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Oil demand ‘relatively resilient’ even with the delta variant: Analyst

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Stewart Glickman, CFRA Energy Equity Analyst, joins Yahoo Finance to discuss the state of the energy market.

Video Transcript

JARED BLIKRE: WTI crude oil topped $82 per barrel today, the highest prices since 2014. Meanwhile, natural gas futures in the US have topped-- have actually doubled over the last year. And with no end in sight, many energy markets around the world are at record highs.

We want to talk about this with Stewart Glickman, CFRA Energy Equity Analyst, along with Yahoo Finance's Karina Mitchell. Stewart, thanks for joining us. We were just talking about this with the previous guest. Can you give us an overview of this energy situation, how we got here? It just seems to be like a perfect storm right now.

STEWART GLICKMAN: Yeah, Jared, thanks for having me. So, on the supply side, that's been really, I would say, the biggest driver near-term. You have Hurricane Ida, which knocked out around 1 and 1/2 million barrels a day of US oil production. That compares with roughly 11 million barrels a day on average for the US. You have outages in Europe that are taking away a lot of natural gas supply away from that market.

There's been some fuel switching away from gas, natural gas, over to crude oil, which is only ratcheting up the demand. And demand in general is on its way back after having a terrible 2020. You know, the onset of the pandemic saw crude oil demand drop about 9 million barrels a day down to, roughly, 91 million barrels per day on an absolute basis. And now we're getting back up close to roughly 96, 97. And so, you know, it's even with the delta variant, demand looks relatively resilient. And that's why we're in this position we have. We have too many customers chasing too few barrels.

KARINA MITCHELL: And so, tell me, how much of the price gains that you're seeing are actually healthy gains? So you talk about this slump that happened last year, you know, the biggest since World War II. And now we've come raging back. Natural gas prices are up something, like, 700%. How much of it is healthy gains versus inflation that we're dealing with here?

STEWART GLICKMAN: Yeah, so I think on the gas side, a lot of what we're seeing is really outages, like lack of supply that is driving prices considerably higher. I mean, your previous guest pointed out that gas is up 5x this year. That's not normal incremental demand growth causing that. That's an awful lot of shortages.

And with gas prices, the level they're at in both Europe and Asia, that's driving an awful lot of demand for LNG coming out of the states. Even with natural gas here at 5.50 per million BTU, which is really expensive compared to what we've been experiencing in the 2's and 3's, there's still an awful lot of money to be made by taking that gas from the US and shipping it overseas.

Now, on the oil side, I think a large part of that improvement in demand really is relatively healthy recovery. And certainly, you have some increase in price that's a function of Hurricane Ida and its impact on the US. But I would say for the crude oil markets in general, it's largely, I would say, a recovery play that's driving the prices higher.

JARED BLIKRE: Well, Stewart, since you're an equity analyst, I got to get your take on what stocks you're liking here or maybe any set of stocks that you don't happen to like.

STEWART GLICKMAN: So we're definitely positive on the E&P space. Most of the independent producers are going to be driving a considerable amount of free cash flow at $80 a barrel. This is, you know-- last year, WTI averaged only about 40 bucks a barrel. And everybody was battening down the hatches and really focusing on just trying to survive a terrible market. What they're doing with that cash this year they are paying down debt that they incurred in the last year, they are expanding their dividends, they're expanding buybacks.

What's notable is the relative absence of new spending on organic-- spending through the drill bit to try to expand production, because the industry has been told for nigh on seven years now, don't tell us about growth. Tell us about how efficient you can make your portfolio. And high-grade that portfolio and deliver more cash flow. And so the industry is kind of following through on that.

I think the midstream space should see an awful lot of demand as well. A lot of that incremental demand is coming from overseas markets. You have natural gas liquids that have to be-- you have to take that raw mix and turn them into their purity products, like propane and ethane. Midstream players are well-positioned to help with that and send those purity products overseas.

The only space I'm not really a fan of right now is downstream refining. I'm worried that, you know, when you have Hurricane Ida and its influence on US oil production, I am worried that the Brent WTI spread is going to compress more. I think consensus estimates right now are calling for roughly 350 per barrel spread between Brent and WTI in 2022. And I'm worried it's going to be a little bit narrower than that. And that could weigh on margins.

But in general, you know, you have names like EOG Resources, Pioneer Natural Resources, Devon Energy, all of them are going to be driving an awful lot of free cash flow. In 2022, there is going to be some offset if you've hedged too much of your future production in the next year. But for the most part, companies have hedged less in '22 than what they have remaining to report for '21.

KARINA MITCHELL: So tell me, where does the supply side go from here? Do you see it drying up? OPEC says it's not releasing any more crude. What happens in the future, and how high do these prices go?

STEWART GLICKMAN: Yeah, it's a great question, Karina. The OPEC consortium has been remarkably stubborn in not returning barrels faster to the market than what the market is clamoring for. I think they're enjoying-- you know, they're certainly enjoying $80 per barrel for the first time in about seven years.

And they have been very resolute on this. It's easy to be resolute or easier to be resolute when oil prices are weak. It's harder to avoid that temptation when oil prices ratchet up considerably. So I think we may see some cheating at the edges by OPEC. But for the most part, it looks like they're remaining pretty strong about this.

And on the US oil community side, you know, investors have been telling the space for the better part of seven years, get your act together and stop selling us on a growth story that is really tone deaf to what we want and what the US oil community-- excuse me, what the US investor community has been asking for, is, you know, higher cash flows. Then you have along with that, you have the ESG community that's saying we have to prepare for a transition, so stop telling us about how much fossil fuel production you'd like to give us.

And so, the industry has kind of followed suit from that. And until they start getting different messaging, I think they're going to be pretty reticent to expand production a lot because they have other fish to fry.

JARED BLIKRE: And we're going to leave it there. Stewart Glickman, CFRA Energy Equity Analyst. And Karina, stick around. We're going to talk to you later in the show.