Crude oil is going back to $40-$50 a barrel: Analyst

Bloomberg Intelligence's Mike McGlone joins Yahoo Finance Live to discuss the oil market as the Russia-Ukraine war continues and the outlook for metals amid supply concerns.

Video Transcript

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BRIAN CHEUNG: Well, as tensions continue to rise between Russia and Ukraine, oil markets continue to go for a ride, the latest action in markets showing crude oil tumbling at least on this Monday. You can see WTI down $8, Brent Crude Oil down $8 as well. Again, we had seen that pretty roaring increase as of the beginning of the conflict, but now that volatility continuing.

So joining us now to break all of this down is Mike McGlone, Bloomberg Intelligence commodity strategist. Mike, it's great to have you on the show. You know, we had had many oil guests on our program before the Russia-Ukraine conflict say, look, there are already secular trends that would maybe take a barrel of oil up to 120, maybe $130. So does that mean that the decline that we're seeing today is kind of something out of the norm here? How are you kind of parsing through the market action we're seeing?

MIKE MCGLONE: Well, you need a good contrarian once in a while, Brian. I didn't agree with that narrative before. I fully expect crude oil is gonna go back towards 40 or $50 a barrel, which is still well above the US cost of production. And that's not profound at all based on how stretched prices were.

So just a couple weeks ago, prices were the most extended above a 60-month average or a 100-week average ever on a future scale. The only similar examples were 1990-- the Gulf War. I was in the trading pits then. I remember well-- and 2008.

And every single time, you correct about 60% to 70% in a few months based on one key factor, demand destruction. And I see, you know, supply and demand issues worse now than they were then. The key issue is now, the US is a net exporter with Canada a massive exporter. And from this war, I think we're gonna see a significant amount of demand destruction.

So the market price for supply contraction, I think it's not gonna get that, because all that Russian supply is going to China. They made an agreement. And now it's seeing the beginning of recessionary issues that Michael Darda touched on earlier in the previous segment.

BRIAN CHEUNG: Yeah, no, I like looping in the universe of Mike's into that commentary there. But I guess, just to take the macro picture, right, there's this whole conversation right now about how inflation is underscoring how strong demand is. So when you say demand destruction, what are you talking about? Are you talking about the fact that China, for example, going offline because of their zero COVID policy is going to impact that? What's the basis for that?

MIKE MCGLONE: Well, we'll start with China. Incremental demand from in the world for crude oil imports is coming from China. China is in a secular decline. It's having a real estate crisis like the US in 2008. And what you saw today-- revisions lowers in China GDP. I fully expect that.

And don't underestimate the higher price cure. It always happens to commodities, particularly crude oil. Prices go up, squashes demand. Prices go down, increases supply.

We fully expect that. That's not profound. That's what's happened in the past. So China demand, in decline. Total crude oil imports from China, around 7 million barrels a day, probably peaked a year ago. Now they have problems, and they have to go to source a lot of it from Russia.

Then let's look at supply. The massive amount of supply-- the most supply that's really pressured prices in the last decade-- has been from North America, i.e. US shale. The average cost on my screens for US shale is below $40 a barrel. So expect that massive supply-- and I say North America because Canada, too, my data in the [INAUDIBLE] shows this year, with these prices up, that surplus of supply versus demand of liquid fuels-- I have to include liquid fuels because of biofuels, ethanol, will approach 20% in this country.

Why? We're gonna squash demand and increase supply because of prices. And that's a key thing then, commodity, that you're seeing. Those higher prices are the cure, and it's just starting to kick in in crude oil.

BRIAN CHEUNG: Let's pivot over to metals, supply and demand very much a story there, geopolitical headlines also weighing on, for example, nickel, where we saw a short seller out of China really get squeezed last week. Look, aluminum, nickel, palladium all on the move. What are you seeing in the metals space? What's catching your attention?

MIKE MCGLONE: Key thing right there, Brian, is those are primary exports from Russia. They're all gonna be shut down. Aluminum is a problem. Aluminum was rallying before because of Chinese electricity production problems earlier in the year.

But the key focus is nickel's probably peaked. Palladium's probably peaked. And remember, there's a significant substitute in platinum, which is half the price. It can do almost the exact same thing. It's half the price.

And then, the key metal to really watch in industrial metals is copper, Dr. Copper, the metal they say has a PhD in economics. It's basically almost down in the year now. It can't get above that $10,000-a-ton resistance level, which is the same prices almost 12 years ago.

What does that mean? That we're bumping up against good resistance in copper, the metal that really matters. And once crude oil peaks, which I think it has, those key macroeconomic commodities on the planet-- crude oil and copper-- are fully expected to revert much lower this year. By the end of this year, they should be much lower, based on that demand destruction, based on the higher price cure. And the one metal I expect to be higher is probably gold because it looks like we're heading towards a recession.

BRIAN CHEUNG: I mean, Mike, this is a really interesting point that you bring up because what happens to one metal spills over into others as well. How much of that is just because of the fact that liquidity in those markets is very different than, say, in equity markets?

I mean, when you look at a move like we saw in nickel-- hundreds of thousands of dollars of price movement-- I mean, is that concerning? Are you worried about the way that the London Metal Exchange or that the markets are set up, given the ability to have that kind of volatility where you have an entire exchange saying, you know what? We're actually gonna cancel orders that were already put in.

MIKE MCGLONE: Well, it's a lesson I learned in the trading pits. I have my trading coat on here from the Chicago Board of Trade Days in the '80s and '90s. And there was one key short, Nickel. And, yes, they're very much less liquid than the equity market. But those big spikes are indicative of what happened.

We had a significant event with Russia invading Ukraine. That was very unusual. Now they're past the initial shock, and, oh, we're getting into realization that, OK, we're gonna cut back supply. But the key supply that really matters from Russia is fertilizer.

I mean, let's look at Brazil. They import 80% of their fertilizer from Russia. That means enduring prices for eggs. But the metals, eh, they'll come right back. We'll figure that out. The more macroeconomic sensitive, crude oil-- all that supply from Russia is just gonna go to China. It'll probably go right back down.

So I'm more worried, in the commodities, of the fertilizer reducing global yields and ability to eat. But the bottom line from all this, Brian, is North America commodity producers-- corn belt, shale, liquefied natural gas-- will crush it in this environment. The profits should be sustainable, it should last a while, and that'll bring on that more supply. It'll just take a little while.

BRIAN CHEUNG: Mike, does the color say anything about your position? Like, did you pick purple for a reason? Give our Gen Zers who don't know about the trading pits an explanation here.

MIKE MCGLONE: Well, I didn't pick purple, but I moved to Miami in September from the New York office. And I pulled this out of a box, and I found it.

It was just the color of the firm I used to work for. And I liked the lapels, and it just kind of brings me back to those trading days. So I like to kind of banter about it.

But it really makes you remember. I was in the pits in 1991, when Saddam Hussein invaded Kuwait. And maybe we were getting caught off a little [? beside ?] like then. But crude oil went from 20 to 40 and then right back down and 20 after it resolved. I fully expect that this year.

But the big difference is that back then, the US was a major net importer. And now we're one of the most significant producers of energy on the planet, a net exporter-- producers of agriculture on the planet. And we have the dollar. So what's happening now, I think you're gonna see a major depression or recession in Europe led by a collapse of the Russian economy--

BRIAN CHEUNG: Right.

MIKE MCGLONE: --which is obviously a problem for those commodities, but a major boom for the US in terms-- once we get past this recession but for those commodity producers. And that's good for the dollar, which, overall, when you have strength in the dollar, it means pressure on commodities.

BRIAN CHEUNG: Right. That [? oilhead ?] jacket has certainly seen a lot. But we just like that you're wearing purple because that's the color of Yahoo. But, Mike McGlone, Bloomberg Intelligence commodity strategist, thanks again for stopping by this morning. Appreciate it.