Global Energy Economist at Kpler Reid I'Anson joins Yahoo Finance’s Zack Guzman to discuss his outlook on oil prices following a tumultuous week amid the coronavirus pandemic.

Video Transcript

ZACK GUZMAN: I want to bring on Reid I'Anson, senior commodity economist at Kpler joins us now. And, Reid, I mean, when we look at this, rolling from contract to contract can bring some of that volatility, but especially that will be the case when we're thinking about the supply concerns right now and whether or not those issues have really been resolved. It doesn't necessarily sound like they have when we think about how much oil is still stacked up right now and how there is no place to put it.

REID I'ANSON: Yeah. Indeed, Zack. We're nowhere near resolving the situation at present. Obviously, the WTI contract is delivered into Cushing, Oklahoma. Right now, we're looking at inventory levels there at about 80% capacity, or 60 million barrels. And that's a gain of about 21 million barrels just since in February. So we're looking at maybe two to three more weeks before Cushing is filled up, let alone the fact that most of that additional space has probably already been leased out.

And so the big question now is on [INAUDIBLE] contract, whether the WTI contract for June, obviously, begins to have the same issues that we saw in May-- hard to know at this point. I think you're on mute, Zack.

ZACK GUZMAN: There we go. I'm back now-- it seems like I maybe. The camera fell off the old laptop there, Reid-- don't know how that happened. But when we look at it, there are a lot of questions about the moves that were made to kind of cut back on production. Of course, that was expected to be, I think, a little bit more impactful when we look at what OPEC did. But there hasn't exactly been the same kind of rally around here for US producers who've always said the prices will dictate what production cuts will have to come in here.

But when you look at those and the way that supply continues to stack up, what other options are on the table to kind of prevent another kind of collapse that we saw with the last expiration? Because there is still so much crude out there.



REID I'ANSON: You know, it is important to note that the United States does still have storage optionality available-- around 130 million barrels of non-SPR space available. The question is logistics. Most of that space is available in Pad 2-- along the Gulf Coast, which is far from Oklahoma. The question is that all of this excess volume, can it find space elsewhere within the United States? But ultimately, it's not outside the realm of possibility to believe that even this 130 million barrels begins to fill very quickly.

And so we're going to basically be in this battle of supply coming offline, which is going to probably happen pretty quickly, and the fill in storage. Now, it's also important to note that we have seen a large influx of crude from Saudi Arabia incoming. It's not yet made it to the United States. There are still questions about whether the Trump administration is going to allow that to be imported. I don't know. It probably will, but it's hard to say. And this is also going to add to the storage issues within the United States, particularly within Pad 3.

ZACK GUZMAN: Yeah. I mean, when we talk about that specifically too, there's a lot of concerns that once we do hit this expiration that we're going to see the same. We had a guest on yesterday in the 2:00 PM hour mentioning that it wouldn't be unreasonable to suspect oil prices to dip back down potentially even to negative-$100 when we think about where the price of oil could go. How much more does the volatility seem to grow here when we talk about so many unknowns, not just on the production side, but mainly how long it'll take before demand starts to tick back up? Because that is one thing right now that seems to be the main driving issue.

REID I'ANSON: Yeah, of course. Obviously, this is really a demand problem more than a supply problem. And the question is uncertainty. I don't know when demand is going to come back. I mean, it's likely to think that demand within the United States will remain deeply depressed for some months to come, because folks will simply not be traveling out as often. So I think that this is not a short term problem. This is a long term problem for the United States-- or at least medium term.

And oil firms are going to have to figure out how to deal with it-- you know, how much output they're going to need to cut back on and where they can maybe find additional inventory space. But obviously, demand is a question that is highly uncertain. But don't expect it to just come back in two or three months, because I don't think it will here in the United States. It will take some time.

And I think it will be gradated. So you could see gasoline demand start to come back a little more quickly than jet, for example. And this will make it difficult for refiners who have to try and understand yields across the oil barrel as well.

ZACK GUZMAN: Yeah. And just before we let you go, because I know the interest in the oil market has clearly grown. We talked about people who have never played in the oil market before, but seen this volatility and say, there's no way that oil will stay negative. Of course, that's not necessarily what happened. It was just the contract price. But when we look at it, there are people saying, OK, if oil does eventually recover back to about $40 a barrel, that would obviously be above the cost to produce here in the US for a lot of the producers. So maybe there are opportunities to play this long. We've seen a surge in interest in USO, the ETF tied to the oil market. So I mean, when you look at it, what might be one way for an investor-- a common retail investor-- out there to say, OK, maybe I can pick up, you know, an Exxon, a Chevron, maybe some of these bigger producers to hold here for a while if it ever does get back to normal?

REID I'ANSON: You know, yeah, I think it's clear we will probably see consolidation in the space. And so the bigger players do make sense. I would also, from an investment perspective, look at gas output. Associated gas, which is gas produced from a shale oil well, is going to probably drop dramatically as oils-- as these oil wells get shut in. This could cause prices within the United States for natural gas to rise and actually increase production within the Marcellus Shale region, which is just dry gas, no oil production at all. This is a region in the Northeastern United States.

Kinder Morgan, which is actually a midstream firm that services this area, could serve to do quite well in the medium to long run. We'll have to see if producers are willing to kind of ramp up dry gas production moving ahead.

ZACK GUZMAN: All right. There you go. The latest from Reid, who's out in Houston. I appreciate it-- always got to get someone in from Houston to talk oil here. But Reid I'Anson, senior commodity economist at Kpler. Thanks so much for joining us, man. Appreciate it.

REID I'ANSON: Thanks, Zack. Take it easy, man.