Oil analyst: OPEC+ reminded markets it’s the ‘central banker to crude’

CIBC Private Wealth U.S. Senior Energy Trader Rebecca Babin joins Yahoo Finance Live to discuss OPEC+ production, energy markets, gas prices, and oil demand.

Video Transcript

[AUDIO LOGO]

- Also, switching gears here. Let's get back to oil. Oil prices have dropped over the past few months driven by US recession fears and an economic slowdown in China. In response, Saudi's Energy Minister made comments yesterday that OPEC plus has the means to deal with market challenges, including cutting oil production at any time.

Rebecca Babin, senior energy trader over at CIBC Private Wealth, joins us now to weigh in. Rebecca, always a pleasure to speak with you. When you hear that this could be the potential play of OPEC plus potentially cutting production, what goes through your mind and how are the markets digesting that from what you've seen?

REBECCA BABIN: So the way I read that was that Saudi Arabia was sending a little reminder note to both the markets and the United States that they are the central banker to crude. And that they, ultimately, can make market-moving decisions. And I think they sent this message for two reasons. I first think at face value, they're frustrated with the volatility and the fact that it's driven a lot of producers and players away from the market.

I think the subtext, though, was, hey, if you sign a deal with Iran, which potentially brings barrels back to the market and potentially destabilizes the Middle East, we will be there to cut supply. So your efforts are going to be this one step forward, you bring our Iranian barrels back, but our response is going to take those barrels right off the market.

So I think there was a political undertone to that statement and that's kind of what went through my head when I first read it. The markets, obviously, digesting it feel like it's providing a little bit of a floor, or a base, to crude, which the market has been highly-focused on these Iranian barrels potentially coming back and has kind of eased those concerns and gave the market confidence that, indeed, OPEC plus will be there to respond.

JULIE HYMAN: Rebecca, how much credibility does OPEC have or even influence does OPEC have at this stage of the game? We're looking at global oil markets not just sort of the balance of where oil is coming from at this point, but also, of course, the sort of things that are out of their control like the Russian-Ukraine conflict.

REBECCA BABIN: Hey, Julie. Yeah, so that's a great question. I think OPEC plus still has a significant amount of influence, and particularly Saudi Arabia. They can still bring back and take away barrels from the market at critical points. It might not necessarily be the quantity, but it's the timing and their unity behind making those decisions.

And they've worked really hard to maintain that cohesion during this really volatile time. So their influence is still there. It might not be quite as significant as it was in previous cycles, but it's still a real factor. And I can think the market action tells you today up 3% that the market takes them pretty seriously.

- Rebecca, we've seen a pretty consistent pullback, of course, in gas prices. How much more downside do you think is there?

JULIE HYMAN: You mean gasoline, just to be clear.

- Gasoline. Gasoline prices.

REBECCA BABIN: Yes. So I don't think there's too much more downside in US gasoline prices. And I think there's a couple of reasons for that. The first is we have the SPR rolling off coming up in November. The second is we have sanctions set to increase out of Europe on Russia in December. And all of these things tell me that we're might be heading into a tighter market into winter.

And, secondly, we have this need for heating oil, which refiners are going to reconfigure away from straight gasoline into producing that heating oil, which has a higher spread right now. And so, you're not going to have as much gasoline supply in the market. So even if demand dips, supply is going to dip with it and I don't see a significant pullback. If anything, I think gasoline prices at the pump on a national average probably rise from here.

JULIE HYMAN: Well, that is unfortunate for all of us, isn't it, Rebecca? I mean, so going back to the feedthrough from crude oil, you talked about Saudi Arabia maybe providing a bit of a floor here. What do you think the ceiling is at this point? Do you expect oil to run a little bit from here?

REBECCA BABIN: I do expect crude has some room to run. And there's a couple of reasons outside of the catalysts. I mentioned SPR and sanctions and Saudi Arabia. The other factor is positioning has been severely liquidated. So you don't have an overcrowded trade of longs in the market. A lot of that inflation hedge that was put on is wiped out. They took it off as soon as the Fed indicated they're really going to fight inflation.

So there's a light positioning, which could give you some momentum to the upside and, of course, that's purely technical. I think from a ceiling perspective, that's a hard call just given how much uncertainty there is around Russian sanctions, but places where we saw demand destruction start to take place, 120 WTI I think is a good place to start as significant resistance because demand really starts to fall off there.

- What are the biggest trades that you see this impacting kind of as a secondary impact or even tertiary more broadly here?

REBECCA BABIN: So I think the big picture here is as we reroute or redefine the energy map, what it means for us energy producers and Canadian energy producers who are going to have this huge opportunity to set up these long term contracts as Europe winds itself from Russia. This isn't just a this year trade, this is the next five years, right? As they look for LNG, as they rely more on US partners and relationships to replace Russian energy, I think that's where I think the interesting trades are.

It's in energy equities, it's in US LNG exporters. So I think that's really the big picture is super interesting as you start to see these longer term relationships defined. And even if that conflict in Ukraine, which I hope it does end soon, some of the changes are not going to be reversed. So I think that's where I look for those kind of more fun traits that could work.

JULIE HYMAN: Rebecca, it's always great to get your insight on all of this stuff. Rebecca Babin, CIBC Private Wealth Senior US Energy Trader, really appreciate it.