Energy markets have remarkably 'shrugged off risk': Analyst

OPEC+ production cuts and Middle Eastern tensions are pushing crude oil prices (CL=F, BZ=F) higher. KPMG Global Head of Clients & Markets Regina Mayor joins Yahoo Finance to discuss the geopolitical pressures putting a squeeze on energy markets, especially ahead of the summer driving season and what oil prices could in turn mean for gas prices.

"If the geopolitical tensions do not scale back somewhat, especially in the Middle East, then you could potentially see a driver that increases prices, but frankly, I'm more on the bearish side and I'm not going to predict a three-digit oil price any time soon," Mayor explains.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

[AUDIO LOGO]

JOSH LIPTON: Oil prices closing the day above $85 a barrel, hitting a five-month high. The move coming as US stockpiles rose unexpectedly by 3.2 million barrels in the latest week. Joining us now is Regina Mayor, KPMG Global Head of Clients and Markets.

Regina, it is good to see you. So oil has been rallying. We did reach this five-month high. What explains that, Regina? What's driving that move?

REGINA MAYOR: Well, the market's been remarkably able to shrug off risk. And I guess in this particular instance, they haven't been able to. So we've got escalating tensions in the Middle East. There looks like there might be a spread. That's what's really driving the big kick up now. And we're starting to see demand actually continue to increase, like manufacturing-- manufacturing data from the US was stronger than it's ever been since 2022. China's was stronger for the last six months. So those are some of the factors that are going into it.

We also saw January, a lot of production was down because of some of the cold weather. So I think there was an expectation that stocks would be lower, demand is going higher, geopolitics are creating a greater risk factor. So those are the things that are driving the current rally. Personally, I don't expect that to continue.

JULIE HYMAN: Well, that's what I was going to ask you about, Regina, you know, whether some of those factors are going to remain in place. I mean, geopolitical tensions don't seem to be necessarily abating here. But what about the other factors that you were talking about?

REGINA MAYOR: Well, stocks did build as you just mentioned. And so I do think January was a little bit of an anomaly when it came to production. And you see the US driving much greater levels of production, hitting record levels of production in December. And I would anticipate that will come back.

And the US is becoming a much greater exporter of its hydrocarbon resources. And that's driving a lot of positivity around easing supply concerns. I don't think demand is going to necessarily dampen. So if the geopolitical tensions do not scale back somewhat, especially in the Middle East, then you could potentially see a driver that increases prices. But frankly, I'm more on the bearish side, and I'm not going to predict the a three-digit oil price anytime soon.

JULIE HYMAN: OK. So that was going to be my next question for you, Regina. Where do you think the cap is in this current surge that we've seen?

REGINA MAYOR: Again, I go back to the market has been incredibly remarkable in its ability to shrug off risk. This has been going on for the last two years since the conflict in Russia-- or the conflict in Ukraine when Russia invaded Ukraine took place. And even with a lot of those barrels coming off the market, we're still able to increase production from other parts of the world. And we've been able to meet the burgeoning demand.

We reached record high global demand in 2023, greater even than pre-pandemic. And I recall during the pandemic when we were saying we had reached peak demand, and that does not necessarily seem to be the case.

JOSH LIPTON: We keep talking about this phenomenon with regard to US stocks as well-- equities, that is. In other words, this sort of resilience, this view that because economic growth has continued, that stocks have just continued to go up. So I guess what I'm asking is, how much is animal spirits sort of a factor here? How much speculation is happening when it comes to the oil markets? And how tenacious can that be a factor going forward?

REGINA MAYOR: It's incredibly speculative. I mean, there's all kinds of factors that drive supply and demand. And I believe that the market probably has been under-representing risk in the delicate supply-demand balance that we have for global crude supplies.

So you could say it's irrational exuberance, like we're seeing maybe in some of the equities markets. And if that potentially comes down, you know, what does that do? But if the stocks do eventually crash, that probably means a crash in oil prices as well. So I see enough dampeners as well as the things that are being priced in right now to say, I think this is something of a blip. But again, I'm not particularly good at predicting oil price. So don't take that one to the bank.

JULIE HYMAN: Well, I want to ask about gasoline also, because obviously that's getting a lot of attention-- I mean, it always gets a lot of attention. But it's in a presidential election year, there are some factors going on there. And in the past when we've seen these gasoline prices creep up, we have seen some pushback from motorists, who don't want to pay especially lofty prices. What kind of dynamics are we seeing at play this time?

REGINA MAYOR: Well, the public's always able to vote with their feet when it comes to gasoline consumption-- not 100% So I'm not trying to be hyperbolic about it. I understand people need to drive their cars to get to and from work and to pick up their children and take them to school and things of that nature.

However, they might think twice about driving over the summer holiday if gas prices reach a level that they deem unacceptable. I've seen that typically at $5 per gallon in the Southern states where gas prices tend to be lower. You do see demand destruction.

We're getting into summer driving season. We expect gasoline demand to continue to grow. That will drive prices up in the short term. So the extent to which it's affecting an American's pocketbook will drive how they behave this summer.

JULIE HYMAN: Regina, good to see you. Thanks for joining us.

Thanks