Oil market enters tight supply phase after years of underinvestment: Nikhil Bhandari

As crude oil edges towards the $100-per-barrel mark, questions are once again being raised about whether global investment flows are set to pivot back into the energy sector after years of relative underinvestment. Against the backdrop of tightening supply dynamics, slowing capex, and an uneven energy transition, market participants are reassessing the medium-term outlook for oil, refining, and renewables.

Speaking to ET Now, Nikhil Bhandari from Goldman Sachs highlighted that the industry is entering a structurally tighter phase, driven less by demand shocks and more by years of restrained investment.

Underinvestment sets the stage for tighter oil markets“We came underinvested on energy, on crude heading into this event. We had last wave of some of the non-OPEC supply projects, long cycle projects completing by the end of this year. But starting next year, we do not have a lot of non-OPEC supply growth coming. We have capex which is down, reserves are down, exploration activities are down in the last few years, while we think the peak oil demand is still about 10 years or longer away,” he said.

He added that current price signals are still insufficient to trigger a meaningful investment cycle revival.

“At the current forward curve of oil where three-year out forward curve is at $75–76 per barrel, we do not think the incentive is there for the capex to return because most big oil companies are still budgeting $75 around crude already in their budget. So, to get them to invest more capex, we need the backend to go up.”

Refining sector faces deeper structural stressBeyond upstream supply, Bhandari flagged even sharper constraints in refining.“In the refining side, we have closed more capacities than we have added in the last few years because it has been a relatively more stranded industry in the age of climate change.”While peak oil demand expectations have shifted repeatedly—from 2021 during the pandemic to now potentially the 2030s or 2040s—he noted that demand destruction is not uniform across segments.

He said: “We think that transition will continue. However, there is still an income growth angle in emerging markets globally. Even when we are moving towards electrification and renewables, given there are so many people who do not have access to energy, as income grows, there is always an S-curve, disproportionate increase in energy consumption growth relative to GDP growth.”

India, China and the next phase of demand growthOn regional demand, Bhandari pointed to diverging trends across Asia’s two largest economies.

“In China, we think the peak oil demand will come somewhere towards the late part of 2020s. In fact, some products like diesel and gasoline are already passing their peak, but petrochemical demand and jet fuel demand is still growing.”

For India, however, the demand trajectory remains structurally stronger.

“We think India will contribute hugely to the incremental energy demand growth out of Asia for the next 10 to 15 years. India has entered that sweet spot of $2000 to $3000 GDP per capita where every increase in GDP from here has a more disproportionate increase in the consumption of energy.”

Renewables growth strong, but grid constraints persistOn the accelerating renewable buildout, Bhandari cautioned against assuming a linear displacement of fossil fuels, particularly oil.

“That transition is not coming more at the expense of oil, that is coming more at the expense of coal.”

He noted that India’s power system is already undergoing rapid structural change, but integration challenges remain significant.

“We still need a lot of batteries, the grid to work flawlessly on evacuation, HVDC lines, and smart grids. We need to invest more aggressively in the grid and batteries as well.”

He also flagged a growing risk of curtailment in high-renewable systems, citing China’s experience where 15%–20% curtailment has been observed.

Downstream stress and product shortages emergeBhandari’s most immediate concern, however, lies in downstream oil markets.

“The bigger stress is in the products. It is diesel, jet fuel, and naphtha where most barrels coming in from the Middle East are producing more diesel and jet fuel as output, which we are producing less right now.”

He warned that inventory depletion is already underway.

“If the strait were to close for another two months, we think we create a risk of hitting tank bottoms at a global level on product inventory by 4Q this year.”

India, while a net exporter of refined products, is not insulated.

“India carries relatively lower levels of oil and product inventory compared to Korea, Japan, China, etc.”

Early inflation signals already visibleThe impact is already filtering through industrial supply chains.

“We are already seeing 40% to 50% inflation in packaging, plastics, PET, and mineral water bottles. Edible oil cooking packaging prices are up nearly 100%.”

Bhandari stressed that while the system is not yet in outright shortage, it is firmly in deficit.

“We are in deficit already. Every day demand is higher than supply today and we are drawing inventory.”

Outlook: a structurally tighter energy systemSumming up, Bhandari described the current phase as one where underinvestment, transition complexity, and regional demand divergence are combining to create sustained tightness in global energy markets.

The result, he suggested, is not just a cyclical spike in oil, but a multi-year structural squeeze across crude, refined products, and energy infrastructure.