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Oil market is ‘self-sanctioning’ Russian energy, analyst says

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Kpler Lead Oil Analyst of the Americas Matt Smith joins Yahoo Finance Live to discuss the rise of crude oil prices as well as the outlook for the market.

Video Transcript

AKIKO FUJITA: Matt let's walk through the price moves first before we talk about where the flows are going right now. How much of the spike that we have seen over the last few days has already baked in what some would say is inevitable, the fact that Western countries are likely to go after Russia's oil and gas exports?

MATT SMITH: Akiko, what I think we've seen over the last few days is really the realization that there may be a material supply loss, in terms of those rushing barrels. And so even though there haven't been specific sanctions placed on the energy side of things because, you know, the Europeans don't want to disrupt the natural gas flows or, indeed, the crude flows, what's happened, essentially, in the last few days is self-sanctioning, where the countries and the companies and the tanker companies are not wanting to buy or transport that crude oil.

And so what that means is, essentially, at some point, that Russian crude is going to get absolutely shunned, 100%. And we're talking about 7 million barrels a day, in terms of those exports there. And so the realization of that essentially being taken out of the market and having to be replaced from somewhere else is why we've seen prices rally so much over the last few days.

BRIAN CHEUNG: Matt, it's Brian Cheung here. I mean, on the US side of things, what seemed to be the policy stance was that they were not originally going to sanction Russian oil and energy, and now it seems like they haven't necessarily ruled that off the table. I mean, what would the significance be if the Biden administration did want to take a stance against Russian oil imports? I mean, is that even that substantial to the US economy?

MATT SMITH: It's a non-issue, I think, Brian, because what they've done is put these financial sanctions in place. You know, they've wanted to hurt the Russian economy. And it's playing out that those energy flows are getting impacted anyway, and so there's nothing really they'll gain by putting sanctions on the energy side of things.

In terms of the direct import impact on the US side of things, the US doesn't import that much from Russia. That said, it's still bringing in sort of like 400,000 barrels a day, something like that of gasoline, of diesel, of fuel oil. Indeed, even just today, we're seeing Russian crude discharging on the East Coast, in Honolulu as well. And so the whole world is intertwined, in terms of energy flows. But in terms of sanctions, specifically to your point, I don't think we're going to see them on the energy side of things just because the sanctions are working already here and people are essentially shunning Russian energy.

AKIKO FUJITA: And Matt, you've put out some good data in terms of where those deliveries are going right now. You say you're not seeing a significant slowdown just yet because these are contracts that were signed before the invasion that are now being fulfilled. At what point do we start to see a more significant slowdown?

MATT SMITH: Sure, probably towards the end of the month. So what we're seeing-- and to your point there, we've seen a couple of LNG diversions. So they've headed into the UK, and the UK have turned them away and they've gone elsewhere in Europe. In terms of the crude exports out of Russia, we're continuing to see them every day. We're continuing to see them going into Europe, those original destinations. To your point there, the reason for that is because of the lag between buying that crude and loading it.

So the situation is now that the people aren't buying that Russian crude. And so by the end of this month, when that should be being loaded and going to these countries, that's when it's not going to be flowing. And so we could just be seeing those loadings put onto vessels and then they're just sat floating because there's nowhere for them to go. Essentially, what it is doing then is taking those barrels out of the market, which then are going to have to be replaced into Europe, be it from the US, be it from West Africa, be it being pulled from the Middle East, and so that's the situation that we've got. But we're not going to see that really for another couple of weeks yet.

BRIAN CHEUNG: Yeah, Matt, as you point out, the kind of flow of the vessels that are actually picking these up is so important. But lastly, I want to just call attention to Iran, obviously a big focus there on a possible deal. What would be the significance of their production coming online? I mean, would it be significant to any sort of relief as we see these prices continue to climb or it's not as impactful?

MATT SMITH: It's a big deal, Brian. So I think that's why we're seeing crude prices pull back today, essentially whispers, rumors in the market that an Iran deal is going to get done. If we saw that coming through, we would see production increased by 1 million barrels a day probably three months into the sanctions being lifted. That's not the main kicker here. The main kicker is that there's so much floating storage built up of Iranian crude ready to go now that once sanctions are lifted, you would immediately see the physical impact of those barrels hitting the market. And so that is having that downward pressure on crude today, if it got done.

Yes, the deal is somewhat priced into the market, but it would help keep prices in check because it would be putting more supply back onto the market here. You know, the US administration has only got a couple of bullets ready to fire here, in terms of trying to keep prices in check. They did the emergency SPR release. That hasn't really worked because of the impact on market sentiment, rather than on physical barrels. An Iran deal would have an impact on the physical flows, and so that's why that would probably have more of an impact than anything else.

AKIKO FUJITA: And finally, Matt, we saw OPEC Plus staying put on output numbers yesterday. There's an interesting dynamic here playing out, obviously because Russia is such a big player there. At what point do you see countries like Saudi Arabia potentially stepping up and say, we're not necessarily going to go along with this?

MATT SMITH: Well, what we tend to see out of OPEC and what we've seen from them in the recent months is that they try to keep the politics aside and they try and let the dust settle on things. They did that with Omicron back in early December. They did it just earlier this week, in terms of the meeting lasting just a few minutes. And so I think what we're going to do is just see them being steady as she goes, continuing to put supply back onto the market. After all, with the price of over $100 here, a lot of OPEC members are really happy, in terms of how much revenues they're making. And so in terms of what we get out of OPEC, I don't think we're going to hear very much in the coming weeks.

BRIAN CHEUNG: All right, Matt Smith, Kepler lead oil analyst of the Americas, thanks so much for stopping by this morning.