Crude oil is ‘clearly pricing in slower economies’: Analyst
Bob Iaccino, Path Trading Partners Co-Founder and Chief Market Strategist and The Stock Think Tank Co-Portfolio Manager, joins Yahoo Finance Live to examine energy markets in relation to crude oil reserves, the impacts of weather, and spiking oil demands amid COVID policy easements.
Video Transcript
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- We're also going to take a look now what we're seeing with the market action. We want to bring in our guest here, as we've seen a lot of volatility this week. We have Bob Iaccino here. thank you for joining us this afternoon, Bob. So I want to first get your take on the market action so far.
BOB IACCINO: Well, in general, there was a lot of options expiration. So we're talking about equities, it's pretty standard. We had now of 6 consecutive days in the S&P without a 1% move in either direction. And I think that, with the options expiration combined on going into a holiday week next week, a shortened week for the US, it makes a little bit of sense.
We also don't have any new direction. The market doesn't seem to be believing the recent Fed speakers. If we're talking about crude oil, crude oil is clearly pricing in slower economies globally, regardless of what China decides to do with their COVID Zero policy, which there were more headlines today that they're easing up on that policy.
Supply is out there. Even though Saudi Arabia and the members of OPEC Plus have talked about production cuts, they've actually under-performed those cuts. So overall, the supply is therefore the demand, and the demand is expected to fall more and more as it becomes more and more likely that we're getting a global economic slowdown.
- So Bob, what does all this mean for prices? Here we are today, below $80 a barrel. Are we headed even lower?
BOB IACCINO: I almost hate that question, Seana, because I've been talking, probably the last time I was on with you I said it. I've been talking for a while that I thought we'd get to 65 before 105 and nothing has changed on that. I got a little nervous about that call about 10 days ago or so. But that still holds for me and I think $65 is kind of a stress point for OPEC and OPEC Plus.
They're in the driver's seat in the short term, especially with the depletion of the SPR, because you can't go much lower than we've already gone. I mean, I guess you can, but it really puts national security at a threat if OPEC or any of the OPEC countries wanted to get actually nasty about it. So I'm still looking for that sort of, let's call it, $65 hit, and that's probably going to be the low we'll hold there.
Crude oil has a characteristic. It moves sideways until there's a supply and demand disruption and the ranges of that sideways movement can be pretty wide. We're establishing a lower range now where we'll likely settle in, I'd call it between 70-85 until we figure out where that disruption is going to be, continued demand disruption or more supply disruptions that may drive prices higher.
- Yeah, talking about driving prices higher, Bob, that was the big question I had for you, just in terms of the catalyst. If it's not supplies, what else can move prices to the upside?
BOB IACCINO: I'm going to throw you guys a little curveball and tell you that it could be weather. Believe it or not, it could be weather. If we get a surprisingly cold winter across major parts of the globe, you're going to see demand for energy in general spike. And one of the things people don't know, we're still in a diesel supply shortage.
Distillates, which diesel falls into distillates, are still 17% below their 5-year average in terms of inventory. Gasoline is not as tight, crude oil is not as tight but distillates are. And when you look at it from that perspective, heating oil, which a decent part of the US and major parts of the globe still uses to heat their homes outside of the natural gas spectrum, is made at the same time that diesel is. It's within that distillates range.
So if you get a spike in demand for heating oil, the world of crude oil production and refineries will try to meet that and it'll slow the production of diesel fuel. And diesel fuel is already tight and it's a major part of the supply chain. So it really could cause a trickle down effect that nobody wants to see in the price of crude oil itself and subsequently the price of diesel and gasoline.
- And Bob, as you mentioned the weather there, I know we've had guests on talking about how that's affecting some of the refineries down here as well. But also, as you look outside of the US, as we look at what's happening with China, they have a Zero COVID policy still in place. Trying to ease it has been spiking lately. So what does that do in terms of demand?
BOB IACCINO: Well, I think, Rochelle, what you're going to see is they're going to step out of it, not sprint out of it. And that's one of the things that I think is being talked about now. The way to get out of COVID Zero, and all that does is bring in an extra trickle of demand, of which I would argue the supply is already there to satisfy.
So that would probably get us toward the higher end of the range that I just mentioned that I think we're establishing, that's sort of $70-$85. But unless they all of a sudden say, no COVID Zero, we don't care if you're sick, which I don't see happening in China or really anywhere, you're not likely to see a huge spike off of lighter COVID restrictions in terms of COVID Zero policy. That could be a demand catalyst, but it won't be a large one, considering that I believe we're probably 800,000 barrels a day oversupplied at this point.
- All right, Bob. Always great to get your perspective, especially on a week like this, when we saw such a downward move for crude. Thanks so much for joining us.
