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Gas: Europe was ‘overly dependent’ on ‘one geopolitically unstable region,’ analyst says

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Cowen Analyst Jason Gableman joins Yahoo Finance Live to discuss the energy markets, the outlook for oil prices, and where Europe's energy picture stands looking ahead into the winter.

Video Transcript


BRIAN SOZZI: Oil prices are sinking further today after sliding to a near six-month low yesterday, with data showing an unexpected rise in crude and gas stockpiles last week. Joining us now to discuss is Cowen analyst Jason Gableman. Jason, good to see you here. Lots of focus on the pullback in gas prices, of course, driven by what's happening in oil. How long do you think you can continue?

JASON GABLEMAN: Well, we're definitely constructive into the second half of the year. I think we're seeing a bit of volatility right now. But as you think about the supply demand changes moving into the back half, you'll have China demand increase as they come out of COVID lockdowns. You'll have the US Strategic Petroleum releases end in October.

And then there's risk, Russia's supply comes off the market in the back half of the year. So we could see a bit more volatility in the next couple of months but definitely constructive towards the back half of the year, specifically in the fourth quarter.

JULIE HYMAN: So I'm curious, Jason, what the implications are for the US oil majors. We just heard from Conoco this morning, another company coming out here beating estimates and continuing to spend, although it's spending maybe a little bit lighter than the Street had anticipated. Obviously, these guys have been the outperformers consistently this year, even as we see them falling today. But what do you think is going to be happening going forward, especially as we look at the outlook for oil prices and the implications for these stocks?

JASON GABLEMAN: The USEMP group has been very disciplined with capital spending. I think that's going to continue given the positive response from shareholders. And as a result of high oil prices, that excess cash flow is gonna continue to be returned. And so it's a pretty constructive environment for the group.

These stocks, for a long time, had to deal with low oil prices. And so the companies have kind of reconfigured themselves to be able to exist and thrive, quite frankly, at oil prices well below than what we're seeing right now. So the oil prices being very high should be a positive for shareholders, given the companies are likely to continue to remain disciplined with capital spending.

BRIAN SOZZI: What we've seen in oil prices recently, Jason, is that the market trying to price in a mild recession?

JASON GABLEMAN: Yeah, I think that's probably fair. You know, you're also contending with probably liquidity a little bit on the light side given we're in the summer. But typically in a recession, you lose about 1% of oil demand, that's a million barrels per day. I think you're probably seeing some of that get priced in right now.

The most up-to-date data from the weekly EI-- EIA data in the US suggests some gasoline demand pullback. So I think that's also being factored in to the market right now.

JULIE HYMAN: From gasoline to gas, natural gas that is, I want to ask about that also, Jason, because we have been seeing the prices there tick up as well. And it's not even traditionally, like a seasonally strong time necessarily for natural gas. That's more traditionally the winter. So what's gonna happen with the prices there? And then are we gonna see natural gas become a more important part of some of the energy producers', you know, revenue streams?

JASON GABLEMAN: Yeah so if you look globally, particularly in Europe, as a result of the Russian war, they're getting a lot less natural gas than they typically would. Gas flows are less than a quarter from Russia versus where they were just a couple of years ago. And so you're right, gas prices are at record levels in Europe in a typically weak part of the year.

And as you move into winter and gas demand moves higher, it creates risk of really an energy crisis in the back half of the year. And so we're watching that pretty closely. That has follow-through benefits into the US, given the US is an exporter of gas to the rest of the world and probably provide some long-term support for US gas supply.

I think the Russia-- the Russia war is highlighting that Europe was overly dependent on one region, one geopolitically unstable region, for a large amount of their energy. And they're gonna look to diversify.

And you've seen that with European companies signing contracts with USLNG providers. And that sends a signal to US gas producers that they could produce more because that demand is gonna be there from international markets. So the entire Russia-Ukraine conflict likely ends up being a net benefit to US gas producers.

BRIAN SOZZI: And Jason, it's becoming increasingly clear that Europe is not only in a major economic slowdown, potentially it might just be in a recession. What type of pressure will that put on oil prices globally?

JASON GABLEMAN: Yeah, so clearly, Europe is the highest risk area of having a recession, just given what's going on in energy prices there. And you're probably gonna see some demand pullback, as a result. But it is interesting because they're gonna try to diversify their heat and power sources away from gas, given what I just mentioned, Russia is cutting back natural gas flows to Europe.

So while you could see some pullback in traditional oil consumption, like on-road transportation fuels, there are indications that they're increasing consumption for power and heat. And so you could see somewhat of an offset there where the expected demand impact from higher oil prices isn't actually what's realized because you're seeing more demand from nontraditional demand sources in Europe, such as heat and power.

BRIAN SOZZI: All right, we'll leave it there for now. Jason Gableman, analyst over at Cowen, really good to see you this morning. Thanks so much.