Here’s why a harsh winter in the Northeast could affect oil prices
Bob Iaccino, co-founder of Path Trading Partners and chief market strategist and co-portfolio manager of the Stock Think Tank, warns that the energy crisis in Europe is a concern for the United States and that a harsh winter could bring a rise in oil prices.
ZACK GUZMAN: We were watching the energy sector at the big sale yesterday. One of the few out there – in fact, the only one – when we were looking to hold out in the green. Today, however, when you look at Brent prices over there, you’re giving back a little bit of the gains here. As supply and demand issues continue to resolve during the pandemic, we have heard more and more calls that peak oil may push prices up here, not only for oil, but also. of gas around the world.
And to learn more about the outlook, I’m pleased to welcome today Bob Iaccino, Co-Founder and Chief Market Strategist of Path Trading Partners, as well as Stock Think Tank portfolio manager. And Bob, I mean, when we look at it, it’s interesting because we saw Goldman Sachs call it a while ago earlier this year, calling for $ 80 of oil, now bringing it to 90. I want to say, when you sort of digest what’s going on on the dynamics of supply and demand, tell me about what you see in the prices coming up.
BOB IACCINO: Well, good afternoon. Specifically in oil, I think Bank of America’s triple-digit price target is very worrisome in the short term, in terms of transient or non-transient inflation. And again, I’m still not sure what the Fed means in terms of how long this transition lasts. But that’s the biggest fear for me.
And I think people might not realize how the energy shortage due to winter and if we have a harsh winter in Europe, Northeastern US, could affect prices as well. crude oil, simply because the demand for heating oil will increase, particularly in areas of the Northwestern United States or the Northeastern United States. So there is a carry-over effect on the natural gas situation that the world is currently experiencing.
And this shift, as you mentioned, from carbon to green, there is a cost to those things. And I don’t think people naively entered, for lack of a better word, that there wouldn’t be any short-term cost or pain. But the weather is a wild card in the energy markets. It’s still a wild card. Even in green energy, where the sun has to shine and the wind has to blow in some areas of green energy, weather is a wild card.
And that’s really where the peaks we’re seeing in both natural gas and crude oil come from. You look at what happened on the Gulf Coast, with two back-to-back storms, a hurricane and then a very humid tropical depression that slowed production to a halt and, in some cases, a halt. So it’s determined more by supply than by demand. And this is where the weakest part of the equation lies.
AKIKO FUJITA: Bob, when you look at the import capacity in a place like Europe, it has actually increased for natural gas over the last decade or so. If you look at the data that was released, I mean we had the World Energy Monitor who said it was actually going to jump 13% – or in fact, they said 35% from here. 2030. So it looks like production is there in place. The projects are in place. Why has everything stopped now?
BOB IACCINO: Well, like a lot of things Akiko, the pandemic has cut supply. In fact, we went through this in the middle of last year with metals, for example, with copper, where there was a demand for them, the supply chain was there, the production was not. And that’s what we are seeing in the energy markets now as well, when the capacity is there to be filled.
And this is completely the opposite of what happened two years ago, precisely in the crude oil market, where we had crude oil, particularly in the United States. We didn’t have the pipeline capacity or even the cars to ship it. It’s the other way around now, especially, as you mentioned, towards Europe. The supply is simply not there to meet the demand. And again the fear becomes if there is a harsh winter there is going to be severe price spikes.
And the government only has some capacity to sort of mitigate those of individual households, those price spikes, because, again, the supply just isn’t there. Now, whether or not this is dealt with quickly or not, it does not appear to be the case because the CapEx did not take place, partly because of politics, but mostly because of the pandemic itself and the inability to produce the necessary supply. Just look at the United States. We are 229 billion cubic feet below the five-year average in terms of natural gas inventories. That’s a big number for the winter. This is a very large number, and it is worrying.
ZACK GUZMAN: Yes, and when we think about how it all works, of course, as you mentioned, the critics might point out that the energy the Biden administration has taken in here has sort of led to some of these issues. and not to be prepared. And now we’re sort of waiting to see what OPEC – you know, what OPEC is going to do to maybe increase the supply. When they meet next week, you have the EIA numbers posted here.
What, the snap – we clicked seven weeks of inventory drops, so we saw additions there. I mean, when you put all the pieces together and see the possibility of increasing the supply, as we talked about, maybe not so much here in the US, given that we haven’t seen a Capex, I mean, how limited is the upward trend that we might see if we witness a spike in prices?
BOB IACCINO: Well, there is enough oil, especially oil, and to some extent natural gas, within OPEC countries to meet current demand. What it cannot compensate for is the growth in demand. And you mentioned the EIA. The Paris IEA has increased its demand expectations for 2022 and 2023 based on economic growth. These things will slow down. Again, they can slow down on the supply side.
We must therefore put pressure on OPEC. And OPEC can respond verbally to pressure. Then there is always some kind of gap between what they say they are going to produce and what they are producing. Sometimes it’s over what they say, sometimes it’s below. And that almost becomes a bigger wild card than the weather. I do not think, again, that the administration was specifically naive in the face of this problem. I think the weather joker is the most important thing.
Take a look at the use of American refineries, for example. We are now back in that 80% range. We will have another number tomorrow. It was based on a hurricane and a tropical depression, as well as the upcoming refinery turnaround. It is something that cannot be planned.
AKIKO FUJITA: When you think of some of these climate ambitions that have been stated by many countries, a lot of it is driven by supply and demand in the market. So the idea is that if you reduce the supply of fossil fuels, it drives up the price and ultimately speeds up the transition to renewables. Do you think what we’re seeing right now is going to have the impact we expect?
BOB IACCINO: Not in the short term, again, because it’s on the supply side. I think the equation is correct. This will increase the demand for renewable energy. But again, you’re going to fall into the supply crunch there. And there is only so much that can be alleviated.
Again, this is like any other investment equation, Akiko, where risk and reward must be balanced. In this particular case, the risk of climate change is not necessarily balanced with the cost of what it will take, at least in the mind of the individual consumer. If they can’t heat their homes this winter, they’ll vote against climate change mitigation policies. And that’s where the problem lies, I think, because, again, it’s a supply issue. The time joker we have now, the pandemic joker was the problem.
ZACK GUZMAN: Yes, you hope the wind is blowing, but not too strong there, as the winter months approach here, to establish further disturbances. Bob Iaccino, Co-Founder and Chief Strategist of Path Trading Partners, thanks you for taking the time to chat with us again. Be well.