Oil prices climb as supply cuts increase

Prosper Trading Academy CEO Scott Bauer joins Yahoo Finance’s Akiko Fujita to discuss the energy outlook as more areas across the country begin to reopen.

Video Transcript

AKIKO FUJITA: We've been talking about the big market rally coming on the back of a three-day weekend. Oil's certainly a big part of that. We are seeing WTI today up nearly 3% now. Brent crude up just over 1%.

Let's bring in Scott Bauer. He is the CEO of Prosper Trading Academy. And Scott, it's good to have you on today. Let's start with those moves that we are seeing in the market today. Why are we seeing the-- why are we seeing Brent crude so much higher? It's up 2.8% compared to where-- or I should say WTI--

SCOTT BAUER: West Texas.

AKIKO FUJITA: --why are we seeing that move so much higher?

SCOTT BAUER: That's all right. It's the first day of the week. You know, there's a lot of demand that is starting to come through here based on the opening, right, based on the reopening of states. And-- and, you know, I don't know if it's so much that the data is there that-- that we're seeing cars actually picking up, but it's-- it's the prospect of things happening.

So what that does is, is where is the demand going to come from if we're opening up in the states here? It's going to come from West Texas. And that was a really, really big rally, not just all day here, but into the final minutes of the close today. West Texas rallied almost another percent in the last 10, 15 minutes of the day.

AKIKO FUJITA: It does seem like we're seeing sort of two narratives, right? On the one hand, the reopening is helping lift the oil markets, you know, the sense that demand is, in fact, coming up-- coming back up. Activity is picking up. And then you've got what's playing out over in China and concerns about whether those tensions could play out and whether that could bring demand down at a time when they're already struggling on the economic front. How do you weigh those risks right now?

SCOTT BAUER: Very, very carefully, honestly. And in addition to the risks of the US-China tensions, you know, there's estimates out there now with-- with China reopening and demand ramping up in China that they might get up to 13 million barrels per day in the second quarter sometime, which is not quite where it was a year ago, but very close. So you have all of these dynamics. You have the-- this risk of the US-China tensions, but then being offset by potential demand. So I think if you're looking at the entire oil space, you have to keep any sort of trade that an investor or trader's going to make very, very close to the vest here.

AKIKO FUJITA: So the pickup in the activity that we've seen as a result of the reopening, I mean, how should we be looking at that in terms of the big supply glut that we have seen build up over the last two months? How far does this go in-- in clearing that?

SCOTT BAUER: Right.

AKIKO FUJITA: And then we'll talk about OPEC on the other end.

SCOTT BAUER: Sure. Sure. And that's-- that's a real tough one because, unfortunately, and I don't mean to be a glass half-empty, and I'm not a glass half-empty person, I'm not quite as optimistic about some of the drawdowns that we might see from the massive supply and storage glut that we've seen coming over the next few months. You know, you look at Baker Hughes. They came out. They just said that rig count was down again by 21 rigs last week-- or fell by 21 last week.

They now have 237, which is more than 60% less than it was just two months ago. So what is going to happen with the massive amount of supply with the storage we have? I don't think it's going to get depleted as quickly as people think it's going to.

AKIKO FUJITA: So what does that mean for oil prices then?

SCOTT BAUER: Well, what it would mean, is this-- this rise up that we're seeing, this-- this, I don't want to call it a shock, but this quick rise up that we're seeing now, I think really ebbs a little bit and, if anything, is going to put some pressure back to the downside.

AKIKO FUJITA: We've got another meeting coming up in June with the OPEC members. And obviously, they've already agreed to a certain supply cut. Is it just extending that enough to keep prices where they are right now? Or do they need to add additional cuts in order to at least try to rebalance the market?

SCOTT BAUER: It's a great question. And I still really feel that the impetus behind the oil market is more on the demand side than it is on the supply side. So I think that they are going to keep the status quo. As long as OPEC and Russia, so OPEC-plus, are adhering to these initial cuts that we're supposed to get, which they are, in May and June, I don't think they're going to raise it.

I think that they're going to just kind of play it out a little bit and feel out the demand side of the market. And you know what, if things change, I think they'll be willing to change real quickly with it. But I don't really see them increasing those cuts in the near future.

AKIKO FUJITA: So the thinking is now as we go on the next few weeks, the next few months, the reopening process will continue with-- you know, in phases. What's the one risk that we should be looking out for? The thinking is if economic activity improves, then demand pushes higher. That's sort of a very overly simplified way of looking at things. But what are you looking at? You think that could kind of derail the gains that we've seen so far?

SCOTT BAUER: So it's not really oversimplified. It's not. Because the entire market right now, whether you're looking at the commodity space like oil, other risks on or off asset classes like-- like metals, gold, or the equity market, it's really trading now off of the reopening of the economy and where the growth or-- or the bounce back in the economy is going to be. So the risk is that we reopen and we get data in a week, or three weeks, or six weeks, whatever it is that says, you know what, this didn't go as well as we had hoped for.

Now, none of us hope that that is the case. We all hope that these-- these increased phases go very well, very safely. We want that. But I think the overall biggest risk to the entire market, not just commodities, but the equity market as well, is that this reopening sets us back, and that we have to pull in the reins a little bit and say, you know, no, we can't do this yet. We have to wait a little bit. Or on another scenario is maybe a second wave, which all the experts and, you know, scientists are predicting, maybe that hit sooner than expected.

AKIKO FUJITA: Yeah, like so much of what we talk about, a lot of it is going to depend on what happens on the medical front.

SCOTT BAUER: Sure.

AKIKO FUJITA: Scott Bauer, always good to talk to you. Thanks so much.

SCOTT BAUER: You, too, Akiko. Thank you.