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Oil: What happens next with oil around $85 and geopolitical tensions rising

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KPMG’s Global Head of Energy Regina Mayor joins Yahoo Finance Live to give insights into the oil market in 2022 given various factors.

Video transcript

ALEXIS CHRISTOFOROUS: Welcome back, everybody, to "Yahoo Finance Live." I want to get a check of the oil markets now and check in with Jared Blikre. So Jared, I see that crude easing a little bit today, but that hardly tells the story for the week, because crude is going to end higher overall.

JARED BLIKRE: That's right. And in a week where we're counting down the hours to the end of the day and the carnage to the NASDAQ, guess what? Crude oil going to post some decent gains, about 2 for the week. And you can see on our commodities heat map here a lot of red on your screen. So let me get up crude oil, down about half a percent here.

And let's just check out the intraday price action. And the official settled, by the way, was $85.14. So you can see a choppy to sideways action right here.

But let's take a look at what's happened since the open on Sunday. And we can see they're up about 1 and 1/2%, excluding that opening print. It looks like we're down 4/10 of a percent. But overall, we are finishing the week up for crude.

And let's take a look at the energy sector, also seeing some red in this sector today. We have seen energy as a stalwart of the year so far. You take a look at what's happened year-to-date, we've still got Exxon up 18%, ConocoPhillips up 15%. But not looking so good for the other sectors.

Here's our sector action. You can see, indeed, energy is the only one that's still in the green for the year, up 13%, Alexis.

ALEXIS CHRISTOFOROUS: All right, thanks a lot, Jared. I want to stick with oil, bring in Regina Mayor, KPMG's global head of energy. Regina, happy Friday to you. It's been a long week.

I want to talk to you for a moment about the psyche of oil traders, because it seems if you look at the price action that they've been discounting COVID. There was concern that Omicron would pull back the economic rebound and that perhaps we might see a dropoff in oil demand. Do you think oil traders are thinking differently about that now?

Well, I don't think so. I think the market's largely shrugged off the fears around Omicron. And so what remains with the oil markets is it's all about supply. So the expectation is that demand is going to continue to surge. It'll hit prepandemic levels in 2022, according to most of the estimates.

And we're dealing with a supply-constrained environment, where OPEC+ is demonstrating restraint, but also they're at the limits of their capacity. So we don't have a global safety valve. So that's where the traders are looking. And that's why oil remains buoyant. And there are those that are calling for triple digits before things settle back down.

- And Regina, when do you-- how high do you see crude going? And then when do you when do you start to see constraints start to ease up a little bit?

REGINA MAYOR: So the bulls are definitely calling for $100 plus oil before the end of the year. I'm not that bullish in terms of the overall price. We're at a point where marginal production is absolutely being spurred. And the key statistic that I've noticed is the Permian production in February is slated to exceed all-time production, so 5 million barrels per day.

Canadian rig counts went up 50 rigs just in one week alone. So I think we're going to see renewed production from the US, Canada, and Brazil. And, obviously, if OPEC+ and Russia can produce more, they absolutely will produce more. So I think that's a governor on the triple-digit prices.

But at the same time, there's still upward pressure, right? Inflationary costs, so it's going to cost us more to get the oil. There's the cost of capital challenge that will be facing us. So there are more upward pressures than downward pressures. But I don't necessarily see it going to triple digits this year.

ALEXIS CHRISTOFOROUS: Well, what about, though, if the geopolitical situation changes? I'm wondering how closely a possible conflict between Russia and Ukraine is playing into things right now. And if there really were some sort of an issue there and Russia were to actually take action against Ukraine, what could happen to oil? I mean, could we then see $100 crude.

REGINA MAYOR: Absolutely, Alexis. And you hit the nail on the head. That's where a lot of the upward pressure comes from, is there are quite a few geopolitical hot spots that we're all watching. And we're just one blip away from a conflict that could actually drive the price up even further because we're in such a tight supply market right now.

While the market, we lost a little bit of ground on WTI, was because there was an unexpected increase in US crude inventories. But US crude inventories overall are still 8% below the five-year average. So that indicates considerable restraint. And if you do see a conflict with Russia or a conflict in other parts of the world around oil-producing nations, you absolutely will see the supply constraint lead to a spike due to the geopolitical situation.

- President Biden is in a pretty tough situation, right, because he can't just call up OPEC and say can you open up the spigot some more? We saw when he released from the Strategic Reserves, that did very little to help drop gas prices just before the holidays. What more can be done? Can anything be done?

REGINA MAYOR: Well, I think-- and, actually, the industry has been working closely with the current administration and looking for policy incentives to enable more activity. So the administration's been focusing on increasing permitting, right? So while there was a moratorium on drilling and development on federal lands, that has been lifted.

And I know that Secretary Granholm has been meeting with members of the industry to talk about other things that the administration can do to unlock more of the reserves that we have within the United States alone. But we're also, the Permian and Midland Odessa, we're seeing activity from the ground. There's quite a lot of people movement. Prices are increasing. Jobs are booming. And you're starting to see more of that activity in the US.

So I think making it easy to do business in the US for the energy industry and improving some of the incentives around carbon capture so that we can continue to achieve our objectives around greening the hydrocarbon footprint, all of those things are proactive things the administration can do. And I do know that some of those conversations are underway, which is really encouraging.

ALEXIS CHRISTOFOROUS: I want to touch on gas prices, though, which affects just about all of us. Do you see gas prices moving much higher? We just saw a graphic a moment ago showing the national average at around $3.32. Some are saying we could see well over $4 a gallon by springtime and into summer as more people hit the roads. What's your thinking there?

REGINA MAYOR: Well, we've definitely seen some relief because the weather limits. This isn't necessarily summer driving season. And refinery utilization can definitely go up. This week it was at only 88%. And the country has the capacity to go to 95% or 96%.

And also, I would say, Alexis, gasoline stocks are building in the US, which is definitely a plus for the consumer. I think we can see some pain relief. But if the price of crude continues to go up, if it gets to $100 per barrel, that will definitely put more pressure at the pump. But during the winter season, I'm optimistic because stocks are building, refinery utilization runs are increasing, and we're not using as much of the stocks because of the weather and the movement. So fingers crossed, things will settle down a little bit more for us as consumers and our pocketbooks.

ALEXIS CHRISTOFOROUS: Yeah, fingers and toes crossed on that one. Regina Mayor, KPMG's global head of energy, have a great weekend.

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