China ‘is self-insuring’ energy supply with Russian oil, strategist says

Path Trading Partners Co-Founder Bob Iaccino joins Yahoo Finance Live to discuss global oil demand amid the COVID resurgence in China and the outlook for commodity markets.

Video transcript

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RACHELLE AKUFFO: We're also keeping an eye on crude oil, just one part of the commodity market that will be impacted by China's reopening. Let's not forget, expansionary economic policies in Beijing have been the main driver of everything from silver to copper and iron ore for over two decades now, the latter hitting its highest level in four months today on expectations of a revival of the crucial property sector.

Well, for a broad look at the commodity space now we're joined by Path Training Partners co-founder and Chief Market Strategist Bobby Iaccino. Thank you for joining us today, Bob. So first I want to start with the oil picture. We're seeing that oil is down for the week, a lot of that perhaps tied to the reopening, some of it jitters wondering with the Fed, as well. But what are you watching in terms of the oil picture and what we can expect in terms of demand with China?

BOB IACCINO: Well, good morning, and thanks for having me again. Oil, to me, has a characteristic to it. It almost has a personality in terms of price action, and that personality is basically it trades at a wide sideways band of price until there's some sort of disruption to either supply or demand. Recently, we've had disruption to demand expectations based on slowing economies. The China story has been priced in multiple times in crude oil and it hasn't really stuck.

Now that doesn't mean it's going to change things now that there is a version of reopening, but you know, there's a devil in the details to the reopening. China hasn't been buying as much crude as they had, but they were still buying quite a bit of it from Russia. There's evidence right now from some of the people we speak to that they're buying despite the price cap and Russia is self insuring to get around those rules, so they have a source of energy that isn't necessarily going to be crude oil that is taken off the global market because it's Russian crude oil, which theoretically, is already off the global market.

So while I agree that if they come back like they did in 2011 we're going to see higher energy prices. There's a caveat to that. When you reopen and you don't have widespread vaccinations or very good health care that is COVID based, you could lock down sectors again, you could see people voluntarily not traveling at the rate that they maybe would have. That's probably down the road. We saw in the protests that the Chinese populace really wants to get out of these lockdowns. But once those numbers start crawling up and the death rates start crawling up again, they may change their minds and you could see a little bit of a slowdown. That's crude oil specific.

AKIKO FUJITA: So Bob, I mean, if we bring it back to those comments that Rick got from S&P Global saying that China's COVID policy is the most important fundamental factor, I mean, it sound like you're saying that's not exactly the case because the virus case counts could really sort of dampen this push for additional demand coming out of one of the largest markets.

BOB IACCINO: Well, Akiko, I'm not saying it's not the case, I'm just saying there's two sides to that story. It isn't a guarantee that simply because China is reopening they're going to go gangbusters buying energy like they were in 2011. And to be fair, I don't think that's what Rick was saying either. I just think he was bringing up the upside case since we've been so far to the downside. And I do think we've put in a short to medium term bottom in crude oil here. A while back, I was on, I believe, it was your show where I said 65 before 105.

I still believe that. That's a little easier to say now that we're in the low 70s, but then I really don't see us getting to 100 at least until the US summer driving season arrives again, simply because, number one, you have to worry about the health of the global economy. And whether you believe there's going to be a recession or not, there's a slowdown in place.

You see it everywhere except for the non-farm payrolls data. Everywhere else they're slow down, at least in the US economy. And also, we're likely to see the ECB and the Bank of England be aggressive next week in the face of double-digit inflation, so you're likely to see slowdowns continue there. But from that perspective, China can make up for their own consumption and get prices up maybe $15 to $20 from where they are now.

RACHELLE AKUFFO: And how reliant should they be on what they're seeing in terms of domestic demand, especially when you think of things like metals, as well?

BOB IACCINO: Well, copper, obviously, a key one. China has been, for quite a long time, the biggest consumer and smelter of copper. We've seen copper go up in the last 12 sessions almost 9%. Since the end of September, since those lows when the talk of the COVID Zero Policy being pulled back by China started, copper is up 18.25%, so there's been quite a move, but we're still only back to February 2021 levels.

And I think this reflects, Rachelle, the balance between global slowdown and China reopening. China will absolutely spend, they will build, so that's why I think crude oil and industrial metals are almost two separate stories on the backs of the China reopening. If China is reopening aggressively and putting that stimulus into play without sort of policy lockdowns, people can decide on their own, sick or not, to use less fuel, especially as we get into warmer temperatures in the spring, but the government can still build and they're likely still to drive copper higher.

Plus, longer term, I believe copper is a play long anyway. And why I say that is because I don't think electrification is slowing down and the amount of copper and other industrial metals involved in the electrification of the globe, the decarbonization of the globe, those numbers are large.

AKIKO FUJITA: Bob Iaccino, always good to get your insight. Path Training Partners co-founder and Chief Market Strategist.