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It’s a buy the dip mentality in crude oil: Trader

Yahoo Finance’s Alexis Christoforous and Rebecca Babin, Senior Energy Trader at CIBC Private Wealth, US, discuss energy outlook amid the coronavirus.

Video Transcript

ALEXIS CHRISTOFOROUS: For more now on the outlook for oil, let's bring in Rebecca Babin. And she is senior energy trader at CIBC Private Wealth. Rebecca, what do you make of the sell-off that Jared just outlined? Did investors get ahead of themselves a little bit here? Was this a knee jerk reaction to these fresh lockdowns we're seeing?

REBECCA BABIN: Yes, so I think crude remains pretty much in the crosshairs of the coronavirus trade, meaning we get negative headlines, and it's very reactionary. And investors do tend to shoot first and ask questions later, as they did with this headline. But I think the huge difference we see in the set-up in the commodity right now is, if we had seen that headline when the virus first hit, we would have been down 6% and then down 10% because it was a kind of sell into any weakness.

And since we've had the vaccine news hit in November, it's now we'll buy the dip mentality in crude oil. So that may be commonplace for equities, where it's been buy the dip for a long time now, and anything but energy equities, it's buy the dip. But it's now by the dip in crude as well. And it just tells you that investors are a lot more comfortable with that longer term horizon of demand picking up in 2021. And they're still believing that story that we will get through this and see a brighter end of the tunnel as we enter into the second half of '21.

JARED BLIKRE: So I want to get your thinking on some of the other parts of the energy sector. We saw natural gas, or at least, liquefied natural gas, had a big spike up last week. We also have heating oil as the temperatures continue to trend downwards over this winter period. Any of that affecting some of the markets-- the energy markets that you're following?

REBECCA BABIN: Yeah, so I think that the NAT gas and the LNG trades have been really, really punished as the weather in early December was really mild. And so, I think that that kind of took-- that was a trade that a lot of hedge funds had kind of gotten long into coming into the winter season, thinking that we were going to get a nice, cold winter, and it didn't come to fruition. So I think it caught a lot of people off sides there. I think fundamentally, it's getting to a point where investors are starting to take another look. We are getting colder weather. And I think it's a trade that people are going to re-engage with.

ALEXIS CHRISTOFOROUS: Rebecca, I want to talk about some things investors should be looking out for in the next few weeks and months with regards to energy. You say the Georgia runoff election could have some implications. How so?

REBECCA BABIN: Yeah, I think the Georgia runoff elections are super important for energy equities, particularly if we get a Democratic sweep in Georgia, which I'm not calling, is going to happen. It's very much a dead heat right now. The implications, though, for energy are pretty substantial. You could get increased regulation and potentially some limitations on drilling on federal lands that could be passed. It'll make a more restrictive fossil fuel energy policy much more achievable, which could really hurt US equities in the near term.

On the flip side of that, it's probably a crude positive if you get a Democratic sweep in the Senate because you will have more restrictions in the US, less production coming out of the US, and less crude oil on the market. And that actually will be a beneficiary to crude markets, especially as you pass a stronger stimulus package and get the demand side picking up. So it's actually a little bit counterintuitive. It could be negative for US energy equities, but positive for crude oil if you get that Democratic sweep.

ALEXIS CHRISTOFOROUS: And what about implications for the OPEC Plus meeting in January? I know that Russia has been pushing to increase production. What should investors know there?

REBECCA BABIN: Yeah, I think the thing to know there is that it's going to be a difficult conversation, as it always is with OPEC. We have a lot of headlines, and it can be volatile around that time period. But I think OPEC is pretty determined to keep a close eye on the market and remain highly vigilant. The fact that Russia is saying they want to increase by 500,000 barrels in February does tell me that at this core, at the leadership level of OPEC Plus, there is a desire to increase output, and they think the market's strong enough to do so. If we get any major increases, though, beyond that 500,000 barrels a day from OPEC Plus at that January meeting, I think the market will be extremely disappointed.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Rebecca Babin, senior energy trader at CIBC Private Wealth, thanks for being with us.