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Putin’s war escalation highlights that Russia ‘is in it for the long-haul,’ analyst says

Matt Smith, Kpler Crude Analysis Co-Head, joins Yahoo Finance Live to discuss Russian President Vladimir Putin's announcement of a partial military mobilization and what Russia's war with Ukraine means for oil prices.

Video Transcript

INES FERRE: Oil prices giving back gains after surging this morning. This after Russian President Vladimir Putin announced a partial military mobilization for the war in Ukraine. Gas prices are also rising with the US daily average coming in at $3.68 a gallon today, snapping 98 straight days of declines. For more, let's bring in Matt Smith, Kpler co-head of crude analysis. Matt, thanks for joining us. Just when you thought that things couldn't get worse for Europe, how significant is this development when we're talking about the European energy crisis?

MATT SMITH: Yes, it's very significant. So this is just highlighting the fact that Russia is in this for the long haul. Obviously, as Ukraine have made territorial gains or regaining of land in recent days and weeks there, you have seen this response from Putin.

So this is just one more escalation along a series of escalations we've already seen in terms of Nord Stream pipe flows being cut there. We've got crude sanctions coming through in early December. And now you've got this mobilization of troops as well. So this is going to be supportive for crude prices going forward here. There's just a huge amount of uncertainty. But this doesn't seem like it can end well.

AKIKO FUJITA: Yeah, Matt, we were talking about this at the top of the show about some of those headlines coming out of Europe today, Germany number one, nationalizing one of their key utility here because of what they are having to deal with, especially with natural gas and that uncertainty around the Nord Stream pipeline. What does the supply pipeline look like for Europe right now?

MATT SMITH: Well, pretty good at the moment. So, Akiko, from the perspective that they've refilled storage as much as they possibly can, that's looking really rather strong here. But there's such unknowns going ahead here into winter. We don't know how harsh it is going to be. There's also been this easing of sanctions on coal as well. So there's this real kind of supply grab that's happening from Europe right now to make sure that it's got the supplies as we head into colder temperatures here.

But that's really the question that is unknown just because Europe historically has relied on Russia for sort of 35%, 40% of its needs in terms of natural gas. And so that's the big question mark, how cold is that winter going to be? But the key takeaway just right now, what has been the case already in Europe here, is they are already dealing with extremely high prices here. And they could spiral even higher here if temperatures continue to drop as we head into winter.

INES FERRE: And Matt, as you head into winter, I imagine that more diesel will be needed, heating oil will be needed. How does this position US refiners going forward?

MATT SMITH: Yes, sure, so it could be a case of musical chairs. And we've seen it in other commodities, say, in terms of fuel and all of that. The US sends the vast majority of its diesel into Latin America right now. We could be seeing that pull to Europe, should prices really start to spike in Europe there. But at the same time, too, as well, as sanctions start to kick in, they don't kick in for the clean products until early next year.

But we could see that diesel-- you know, it's nearly a million barrels a day that goes into Europe from Russia-- instead, trying to find a home elsewhere. So we could see that perhaps going into Latin America. You see the Middle East pushing more into Europe. There are a lot of moving pieces right now. And those will only continue to play out further as we get closer to these sanctions kicking in.

AKIKO FUJITA: Matt, here in the US, on the one hand, we're hearing from the White House. President Biden has said, look, we're going to lend a hand to Europe, especially when it comes to natural gas supplies. Obviously, that's not an overnight fix. At the same time, we're already hearing some warnings from utility companies who are saying, those prices, even in the US, are going to tick higher come winter. What should American consumers be bracing for?

MATT SMITH: High prices. So in terms of the natural gas price now, yes, it's nowhere near what they're seeing in Europe, you know? But we're still seeing prices double what they were kind of a year ago. And so that's only going to result in higher utility prices here in the US. But at the same time, too, as well, it's the case of in the land of the blind, the one-eyed man is king.

And that's the situation for the US. So we have a plethora of domestic production here. We're hitting record production in terms of natural gas. The same on the crude and products front. We're very well supplied on that side of things. But at the same time, too, we are connected to global markets. And global markets are influencing those prices. That happens more on the crude and the product side of the picture. But as the US is becoming one of the leading exporters in the world, those prices for natural gas in the US are much more tied to international prices. And they're being pulled higher as well.

AKIKO FUJITA: And finally, Matt, we were talking today about gas prices ending that streak of 98 straight days of declines. We're talking just a penny higher, but should we anticipate those prices to go higher, going into year end as well, especially for drivers at the pump?

MATT SMITH: So, Akiko, well, it's a seasonal thing. And so you see this seasonal trend of gasoline prices at the pump moving lower into the end of the year here. So as long as crude prices remain around these kind of levels, then we should see that gradual decline at the pump there. That said, any swift move higher in the oil price is only going to take gasoline prices, prices at the pump, high with it, unfortunately. So I think we're nowhere out of the woods yet in terms of the price of the pump here.

AKIKO FUJITA: Matt, always good to get your analysis. Kpler co-head of crude analysis, Matt Smith, joining us there.