist system, a spike in oil prices can be a huge opportunity. Entrepreneurs the world over would suddenly have an unprecedented incentive to profit from developing lower-cost alternative energy. ²³⁾

High oil prices will also increase efforts to stretch existing supplies and explore for new reserves. ²⁴⁾

Below some price level, spending more on exploration is not cost effective. In such times, many supermajor oil firms will instead opt to use their cash to buy back shares or hoard cash. ²⁵⁾

High oil prices also spur efforts to develop previously uneconomi- cal petroleum sources like oil sands and oil shale (see box below). ²⁶⁾