Oil outlook amid the natural gas price spike

Jay Young, King Operating Corporation CEO, joined Yahoo Finance Live to break down the action in the oil markets.

Video transcript

ADAM SHAPIRO: I'd want to pay attention to what's happening with oil amid the natural gas price surge that we've been witnessing in some other areas. So let's bring into the stream Jay Young, King, Operating Corporation CEO, to talk about what's happening with nat gas. And I just wanted to give my team a clue. I think my Slack has died, so I'm going to have to maybe reboot. But Jay, good to have you here. I am curious, we're going to get a reading from the Energy Information Administration about natural gas in storage. What are we expecting and what's the impact going to be on prices?

JAY YOUNG: Yeah, I mean, we're seeing a big, big surge here in the past three to four months. We've been buying some assets right now, and we look extremely smart, because we bought these at $2, $2.25. And now natural gas prices are $5. I think it was down a little bit today. And I believe we're going to see that going in the future. Not that I think that it's going to double. Goldman Sachs says it's going to $10. I don't know if I see it going that high or not, but I do see it going up.

It's a clean burning fuel. It's easy to operate. And right now with global demand just, especially China, going above and beyond, trying to get as much of our gas as possible, we became a, we were a big importer at one time and then we started drilling Barnett shale and the shale wells and all of this, it oversupplied us with gas. And now we're equalizing out. I believe the $4 to $5 is a good price. I'll take $6 to $7, because we're a big producer and we love higher prices, but I just don't know if it's going to get way up there or not.

SEANA SMITH: Jay, the big question though, or one of the big stories, I should say this week, is what's going on over in Europe because of the supply that Russia is holding back. When it comes to Europe's energy crisis, is that something that we could potentially face here in the US?

JAY YOUNG: It is. And when you look at it, it's all about supply and demand and what Russia does. And Russia's very well known for commodity price pullback and not doing anything with prices and holding back. And they'll do the same thing with China. They're doing the same thing over in all the seaport right now. You're going to see that in the future.

And what that does, it allows us over in the United States to use more of our supplies and not import as much as we do. So when you see global demand going up as much as it is in China, I mean, they need like 336 billion cubic feet a year and they're only producing like 200. So they need to import 160 billion in. When you see big disruptions in Russia, I mean, they poured oil on the markets right before the pandemic because they wanted to put us out of business. They wanted to drive the price of oil down because of their commodities.

This is not anything new to them. I mean, they do it all the time with taking commodities and throwing it on the market to oversupply to put people out of business. And all of a sudden, they want to increase the demand. So all of a sudden that global demand starts increasing, nobody has it. They have to come to them on their knees and just beg. And this is nothing new. So I don't see anything, I don't see anything new.

ADAM SHAPIRO: The Saudis used to do that.

JAY YOUNG: Do what?

ADAM SHAPIRO: The Saudis used to play that game. But we can fight that game, but we haven't, what's the issue with the number of drills? Or, I don't know the terminology, but the number of rigs that we have today say versus 2015, and whether that's contributing to the fact that we're not keeping up with demand.

JAY YOUNG: Absolutely. And it's a great story, Adam, I appreciate that. We were drilling 1,000, we had 1,000 rigs drilling for oil and gas before the pandemic. Not five years ago, I mean, I'm talking about right before the pandemic we had 1,000 rigs drilling for oil and gas. All of a sudden the pandemic happened, oil and gas prices go down. We were 75% less rigs. 250 rigs drilling for oil and gas. And you would think by now we'd be back up to 1,000 rigs a day drilling for oil and gas, because new rigs, rigs mean new oil, new gas.

But we're not. We're not even halfway home. We're not even halfway home. We're still at half the rigs drilling for oil and gas in the United States drilling for oil and gas. Why? Capital. The capital is not there anymore. We don't have the capital. We're, Exxon and Mobil are going, they're putting these green hats on and they're saying, we don't need oil and gas. We're not there yet. We're not, we're not there. We need some oil and gas, and our demand is there.

Our demand is not going to be affected for five, 10 years. We're going to need oil and gas for a long period of time. We're not going to have it, because if you're not drilling, there's no new oil and gas. And if you don't have the capital, you're not going to drill. Because it's expensive. I mean, it's $100 million a year to get one rig running. So it is expensive game, and if we don't have the capital, we don't have the rigs, we don't have the new oil and gas, what that means is, basic supply and demand.

SEANA SMITH: Well, Jay, speaking of getting rigs running, I mean, production disruptions in the Gulf, it's still going on after Hurricane Ida. We're seeing a number of rigs that continue to be offline and they might remain offline now for weeks to come. I guess, how big of a disruption do you see this being to the crude markets? Because we haven't seen that big of a reaction when you take a look at the price of crude.

JAY YOUNG: Yeah. And we're ready for it I mean, we understand there's going to be hurricanes in the Gulf in these times. So we know we're storing it. And we're still knocked off a little bit, but not a tremendous amount. So we need 20 million barrels a day in the United States. We're producing 12 million. And we do take that into consideration the Gulf. I mean, it was producing a couple of million barrels a day. And it went down and then it came back up. So now we're, we're OK. I mean, that's not our big problem.

Our big problem is long-term, two years, three years, well, I say the end of this year we're going to see $90 oil. I think we see $150, $200 a barrel next year unless something, unless something happens to where there is a big influx of oil from Saudi Arabia, Russia, that kind of keeps the price below $100. Because I mean, just basic supply and demand. Every day supply demand. We'll have interruptions, but basic supply and demand over time, because when we need 20 million and all of a sudden our demand goes to 21 million, 22 million barrels of oil and we're not increasing our barrels, we were up to over 14 million barrels back before the pandemic, 14 million.

Then when we quit drilling and all these wells, they don't they don't increase in production, they decrease in production. And when they deplete and we have no new oil going to the markets, not a good thing for us. We need new oil, which means we need new capital. And the capital's not there, the rig count's not there, we're not we're not going to have the oil we need. So I see prices going up and not much, not much we can do about it.

ADAM SHAPIRO: One good thing about capital though, Jay, is that no one is expecting interest rates to go up, at least in the next 12 months. That's actually our next topic, but we've got to say thank you, Jay Young, King Operating Corporation CEO.