Oil demand at new record as inventory rapidly declines

Pavel Molchanov, Raymond James Energy Analyst, joins Yahoo Finance to discuss the OPEC+ meeting, demand in oil, and oil production.

Video Transcript

- I want to continue this conversation on the energy markets really with a specific focus on oil now with Pavel Molchanov. He's a Raymond James Energy analyst. Pavel, thanks so much for joining us today. Now, I want to start on that OPEC-plus meeting that Jared really ended with. Essentially we have this impasse here. I think some folks thought that this impasse would have been broken by now. What are you anticipating from OPEC-plus moving forward, especially as the oil price spikes essentially are encouraging some of these countries to take more of an individualistic approach?

PAVEL MOLCHANOV: Right. It is indeed the case that after a year and a half of amazingly strong discipline on the part of OPEC and Russia, those countries are breaking apart a little bit in terms of their cohesion as a group. Look, $70-$75 oil will do that. There is simply not the same sense of urgency that existed 12 months ago or even six months ago, so more appetite on the part of individual members to go it alone.

- So then what do you anticipate comes next? Because I've been reading, and some folks are suggesting that there's a couple of different scenarios that happens here. One, there could be a flood of oil to the market as each of these countries decides to ramp up some production. But also then, that we could see essentially the current deal stay in place. What are you thinking happens next?

PAVEL MOLCHANOV: Well, the short answer is that politics of OPEC is hard to predict. And I think ultimately, every member will do what they think in their own best interest. And so it may well be that Saudi will stay disciplined but some of the smaller members will ramp production back up. Again, that has historically been the case in the context of recoveries. But the other question we need to ask and, indeed, the OPEC countries are asking themselves is, what's going to happen with demand?

We know that demand has improved a great deal versus the bottom of a year ago and in fact, even from six months ago. But now we're getting some headlines related to the spread of the Delta variant that are more concerning perhaps than they were 30 days ago. And so part of the decision-making process for OPEC as a whole and every member is they want to modulate supply in accordance with what they expect demand to do. And as we're seeing, that is highly variable, literally on a week-to-week basis.

- And I'm glad you mentioned that point about the demand because there has been such a bullish outlook as we have seen this pent up demand, especially as folks are starting to hit the road and start traveling again. Do you think that that demand is going to wane as we do see this Delta variant really start to sweep the entire globe and we start to see some countries essentially put in place some of those restrictions again?

PAVEL MOLCHANOV: So here's the amazing statistic. Today, 940 million people, almost a billion people worldwide are in what we define as lockdown, which is closures of non-essential businesses. That is actually more than in January. Now, we know that the US has essentially opened up, and we know that most of Europe has opened up.

But there are plenty of emerging markets, like India, Indonesia, South Africa that are in worse shape today than they were at the beginning of the year. And even some of the developed economies, like Japan, of course, hosting the Olympics pretty soon, Taiwan, Korea look problematic as well. So it's not enough for us to just look at the domestic picture. Let's remember, 80% of the world's oil is used outside of North America. So we need to take a holistic view of this.

- I want to ask about US crude, if you think that we could see an uptick there in that production.

PAVEL MOLCHANOV: Well as far as supply in the US and, indeed, just about anywhere outside of OPEC, that's not likely at all in the next six months. Capital budgets across the board this year by oil companies are the lowest they've been in decades. Maybe that will change in '22. We will find out at the end of the year.

But as it stands, we're not looking for US supply or Brazilian supply or North Sea supply to pick up for quite a while. The entire industry is so fixated on discipline-- capital discipline, supply discipline. So OPEC countries have the ability to ramp production back up at their discretion, but in the US the rig count is at a level where there's just not going to be production growth in the foreseeable future.

- And just last one for you here. I think this is the question that so many folks are really wondering because a lot of consumers have been paying a lot of attention to what's been happening to oil lately because they've been feeling the pain at the pump, so to speak. So let's just ask, how much longer you think that that could continue?

PAVEL MOLCHANOV: Well, I'll take a step back and say that US consumers actually have it really good when it comes to fuel prices, globally speaking. Yes, of course, prices are higher than they were a year ago or two years ago. But compared to what their counterparts pay across Europe, in Japan and Australia, it's much cheaper. Even in California, the most expensive gasoline, it's cheaper.

So if demand gradually recovers to pre-COVID levels by, let's say, next summer and OPEC continues to ramp production back up, we think that the price of crude, the main determinant of gasoline, obviously, will be flattish to slightly up from current levels. And it's worth pointing out, the commodity market is actually signaling that prices will go down from current levels. We disagree. We think prices are more likely to be higher, not dramatically, but maybe a little higher by the end of the year than they are today.

- All right. Pavel Molchanov, Raymond James Energy analyst. Thanks so much for joining us today.