Russia-Ukraine situation shows ‘just how vulnerable we are’ in the energy markets: Strategist

Bob Iaccino, Path Trading Partners Co-Founder and Chief Market Strategist & The Stock Think Tank Co-Portfolio Manager, joins Yahoo Finance Live to discuss crude oil's seven-year high, Russian and Omicron pressures on global oil supplies, tensions with the UAE, and sustainability in energy stocks and ESG investments.

Video transcript

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ADAM SHAPIRO: And welcome back to "Yahoo! Finance Live." We've got about 35 minutes to the closing bell, but we're already watching oil prices. I mean, oil is gushing. We saw WTI, you know, trading at higher than $86. The futures were trading higher than 86 bucks a barrel. And Brent is up above $88 a barrel. Let's talk about what's happening in energy and much more, because a lot of investors are looking at opportunity here.

Bob Iaccino is the Path Trading Partners cofounder and chief market strategist, as well as the Stock Think Tank co-portfolio manager. That's a lot for me to say in one breath, but it's good to have you here. You know, when we talk about oil, hello 2014. How are the wife and kids? I mean, this is where we were roughly eight years ago. What does that mean about where we're headed, though?

BOB IACCINO: Well, unfortunately, I don't think we're gonna get a lot of relief in the price at the pump and other oil-related products any time soon. We might get a $2 or $3 drop in the price of crude oil as we start to sift through exactly how much supply is going to be affected by the drone attack a couple of days ago on the UAE. But other than that, there's just not a whole lot of spare capacity out there.

You really only have two OPEC nations that have spare capacity. One of them is the UAE. So they can clearly-- the drone attack was on storage facilities. So they can clearly fill those storage facilities up if they have enough places to store the actual crude oil that they're going to pump. Saudi Arabia has been very reluctant, has not responded to overtures by President Biden and the administration to loosen production.

And then, of course, we got the tension with Russia, where Russia knows-- Vladimir Putin knows that he can use oil production as another thing to kind of counteract the pressure he's getting from Western countries to back off on the Ukraine. You add to that the sort of diminishing, especially in the Northeast, cases of Omicron, the global demand that's going to come from China, because they're actually engaging an easier monetary policy as their economy slows a little bit. It's likely prices are going higher. Maybe not tomorrow, but in the very short to medium term.

EMILY MCCORMICK: As you alluded to in your answer there, this jump in oil prices has certainly posed a concern for the Biden administration as it attempts to bring down inflation. Do you expect any further action out of the White House in the near term to try to bring down these prices?

BOB IACCINO: Well, Emily, there's nothing they can really do, other than releasing from the SPR. And that has to be something that's unscheduled and shocking, rather than something that's part of the scheduled releases that's just accelerated. So and that would only be temporary, anyway. I don't know what kind of pressure they can put on. I believe that the administration's taking the right path, considering that the problems with Russia v. the Ukraine is much more important than short-term oil prices.

However, they can exert more pressure on Saudi Arabia, specifically. It's just a matter of whether it's going to work or not. In terms of US production, we're still about a million and a half barrels short of where we were at our peak and still about a million barrels, maybe a little bit less than that, as of this month, from where we were pre-pandemic. The Permian is now pumping out a record amount of oil, but the rest of the basins have been very cautious, whether it was from CapEx, new drilling.

And as we all know, shale drilling-- those oils tend to produce a ton of oil in the beginning and then taper off very quickly. So you have to actually have capital ex-- capital expenditures-- to get those new oils, those new wells, pumping. We had a lot of drilled but unconcluded wells. Those have pretty much come to their conclusion now and are pumping oil. So there's really no way for the oil to get to market fast enough to slow what we're seeing as potentially $100, $105 barrel of oil soon as many analysts say.

Our target was 98. Goldman's right around 105. I think Goldman's looking more like they're going to be right.

ADAM SHAPIRO: Hey, Bob, help us understand what happens if Putin and Russia do invade Ukraine. What happens to energy markets? Would this be a black swan event? I'm not sure it's so black swan since everyone's anticipating it.

BOB IACCINO: Well, not necessarily. It really depends on how Vladimir Putin wants to handle the situation, especially with natural gas. It would affect natural gas immediately. And I think one of the things you saw with the drone attack-- and this relates to the Russia-Ukraine situation-- is it showed the market and market participants, like myself and others, just how vulnerable we are to geopolitical shocks in the energy markets unlike 2018, 2017, when the US was pumping. 2019, we almost reached 13 million barrels a day here in the US, down about 11 and 1/2 million, 11.4 million toward the end of last year.

So I think it just showed the vulnerabilities of it. And that's really a Vladimir Putin question. You talk about Russia's contribution or participation in OPEC Plus, they haven't really reached an agreed-upon quota of crude from their specific production levels in 12 months. Even though the production levels have been increasing at OPEC Plus meetings, Russia has not met their quota, whether that's by choice or just simply because they hadn't had the economic wherewithal to actually pump that much. I believe it's the former, rather than the latter. I believe it was a choice.

EMILY MCCORMICK: Bob, what do you think the price action recently and going forward in oil means for energy stocks and the sustainability of this outperformance we've seen so far? Because for the year-to-date-- and of course, it still is just January-- but the S&P 500 energy sector is up nearly 17% and definitely far outperforming the broader index.

BOB IACCINO: I think it's definitely a little bit long in the tooth in terms of its outperformance. That's probably going to start to slow. We still have ESG concerns, where you're going to see some of these stocks fall out of favor. That's still a very desirable type of investing, although it's fallen out of favor in terms of the amount of overperformance you're getting from ESG lately. That may change.

We still have the desire for automobile companies-- Ford, especially, some of the new companies-- to get away from fossil fuels. So I think the energy rally, in terms of outperformance, a little bit long in the tooth. But still, if you're looking at 98 as we are, 105 as Goldman is, you're still going to get some strength out of that energy sector.

ADAM SHAPIRO: Bob Iaccino, always good to see you. Path Trading Partners cofounder and chief market strategist, as well as the Stock Think Tank co-portfolio manager. All the best to you.