Claudio Galimberti, Senior VP of Oil Markets Analysis at Rystad Energy, joins Yahoo Finance Live to discuss the energy markets, crude oil prices, and geopolitical catalysts that could alter supply and demand.

Video Transcript

BRIAN CHEUNG: So let's talk a little bit more about crude oil, as Ines mentioning, continuing to fall, markets trying to figure out exactly what's going on, especially as the stock market rise has actually coincided with falling oil prices. For more on this, let's bring in Claudio Galimberti, Rystad Energy Senior Vice President of Analysis and Oil Markets. Great to have you on the show, Claudio. I guess, natural question is, should we expect to see oil prices continue to decline from here?

CLAUDIO GALIMBERTI: Thank you for inviting me, Brian. It's obviously a difficult question talking about oil and the direction of the price. But indeed, what we have seen in the past few weeks is weakness. So what's the root cause of the weakness in the oil markets? It is the demand side of the equation.

So what we have seen is recession risks coming up just in the past few weeks, high inflation in the United States. Yesterday, there was a surprise move by the People-- People Bank of China to decrease the rates. So this all signals weakness on the demand side.

And there's also strength on the supply side of the equation. So the United States supply is coming up, specifically from the Permian, which means that if you look at the inventory, not the inventory of today that came out of the DOE reports but the general trend of the inventory, is for the oil markets to be more balanced in much less time than they were three or four months ago. So the direction is still towards weakness, but there are a variety of influences in the market that can pick it up or push it down further.

AKIKO FUJITA: Claudio, it's Akiko here. You just kind of highlighted some of the risk factors we're looking ahead to. Specifically on the US, we have seen the White House kind of take a victory lap recently looking at the pullback that we've seen in oil sort of tying that to the release that's been happening with the Strategic Petroleum Reserves. That is up in October. How big of an impact has it really had in the pullback in prices we've seen? And what do you anticipate once that's over?

CLAUDIO GALIMBERTI: Excellent question, Akiko. The SPR was absolutely timely. And when it was announced six months ago, we all thought that was a very bold move of the administration and very credible. And the market reacted accordingly.

So you-- back then, you had the front end of the curve, so the prices for early delivery came off. And at the same time, the back end of the curve, so the prices for the further down the line deliveries past October when the SPR is supposed to come off also increased. And that was an expected kind of effect.

Now, when the SPR is supposed to come off is October, and this is exactly when we are forecasting a very significant growth in the US light [INAUDIBLE] production. So in a sense, we can say that the SPR was well-timed because it allowed the administration to bridge the supply gap between April, when we didn't have yet the strong growth in the supply, and right now where we are very much close to a significant uptick. So-- yep?

BRIAN CHEUNG: Yeah, I was going to say, I mean, that's kind of a big factor of what we're seeing here domestically. But I guess I wonder how much of the story from China based off of the demand picture folds into pricing, as well, when you consider that there are concerns about a significant slowdown happening in China? Do you feel like the story there is also supportive of a particular narrative on where oil prices could go?

CLAUDIO GALIMBERTI: It is supportive. So it is supportive of weakening on the demand side. This is generated. But let's not-- let's not be too pessimistic. So China is known, has been known for many years, to apply fiscal support and monetary support in the second half of the year. And yesterday, the premier of China came up with a statement along those lines.

So we can expect China to put more emphasis on growth in that for the remainder of the year. Therefore, we could expect China not to plunge into recession. As far as the US and Europe, what I would say is that the latest data that we saw from the inflation, at least in the US, seems to be going in the right direction. So inflation has not grown last month, which might mean that we may be in for a downward correction in recession-- in inflation, which is also a benign sign.

So the narrative is still, from the market standpoint, probably bearish for the next few weeks. But we cannot just bank on the prices to be going down towards $60, $70 per barrel. They can quickly, and I say very quickly, bounce back up, especially if we have, for instance, a big surprise drop in the production in Russia, which cannot be ruled out. Let's not forget that the European countries are supposed, by the end of the year, to completely wean themselves off the Russia i,ports, which means we are going to witness very, very big trade floor reshuffles. And anything can happen when you have such a big change.

AKIKO FUJITA: I mean, how much of that supply from Russia are you anticipating coming offline? I mean, despite the sanctions that have been placed, Russians have been able to find buyers, especially in China and India.

CLAUDIO GALIMBERTI: . Absolutely what we are seeing is that there has been already a great trade reshuffle. So the European countries have reduced their imports specifically from the Baltic and the Black Sea by already 1 million barrels per day. And the Indians specifically, but in parts also the Chinese, have increased their imports because there was a discount. But if you look at the latest-- very latest data, it does look like Russia exports are actually coming off right now because the discount for the India refineries is no longer there.

So we could be on the cusp, as a matter of fact, of a reduction in Russia export, which eventually will mean a reduction in Russia production. If that is the case, I always warn people not to forget about this great trade reshuffle because it will happen, and it will happen just in the last quarter of 2022 and the first quarter of 2023. Many things can happen when you are rediverting 5 to 6 million barrels a day of crude exports.

BRIAN CHEUNG: Claudio, so as an expansion of that point, then, if Russia's being offline essentially for the longer-term future, where is the other production kind of being compensated for when you talk about the major oil producers, who's kind of picking up most of that load?

CLAUDIO GALIMBERTI: Absolutely. In our supply focus we have the United States as the major-- one of the major players. So we focus the exit production for the United States in December of this year, total crude and condensate above 13 million barrels per day. This would be above the peak, the record that we reached before the pandemic.

And then next year, production is also supposed to continue to grow, even with not necessarily extremely high prices. OPEC is also supposed to play a role, although OPEC is always concerned about oversupply in the market, therefore they will keep an eye on keeping the market in a relatively stable condition-- condition. And then we have also the North Sea, Canada, and Brazil, but they will play not as big of a role as the United States.

So in a sense, the United States, and specifically the Permian production in the United States, is the big solver. Having said that, if Russia is going to lose a very significant amount of production, let's call it 3, 4 million barrels a day, unlikely, but it's still possible, then not even the might of the United States Permian production could fill that gap. And that would be a situation where you will see, again, oil prices increasing dramatically.