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Oil supply increases ‘will be the driver’ for lower prices: Strategist

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Tortoise Portfolio Manager Rob Thummel joins Yahoo Finance Live to discuss the outlook for oil and energy.

Video Transcript

JULIE HYMAN: Oil prices and oil stocks have been the big winners thus far in 2022, even though we've seen some volatility come back into the market this week that pushed those oil prices back below $100 a barrel. So what's the best way to play what's been going on in the oil market?

Let's bring in Rob Thummel. He's a portfolio manager at Tortoise who tracks the energy shares. Before we get to the specific stocks, I do want to talk sort high level about what we are seeing in the oil market, Rob, and sort of what you expect now. Do you think that this shock is done? I mean, earlier in the week last week, we were hearing calls for $150 or even $200 oil this year. Do you think that's off the table or still on?

ROB THUMMEL: Yeah. So I think if you look at the futures curve, Julie, you'll see that oil prices are substantially lower in the upcoming months. and I truly believe that could play out that way. We're here right now for a couple of reasons. Number one, the global oil market is undersupplied. Global oil inventories are at the lowest level they've been in seven years. So as a result, oil prices are at the highest level they've been in seven years. And so how do we get out of it?

We need to see increases in the oil supply. And that's likely comes from OPEC initially. The US and Canada can participate going forward as well. But that will be the driver to get these oil prices lower. And the futures curve a year from now is probably in the 80s. It clearly is showing that there will be a response and more supply. And we've got to do that before we get demand destruction because that, from my perspective, is the thing that everybody in the energy sector wants to avoid.

BRIAN SOZZI: Rob, did $200 a barrel oil, did that ever seem realistic to you? And is it right to completely remove a call like that off the table?

ROB THUMMEL: Yeah, Brian. Yeah. I mean, $200 oil, obviously, I've never seen it. I mean, maybe on an inflation-adjusted basis. But, effectively, you've never seen the absolute $200 barrel of oil. I'm still skeptical that we'll ever get there. The duration of this is always the question of, how long can oil stay elevated before you see a supply response?

And so there are scenarios on the table. Obviously, you've got the largest-- or the second largest oil producer in the world-- that's participating in a war. And reducing the supply from the second largest oil producer in the world would have a significant impact and cause prices to rise dramatically. But longer term, there will be responses from other large oil producers that will keep oil prices from being elevated for an extended period of time. And I hope we've seen the highest oil prices that we're going to see rather than higher oil prices in the future.

JULIE HYMAN: Rob, let's get to what you do and how investors should play it through stocks specifically. We've been watching the XLE this year, the ETF of course that tracks the energy stocks and the S&P 500. And, whew, it's been a nice run to say the least. Even over the last year as well we have seen it increase. But it's up 33% year to date. Are investors-- I know that you are a stock picker. But what is your general feeling about how the energy sector is going to continue to perform, especially if oil does not continue its climb?

ROB THUMMEL: Yeah. So the great thing about the energy sector, Julie, even without this rise in oil-- and like I said, I'd rather see oil come back down in the 80s and see natural gas prices in Europe come back down as well for the entire sector for consumers as well. The great thing about the energy sector is it generates a lot of cash. And it's paying back a lot of that cash to the shareholders in the form of dividends and stock buyback. And those are two attractive fundamental characteristics that have become more compelling to investors, especially in a rising interest rate environment and a slower economy.

And so that's not going to change. The sector will continue to provide significant dividends and the potential to buy back a significant amount of stock if share prices stay low. And so that's why we think that investors have decided to return to the sector. In rising interest rate environments, typically, historically, you've seen the energy sector do pretty well. And, obviously, I think we all think we're probably in a rising interest rate environment for a while.

BRIAN SOZZI: And, Rob, one of those investors that have returned to the space in a big way-- we've been tracking this growing investment in Occidental by Warren Buffett. Is Occidental doing something that an Exxon is not doing, that a Chevron is not doing?

ROB THUMMEL: Yeah. Well, a couple of things. So, Brian, Occidental's an interesting story. It had a bunch of leverage a little over a year ago at the exact wrong time. The timing of an acquisition just didn't work out very well. Actually, Warren Buffett did a preferred offering, a participated preferred offering that helped Occidental temporarily finance that acquisition. Things have changed entirely.

Occidental is predominantly an oil producer. So they're benefiting a lot from these higher oil prices right now. But this is the other factor that a lot of energy companies are doing that's I think changing the game for energy companies and how investors perceive them. So Occidental has actually embraced the energy transition and is participating. And what I mean by that-- you're going to hear them talk a lot about carbon capture.

So that's actually capturing carbon emissions from the air, transporting them, sequestering them. What that means is storing that carbon underground. From an energy transition and a decarbonization perspective, this will be very significant. And Occidental has invested a lot of resources, a lot of money, and will continue to expand this area of line of business. And when you combine energy security that Occidental can provide, plus energy transition that they're also participating in, that's become more compelling for energy investors going forward.

JULIE HYMAN: Rob, just super quick, do you guys own OXY?

ROB THUMMEL: No, we don't We don't own Occidental. No, we don't own Occidental. We own a lot of the infrastructure companies because we think that that's a great way to play this sector.

JULIE HYMAN: Well, we'll have to have you back soon to talk more about that because we're out of time for the moment. Rob Thummel, thank you so much for being here. Appreciate it. Portfolio manager at Tortoise.