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Russia can ‘go through a severe downgrade’ of oil production, Rystad Energy SVP says

Claudio Galimberti, senior vice president of oil markets analysis at Rystad Energy, joins Yahoo Finance Live to discuss bullish and bearish factors weighing on oil prices.

Video Transcript

JARED BLIKRE: All right, and we're going to stick with the oil story and energy prices. We've got to get to Claudio Galimberti, the Senior Vice President of Analysis and Oil Markets at Rystad Energy. And, Claudio, you were listening to Rick here. I've got to ask you about this energy situation. Have we seen the lowest, maybe, for a little bit of time in gas prices and maybe crude oil as well?

CLAUDIO GALIMBERTI: Thank you for inviting me and thank you for the very difficult question about the direction of prices. At least probably, I can attempt to get to an answer there. In the very short-term, at least, we see some key factors that are bullish on the oil price complex and some factor that are clearly bearish.

So on the bearish side, we have to mention the risk of a recession in Europe, and the lockdowns in China, and the real estate sector in China. So these are clearly concerning. There are concerns that I know of. Recently the ECB, and also the major governments in Europe have made it clear that they will not allow, easily at least, the European economy to fall into a recession. So that should be supportive to some extent.

On the bullish side, we have to mention the fact that we have yet to see what's going to happen to the Russian crude once the embargo sets in, which is supposed to be in the next few months-- so starting in December, the embargo by Europeans of the Russian imports of crude. So I would say that if you're asking me about the oil prices, it's, as usual, extremely volatile.

Probably in the past few days, we have seen more bullish signs than bearish, because the bearish signs have been priced in. As far as the gasoline prices, this adds another layer of complexity, because then you need to consider what's happening to the refining side of things. But all in all, I would say that probably we have seen the bottom of the market for the time being.

Also consider that OPEC and OPEC-plus will not allow the prices to-- or will not try, at least, attempt to sustain the prices if they fall below a certain threshold.

JARED BLIKRE: Well, and let's stick with OPEC-plus plus and maybe reduce the complexity of this next question here. We saw OPEC-plus reduce-- well, try to limit the amount of barrels that were increased or that are going to be pumped for the month. I'm not getting my words straight, but the net effect is that they have already not been living up to their quotas.

I've seen deficits ranging from estimates of 2 million, 2.5, 2.7 million barrels per day. Does OPEC-plus really have the spare capacity, if it were needed, to enter the market again?

CLAUDIO GALIMBERTI: Excellent question. This, indeed, reduces the whole complexity to one key number, which we always have to bear in mind, which is, what is the spare capacity in OPEC? And the effect is spare capacity-- and we deal with this at Rystad in a very detailed, bottom-up way. We know it's not that much.

So if you take into consideration Saudi Arabia, UAE, and part of Iraq, we can get to close to 3 billion barrels per day. And that would be the capacity that could be deployed within the next, let's say, 60 days-- 30 to 60 days. So you still have a lag there.

Now, is that enough? Well, now we enter the realm of complexity in the sense that it very much depends on the size of the outage elsewhere. So Russia can, in fact, go through a severe downgrade of its production starting next year.

And if that is the case, the key question is, can OPEC-- Saudi Arabia, United Emirates, Iraq, in particular-- fill the gap? It might be the case that they can't, right? Or also, it may be very well the case that they don't want to, because that would sustain the prices.

As far as the difference between, you asked me initially, the difference between the pledges of OPEC-plus and the actual production, according to our detailed estimates, it's actually 3 million barrels per day right now. So they are not fulfilling their pledges, which is also a signal that, in part, they can't, and, in part, they don't want to. So that's also a clear signal coming from them.

JARED BLIKRE: And I also wanted to ask you about the SPR. That's the Strategic Petroleum Reserve-- somewhat controversial in the US-- not designed for and not supposed to be deployed for political purposes, but it always ends up in the political realm. Nevertheless, this was an idea, by my recollection, initiated maybe two decades ago when the US was not pumping shale, when the US was not energy dependent. I'm wondering how important is the SPR to United States energy dependence going forward, regardless of whether it's 60% full or 100% full?

CLAUDIO GALIMBERTI: Another excellent question, I have to say. So the Strategic Petroleum Reserve were actually implemented the first time 50 years ago. And this was a time when the United States was heavily dependent on oil imports. And it became even more so in the early-2000s, right?

So this is when the United States was importing 10 million barrels per day, even more. Right now, we're importing much less because we have, specific on a net import basis, we have the Permian-- the big Permian production in US shale oil. So how important are they in dealing with supply-- let's call them supply dislocation?

I would say that they're very important in the case you, for instance, have a hurricane. A hurricane comes through the US Gulf Coast, it knocks off temporarily some production facility-- this is a good use, in my view, of the SPR, because you have a temporary supply outage.

How about using it to tame the prices? That's a little bit more complicated, because, I mean, if you're trying to address a structural problem with SPR, then you are at a loss. And the reason for that, the SPR are not unlimited.

So we started the SDR at the beginning of the year with 600 million barrels, in Strategic Petroleum Reserve, of crude. Right now, after what Rick said earlier, right now, we're down to 440, 430. So they are not unlimited.

Before long, you will need to stop releasing the SPR, and this is going to happen in the next couple of months, and then start refilling it. So if I think of what is the SPR equivalent in terms of demand right now, we are down to 20 days. So it's concerning, right?

So if we have a major, major disruption, then our SPR will not last for many weeks. So the use of SPR in a nutshell, if we are addressing a temporary supply outage, then, yes. If we're addressing a structural shift in the market, then, no.

So I would say that what they did in April was probably very good-- so it was a correct use of SPR. Because back then, we didn't have stronger US production. But right now, we do. So the Permian is growing fast.

JARED BLIKRE: And we appreciate your time here. Claudio Galimberti, Senior Vice President of Analysis Oil Markets at Rystad Energy.