Kpler Lead Oil Analyst Matt Smith joins Yahoo Finance Live to discuss the surprise production cut from OPEC+, oil and energy demand growth, rising interest rates, and the outlook for the economy.
Video Transcript
- Joining us now, Matt Smith, Kpler lead oil analyst for the Americas. Thank you so much. So, Matt, I mean, we're looking here at this surprise cut here from OPEC+. I want to get your reaction to it and what you think prompted it.
MATT SMITH: Well, I think, Rachelle, it's just been this expectation from OPEC+ and particularly from the Saudis that demand growth isn't as strong as they expect it to be going forward here. And so because of that, they're just going to take barrels off the market. We saw this happen in October as well when OPEC made 2 million barrel a day cut. At that time, there weren't immediate signs of demand weakness. But in retrospect, they were absolutely right to make those cuts. And still, we've seen prices moving lower here.
And so now, given what we're seeing, they're essentially targeting prices, right? And so they want a price in the 80s, essentially, because it meets their budgetary needs. But it also means that prices aren't too high so they cause demand destruction. So there really is that sweet spot in the mid 80s there on a Brent basis. So that's what they're targeting. And they're thinking that if they didn't make these cuts going forward here, then prices would continue to drop lower.
- It's interesting because we did see that "The Financial Times" was reporting that some sources think that Saudi Arabia was a bit annoyed with the Biden administration publicly saying they weren't going to replenish the strategic reserves after saying that they would-- after making reassurances that they would. What do you think of that? Could there be some political aspects in here that could also be factored in?
MATT SMITH: There could be. I know that some people are pointing to this cut and saying, well, look, it's going to be taking so much production out of the market through the rest of this year. It's essentially a natural offset for the SPR release that we saw from the US last year. That may be the case. That may not.
Regardless, OPEC is focused on stability in the market here. They don't want choppiness. They don't want volatility. They do want a price in the 80s. And so, regardless of the politics, they are going to be doing what is in their best interests. And in their best interest here is to take barrels off the market to get prices that little bit higher.
- So what's your longer-term outlook, then, for energy equities? Obviously, we've seen this jump right now.
MATT SMITH: Mhm. I suspect we see them faded in the same way as we see that for the oil price, too. So you have a situation here, Rachelle, basically, for 2023 where you have China coming back into the demand, into the market, providing that demand growth, strength. The complete offset for that is the Western world hiking interest rate hikes, hiking interest rates both in Europe and in the US. And the lagged impact of that is going to be causing slowing oil demand, slowing economic growth, and so potentially recessionary conditions.
And so those two things mean that we should see prices around this kind of low 80s level through this year here. That's our expectation. We should see some strength as we go into summer here, with summer driving, season refineries coming out of maintenance and really running hard. But the back end of next year is likely to be weaker than the front end here. And so in terms of energy equities, I would recommend fading them, essentially, because we've had a really good pop across the board here. We should see a bit of give-back after today.
- And, obviously, consumers probably seeing these headlines, crossing and wondering, what does this mean for prices? March and April, as you mentioned, that's when refineries are cranking up some of their summer blend gasoline. What are the expectations for how this filters down at the pump?
MATT SMITH: We typically have a seasonal trend of gasoline prices rising ahead of summer driving season there, so through March, April, May time. And so that would be happening, even if oil prices were remaining flat. And so with this announcement, this is going to provide a bit of support for crude prices. And, as we know with prices at the pump, they shoot up like a rocket but float lower like a feather.
And so this is going to provide a bump at the pump, essentially. We're at $3.50 on the national average now. So we should expect it to continue ticking higher here in the next month or two, perhaps heading towards that $4 a gallon level there. So, in summary, higher prices, basically.
- And, obviously, energy is a global story. And it has been stoking some potential for reflation fears. But it sounds like you think, at some point, this is going to end up fading, then. So for people who are concerned about how this will affect inflation and perhaps whether it will be essentially another tightening for the Fed, as we do see this crunch on the dollar as well, what are your expectations?
MATT SMITH: The Fed is going to stay their course, right? They're looking at quelling inflation over everything else. And that's going to be to the detriment of economic growth here. And so economic growth slows. You'll see that reflected through whether it's a series of dominoes with the housing market, with jobs, et cetera.
And so because of that, that's ultimately going to impact oil demand. And so that should weigh on oil prices in the back half of this year. That's, essentially, because of the negativity in the broader economic backdrop here. And so not really great news for prices because even if we are seeing them lower, it's because of weaker economic conditions.
- We'll certainly be keeping an eye on that. Matt Smith there, Kpler lead oil analyst for the Americas, thank you for joining me in this morning.
