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Energy analyst: ‘We are in the midst of a major global gas and power crisis’

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Francisco Blanch, Bank of America Head of Global Commodities and Derivatives Research, joins Yahoo Finance Live to discuss global energy markets, the outlook for oil prices, and how the latest developments in the Russia-Ukraine war are affecting Europe's energy supply.

Video Transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance Live. Oil prices currently trading lower when you take a look on a month over month basis but currently up about $1 this morning. Still below $97 on WTI crude oil, but this extends declines over the last few weeks, which may lead to some reprieve. But the Biden administration says it is not comforted just yet. Take a listen to what the president's senior advisor for energy security told Yahoo Finance last week.

AMOS HOCHSTEIN: I would caution a little bit. There's a little bit of hysteria at the moment in the analysis of oil markets. So we're focused on trying to bring the price down. We think we can continue to maintain a lower price.

BRIAN CHEUNG: Amos Hochstein of the White House. Let's bring in Francisco Blanch, Bank of America, head of global commodities and derivatives research to discuss all of this again a lot of fixation on the price declines that we have seen in the barrel of oil over the last few weeks. But what do you see as kind of the medium term trajectory here? Are we-- is that a trend that you expect to continue?

FRANCISCO BLANCH: Hey. Thank you for having me in your program. So first, let's say that our baseline scenario for oil is $105 a barrel for Brent in the second half of the year we've had this forecast for the last five months, so we haven't really changed our numbers much.

And we expect WTI to be $5 under that. Now for next year, we're looking at a baseline of around $100 for Brent and $95 for WTI. And if you look at the markets, because we are trading in backwardation, stock prices are trading meaningfully above the forward price of oil as you see on your screen. We are looking for essentially $15 or so upside to the crude price for next year.

But to your question, there's two potential big swings that could get us a little higher or a little lower. I think to a downside, we could see $75 a barrel in a global recession scenario, again, mostly demand-driven if the fears of an economic meltdown around the world materialize and we see, I think, a synchronous economic downturn into 2023. We could see $75 for oil. That's kind of our recession risk scenario.

But then to the upside, there's substantial risks that we spike to $150 a barrel and above, and the reason is energy supplies are very, very tight around the world, particularly when it comes to gas and power. And while the US has seen Henry Hub prices rising to around 8 and 1/2 dollars a barrel per MMBtu, which is right under $50 a barrel, we've seen also global gas and power prices going to $300, $400, $500, $800 a barrel of oil equivalent. So the European market in particular is extremely tight, and that, I think, can provide a lot of support to the barrel of oil--

AKIKO FUJITA: Yeah.

FRANCISCO BLANCH: --which, on a relative basis, remains rather cheap in our view.

AKIKO FUJITA: So Francisco, when you talk about your base case, how much of that assumes, number one, that OPEC Plus will increase capacity, and there's debate about whether, in fact, they have spare capacity, but also, you know, number two, what this means specifically for Russian oil? I mean, the expectation is right now that there's further capacity that's going to come offline. We've had guests, though, that have come on and said there's a bit of a panic that's happening around that.

FRANCISCO BLANCH: Well, so I want to emphasize that we are in the midst of a major, major global gas and power crisis. But oil is not in crisis yet. And I think the key word here is yet.

To your point, Russian supplies have actually continued to be released into the market. In particular, we've seen continuous flows of Russian crude. The one thing that got oil markets very tight was actually a shortfall in Russian diesel, which was the direct result of US sanctions and then UK and European self-sanctions on Russian petroleum products. Again, remember, Russia is the second largest petroleum products exporter in the world.

So that shortfall in diesel was one key factor driving diesel prices above $200 a barrel in the past few months. But crude oil from Russia has continued to flow. I think going into the second half of the year, we could see a few things also on the supply side.

For instance, we could see, to your point, more OPEC Plus oil. In particular, Saudi Arabia could increase production. But remember, Saudi supply is now at 10.6 million barrels a day, and Saudi sustainable capacity historically over a three month window has been 10.8 million barrels a day.

It doesn't mean they cannot produce 11. It doesn't mean they cannot produce 11.5. It means they've never actually produced more than 10.8 million barrels a day over a three month window. So yes, we could see some more Saudi oil, but it's going to be a little bit of a stretch to keep it high for a sustained period of time. So I think that's one key concern-- that if Russian output starts to fall out of the market, we could see things tightening very quickly into year end and 23.

BRIAN CHEUNG: So Francisco, let's talk about maybe where the crisis is a little bit more pronounced. That's on the nat gas side of things, a lot of attention on the percentage that's flowing through Nord Stream 1 from Gazprom. We know that there's a political challenge here.

The EU is trying to get a reduction in the use of nat gas. What do you see on that side of the equation? Because things are really heating up politically there.

FRANCISCO BLANCH: Yes, I mean, Nord Stream 1 is obviously a critical issue for European energy security. Remember, about 40% of European energy comes from Russia. And I think the trust, you could say, is pretty much broken.

And even if there is a resolution to the Russia-Ukraine conflict, I think that rebuilding the trust between Europe and Russia will take a very long time. And Europe will try to move away from Russian energy, I think, for years to come. So that in itself, I think, will keep global energy markets on a secular bull trend for multiple years.

Now, when it comes to what's going on today, we've seen Gazprom specifically arguing that there is a technical issue that's preventing moving up flows in Nord Stream above 20% of full capacity, so meaning that essentially, flows through Nord Stream 1 are down 80% from pre-war levels.

Now, to put into context, the amount of gas that Russia supplies into Europe is about 10% of European energy supplies-- just gas alone. And gas is not easy to redirect because 75% of Russian exports on the gas side are going to Europe via pipeline.

So they're not coming into Europe. They're really not going anywhere else. And these are cars that will not be made. This will be washing machines that will not be manufactured.

So I think I think what Europe is preparing for right now is severe curtailments to gas demand, whether it's on the industrial side, on the consumer side. And the strategy that Russian President Putin seems to be chasing here is one of divide and conquer with different European nations trying to look after themselves while the European Commission, on the other hand, is trying to keep everyone together on the same boat and sharing the few scarce resources that will be available into the winter months.

But there is no doubt in my mind that Russia's plans are really to put enormous pressure on the European energy system into the winter, which is typically when you need Russian energy the most. And that's, I think, the game plan right now-- I mean, put enormous downward pressure on the European economy and to European heating systems in the winter.

BRIAN CHEUNG: Well, nonetheless underscores the reliance that Europe has on Russia. Francisco Blanch, though, Bank of America, head of global commodities and derivatives research, thank you so much for joining us.