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Oil market is ‘a coiled spring’ ready to explode, strategist says

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RBC Capital Markets Managing Director of Global Energy Strategy Michael Tran joins Yahoo Finance Live to discuss velocity in the oil market, the ban on U.S. imports of Russian oil, and the possibility of a recession.

Video Transcript

JULIE HYMAN: All right, we're going to get back to commodities for just a moment as well, and energy in particular, as we see the volatility in the energy markets this morning, but what, of course, has been a mostly higher market, with the president announcing yesterday that ban on Russian oil imports and then a lot of discussion about what the US industry is going to do in this regard as well. And then there is a call out from RBC that we could see potentially oil spike to as high as $200 this summer, trigger a recession, and then fall to $50.

Not the base case of Michael Tran, digital intelligence strategy at RBC Capital Markets and managing director of global energy strategy, but a possibility. Michael, thank you for joining us this morning, by the way. That call definitely got our attention, even if it is not your base case. What's the likelihood that that could happen, though, a spike to $200? And what would have to happen first to make that occur?

MICHAEL TRAN: Look, Julie, I know we ticked off the segment talking about how the oil market is taking a bit of a breather at the moment. The commodity market is taking a bit of a breather after moving at really, simply, warp speed since this war started about two weeks ago. I think the bottom line here is that the fundamentals of this oil market have been very strong for quite some time. We've clearly been grinding higher for much of the past year.

What we've really seen is the oil market has been a coiled spring. You've sprinkled some geopolitical risk, you turn that into geopolitical reality, and all of a sudden, what we've seen over the course of the past 10 days, is just this extreme escape velocity in the oil market. Now we've clearly been moving higher really, really quickly. The bottom line here is, when we think about the buyers' strike of the Russian barrels, those barrels being shunned by the market, that's a really, really big number. We're working with something about 3, maybe 4 million barrels a day of Russian exports that will be shunned, have been shunned. And we need to find replacement barrels for that.

And as a function of that, there's really just not enough surge spare capacity globally to make up for that. So we're expecting a really large deficit. And so when you think about the fundamentals that have been very strong in this oil market, when fundamentals get taken over by fear, oil prices can go materially higher than where they are now.

BRIAN SOZZI: Michael, we're so locked in on that $200 a barrel suggestion. You also note in the same breath, though, that you could see prices go from $200 back down to $50. Should they hit $50 a barrel after rising that high, is the US in a recession?

MICHAEL TRAN: Yeah, look, so Brian, great question. I mean, again, $200 is not our base case. $50 is certainly not our base case either. But we've kind of seen a playbook like this before, right? When's the last time we saw gasoline prices in the US rise to $4 a gallon? Well, that was 2008. We all know how that story ended, right? We saw prices move materially higher. And then prices came off very sharply. And again, we know what ensued in the subsequent months to that.

So the bottom line here is, when we think about the fundamentals of the oil market, very strong, what would be a more healthy oil market would be a slow and steady rise higher rather than gapping significantly higher. And any time you see gasoline prices-- right now, over the course of this week, sticker shock every single day this week. We've hit a new record high. We're $4.25 a gallon at this point. So there are certainly consumers feeling the pinch at this point. And with everything being so much more inflationary, that makes us nervous.

BRIAN SOZZI: Michael, can you frame this for us? Because we've seen gas prices, they have started to rise pretty significantly. California, I believe, well over $5 a gallon now. What does $150 oil look like to prices at the pump? And then where would they be at $200 a barrel?

MICHAEL TRAN: Right, look, I think what's really important here is when we run our statistical models, to get to $150 a barrel, that's roughly $5 a gallon at the pump nationwide. So let's call it about $0.75 from where we are now. When we think about $200 a barrel, you know, you're looking at $6 plus a gallon at the pump. And we're all already really feeling the pinch.

And it's not just gasoline, but it's paying for a loaf of bread, and it's paying for every consumer good. So from that angle, everything is getting much more expensive. Get ready to pay much, much more at the pump. I mean, this summer is simply going to be a summer of disarray as it pertains to the oil market and what we'll all be paying at the pump as consumers.

JULIE HYMAN: Michael, maybe you can help sort something out for me. As we talk about production here in the United States and US oil producers' role in potentially helping bring prices down, the industry is saying it's the administration's fault that we have not gotten more permits, that we haven't been able to drill more. The administration is saying it's not our fault. We've been issuing permits. What-- can you give us an unbiased view of what is really going on here in the US oil industry?

MICHAEL TRAN: Yeah, look, I think what's really important is that, look, the Biden administration doesn't have that many more levers to pull. They've already released reserves-- barrels from strategic reserves twice already in the past four months. I mean, when you think about what they're trying to do now-- they're trying to talk to the Venezuelans to try to get them to bring more barrels on-- it's a pretty desperate scenario to be perfectly honest, Julie. I mean, when you think about US producers, we have immense shale resources right under our feet here in the US.

A lot of it is a function of timing, though. We like to think that US shale is very prolific. It's very quick to market, very elastic. But the bottom line here is to be able to secure rigs, to be able to hire frack crews, to be able to secure equipment, drill the well, complete the well, assuming that permitting is in place, like you mentioned, that's a six-month period.

So when you think about from putting that rig down to, first, oil, that's half a year. So from that angle, what we're seeing is that there's a gap that we're dealing with right now, is just too large from Russia. And as a function of that, we're not going to get any reprieve over the course of the next several months. So again, part of it is the policy that we've all been working with for the past number of years. But part of it is also we're not able to surge fast enough. There's really just no real relief valve in sight over the very near term.

JULIE HYMAN: Michael, really interesting stuff, really helpful in understanding everything that's going on right now. Michael Tran, hope to see you again soon, of RBC Capital Markets. Appreciate it.