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Oil prices should ‘find a lower home’ as markets normalize: Analyst

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Wells Fargo Senior Equity Research Analyst Roger Read joins Yahoo Finance Live to discuss the energy markets and the outlook for oil prices.

Video Transcript

- All right, a stark warning from the head of the International Energy Agency. He says we may not have seen the worst of the global energy supply squeeze. Joining us now is Wells Fargo senior equity research analyst Roger Read. Roger, good to see you. Some form of calm has returned to the oil markets, hovering around $100 a barrel, but what is likely if we get a supply disruption this summer?

ROGER READ: Well, I mean, you've seen some supply disruptions obviously or fears of them, right? I mean, sanctions on Russia, outages recently in Libya, and then that's been counteracted a little bit with lockdowns in China kind of off and on. And then questions about whether or not high prices are doing what they're supposed to do, which is push back a little on demand, right? So even here in the US with gasoline, the run to $5. I can't say that we actually have seen it. But there's reason to believe that the push to $5 on gasoline did have a little bit of a demand push-back on consumers.

- OK, and so for some of the larger purchases as well, I mean, you think about airlines that have also had to make fuel accommodations that are seeing higher prices as we had seen in Americans kind of preliminary results that they had put out, how much longer will this also need to be factored into fares that consumers are weathering through?

ROGER READ: Yeah, I mean, if you take our forecast, we look at it and say, we think prices are going to moderate a little bit because you are going to get some supply growth out there in various parts of the world, including North America. You're also going to see demand growth rates decelerate as we come away from the COVID recovery, right?

So we've had incredible demand growth since really the end of the first wave of lockdowns. And so kind of more normalization in the market should allow oil to find a little lower home than maybe the 125 range that we have forecast in the very near term. But you're going to have to balance that against the fact that we put the SPR releases out in the market.

Those are going to end roughly mid-November time frame. So a million plus barrels comes out as maybe we get a supply increase of that. So I would think prices stay elevated relative to prior periods and not so much that we're going to get a collapse in prices just because things normalize a little bit.

- Roger, Julie here. I back on June 20th you guys cut your WTI forecast for this year to just under $109 a barrel-- $108.67 at the time. And indeed, we've seen oil prices pull back since you guys did that. Going out to 2023 and 2024 though, you're looking for more deterioration in prices to $85 for next year, $70 the following year. What we heard from OPEC and the IEA today seem to indicate they don't see any big significant change for maybe the foreseeable future. So do you think that we are actually going to see things more elevated for longer than you had anticipated?

ROGER READ: You're being rough on me.

- Sorry.

ROGER READ: You're making me live with the oil price forecast. I think a lot of it is-- and here's one of the reasons we cut that oil price forecast. So in the second quarter, we had anticipated $125 for oil for Brent, a little less for WTI. But what we got was significantly higher crack spreads.

So the price that consumers were paying was in excess. If you just put it in oil terms in a normal refining environment, it was more like $135 crude. You could even make a case that it got as high as $150 at its extremer levels. So we actually, from what consumers felt, were more or less right. From what you actually saw in terms of the posted price of crude, we were a little too bullish on the near-term crude price. So there are a lot of pieces to it.

But I guess what we look at is what they always talk about in this business is nothing cures high prices like high prices. Nothing cures low prices like low prices. So some moderation from where we are at what we would consider an elevated level right going back even as far as 2014, lower seem more likely than higher. But a forecast is a forecast. Pretty much the moment we make it you can start picking holes in it.

- Roger, so you have-- in terms of stocks, so you have overweight ratings on Exxon and Chevron, but you're underweight I believe in Occidental. Why is that the case?

ROGER READ: So for us, a lot of it is balance sheet driven and cash returns to shareholders driven. So Oxy, owing back to the transaction they did buying Anadarko in 2019, took on a substantial level of debt. And credit to the company, they've reduced a lot of that debt.

But compared to Exxon and Chevron, you're talking about a gross level and a relative level of debt versus production metrics, cash flow, et cetera, that is still much higher at Oxy. So as we think about if prices exceed what we think they're going to do or even if they're on our forecast, the cash returns to shareholders are just going to be much more compelling at Exxon and Chevron than at a company like Oxy.

- All right. Well, Warren Buffett certainly would have something to say about Oxy on that front. We do know continuing to increase his stake. Roger Read who is the Wells Fargo senior equity analyst-- senior equity research analyst-- excuse me. Roger, appreciate the time here this morning.

ROGER READ: Thank you, guys.