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Oil: ‘We’re seeing that reciprocal demand destruction,’ commodity strategist says

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Bloomberg Intelligence Commodity Strategist Mike McGlone joins Yahoo Finance Live to discuss the impact of inflation on oil and gas, President Biden’s plead to Congress for a 3-month gas tax suspension, and the outlook for commodities.

Video transcript


BRIAN CHEUNG: As gas and oil prices continue to impact consumers, our next guest says it's more likely for crude to revert towards $50 a barrel than reach for it to reach new highs of $150 a barrel. Let's welcome in Mike McGlone, Bloomberg Intelligence commodity strategist. Mike, it's great to have you on the program this morning. Look, we've come down pretty far from the recent highs. We were seeing crude oil around $120 a barrel, now at about $105. And it sounds like you think there could be more declines to go. That might be welcome news. Why do you think you're making that call?

MIKE MCGLONE: Well, one thing I have to start with, Brian, I was a little bit early. I didn't think it would go up that much. But we just had, this year, the highest velocity move in WTI crude oil futures versus its 100-week moving average ever. And we're seeing that reciprocal demand destruction. You're seeing it everywhere. I've seen peaking US diesel demand, US unleaded gas demand. And those prices at the pump actually jumped a lot more than actual crude oil. And we've seen global GDP estimates revised downward everywhere. The supply is coming back.

So to me, this is part of the macro kicking in. And the key thing you have to remember about crude oil is, OK, going back to 50 is not profound. It's dropped 75% on three occasions since its peak in 2008. And it keeps kind of doing it from lower levels. Remember, the peak this year was 130. The all-time high was 145. And here, we're at 100. The last time it traded at 100 was 2008. So what I see is the potential last gasp of an enduring bear market that now is trickling over into the macroeconomics. And it's pushing it all lower.

BRIAN CHEUNG: OK, well, this is a really important note because I mean, you know, it's oil and gas that's been a big driver of the global inflation that we've been seeing. So if that was kind of the top, are you suggesting that we've reached the peak effectively?

MIKE MCGLONE: Oh, sure, well, and the simple base effect-- by this time next year, if you and I are speaking, I fully expect the key topic will be deflation. And it's the classic base effect. So just getting crude oil to go from an average price of 50 to almost 130 was pretty significant. But once you get to 100 to go to 200, that's a big deal. Going back to 15 is just what it's been doing for the last 14 years. It's normal. And it's trickling down everywhere.

So the key thing to remember about inflation, it's a backward-looking measure. But if you look at the forward-looking measures, like, the number one is the US stock markets dropping at a high velocity. Bonds are dropping at a high velocity. And this spike in crude oil, to me, is showing the potential for that inflation that we've had going away at some of the fastest pace I've ever seen it. And at the same time, despite the stock market going up, we have the Fed increasing rates. And that's just here.

So crude oil is just part of it. It helped accelerate the Fed rate hikes. And now I think the whole thing is going to trickle down and just go back to what it normally does. What does crude oil have a history of doing? It is doing pumping and dumping. And it's just going back to the dump zone, as I see it right now.

BRIAN CHEUNG: Yeah, I'm putting a bookmark that we'll talk again on June 23 next year. I wanted to ask about just the impact of the news that everyone's watching, which is, of course, the Biden approach to this perhaps gas tax holiday here in the United States.

You know, I feel like, you know, I know what you're going to say already. This might not be as substantial in the broader picture. But look, is this going to have any impact on the demand? Because you have some people saying, well, I mean, if gas prices get cheaper, maybe I go and take another vacation. And maybe that keeps the demand high and that oil prices could remain high.

MIKE MCGLONE: Well, he doesn't care about that right now. He only cares about getting elected and getting in the midterms. And you're right. When you reduce the price, demand goes up. And that's the problem. We've had such a significant spike in prices, demand is rolling over and actually potentially might be collapsing, like it did in 2008. I see a scenario just like that. So I think it's appropriate maybe to reduce the taxes, but it's more political.

But if you really want to help the situation, you add supply. And what's the first thing the Biden administration did when they came in? They cut the Keystone Pipeline. I mean, there's a massive surplus of liquid fuels, crude oil and liquid fuels if you include US and Canada. In fact, it's running near 20% now of production surplus versus consumption. But it's maybe we need to-- and this is part of the old guard fossil fuel economy, fossil fuels showing us that's how significant it is.

But now, what I see, if they do nothing, prices are much more likely to go lower. And you can see that, like I said, what's happening in the stock market. It's just the market's taking back that big, liquid fuel pump we had in '20 and '21. And it's taking it back at a shocking pace.

BRIAN CHEUNG: So what's the big headline that you're going to be watching for in terms of the supply story going forward? Is it going to be OPEC+ announcements going forward? Is it going to be perhaps Biden administration policies on wanting to-- it seems like they've been driving a little bit of that narrative on wanting to increase oil exploration right now. I mean, how important are those types of stories as you continue to talk about the macro environment that might already be perhaps pushing prices down over the next medium term?

MIKE MCGLONE: Well, that's one of the reasons I love speaking to you, Brian. Part of my job is to predict the headlines. And it's also a very dicey thing to do. But OPEC is somewhat difficult to measure. Remember, they're a cartel and their job is to make prices go higher. But what have they done over time? It's part of the reason that we've had this massive paradigm shift in North American production accelerating over time and consumption remaining the same.

So, to me, you know, OPEC might be a difference. But I think Mr. Biden should go to Texas rather than to Saudi Arabia because that's what's been the major shift since the peak and since the crisis really collapsed in 2014. And that is just that paradigm shift of the US becoming a net energy massive producer, net exporter. LNG is one of them. Just let free markets reign. And that will happen.

What I see happening now is potential just rollover where supply is coming, but it's with a lag. But demand is just starting to trickle down. And it's happening everywhere. I mean, inflation is really hurting people. But if you look at the forward-looking indicators, like I said, this plunge in the stock market, it's all heading back towards-- it's basically just mean reversion is a big risk.

BRIAN CHEUNG: Well, and this is an important point that you bring up because if this view that you have is also the prevailing view inside the C-suite offices over at Exxon Mobil and the other big drillers here in the United States, well, they might be saying, well, I'm not going to spend the money to turn on more pumps because I know that the pressures from the demand side might be abating very soon. So on that front, are you seeing any trends in CapEx among the US domestic drillers that tells you they kind of feel the same way about that?

MIKE MCGLONE: Well, you just nailed the major thing that a lot of the naysayers have been, all of the bullish people have been saying, and I've heard this for quite a while about lack of CapEx. That makes sense-- and potentially, the shift to EVs. But we've had it. We've plateaued in our consumption in the US, even without EVs. That's just pure efficiency.

The key thing they look forward to is, you're talking about the publicly traded majors. There's hundreds of independent oil companies in this country that just have a lot of land, and they can create a lot of value from it just by selling forward and the futures curve and producing crude oil at less than $50 a barrel.

On the screens, you see $100 a barrel. So it's just pure-- to me, I look at it as pure supply demand and economics are not good for the price. And what I think is the bigger picture is this global macro turndown in GDP. I mean, we have Bloomberg's global GDP tracker. And it's dropping at a faster pace than in 2008. So I'm worried about that kind of scenario. We pumped and then we dump towards the end of the year. And everything is starting to head that way.

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