Kpler Sweet Crude Analysis Head Matt Smith joins Yahoo Finance to discuss the energy markets and the outlook for oil prices.
BRIAN CHEUNG: Oil prices rising this morning after OPEC+, a group of some of the world's most powerful oil producers, agreed to stick with its plan and boost oil production by nearly 650,000 barrels per day in August. Crude oil now about 108. Keep in mind, it was about 122 not long ago. Here to discuss more, Matt Smith, head of Sweet Crude Analysis at Kpler. Great to have you on the program this morning. Matt, walk us through OPEC+'s announcement here and whether or not that implies that we should continue to see downward pressure on the barrel prices of crude oil.
MATT SMITH: Hey Brian. I don't think that we're going to see continued downward pressure on oil. I think what we've seen in the last couple of weeks in the oil market is this sell-off, as oil has got swept up in broader market sentiment, as we've seen a sell-off in equities, et cetera, as a risk appetite thing. And so that's why we've seen crude pull back.
What we're likely to see going forward here is prices supported in part because of OPEC there. As you mentioned, they're continuing to put more oil onto the market. But at the same time, too, they are still struggling to increase those exports. And so you have the three largest producers in the world-- Russia and Saudi-- we talk about the US as well. But, you know, Russia and Saudi are part of the OPEC+ deal. Saudi Arabia has really struggled in recent months to increase exports. In fact, we have seen them dropping.
And so there's a real challenge there of cross hairs here in terms of what we're hearing out of OPEC that they're increasing production, but we're not seeing those barrels actually hitting the market. We're actually not seeing an increase in terms of those exports. So that's the challenge that is faced going forward here in terms of Russia as well. By the end of the year, we're going to be seeing them materially lower in terms of their production, too. So this is very much a supply side story. And we should remain above triple digits here.
AKIKO FUJITA: Yeah, let's hone in on Russia a bit more, Matt. I mean, you know, what we have seen is Russia has found buyers, even in the face of sanctions. And that's largely China and India. So what does that supply-demand dynamic look like? And as we see or we saw over at the G7 this discussion of a potential price cap, I mean, what is kind of the next shoe to drop? How is Russia likely to react?
MATT SMITH: The price cap thing, Akiko, I think we should just throw that out the window. That's not going to happen. That's something that the Europeans want done, all that. There's no real incentive for Putin or the Russians to do that. So I think that's just not a consideration here. In terms of the supply-demand side of things, we have seen direct displacement of Russian crude dropping into Europe there, still going in at, like, about 1.1 million barrels a day. But we have seen a pullback there into those EU 27 countries.
But it is essentially just going elsewhere. It's going predominantly, as you mentioned there, it's going into India. It's going into China. Now, you know, India was really a marginal buyer of Russian crude prior to the invasion of Ukraine. But as we've seen, as that oil has been discounted by $30 a barrel, suddenly, we're seeing nigh on a million barrels a day going into India. They're one of the largest suppliers now pushing out Saudi Arabia. And so, all it is, really, is just the redirection of flows at the moment in terms of those Russian flows. We're not seeing a significant pullback there yet.
BRIAN CHEUNG: Matt, I wanted to ask just about the growth story, because we know that when it comes to demand, the re-onlining of the Chinese economy is a big story. But this is coming at a time where, by the end of this year, by the beginning of next year, we don't know if Europe or the United States will be in a recession-- arguments we're already in one. So what does that tell you about the demand on oil and what that can mean for prices over the next, let's say, 6 to 12 months?
MATT SMITH: Yeah, so what's interesting, Brian, is that this time around, it's more of a supply side driven phenomenon here that's holding up prices. And the reason that I say that is you have all these issues, whether it be with Saudi Arabia struggling to increase, Russian barrels coming off the market, US production struggling to really keep up with expectations of rising production, even though we're in triple digits. And so the supply side of things, that's where the struggle is. And that's not even mentioning-- so issues with Libya or issues elsewhere.
And so that's the concern. On the demand side of things, we're recovering still from the pandemic here. We're still seeing that rebound coming out of that, you know. It's just going to be tempered if we see Europe-- the US going into recession there. And so it's really a supply side phenomenon here. So I wouldn't make the case that even if we do see things going into a recessionary environment in various different regions, we're still going to be in a high oil price environment, simply because of these issues.
AKIKO FUJITA: Finally, Matt, there's going to be a lot of eyes on President Biden's trip to Saudi Arabia later this month. You know, obviously, this is the White House's effort to try and get the Saudis to basically turn on the tap a little more. What's a realistic outcome to expect out of this trip? And how big of a dent can the Saudis alone make when you talk about global oil prices?
MATT SMITH: Yeah, sure. I think we'll get something. I think it's going to be constructive. You know, Biden has been very loathe to have communications with Saudi, given everything that's happened in recent years. But this is a big step, going over there. And I think that we are going to get something happening because of that. The real challenge is going to be, for Saudi, how much they can really put onto the market here.
So in terms of production, they're around 10.3 million barrels a day here. It's challenging to see them push another million barrels a day on top of that, you know. And even if they did, that would raise their spare capacity, which then leaves us really open to any supply shocks that may happen. And we could see prices really spike. So we're likely to see some kind of results out of Saudi Arabia here, whether it's just to appease Biden or not. But, you know, given the interlinked relationships there, we should see something happen, yeah.
AKIKO FUJITA: Well, Matt, good to have you back on the show. Matt Smith, Kpler head of Sweet Crude Analysis.