Oil drops 25%, extending weeks of losses

Director of Energy Futures at Mizuho Bob Yawger joins Yahoo Finance’s Seana Smith to discuss how oil’s latest drop will hurt the markets.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance's live market coverage. I'm Seana Smith. Now, it was another rough day for oil. We have crude settling down 24.6% at $12.78 a barrel. Now, for more on this, I want to bring in Bob Yawger, director of energy futures of Mizuho Securities.

And Bob, we've been talking about a recent slide in the price of oil. And let me just start with asking you-- we've been talking about the fact that we're seeing an oversupply and also the storage concerns out there. If you take a look at the slide in the price today, what do you think is driving that drop?

BOB YAWGER: Well, there is definitely a serious oversupply of crude oil in the market here. We have a store to pour out on Wednesday. I'm looking for an increase of 17 million. Up till a week ago, 17 million would have been the all-time record built. But we've since broken that. It's 19 million now. So we're getting through all-time record storage injections.

Every week, the stores gets higher and higher. We are effectively running out of storage here in the United States and across the globe for that matter. There are reports today that South Korea has run out of storage. South Korea is a major site for storage for Asia. At that rate we're going right now, we'll run out of crude oil storage here in the United States in about eight weeks.

This is, perhaps, even more important. We will run out of storage at the NYMEX delivery site at Cushing, Oklahoma, the largest storage facility here in the United States. But it is landlocked. We'll run out of storage there in probably two weeks. It's not good.

SEANA SMITH: Yeah, when we talk about that, we try to put that in perspective, just what exactly that means for the price of crude, at least, in the near term. Do you think we could retest some of those negative numbers that we saw at the beginning of last week?

BOB YAWGER: I think it is definitely possible. But it is probably a little bit less likely, because at the same time, we have this really bad storage situation. We have a-- we have total mayhem in the United States oil fund. And they have actually been forced to move their contracts away from the front of the curve.

June will be the next month they expire. By the time June gets here-- gets to that point, they will have the June contracts on the books-- the contract the USO will now hold any June crude oil. It all be in July, August, September, October, as far back as June of 2021. So it takes a little bit of the shock value away as you approach expiration.

However, you could easily make the argument that today that the liquidation of that front of the curve July contract put pressure on prices today. And that is why we were-- one of the reasons we were down as much 30% to that.

SEANA SMITH: Bob, I want to get your thoughts on the globally coordinated cuts. Do you think that that will be enough to stop some of this pain that we've been seeing in the oil markets? And if not, how much-- I guess, how broader or how much bigger do you think these production cuts need to be?

BOB YAWGER: Well, when they-- as soon as the OPEC folks had the-- and the G20 had their meeting, the market has been down as much as $20 to $30 since then. So not a lot of believers across the oil space that it's really going to help very much. For starters, there's demand destruction of $30 billion barrels-- global demand destruction of 30 million barrels.

They cut 9.7 million. So not a very impressive job of equaling supply-demand dynamics. That said and done, it took OPEC five days to come up with an agreement that was basically rushed so it could beat NYMEX's open on Sunday night on the Sunday night at the agreement. And it just didn't really seem like they were in, you know, working together to get it done.

There's also reports that the Saudis are going to move 40 million barrels of crude oil into the United States into the Gulf Coast region here in the next five weeks. That's not the kind of thing you do when you're trying to take barrels off the market. Now, those barrels were sold in March before the OPEC meeting. But still, it's not the kind of situation that builds a lot of confidence in the crop.

Now, as far as the United States, we're a market economy. We can't just go going in and be dictated to about the amount of crude oil that we bring out the earth. It will pull back naturally, but it's not happening very quickly. Crude oil-- domestic production last week in the United States is down to only 100,000 barrels.

If I was an OPEC person, and I'm cutting 3 or 4 million barrels-- in another words, if I was Russian or Saudi Arabia, I would be a bit upset to see that US number only slide by 100,000 barrels. I might say to myself, why am I taking all these barrels off the market when the Americans are doing effectively nothing?

So I wouldn't be happy if I was an international producer as a part of OPEC. If I was-- I was part of the United States, I wouldn't want to be told what to do. So it's kind of-- it works both ways. It's going to be a dicey situation. In my opinion, we will stay overly supplied here for the foreseeable future.

SEANA SMITH: Bob, I want to get your thoughts just on a number of bankruptcies that we could see, because we got the news yesterday that Diamond Offshore filing for Chapter 11 bankruptcy. And we talk about the broader implications of this-- what do you think they are? And do you think we're going to see a wave of bankruptcies within the energy sector?

BOB YAWGER: Yes, I think that you probably will. I mean, in the case of Diamond and some of the other operators, you know, there's peak folks that operate in shallower water in the Gulf. They're vulnerable. There's not really a lot of need for their services. So they'll probably be first wave. They're smaller producers. There's a few-- keep in mind-- there's dozens, if not hundreds, of producers in the United States-- a lot of them in the Gulf.

So those going to be some consolidation. The most likely scenario is there's two things are going to happen. There'll be consolidation. The big fish would gobble up the small fish. And also, there'll be people that was shut in production. That production will never come back 100% at the level that it was before it was shut in.

There's a certain equilibrium about it as far as geography is concerned that is inherent in crude oil production. When you break the equilibrium, crude flows at a certain level. When you stop that flow, it doesn't come back at the same level. That is going to happen to a certain degree. We will have all-time record production of 13.1 million only about five weeks ago. I find it hard to believe that you will see that number anytime soon if ever again.

So that's going to be one the kind of-- that's going to be part of the fallout from all this. We will lose production as a function of shutting in barrels. We will lose the small producer as a function of shutting down the economy as a function of kicking back on driving gasoline demand. These things will have their effect. And yes, there will be consolidation in the market, production. And the players will all shrink.

SEANA SMITH: Well, certainly, that is likely to happen. Once again, crude off pretty big today, down 24.6% at $12.78 a barrel. Bob Yawger, director of Energy Futures at Mizuho Securities. Thanks so much for joining us today.

BOB YAWGER: Thank you.