Gas prices will ‘push higher’ until demand destruction kicks in, analyst says

Vectis Energy Partners Principal Tamar Essner joins Yahoo Finance Live to discuss rising gas prices, demand destruction, inflation, the probability of a recession, and the outlook for summer travel.

Video transcript

BRAD SMITH: And we're watching the price of gas and oil, how it's leaving a lasting impact on consumer spending. For more here, let's bring in Tamar Essner, Vectis Energy Partners principal. Tamar, great to see you, and thanks for joining us here. First and foremost, you're still bullish on fuel prices with the post-COVID demand for travel and that persisting here. But as we've discussed in the past, do you believe that we'll see any sort of demand destruction? And at what point?

TAMAR ESSNER: Hey, Brad. It's good to see you. Yeah, I think we'll see demand destruction as we get past the summer. I already think that we're seeing signs of it. Demand growth is probably not as strong as it otherwise would have been coming out of COVID. But disposable income is still very high. People are still traveling. And if they're not driving, then they are flying. We see that in the numbers.

And so that is why we are going to continue to see this disconnect between product prices, meaning jet fuel and gasoline, and what you're going to quote on the screen for WTI or Brent crude oil prices.

BRAD SMITH: Tamar, when might we see gas prices below $4 a gallon?

TAMAR ESSNER: Well, the big concern over the summer in terms of higher prices is what happens in the event of a hurricane season and refinery outages. So I think prices have to go quite a bit higher, to your point, in order to see demand destruction. What that magical number is I don't know because we are in unprecedented times in terms of having this buildup of demand post-COVID, at the same time because of stimulus and higher disposable income and wages.

We are having higher wage prices and income relative to past levels. So it is difficult to sort of say what that magical number is. But I think that the only thing that's really going to make a dent in gasoline or jet fuel prices is demand destruction. So we're going to have to push higher until we get to that point.

BRAD SMITH: We're continuing to watch at this point in time, as our own Ines Ferré was just breaking down, even more of a buying in from Warren Buffett into a company in Occidental Petroleum. Him now taking a 17, in aggregate, percent stake in there. Do you expect to see more buying into this sector right now, given some of the movement that we've seen most recently and, to what you're mentioning, the fact that it's probably going to get worse far worse before it gets better?

TAMAR ESSNER: Well, I think that the recent weakness in energy equities is an interesting buying opportunity. I think some of that reflects the mounting political risk. You know, the more the Biden administration criticizes refiners and energy companies for price gouging, the higher the risk that there is some form of regulation or higher taxes on that industry. And so that might keep people a little bit at bay.

We're also going to look to see if-- you know, Continental recently announced a bid for a take-private. So the market is looking much more attractive on the private side than it is on the public equity side. So we continue to think that there'll be a little bit of a lag between what happens in terms of public equity valuations and product and commodity prices. But overall, yes, I think that recent weakness is an interesting opportunity.

BRIAN SOZZI: We've seen a heck of a move the past year in natural gas prices, Tamar. Any relief in sight?

TAMAR ESSNER: Well, we've had a bit of a relief recently. But, you know, the problem overall is, you know, lack of investment. And this is both for crude oil and for natural gas. For natural gas, over time, we imagine that the US will export more. The problem really isn't a lack of abundance of the resource. The problem really isn't lack of drilling, but really lack of pipeline capacity to get product to where it is needed.

So I think that natural gas can have some relief in sight as, you know, recent outages will prevent or stall some of the exports of the US product overseas. But natural gas is really something that had been a sleepy commodity in the past. We really didn't talk about it so much. But we're starting to understand how important it is in manufacturing and all sort of areas of the economy. So higher prices really have an influential role when we're trying to examine the risk of recession.

BRAD SMITH: Earlier this year, as we were weighing the impacts of energy sanctions towards Russia, there was a larger question of, you know, where kind of the international calculus on the energy front and the pricing would net itself out. What have we seen since that point? And how would you describe the state of affairs on the oil price front internationally, as we're seeing kind of this changing of supply and exports?

TAMAR ESSNER: Well, longer term, you know, regardless of what happens in the Russia-Ukraine situation even if there is a material de-escalation, we expect the Western countries will stay off of Russian oil. And so that's going to be a big supply gap to have to correct. Russian oil exports haven't gone down that materially because India and China have largely absorbed those barrels at a discount.

But what we have seen as a material loss is Russian refined products. And that's a big part of why, as we talked about earlier, gasoline and jet fuel prices are so high, is because some of the bigger refinery countries, such as Russia and China, are really, you know, sort of offline here. But going forward, I mean, you start to look at what the US administration has proposed recently in terms of price caps on Russian oil.

In the context of the European Union, recently announcing sanctions on Russian oil. And all that does is make you understand that it is really, really, really difficult for Europe to wean itself off of Russian oil and natural gas. So the sanctions obviously are-- it suggests limitations on them because, you know, they're saying basically, we're going to have to continue to buy Russian oil. And hopefully, we'll be able to do it at a discount.

So the math is really hard over the long term. As we said, we think that, you know, there's a clear redrawing of the map for Western countries moving away from Russian energy, while, you know, certain other countries, largely in Asia, will get closer to Russia. But at the same time, in the short term, we think that the market is structurally undersupplied, especially because it is very difficult to replace those barrels and those gas molecules in the short term.

BRIAN SOZZI: All right, we'll leave it there. Tamar Essner, Vectis Energy Partners principal, great analysis. We'll talk to you soon.