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Oil prices: Supply couldn't make up for Russia’s production in the short term, analyst says

Global X ETFs Sr. Research Associate Rohan Reddy joins Yahoo Finance Live to discuss inflation and the outlook for rising oil prices amid the Russia-Ukraine war.

Video Transcript

KARINA MITCHELL: So we're going to stay on the energy sector and bring in our next guest. Rohan Reddy is GlobalX ETFs research analyst. Rohan, thanks so much for your time today. So I guess the million question is on everyone's mind-- how high does oil fly before it sets back and there's a slump because demand drops?

ROHAN REDDY: A great question. Right now, prices are right around $110. That's one of the highest that we've seen since 2014. And prices still could move up a little bit higher from here, because Russia accounts for about 10% of global production. And there really isn't any sort of supply that can make that up in the short-term.

We do think that right now, there is some risk that this could only be a little bit of a short-term phenomenon. Inflation is high, supply is at a very low level, and OPEC has been super supportive. So if some of those factors start to change at either OPEC's next meeting or we start to see US supply really ramp up in the face of triple-digit oil prices, we do think prices could come down either to the $100 level or even the $95 level, which would still be a really good area for a lot of these energy companies but would provide some relief to a lot of both consumers and companies facing high oil prices right now.

KARINA MITCHELL: But making news today are talks that, perhaps, an Iran nuclear deal could come through and save the day. How much impact do you think that would have on the oil market and supply?

ROHAN REDDY: Well, at its peak, Iran did about 3.8 million barrels of oil a day during the Obama years when some of the sanctions were lifted. Right now, there's about a million to a million and a half barrels that have been lost. So again, when you do that on a percentage basis of global oil production, it's right around 1% to 2% of global oil supply.

So it could be a material amount. But I think given what we've seen with Russia and the fact that that's a massive oil producer, third-largest in the world, it's not enough to make up that shortfall. So I do think the Iran news is helping out oil prices a little bit in terms of driving them down a little bit further. But it's not enough to really make up some of the big gains that we've seen in the prior days.

KARINA MITCHELL: Are you surprised by just how many companies just don't want to touch Russian oil and energy and how quick that turnaround has been?

ROHAN REDDY: It's not been that surprising at all. I think even though they're marketing at very steep discount, in some cases north of 70% or even more, right now, there is the looming overhang of both the US and also major Western countries that could say, well, the entire energy sector in Russia is going to be sanctioned, so what happens if that oil is in delivery while that happens? What does that mean?

And so I think that risk is giving a lot of the buyers pause as to whether they want to accept Russian oil right now. So even though Russia has been fairly stranded right now, and they are desperate, and they're selling oil at a very low price, the sector in Russia has almost become close to untouchable along with a lot of the equities and other assets, including currencies, there.

KARINA MITCHELL: Rohan, the president talked about a push for Made in America at his State of the Union, but he made no mention of producing more energy here at home. We're nowhere near ready to move on fossil fuels, right? So while we push towards this green energy, doesn't it make sense to drill more and produce more here oil and LNG and then be able to export to other countries as well?

ROHAN REDDY: Of course. And the good news is even though it has become a political issue recently, most energy companies in the US are in the private sector, right? So economics and capital will ultimately flow into those areas. So we do think that if prices stay in the north of $90 range for an extended period, even though a lot of these energy companies have said they're going to be disciplined and not grow production as fast as maybe you would have expected in prior cycles, we do think some of them are going to shift off that stance eventually as they start to see that they can make some really good margin, both domestically as they sell it to other US buyers, but also if they start getting more infrastructure in place either through areas like LNG or even other export channels, they can ship that to areas like Europe, which are heavily reliant on Russian natural gas and Russian oil, for example.

Russian natural gas makes up 40% of Europe's overall natural gas supply. And it's about a quarter of their crude oil. So that's a major opportunity center for a lot of these US energy companies. And institutional investors, in particular, will be the ones who will drive some of the decisions. So right now, prices are very high. If they want to capitalize, this is the time to make the investment.

KARINA MITCHELL: And really quick, not too much time left-- but I want to ask you, you know, in the short time, looks like consumers are going to be paying a lot more for gasoline. But so are truckers. And I'm wondering what impact does that have on transportation costs, and then how does that impact food costs, and such already sky high at the moment?

ROHAN REDDY: Well, you've probably seen some of the news on the trucking side that there is a labor shortage as well. So some of those input costs have gone up quite a bit as the supply chain has become very stranded. So if you look at CPI numbers from last month in the US, it was about 7.5%. It could stay in that range for at least the next month or two, we think, as some of the supply chain overhangs and just high oil prices and high commodity prices start to filter in.

But ultimately, there probably will be some relief from other countries that are going to step in to fill that void. So we do think it could be fairly seasonal and, ultimately, going into the summer months along with hawkish Federal Reserve policy, that could reduce some of the inflationary pressures in the system.

KARINA MITCHELL: We'll leave it there. Thank you so much, Rohan Reddy, GlobalX ETFs research analyst.