U.S. Markets open in 18 mins

U.S. oil production falls by 8% in 2020, largest 1-year drop ever

Dan Eberhart, Canary LLC CEO and "Switching Gears" Author joins the Yahoo Finance Live panel to discuss his outlook on oil after the unexpected move from Opec+ extending production cuts.

Video Transcript

[MUSIC PLAYING]

ZACK GUZMAN: Welcome back to "Yahoo Finance Live." Of course, oil took a big hit in 2020 as economies across the globe shut down. We saw that trickle through the market, of course, you can't forget the moment of the front month contract turning negative. That was something a lot of people didn't even know could happen. But since then, we've seen production and prices rebound in oil.

But looking back on it, the EIA coming out with the exact number of how much production dipped here in the US in the year of 2020, and the number is pretty large, the largest on record, 8% year over year dipping down there in production for 2020. Very interesting there to see it dip to 11.3 million barrels a day. But when you think about where we go from here, also interesting to see prices rise in the new year in 2021 as economies start to reopen as well as tensions in the Middle East rising and OPEC Plus surprising a lot of people with extensions of their production cuts put in place.

But how long will that last, and how will US producers back here at home start to react to the prices that we're seeing hit a year high? For more on that, I want to bring on our next guest. Dan Eberhart is Canary LLC CEO and the author of "Switching Gears." He joins us now. And Dan, when we look at this, it seems like we are at an [INAUDIBLE] point here in 2021. Tell me about the expectations though after that surprise OPEC Plus cut, because the expectation would be that US producers would just come in and we'd see oil prices come back down. Why is that not the case?

DAN EBERHART: Well, I think we're watching a different movie nowadays. I think because there's a lot of capital discipline and the access to capital has been restricted from the oil companies to smaller ones, I think there's capital discipline in the large producers, and so you're really seeing a very slow start or a very muted start, and that's why I think OPEC didn't release more barrels to the market. Because if they thought that US shale could just go in and also add capacity and push the prices down, they wouldn't have done this. They think that there's a little bit of cream they can take, because the oil price of the cold spring right now, and US shale is not going to respond that quickly. So everybody can make a profit, and so that's what the kind of calculus I think you see OPEC Plus taking right now.

AKIKO FUJITA: Dan, we've also seen some moves on the back of this acceleration of vaccines, really in the US, but globally as well. To what extent have we seen that trickle down into prices? When you look at the demand, picture the potential for it to ramp up in a big way once we reach herd immunity, where are we right now?

DAN EBERHART: The markets really think the demand is going to come back, and I think the timing is actually very fortuitous for those that are long on oil, because you're looking at the summer driving season, the time when demand usually peaks kind of May, June, July. And in the run up to that, you've got the supply crunch with what happened with the Texas storm, plus the, you know, what's going on with the vaccines and the COVID bill. On top of that, the OPEC Plus not increasing the supply in the market. So I think you've got a recipe here for a cold spring to explode a little bit and oil to have a good run this summer at the expense of consumers.

ZACK GUZMAN: Yeah, one of the question marks would be what OPEC Plus chooses to do at the next policy meeting April 1. What are the expectations there if we do see oil prices in the interim continue to rise at the rate they have?

DAN EBERHART: Well, first of all, you know, Russia has said that they think the markets are already a little overheated. They don't want to see oil go over 80. You know, look, the Saudis took a million barrels a day voluntarily off the market two months ago, and I think that they're going to put half a million or maybe in the full million back in the market followed by another 500,000 plus, you know, from the rest of OPEC coming back to the market this April 1 meeting.

But I'll tell you, I also thought they were going to do that at the meeting they just had last month, so I guess it's a wait and see approach. But right now, they seem to think that the Biden administration is not going to push back too hard. US shale is not ready to kind of move in and increase supply a lot, so this is a time that everybody can make some money, OPEC Plus plus US shale, can make some money, and so I think we're going to see oil run a little bit here into the summer months.

AKIKO FUJITA: What does that mean in terms of the price action? I mean, when you anticipate a little more pressure building up, are we going to get to 80, or do you think it's going to trade in the 70 range?

DAN EBERHART: I actually think we're going to get close to 90. If OPEC Plus allows the cuts to roll past the April 1 meeting, I think that we're going to be looking at $90 oil early July.

ZACK GUZMAN: All right, wow, $90 oil early July. Of course, there are those factors that could swing us off of that, and we've been talking a lot about tensions in the Middle East recently with the attack on Saudi Arabia. I mean, that's not something that we've really addressed for a bit here. It might be getting overlooked relative to the production cuts, so what's your take on that, and maybe where we sit with those tensions potentially rising?

DAN EBERHART: Well, you know, first of all, I think it should be known that the Biden administration hasn't released the sanctions that were put on the Iranian oil production curbs, and Iran has been unable to increase production the way it wanted to just because of, you know, the oil wells that they have and their underinvestment in their transmission lines. So I think that the tension in the Middle East is really a tinderbox that could explode. I think the market discounts the potential for supply disruptions in the Middle East. And you know, what we saw with this drone strike in Saudi Arabia really could just be the tip of the iceberg or a symbol. I think something much larger could happen, and the market is really a lot less prepared than people think.

AKIKO FUJITA: Well, Dan, we'd love to have you back on when we see those swings as well. Dan Eberhart, CEO of Canary LLC and the author of "Switching Gears," good to talk to you today.