European energy transition will 'herald the next few years of pain': Analyst

OPIS Global Head of Energy Analysis Tom Kloza joins Yahoo Finance Live to discuss oil markets both in the U.S. and abroad, specifically Europe's ongoing energy crisis and how it could impact the U.S. economy.

Video transcript

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- The war in Ukraine resulting in the European energy crisis coming to a head. Germany nationalizing energy giant Uniper, while a UK bailout is expected to cut energy bills for businesses in half this winter. What is ahead, though? Tom Kloza is the OPIS Head of Energy Analysis. Good to see you, sir. Let's start with the words of Vladimir Putin, which have changed the energy situation around the globe. What's the biggest impact of the war in Ukraine moving forward on energy?

TOM KLOZA: Well, I think the impact is clearly if he pulls some of the levers that it can pull to cut off the flow of hydrocarbons, either natural gas or crude oil or refined products, to the West, I mean, he's obviously going to put his people through incredible pain, and that doesn't stop him. So we've seen natural gas prices drop tremendously in Europe. But they've dropped from $550 oil equivalent to about $300 to $350. So it's still very, very much a threat.

If you wake up one morning and he's been ousted or whatever, say, a little prayer of thanks but also figure that oil prices and energy prices will drop. But in the meantime, I think the energy transition is going to be moving into another quarter. That's going to herald really the next few years of pain.

- And Tom, we know that we didn't quite make it to 100 days of gas prices going down. But in terms of the domino effects and from the energy crisis in Europe, what are the expectations for what we could see here in the US?

TOM KLOZA: Well, I think the expectations are that we've survived a gasoline scare when we were $501.65 on June 14. And every day of the summer with the exception of today, we've seen prices come off a little bit. That probably ends, but I don't think the next big move is higher, or at least not in 2022. In 2023, we'll see what I call "petronoia," the fear that there's not going to be enough petroleum molecules to go around, particularly in the gasoline season. It will manifest itself. And then maybe we'll have another move.

For the next four months, gasoline has the moves like Al Gore as opposed to the moves like Jagger. But diesel, and heating oil, and jet fuel, those are the products to watch. We're seeing in Ohio, today, for example, the price of diesel is up $0.20 or so a gallon on the loss of a refinery there. And that breaks a string of really, really smooth refining operations in 2022.

- Tom, I like that analogy there with Al Gore and Jagger.

- Al Gore called, he can dance.

- Yeah. Let's talk about this the live picture because we have two very different drivers here in terms of supply. On the one hand, we have Russia's war with Ukraine. Obviously, the energy crisis that's happening right now in Europe. On the other side of the equation, we have the global slowdown economically. I guess, how tight do you see supplies getting by the end of the year? And what does that picture look like looking ahead into next year?

TOM KLOZA: If you could tell me what happens in China, I'd probably be able to answer that question very well. But China has really been a laggard or it's been behaving as though it's in a terrible recession right now. If they start with the appetite to take up all of the crude oil that's out there in the markets, I mean, crude oil markets can turn around very, very quickly.

And I would say that these episodes of $80 or even if we get into the $70s, they're going to give way to higher prices for crude in the next few years. I don't think the 2023, for example, is going to be much more expensive than what we saw in the summer of 2022. But I do believe that the bias is toward higher prices for energy as opposed to lower.

- WTI crude settling at $83.36 down a bit. And Brent, just above $90. The Strategic Petroleum Reserve levels not seen since 1984. What do you make of the lack of urgency on the administration's behalf? And what are the implications there?

TOM KLOZA: You know, it's hard to tell because in the oil and gas industry, it's incredibly Republican-biased. And they're never going to give Joe Biden any credit for anything, even if it works for the moment. The problem is if you put up a mission accomplished sign after 98 days of lower gas prices, you might have to take it down real quick.

So I don't think that there's any imminent danger to replenish the Reserve. I mean, in essence, we have reserves of light sweet oil in the shale in the Permian, New Mexico and North Dakota. But it's quite a political football. I think that'll-- you know, you'll see the White House take credit for the lower prices because of the SPR releases. And for the last few months, I think that's had an impact. We saw record-high prices in every single hydrocarbon with the extent-- exception of the two kind of benchmarks, Brent and WTI.

- And Tom, I want to ask you, because you did focus on diesel, heating oil, and jet fuel as some spaces that you're watching. What do you think people are not paying attention to then? And what are your expectations?

TOM KLOZA: I think what they're not paying attention to is the fact that we've already been in progress for an energy transition, particularly for diesel, fuel, and heating oil. Now, there's not a terrible amount of people that use heating oil to heat their homes in the winter. But we don't have much in storage anymore. I mean, we're way below five-year storage levels in the US and in Europe, and even in the Far East. So it wouldn't take much in terms of cold weather to really mount an assault on some super high prices for diesel, for jet fuel since sometimes it gets used in some of the heating cuts in the winter time. And diesel is the biggest worry, I think, going forward.

It probably doesn't really rally until after the midterms, but we might see some ideas floated like Jones Act waivers to send diesel fuel from the Gulf Coast to New York or the Northeast, where it's desperately needed.