Oil analyst: ‘We’re looking at an increasing demand curve’

Bob Iaccino, Path Trading Partners Co-Founder, Chief Market Strategist and the Stock Think Tank Co-Portfolio Manager, joins Yahoo Finance Live to discuss the projections for rising gas prices and how companies are absorbing energy costs.

Video transcript

DAVE BRIGGS: Like a broken record, the price of gas is breaking records. Today, the average price of a gallon of gas up to $4.59, according to AAA. All 50 states now averaging more than 4 bucks for the first time ever. So how high can we go? And what is the impact on the economy as a whole? Bob Iaccino is the co-founder of Path Trading Partners. He joins us now. Good to see you, Bob. Everyone's feeling this pain, in particular, in California, where it's north of 6 bucks a gallon on average. Nationwide, how high do you expect prices to go?

BOB IACCINO: Well, if you're looking at a nationwide average, I would be shooting for about $5.50. JPMorgan talked about $6. But I can't see there being any sort of political will to let it get that high without some sort of interventionist policies. Honestly, you're not even talking about political parties here. Either side going into midterms would do something about $6 gasoline or to prevent $6 gasoline. There's only so much they can do. So it'll be somewhat synthetic.

But we are looking at an increasing demand curve relative to supply. We continue to see Russian barrels of oil come off the market, which, of course, is pressuring gasoline prices, diesel prices, truckers, the owner operators specifically, of-- in little small trucking companies really suffering through this, along with the general consumer. So I think when you look at it from a price action perspective, we've actually seen crude oil's range compress.

But this is what crude oil does, and RBOB does the same thing. It moves sideways, which is actually what's going on. If you look back to March, April, you saw about a 21% range in price. But it was still sideways movement overall. Now we're seeing about a 15% or a 16% range in price. And as we get down to a 7% or 11% range in price, you'll likely see a breakout, and that breakout is more likely to be up than down.

DAVE BRIGGS: We haven't seen much, if any, demand destruction. At what price point will we?

BOB IACCINO: Well, it's interesting. There was some research done about six years ago that said $4 a barrel-- I'm sorry, $4 a gallon of gasoline was where you would see consumer demand destruction. But it had to be a prolonged period of time. I don't know what prolonged means. I'm not sure what we're looking at. This feels prolonged. I mean, two tank fill ups at 4.48, as it is down here in Florida, seems prolonged to me.

But we are starting to see some small change in behavior. But it's difficult to measure because we're in this beginning of the summer driving season, not the end. And coming out of the cabin fever of the pandemic, it's difficult to sort of classify this as typical behavior. So I'm not sure that research really applies. We're starting to see a little bit of weakness in airline ticket purchases, as prices have doubled, in some cases, up 40% on average over the US. I think automobiles are next, but it's very difficult to gauge coming out of the pandemic.

DAVE BRIGGS: Indeed, and circling back to crude, Jeff Curry, Goldman's head of commodities, said earlier this week, $150 oil is a high probability event. You agree with that?

BOB IACCINO: I agree with new highs. It's difficult for me to put a price target on that. Our target prior to this move was $94. And we were long crude from the low 70s. When it got to about 94, again, we entered into one of these sideways price consolidations. For us to actually get a price target, we have to break out, and then we have to measure the range that we broke out of. Currently, if we're looking at that sort of 16% range, if we break out of this sort of sideways price action that we're seeing right now, we'd be expecting about 138, about $138. But I can't really put that as a target until the breakout actually happens, because it's going to be more price action based than fundamentally based.

DAVE BRIGGS: You mentioned diesel. Target CEO Brian Cornell saying yesterday, we did not anticipate transportation and freight costs would soar the way they have. Target, as you know, had its worst day since the '87 crash. How do you characterize the overall impact on the economy, on the retail sector in particular?

BOB IACCINO: You know, it's interesting you mention that. One of the things I was wondering the other day, as I saw Walmart's earnings-- you remember recently, Walmart raised the base level that they were paying for their truckers to well above $90,000 a year. You combine that with the increased fuel costs, and you see this margin compression in Walmart that allowed Walmart-- I shouldn't say allowed them. I should say more like reckoned them to have their worst single day in the stock in decades, simply because that compression in a discounter like Walmart really hurts.

So it's a case by case basis. But it certainly is a tax on consumers. And people don't realize what a tax it can be on the types of corporation, like a Walmart, like a Target, that isn't necessarily famous for passing those costs increase along, especially in a consumer inflationary environment, like the one we're in right now. So I think it's a very big deal. And I think it means we're likely to see more repricing of equities to the downside after a little bit of stabilization.

This is the kind of thing that you see in the equity markets, where we're now waiting for more bad news. And as it's not happening, you may get a little bit of stabilizing and possibly even a 15% rally in equities. But then it's likely to turn around. And part of that is likely to be a crude oil breakout to the upside if and when it happens.

DAVE BRIGGS: I want to circle back to where you had started in the beginning about some of the political maneuvers here. President Biden, he's throwing the kitchen sink at it, a record release from the Strategic Petroleum Reserve, allowing E15 gasoline sales this summer, outreach to the Saudis and Iran. What's been the impact? Is there anything the administration can do ultimately?

BOB IACCINO: In the very short-term, there's very little. This is the kind of thing that you have to plan for decades. I've been saying this on Yahoo and everywhere else that'll listen for the past five or six years, people think that with shale oil, you turn the spigots on when the price goes up. You turn the spigots off when the price goes down. And it's not only shale, it's everywhere else. It just doesn't work that way.

To ramp up to production with higher costs, you need a reasonable expectation that costs are going to stay at profitable levels, which we don't have right now. And you need a reasonable expectation that you're going to get ROI on that money, and we don't have that right now. And then it's a six to eight-month lead time. So there's just not much that can be done. You could possibly get a federal gas tax holiday. Individual states can do the same thing. But those are band-aids.

DAVE BRIGGS: Backdrop is Exxon, Chevron, ConocoPhillips all up 40% year to date. Bob Iaccino, great to see you, sir. Thank you.