Oil analyst details ‘something much more serious’ going on in energy markets

Energy Word founder Dan Dicker joins Yahoo Finance Live to discuss oil and energy market fluctuations as China extends its COVID-19 closures to movie theaters and gyms.

Video transcript

BRIAN SOZZI: Alright, Julie, over to you with some breaking news on the economic front.

JULIE HYMAN: Yeah. We have the ISM, Institute for Supply Management, manufacturing data coming in at 55.4 in April. This is below the estimated 57.6. Interestingly, however, the prices paid are also below estimates and decreasing month on month.

We continue to have this debate about whether inflation has peaked. Here’s something that shows some relief on the inflation front. New orders, however, are also coming in a little behind estimates, and the employment index there is a little below estimates. So really interesting.

A few moments ago we also got the S&P Global reading on the same. It was also a bit below estimates, so it’s all interesting here. That crafting gauge, the overall number, is now at its lowest since 2020.

And again, as you have seen, these various components have also softened and show, perhaps, that there is a weaker demand for goods here. New orders and production at their lowest levels since May 2020. It’s still growing, but not at the same rate we’ve seen recently, Sozz.

BRIAN SOZZI: Maybe some inflation fatigue, Julie, is starting to show in this economic data.

JULIE HYMAN: Yeah, it sure could be. So how does all of this also feed into what we see in energy markets? Because obviously manufacturing, they use energy to do what they do. Add to that what we are hearing this morning of many Russian oil companies not finding buyers for their oil. And what is happening in China?

For more on all of this, bring in Dan Dicker, founder of Energy Word. Dan, it’s good to see you. So we have what looks like a bit of instability in economic growth. We have the situation in Russia. We have the situation in China. What does all this mean for oil prices?

DAN DICKER: Well Julie, I’m kind of trying, at least in my mind, to divide these things into short-term issues with energy markets and then long-term issues with energy markets. And for my followers, and for you when I come to talk to you, I tend to deal with the longer term trends for oil as opposed to the short term trends.

As bad as the latest variant of COVID may be for the Chinese, the declines in shutdowns in China and the consequent obvious lack of demand in the oil market that’s going to be really pushing prices up in the last two days, I – we’ll see that such as a temporary decline in oil prices.

These are variants that have come in the past. And they pass. And that’s unique to China because obviously their rollout on their vaccine – and in fact their vaccine effectiveness is lower than what we’ve seen in the United States. This is what I call a short-term problem with energy markets.

In the long term, something much more serious is happening, and that is what is happening in Russia. And not just the bans that probably come from Europe that they seem to have a very long-term interest in enforcing. But also, and we don’t talk about it much, energy companies — you know, Exxon, Total, BP — leaving Russia, tying up assets in Russia.

And what we’ve seen is that production in Russia is down over a million barrels in April alone. In many ways, the infrastructure in Russia depended on western energy companies to get hardware out of the ground, and they are missing that now. And that’s going to be a long-term systemic problem with production in Russia, which could ultimately lead to three million barrels of oil a day coming from Russian markets. This is a very, very, very big problem for long-term prices.

BRIAN SOZZI: Dan, if Europe bans Russian oil, where do they get oil, and what would that mean for world oil prices?

DAN DICKER: To the right. And Brian, that was the argument. The arguments of the Europeans are that you can ban Russian oil, but you can redirect it to China, to India, and that really does nothing to harm the Russians. Now, that’s not quite true.

First and foremost, when you move it from west to east, you have a price issue. The Chinese and Indians pay a discount to take what is essentially black market oil. Then you have an economic problem getting that oil through the regular financial system, which is shut down by sanctions. So either way there will be discounted profit going to the Russians on what they can move.

The reason I draw your attention to what is happening in production is that yes, oil that is not sold in the West can be sold in the East. But oil that is lost from the global supply chain due to production problems in Russia is lost, period. And there is no money to be made from it. And that, I think, is going to be the most important aspect as we move forward – no matter what happens in Ukraine – if again the Europeans stand firm on banning Russian oil. And American and European oil companies stay strong by not trying to make a quick buck in Russia when the opportunity arises.

JULIE HYMAN: So the oil that is produced in Russia, is it able to sell all of that at this point? And if not, what happens to this oil?

DAN DICKER: Yeah, and Julie, most of them have found homes. But again, much of it was sold at discounted prices. And I think the pressure that Putin feels from that particular part — remember, Russia is very dependent on oil sales to generate revenue. And, you know, he really bet on this whole consortium of American and European consumers, as well as American and European oil companies, to lose hope or not be able to sustain that kind of pressure on Russian oil.

He may be right in the long run, but what I’m trying to warn everyone about is that if he’s wrong about this, he could literally be with a Treasury that went bankrupt in August . So it’s not that far off that these kinds of bans and cuts in production numbers really have a major effect on what’s going to happen in the Russian economy, and the real impact that’s going to have on Putin. In my opinion, that’s a much more effective way to defeat Putin, if that’s what you’re considering, than all the weapons in the world coming into Ukraine. Ultimately, it will be the pressure on the Russian economy that will prevent Putin from doing what he is doing now.

BRIAN SOZZI: Dan, so many people are focused on the upside risks to oil prices. I think Goldman Sachs was this morning looking for $125 a barrel of oil this summer. But growth is clearly slowing down. Consumers are clearly starting to show inflation fatigue. See…can you make the case for oil below $90 a barrel this summer?

DAN DICKER: I don’t know Brian. Of course, you know that’s very hard to predict, right? You talk about a very important macroeconomic input into oil prices, and that is whether we are looking at what will be a major or minor recession or a soft landing. And for me, I mean, you talk about it with people who are much better at predicting these things than the oil guy is.

But you are right. If we get a really deep recession, it’s not oil that’s going to come out of it. It will also sink. My takeaway for people watching is that in a market where technology is killed and most consumer durables are killed, I will tell you that the fundamental nature of oil will make it a nice shelter in what could be a very Dark Storm.

BRIAN SOZZI: Don’t be shy, Dan. You’ve made a lot of big calls over the years on oil. I followed them all. We will leave it there. Dan Dicker, the founder of Energy Word. Thank you so much.

Alright, cinnamon-scented…

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