Oil prices could spike ‘well over $150’ a barrel, energy analyst says

Neal Dingmann, Truist Managing Director of Energy Research, joins Yahoo Finance Live to discuss the energy markets and the outlook for oil prices through the second half of the year.

Video transcript

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AKIKO FUJITA: Welcome back. Prices at the pump continue to fall, with the national average gas price now at $4.67 a gallon, according to AAA. Our next guest says the macro energy backdrop though, remains positive, despite the tight overall supply and relatively stable demand. Let's bring in Neal Dingmann. He is Truist Managing Director of Energy Research.

Neal, there's a lot of people who are looking at what's been playing out, at least with gas prices, saying, well, are we finally starting to see relief. But it sounds like from your notes that you think the strength is still going to be there in terms of prices.

NEAL DINGMANN: I do. I think this is very temporary right now. I think a lot of this interaction, especially for oil, is going to go back to Russia. And I think you're going to see supply upended, if not at the end of the year, if not before. And I think that has the potential to cause oil prices to even spike higher than what we just saw a couple of months ago.

I'm not changing my price tag yet here based on what I'm sort of valuing my companies. But I do think there's a very good chance that if trade flows and price caps happen, as potentially, they could before the end of the year with Russia, I think there's a very good chance for some price spikes in oil.

AKIKO FUJITA: So let's talk about what we're seeing today. I mean, WTI trading at roughly $102 a barrel there. It is down yet again today, as is Brent crude. I mean, what kind of prices are we talking about if you think there's going to be further upside?

NEAL DINGMANN: I think well over $150. And why I say that is, if this happens with Russia, you also do not have any spare capacity or virtually no spare capacity with OPEC-plus. You certainly don't have any domestically. All my companies are saying that they're not going to--

I get a lot of questions about, are they going to come back on the capital discipline? The simple answer is, absolutely not. They're just not going to bump up their production. So between us and OPEC-plus, there's no spare capacity. Russia capacity comes offline, and I think you see a spike potentially 50% higher before the end of the year.

AKIKO FUJITA: So you're saying no spare capacity with OPEC-plus. But then you've got President Biden making that trip over to Saudi Arabia later this week. I mean, how much leverage is there in talks here if you're saying there's not enough capacity to really make a meaningful impact on the price action?

NEAL DINGMANN: Yeah, I think it's pretty much a fruitless trip because we've seen, between the likes of Saudi, UAE, you name it within OPEC-plus, they've all had the allowances to produce more. And they basically say, well, we're going to stay constrained for various reasons. Well, the simple reason is they don't have the capacity or, I believe, all of them in nearly all of the OPEC-plus members would be already producing more right now if they could.

So again, to me, the only real true spare capacity, unfortunately, out there prior to all the issues was in Russia. And now, because of potential price caps, as I said, all the things that are probably going to happen there, I think that's going to cause potential spike of availability going forward.

AKIKO FUJITA: So you mentioned $150 a barrel. I mean, is that the number that we're going to continue to see without any resolution between Russia and Ukraine? I mean, further capacity coming offline from Russia, but the reality of the uncertainty surrounding the war hasn't really shifted.

NEAL DINGMANN: No, no, it hasn't. But just to me, it's that sort of tightness because you still had China, India still coming in and buying some Russian-- again, I think if that supply and trade flows are upended, which I think, if price caps happen, which is possible, a lot of those things, I think that's what's going to cause a lot of this to finally come offline.

The real question then, I don't think, becomes more on supply. It's on the demand side then as prices start to go up to 120, 130, 140. At what inflation-adjusted level does demand start to pull back? That's where I'm a little bit concerned. Before, I thought we saw some of that. But again, I think in today's environment, I certainly think we could get close to 150 before you see any demand destruction.

AKIKO FUJITA: So Neal, let's talk strategy here. Certainly, a lot of people who've been invested in some of these big oil names, they've made huge gains so far this year. As we look to year end and some of those headwinds that you've pointed to, or I guess tailwinds in this case, where do you think investors should be positioned in the space?

NEAL DINGMANN: I still think you look for it within the MPs. It's hard to find another sector that are paying out this kind of returns and, secondly, have this low cost of capital. And the nice part about all of this, these companies are in the best financial position they've probably ever been in in their history.

They don't have to use-- they're all self-funding. So whether rates go up and different things happen, inflationary pressures, all of these companies are self-funding. So I mentioned a couple before in the interview, talking about Diamondback or something like the likes of them. They're already yielding free cash flow yield over 20%.

And the part is that they're just pretty cash, is the way I like to say it, because their cost of capital and their shareholder returns are so strong. And a couple of others you have out there, I mean, I look at Apache. Apache's a little unique because it's not just domestic. But they have such a unique position in Egypt, over 2 million acres, some of the highest returns of anywhere else.

So again, what's interesting about almost any of those that you listed is that their free cash flow returns-- to have them over 20% today and have payouts that they're paying out 50%, 60%, 70% of that free cash flow in the likes of either dividend or buybacks, I just think it's unique. You can't find it in any other sector.

AKIKO FUJITA: Yeah, certainly a lot of investors giving the space a second look, if they're not invested in it already, given the gains that we've seen this year. Neal, it's good to have you on today. Neal Dingmann is Truist Managing Director of Energy Research.