Oil prices: China demand is a 'dilemma,' India may hold solution

Oil (CL=F, BZ=F) prices are sinking again on Friday after breaking through the $80 threshold in mid-March. Mizuho Americas Executive Director of Energy Futures Bob Yawger joins Yahoo Finance Live to discuss broader trends in the oil and gas markets.

US refineries are set to ramp up production, Yawger signals, with geopolitical tensions and the upcoming "driving season" putting pressure on supply. Yawger advises, however, that gas prices are unlikely to trend much higher: the refineries have learned their lesson following COVID when the price shot up to $5 and demand tanked. "They will try to feather the price somewhere around $3.50...They know what will happen if gas gets to $5," Yawger says.

The outlook for oil is exacerbated by China's demand situation. Following COVID, China "rallied the market to the moon," but according to Yawger, "that's not in the cards any time soon." India, however, could be a future demand agent: Yawger explains that the nation's substantial population will soon be driving gas-guzzling used American vehicles. With this in mind, Yawger projects peak oil production won't occur until 2035.

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 Gabriel Roy.

Video transcript

JOSH LIPTON: Oil prices sinking again in today's trade. That's after climbing earlier this week. With more, we're now joined by Bob Yawger, executive director of Energy Futures at Mizuho Americas. Bob, it's good to have you here.

BOB YAWGER: Thank you for having me.

JOSH LIPTON: So oil is interesting to think about here, just the push and pull, Bob. You think about geopolitical conflict, but on the other hand stronger dollar to consider. Looking at oil, just under 81 here. Where do you think we're headed, Bob, just in the near to intermediate term?

BOB YAWGER: Well, on top of the geopolitics involved, we're two months away from driving season. So right now, the refineries in this country are going to start to ramp up. They're going to take a lot of crude oil through the refinery. This is a seasonal thing that happens every year.

We had a big pop in demand in the last two weeks in the month of March, which is very rare. And we had gasoline outpace crude oil to the upside. That's one of the things that sparked crude oil to the new high, the new multi-month high that we put in this week earlier in the week.

And this last storage report though that demand number sagged a little bit, but it's a very good sign that demand is very strong. It's at 9 million barrels a day. The all-time record is 10 million barrels a day and that was in the summertime in 2021.

JULIE HYMAN: I want to-- we'll go back to oil, but I do want to ask a little bit more about gasoline because so many drivers are paying so much attention to it. There are political implications of where gasoline goes. So do you think we will continue to see that trend higher more than it seasonally does in summer?

BOB YAWGER: Well, I think that the refiner has learned his lesson. We came out of COVID, the perception was that the US driver wanted to drive all over the place and burn through gasoline like there was no tomorrow. And the price at the pump got as high as $5 a gallon. It killed the golden goose. The driver stopped driving and the refiner was basically left holding the barrel.

Prices fell accordingly very quickly and I think they've learned their lesson from that. They will probably try and feather the price in there somewhere around $3.50 at the most, maybe $4. We're basically $3.25 right now-ish. And they know what will happen if we get to $5. They'll lose demand rather quickly.

JULIE HYMAN: So that's good news then for people who are driving--

BOB YAWGER: It is good news, yeah.

JULIE HYMAN: --around.

BOB YAWGER: It is. And I think there's some political pressure on not to get there also as a function of inflation also.

JOSH LIPTON: And Bob, I want to get your take too, you look at China still kind of shaky over there. How does that play into your outlook for oil?

BOB YAWGER: It's not good at all. That's a big number right there. Their demand-- they were the reason why we were able to get to where we are now post COVID, post negative prices.

When demand slid off the face of the Earth at the beginning of COVID and we went to negative prices, two things happened. Saudi's cut production and China eventually emerged and was the big demand engine that rallied the market to the moon. That's not going to happen anymore. It doesn't look like that's in the cards for anytime soon.

So they're not going to-- it's not going to be demand destruction, but they're going to stay at this level to maybe a couple of barrels higher. But they're not going to take the market and run higher with it. And that's a dilemma for the folks at OPEC.

They need that demand. They're starting to increasingly look to India as maybe the future demand engine. So that's a different situation--

JOSH LIPTON: How realistic is that, Bob?

BOB YAWGER: There's 1.3 million people there. A lot of them don't drive at all at this point. And they're going to be buying old cars from the United States that we ship to India. And the rest of the world will be shipping.

And those are gas guzzlers. The largest refinery in the world is the 1 million barrel per day reliance refinery. That's a monster and it's there for a reason.

JULIE HYMAN: As we were talking before we came on air that I was in Houston at CERAWeek this week, which is the big oil and gas conference annually. And there has been, sort of, a renewed push back amongst the oil industry about the energy transition, right? You had the Saudi Aramco CEO calling the idea that we are moving away from oil and gas right now a fantasy and that we need to invest more. Where are you on the question of, like, peak demand where we are on that continuum?

BOB YAWGER: Well, it's two sides to this story basically. First of all, the ECO Clean Energy Index for starters, it's trading at multi-year lows. So as a combined index with 75 names in it, it's getting killed. It's not working.

A lot of the names in that index are just not cost effective. The technologies cannot compete with fossil fuel at the end of the day. And the people involved have stepped back a little bit from that space as a result.

On the other hand, we're going to be-- we're going to set the new demand number probably in 2035-ish. So you still have 10 years. We have to work through this Indian situation for starters also, other emerging third world countries. They're not going to be driving new Teslas anytime soon and that's going to put the peak oil story on the back burner for a while.

Now, there are some clean energy companies that are doing really well on the other hand. Like, Constellation Energy is a utility that is nuclear and has a lot of clean energy mixture also. That's the third best performing name in the S&P 500 this year. So there's a certain rotation away from the Magnificent Seven into the old school name and they seem to be the darling of that switch.

So there's other names like [INAUDIBLE] is doing great. They're a provider of clean energy infrastructure to a lot of people that participate. So there are two sides to that story. But fossil fuel is not going to go. It's not going to evaporate from the scene anytime soon.

JULIE HYMAN: Right, yeah.

JOSH LIPTON: Bob, thanks so much for joining us today. Appreciate it.

BOB YAWGER: Thank you. Thank you for having me.