US oil drops as OPEC plans to increase production
Randy Giveans, SVP of Maritime Shipping Equity Research, Jefferies, joins Yahoo Finance to analyze the outlook for the energy market and gas prices.
ALEXIS CHRISTOFOROUS: All right, Randy Giveans, senior vice president of marine equity research at Jefferies, is joining us now. Randy, good to see you. I want to start with one of the reasons why we may have seen this big pullback in raw WTI, the worst in a day since September. They say that because we are seeing an increase in COVID cases, the fear here is that the economic recovery is starting to slow down. And that will hurt the demand for oil. Do you think this is a legitimate reason why we see the market reacting the way it is today?
RANDY GIVES: Hi, Alexis. Yeah, you hit the nail on the head. And to risk passing for a sorority, it’s Delta, Delta, Delta, right? And the concerns there about COVID-19 variants across Europe, even here in the United States – you see California going back on lockdowns. So the big picture over the last six, nine months has really been the reopening of commerce – economic activity is coming back, lockdowns end, people are stealing again, going back to the office, going back to school.
So now, if there are concerns about a return to lockdowns, it is the opposite of what an economic reopening would look like. So it’s certainly on the demand side of the equation, why energy, and especially WTI and crude prices, have come down so badly today.
ALEXIS CHRISTOFOROUS: So we now have crude prices more than 10% below their multi-year high, which was reached, I believe, just over a week ago. So now we are in correctional territory. Do you think there is more to come, more downside to coming here?
RANDY GIVES: Yeah, you know, it really depends. Inventory levels are therefore already relatively low. So these countries, the importing countries, cannot continue to destock perpetually, can they? At some point there will be a restocking of stocks. At the same time, you get an increased offer, don’t you? We heard this weekend that the UAE, Saudi Arabia, Russia, everyone kind of got together, and they’re going to increase their production by 2 million barrels a day over the next five. months by the end of the year.
And then the capacity limits increase again by 1.6 million barrels per day next May. Production is therefore on the rise. That being said, the only reason they are comfortable doing this is because the demand will increase. Now, is the recovery going to take place in August, September? Maybe postponed to October, November. But there will be an inflection.
And when it comes to the oil industry, isn’t it – that’s where we specialize in – lower prices due to higher supply is a good thing, isn’t it? not? More exports, more exports from the Middle East, to Europe, to the United States, to Asia, is very beneficial for INSW, for Scorpio Tankers, for Euronav, DHD. So there are ways to play it, only on a volumetric basis, other than the EMP producers who are certainly negatively affected by the drop in crude prices.
ALEXIS CHRISTOFOROUS: You mentioned, Randy, that one of your priorities is the oil companies. What are your short term prospects there? And what are the biggest headwinds for them?
RANDY GIVES: Yes, so since our outlook article in January of this year, for our 2021 outlook, we’ve pointed out a pretty weak first half. And it was actually the worst six-month period in about 30 years for tanker tariffs. We are therefore coming out of a very strong year 2020, but still a very weak first half. In the third quarter, we expected some kind of rate improvement. Part of that was due to the increase in production from OPEC, but also the history of demand, right? Stocks, as I mentioned earlier, can only go down to a certain level. There must therefore be a restocking.
Demand will increase, right? People will fly. People are going to drive, go back to work, go back to school in the fall. So, is this recovery happening in August? Maybe not. Maybe it’s pushed back to October or November. So I was able to see even more weakness and short-term volatility throughout July, maybe even into August. But as September, especially October rolls around, you move through the next refinery maintenance season, we certainly think there should be an increase in crude prices and especially tanker tariffs, especially in the US. fourth trimester.
ALEXIS CHRISTOFOROUS: I just want to quickly ask you about the impact on gas prices right now. We see crude down 10% from its recent high. You say there might be room for it to grow, to fall even more. Maybe we’ll have some relief at the gas pump. I mean, nationally, gas prices have been holding above $ 3 a gallon for a few weeks now.
RANDY GIVES: Yeah, I definitely think you will, just because of the lower cost of inputs, right, crude. However, the demand is still quite high. I know people might not be comfortable flying to Florida or down to Texas or going somewhere else, but they are comfortable getting in their car and driving. So there is still the summer travel season which will take place in July, even in the first half of August, before the start of the school year. So that’s kind of a competing dynamic there, isn’t it? You have increased demand.
Having said that, you have a decrease in the cost of inputs into crude oil. So for gas prices, they’re likely to stay relatively stable here now. If the crude continues to fall, there is a lag, right? It does not touch the pump immediately. But give it three, four, or five weeks, you can certainly expect gas prices to follow suit.
ALEXIS CHRISTOFOROUS: Okay, Randy Giveans, thank you very much for being with us. We appreciate your time.