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Oil prices rise as drilling rigs increase: 'Supply has to come back to the market,' analyst says

In this article:
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  • COP
  • CL=F
  • XOM
  • CVX
  • RDS-A
  • RDS-B
  • RYDAF
  • RYDBF
  • BP
  • BPAQF
  • BKR
  • HAL
  • BZ=F

Scott Bauer, CEO of Prosper Trading Academy, evaluates the oil trade's supply issue which is increasing prices, potential downward spikes, and how these operational costs affect the consumer.

Video Transcript

- Welcome back. WTI crude oil trading under $80 once again. This is on expectations of higher supply while demand forecasts are being lowered as well. And then Biden, is he going to tap that Strategic Petroleum Reserve? Well, let's talk about it with Scott Bauer, CEO of Prosper Trading Academy, who we welcome into the stream. Scott, always good to sit down with you here. I followed this saga throughout the years, and any time there's a release from the Strategic Petroleum Reserve or SPR, it seems to be fleeting. Why would it be different this time?

SCOTT BAUER: It wouldn't be. It absolutely wouldn't be. It would be a very short-term fix, if you will. But when we've done that in the past when that has happened, you know, it has taken the edge off, if you will, of the marketplace. But you know what, for longer term, Jared, things do have to change. Supply has to come back to the marketplace here. The good sign is for right now is oil rigs, the amount of rigs that-- that get counted out there, that is rising. It actually rose by six last week. It's the highest level that we've seen in about a year and a half. So that means you know, maybe that-- that there will be some more drilling out there.

But you're right-- it is fleeting. And hopefully though, it does take the edge off and buys us time. That's really what-- what it's supposed to do-- is buy us time, so that the landscape, the supply and demand pressures change a bit.

- Scott, this is Emily here. One of the things that you mentioned in a note to us before this show here was that you see crude-- crude oil actually hitting $85 a barrel. We do have barrels trading below $80 right now. What do you think gets us to that 85 level?

SCOTT BAUER: So-- so I think what I actually sent was that I saw it hitting 75 before it would hit 85, because a lot of headwinds right now coming into the space. Now I do think we can hit 85 if Biden comes out and says, no, we are not going to tap the Reserve, and if the COVID cases that are really spiking again in Europe, which hopefully don't come this way here-- if they start to ebb sooner rather than later. But what I really do see is hitting 75 before we were to hit 85.

- So Scott, take us through this. Is 75 year lowest downward projection target for crude oil? And I'm wondering, because we've seen the demand projections from OPEC Plus, the IEA, that's the International Energy Agency-- those have been revised downward for this year as well as-- as next year. And then crude cracking $80, kind of an important psychological level. I'm just wondering what this might be saying about the market place's demand expectations for the next year.

SCOTT BAUER: Well, so first off, the demand expectations, OPEC just downgraded that for the fourth quarter by 330,000 barrels a day. That's-- that's fairly significant. But again, that is due to rising COVID cases. That is really what is weighing on demand right now. And again, hopefully, that goes away sooner rather than later.

In terms of what's going to happen next year, demand, I believe, is-- is going to be pretty high. It's a matter of what is supply going to be. So last year, when we were going through the initial shock to the system from COVID, the pandemic, from-- from the shutdowns everywhere, it was all about demand destruction. Now it's flipped, and now it's about supply constraints.

So that price will ease as more supply comes to the marketplace, which hopefully, that's going to happen. You know, OPEC is kind of running a very hard line right now. So I don't know that that's going to happen there. Maybe we get more production here in the US. But I personally see in the short run here, lots of headwinds. I know everybody is-- myself included, unbelievably upset that we've got to pay for or $5 a gallon at the gas pump. I think that's going to ease here going into the next couple of months though. I really do.

- And then perhaps taking a step back here and thinking about the long-term secular trend, we've been seeing of course, this push towards ESG investing. Of course, the infrastructure package included a number of provisions, specifically investing in electric vehicles and electric vehicle infrastructure. How do you see all of this impacting the longer term demand and price action story for crude oil prices, both for WTI and for Brent?

SCOTT BAUER: You know, longer term is-- is hard to determine, right? As a trader, my mindset is very short term, meaning like, literally, days, weeks, maybe months. Within the next year or so, I don't think the EV space really impacts what happens to the price of oil. I think you've got to look at three, five, 10 years down the road here, and I think that's where you could see a significant drop in the price of crude.

To me, what is impacting crude the most here in the US is that the shale drillers have not gone back to work yet. The reason that they have not, you know, increased their capacity and gotten back to the levels that they were pre-COVID is because they're really concerned about stock prices, they're concerned about their shareholders. And they don't want to go out on a limb again and get caught with these expenses if something-- if demand starts to pull back again. Once that happens, in my opinion, if we can get those shale drillers back there and back up to the capacity and the supply that we saw pre-COVID, AGAIN I think that will ease the price a lot as well.

- And Scott, before we go, I want to take a look at the US dollar index. I have a chart on the YFi Interactive. This is over the last three months, but I'm going to put this out to 10 years, because I see potentially a much bigger formation here. I mean, dollar is very much a non-trending asset, at least the way it is in this basket. But we're in the middle, we just broke up to a what-- a new yearly high or thereabouts.

SCOTT BAUER: Yeah.

- This-- this has a lot of implications for commodities, doesn't it?

SCOTT BAUER: It sure does. You know, stronger dollars typically put a lid on commodity prices, but that hasn't been the case, obviously, over the last couple of months or so. As we've seen the dollar rally, we've seen commodity prices rally as well. But Jared, you make a great point-- you know, breaking out to-- to basically new highs in the dollar here, once we got above that 93 and 1/2 level or so, that was the breakout. If that 93 and 1/2 level now becomes support, where it was resistance here, that dollar is going to stay at least on the trajectory to the upside, which hopefully, that does help put a curb on commodity prices as well.

- All right, we'll leave it there for now. Scott Bauer is Prosper Trading Academy CEO. And thank you so much for joining us.