Oil prices lower on doubts over output cuts

Yahoo Finance’s Alexis Christoforous and Brian Sozzi take a deep dive into the oil market with RJO Futures Senior Asset Manager John Caruso.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, let's talk a little oil here. We've got crude oil down more than 1 and 1/2%, $36.66 a barrel. It looks like Saudi Arabia and Russia have agreed to keep deep production cuts in place into July. But the rest of OPEC+ is not yet on board. And that just as hopes are growing that reopening economies could push a big increase in demand for oil.

Let's talk about this now with John Caruso. He is a senior asset manager at RJO Futures in Chicago. John, good to see you again. So is extending these cuts enough to boost the price of oil?

JOHN CARUSO: Well, I think you've got to kind of take a look back and look where we were and in terms of how far we've come. The price since the July contract low. We rallied more than 100% right now. So I'm actually in the camp that believes that we could see a 3% to 5% correction, a little bit of a setback from here. We are seeing some softness in the market this morning, perhaps a little bit of a buy-the-rumor, sell-the-fact type setup in the market.

I think the one thing you want to really keep an eye on is compliance going forward. We do know that there's-- the Saudis and Russians, there's a handshake agreement to extend the cuts through July. But from what I've seen, compliance of the 9.7 million barrel cuts per day back in May was only running at about 74% or 75%. So there was some cheating going on in the market.

I really think you need to watch that going forward. And you're going to see that in the weekly inventory numbers.

BRIAN SOZZI: John, you know me. You've been on enough. I'm always looking out for oil price spikes somewhere. But I think I finally have a case to be made that we could-- maybe we do see an oil price spike this summer, early fall.

Look at the market. Look at what the stock market's doing. FOMO, rip-roaring rally-- why hasn't oil caught up yet?

JOHN CARUSO: Why hasn't it-- I'm sorry?

BRIAN SOZZI: Why oil, why has it not caught up yet with the market rally? Just the broad market rally in stocks. Clearly the market is saying something.

JOHN CARUSO: Sure, absolutely. Well, I'll tell you what-- I mean, this reopening of the economy that's happening very slowly, I can tell you just from being here in Chicago that there's still a lot of downtown that is still very quiet right now. A lot of offices haven't reopened. So you're not getting that commute to the bigger cities every single day.

So demand, the demand side of the equation is still very much-- there's a lot of question marks hanging around demand going forward. We have certainly seen a big step forward in terms of the supply-demand fundamentals with the production cuts. Slowly the economy seems to be coming back online.

But if you look back at yesterday's inventory numbers, we did see some softness in the products. We saw some bigger builds than expected in the products. And that certainly is a factor with demand.

BRIAN SOZZI: John, looking back at how we emerged from the last-- from the Great Recession, does that tell you anything what might happen will with oil as economies start to open up?

JOHN CARUSO: To be quite honest with you, I mean, going forward-- after perhaps a 3% to 5% correction here in the near term, going forward, we actually are going to be pivoting to being very bullish on oil. I do think you could see oil run up into the mid-40s at some point over the summer. There is a gap in the market up at 42 that I do think the market's going to likely close at some point from July to August. So after perhaps a small correction here in the market, we're going to be looking at being-- becoming more bullish on the price of crude going forward.

ALEXIS CHRISTOFOROUS: But John, do you think that fundamentally the pandemic has sort of shifted oil markets going forward?

JOHN CARUSO: Sure. There's no question about it. Until we start to see lower viral load-- we actually have seen lower viral loads-- but everybody is kind of awaiting, are we going to see that second wave hit us in the fall time again? So there's still a lot of question marks in terms of where demand is going to be a year from now.

But I do think over the course of the next couple of months, it's not going to shock me to see the price of crude oil reflate into the $40 level.

BRIAN SOZZI: And John, longer term, I think the pandemic has showed us that we can get our work done at home. We can get it done at home. What's the longer-run outlook for oil, do you think?

Maybe we're taking less public transportation. Maybe we're driving to the work less. Certainly maybe we're taking Uber and Lyft less.

JOHN CARUSO: Sure, absolutely. The game has completely changed going forward. We're going to be monitoring those developments going forward. I do know that in the back half of this year, OPEC is likely going to be tapering these production cuts. I believe after July, they're expected to fall back to 7.7 million barrels per day through the end of the year, and lower it even beyond those levels out into next year.

So there's a lot of question marks in terms of demand. Like you had mentioned, the game is certainly changed in terms of transportation. And there's a lot to certainly be looking forward to from that regard.

ALEXIS CHRISTOFOROUS: All right, John Caruso, Senior Asset Manager at RJO Futures there in Chicago for us, good to see you again.

JOHN CARUSO: Thank you so much.