Are oil bears missing supply risks ahead? - Yahoo Finance

Are oil bears missing supply risks ahead?

Geopolitical pressures loom over oil supply and pricing heading into the second half of 2023. Claudio Galimberti, Rystad Energy SVP and Head of Americas Research, joins Yahoo Finance Live to examine crude oil inventory outlooks and how EVs and electrification trends could weigh on energy markets.

Video Transcript

BRAD SMITH: Welcome back. Oil prices are on the move this morning. And moving higher as we near the end of the first half of 2023. And Brent crude has had a rocky start. On track for its worst run of quarterly losses on record, as elevated supply and concerns over demand hit prices.

Let's bring in Claudio Lamberti, who is the Rystad Energy SVP and Head of Americas Research for more on this. All right. So just broad strokes here, what most notably should we take away from or extrapolate from the first half of 2023?

CLAUDIO LAMBERTI: Thank you for inviting me back. Well, it's been indeed a rocky ride for the past six months. Because you will recall that we started the year at a much higher level. And then, there has been for the past, I would say, two quarters a negative risk premium in the market. There has been a lot of uncertainty about one key demand area, which is China.

Now, we need to be aware that the first quarter of China, when I look at the actual data, was actually strong. And the real-time data that we have also shows that the situation in China is still under control. There also is a question about the OPEC plus, what OPEC plus is doing. One thing are the pledges. Another thing is the total oil, which is produced.

But what I would say is that we are probably going into his second half of the year when we will see tightening balances. So it means that our focus for oil prices is upwards. But indeed, as you pointed out, a lot of contrasting factors in the first half. And that's the reason why we have been seeing the oil price going up and down. Currently, 75.

So it does look though, that there is some a floor to the oil price. And that's due to the determination of Saudi Arabia and the OPEC Plus to keep the oil prices above that level.

JULIE HYMAN: And Claudio, what do you think will change that? Because to your point, we already have seen some discipline on the part of OPEC Plus, and, particularly, in Saudi Arabia. But all that's done is place a floor. It hasn't certainly caused oil prices to take off. So where do you see more supply coming out of the market that might cause that?

CLAUDIO LAMBERTI: Well, first of all, Saudi Arabia made it very clear that between now and the end of the year, they can voluntarily and unilaterally take off the market, every month, a million barrels. So that's what I would call a very strong put option. I wouldn't bet against it. Because one million barrels a day is a lot of volume that comes off. So I do not expect oil prices to fall below $70 per barrel. Unless, we are going to see very negative data from China or from other parts of the world.

So that is the point number one. I would say that we also need to take into consideration what's happening in other producing part of the world. For instance, in the United States, we haven't seen a whole lot of growth. And that is very important, if you ask me. And the reason for that is that it gives the OPEC Plus the confidence that they can cut volume, they can reduce volume without the fear, without the risk of losing market share to taxes to the United States.

So these two gives me confidence that we will see prices going upwards. But the most important thing in the trading community is the inventory. So we are yet to see inventories, significant inventory draws globally. We saw some significant inventory drop this week in the United States. And that resulted in the Brent and WTI bouncing back up by 3%, 4%.

The moment we see the global crude inventories to drop and to draw significantly and consistently, this is the point in time when I expect really strong backwardation, which, at the end of the day, means higher oil prices.

RACHELLE AKUFFO: And so what about countries like, Iraq and Nigeria trying to offset, especially some of the Saudi cuts? What's that going to do to demand when you factor in things like electrification and, perhaps, reduce demand overall as people start to pivot to some of these other vehicles?

CLAUDIO LAMBERTI: Well, this is an excellent question. Thank you for asking that. The way I put it is as follows. We have seen a lot of electrification in the past five years. So as a matter of fact, the pace of electrification globally has been exponential. We're sending 1% of electric vehicle in terms of global sales in 2018 and 16% last year.

So it means that every year, it basically doubled. The problem is that we are already seeing a plateauing of those sales. So year-to-date, the total global sales of electric vehicle is below 16. It's actually 14%. So there is some problem there. It can be fixed, of course. But the pace of electrification is slowing down, at least, so far this year.

The second is I would say, what is the total effect on our demand? So far, it's very limited. So we're talking about the zero point percentage effect on our demand. So you can already see. But you really need to use the microscope because imagine global demand is still enormous. More than a million barrels per day and the effect of electrification is in the order of a few 100,000 barrels per day.

But there is another effect, which I think is more important. So if people and investors think that the electrification is displacing a lot of demand, and it is not, at least, in the short, medium term might not be willing to invest in oil production. So you may have a counter effect. As a matter of fact, a counterintuitive effect, which is-- the electrification, yes, will have an effect. But the effect is probably be seen five years from now.

And if you stop investing, then, because you fear that there is already very strong electrification, then you might end up with under-investment in the next few years, so in the short to medium term.

But, overall, what I would say as far as the electrification is concerned is that it is going on for sure. But the effect is still relatively limited so that we are seeing oil demand continue to grow for the next two, three, five years for sure.

JULIE HYMAN: Claudio, thank you for joining us. Good to see you. Claudio Lamberti is Rystad Energy SVP and Head of Americas Research. Thanks.