Jefferies Equity Analyst & SVP Randy Giveans joins Yahoo Finance’s Seana Smith to discuss his outlook on oil prices as volatility in crude continues.

Video Transcript

SEANA SMITH: Well, let's talk about what's going on in the energy sector specifically today, so that is the leader sector-wise, up just around 3%. When you take a look at the Dow, the two big leaders in the Dow today are the two energy names, Exxon and Chevron, both of those stocks up just over 3%. And this, of course, comes as we're seeing a bit of a rally in the price of crude. Crude is up now just 21% at $16.72 a barrel.

So for more on this, I want to bring in Randy Giveans, Senior Vice President at Jefferies. And Randy, I know you're closely watching the price of Brent, in addition to what we've been seeing in crude. But what do you think about what we've seen in the energy market over this past week, what this signals about more volatility ahead? And do you think we could retest those lows and go back to negative territory anytime soon?

RANDY GIVEANS: Sure. Hey, thanks for having me, Seana. As you mentioned, this week has been just a roller coaster, right? On Monday, we saw negative prices for the first time ever, and a lot of that was just forced selling by the ETFs, by the hedge funds, by the banks of the prompt month was expiring momentarily, right?

So they're like, OK, we cannot take physical delivery of these barrels, and that's what WTI is priced in. So they had to offload those contracts at any price, and even pay people to take those contracts from them, right? So that's what happened on Monday. Tuesday, you saw another downdraft, this time in the June contracts. You know, that's what the new contract is rolling to.

Now yesterday, today, you're seeing a little bit of a rebound, and it looks like big numbers, 10%, 20%, but that's, like, $1, $1.50, right? So you're going to see a lot of volatility anytime you see a headline from Trump making a tweet or you see some Iranian, you know, mess over there in the Strait of Hormuz, so there's certainly going to be volatility in the near-term. As for testing the lows, we could see it happening again, especially as you get closer to that expiration date here in the middle-- middle, towards the end of May for that June contract, right?



And then it rolls again to the July contract. So every time you see a contract roll, at least probably for the next few months, you'll see some short-term pressure on that prompt month contract because, again, there's no place to put these barrels. And I'm sure we'll get into floating storage, but that was the big problem with the physical delivery of WTI, no one wanted it.

SEANA SMITH: Yeah, Randy, I want to get into floating storage here with you and just talk about some of these tankers. So as we saw really, the news come out that we are running out of room and where to store crude. We actually saw a rally in tankers. Now, when we take a look at what we could expect over the next couple of months, do you think demand for tankers will continue to rise as people look to store some of their excess crude?

RANDY GIVEANS: Sure. Absolutely. You've already seen-- Cushing, basically sold out right now. It's almost full, and the existing capacity, maybe 10% remaining, so maybe 20, 30 million barrels is already sold out. The barrels are flowing there in the next few days, if not weeks, right?

India, they've already announced a 95% utilization there. BOPEC, one the large onshore providers of tonnage, they are sold out, right? So I'm down here in Houston, low energy prices are not a good thing, obviously. So in an act of solidarity, I'm wearing my Texas pin.

But everyone's calling me up hey, Randy, do you have a tanker that we can put some oil on? You know, what if I have a barrel in my backyard, can I store some there? So everyone is looking for a place to store oil, and that's why floating storage has gotten so popular, these freighters-- [INAUDIBLE] even producers are looking for anywhere and everywhere to store oil.

Now as I said, onshore, basically full, so they're looking to the seas. And a VLCC, a Very Large Crude Carrier, can hold 2 million barrels of crude oil, so that's a large number. So if you can buy the prompt month, as we were talking about with the contracts, you can buy June delivery for maybe $20, $22 dollars now for Brent. You can sell it forward in December for $32, right? So that $10 differential, all you need to do is find a ship to store it, and that's why floating storage have got-- has gotten so popular.

Those contracts for floating storage for six months have gone up to $120,000 a day. That's compared to a cash breakeven level of $25,000 a day, where we were about two months ago. So in just basically two months, you've seen that six-month charter go from $25,000 a day to $125,000 a day. Huge earnings here for companies with VLCCs-- DHT Holdings, Euronav, Frontline, International Seaways, some of those tanker companies.

SEANA SMITH: Randy, there was an article going off of this in Bloomberg yesterday, and they were talking about the fact that there's so much oil parked off the shore in California. And they were saying that oil tankers are carrying enough crude to satisfy 20% of the world's consumption, that that amount right now is gathered off the coast in California and basically has nowhere to go. What are the implications of this?

RANDY GIVEANS: Sure. You're seeing everything getting backed up. And as I mentioned, a lot of those floating storage contracts were just that, contracts for a trade of these oil majors, of the traders. You're also seeing forced floating storage, because these tankers, like you mentioned, off the coast of California, maybe they came down from Alaska, maybe they came internationally, they get to the coast, and they say, hey, we have your oil, and the ports are like, we can't take that. So go hang out in the Pacific Ocean, and we'll call you in a few months, right?

So you're seeing that floating storage being forced. Obviously, that's putting a lot of pressure on the prompt-month prices. So as you see all this inventory building around the world-- floating storage is now up to around 250 million barrels, the previous high set in 2015 was only 150 million barrels, right-- so as you see this massive inventory building, even if you get a demand-supply inflection, which we think happens this summer as demand rebounds when activity starts recovering and as production continues to wane, now you still have bloated inventories that you're going to have to work through. So that is going to keep a lid even on longer-term prices as well. So we're talking about maybe a price recovery in 2021, and that's if these inventories get worked through here in the next six to 12 months.

SEANA SMITH: Randy, real quick. I don't know if you're going to be able to answer this, but just to put it in perspective for our viewers, how much oil do you estimate is currently parked on tankers at this point? And how high do you think that number could climb here in the very short term when we deal with the fact that we simply can't store all the oil on land right now?

RANDY GIVEANS: Correct. Yeah, great question. We're already at about 250 million barrels. Now, putting that in perspective, normally there's only maybe 20 or 30 million barrels that are actually for floating storage. All the other barrels on the water are actually moving, right, from a loading port to a discharge port.

The previous record was about 150 million barrels set in 2015 when, again, crude prices were very low. You had a big steep contango in that forward quarter, contango being low-- low prompt-month-- month prices, higher future prices. So 250 million barrels currently, and that number is certainly rising. We've talked to tank owners-- tanker owners, right, over the last few weeks, and they're all getting inquiries for their ships.

And it was just for VLCCs, those Very Large Crude Carriers holding 200 million barrels. Now, it's a Suezmax holding a million barrel, an Aframax tanker holding 700,000 barrels. So they're just going down the value chain saying, OK, we don't care the size, we just need the storage. So that number of 250 million, we assume it gets to 350, maybe 400 million barrels here in the next two months.

SEANA SMITH: All right, Randy Giveans of Jefferies, thanks so much for taking the time to join us today.

RANDY GIVEANS: My pleasure. Good. Thanks for having me.