Oil reverses gains after attack on Saudi oil facility

CIBC Private Wealth, U.S. Senior Energy Trader Rebecca Babin joins the Yahoo Finance Live panel to discuss what's next for oil and gas.

Video Transcript

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JEN ROGERS: Well, welcome back to "Yahoo Finance Live." Interesting day for crude today. Started off in the green. In the red right now. Holding on to a small green arrow in XLE-- that's the energy sector-- up about 3/10 of 1%. But my, my, what a year it has been for energy. Sector's up about 40% year-to-date. I want to bring in Rebecca Babin. She's the senior energy trader at CIBC Private Wealth in the US.

So, Rebecca, I mean, where do we start here with what's happening in the sector? Was this just-- you know, for people that don't pay attention to it all the time, they knew it was a maybe a dog last year. Wasn't doing really well. Is this just a cyclical thing? Is it something you think's going to continue? What's going on?

REBECCA BABIN: So this has been like a super-fecta in crude oil where we have had four major things happen that have changed the dynamic in how crude has traded. And just to do a flashback, you're right. If you weren't following crude last year around this time, it was trading negative. So we've had quite a reversal. And so the super-fecta really is four things. It's one, roll-out of vaccine and the reopening trade which is accelerating. So that's the demand side of the equation, which is super critical to any rallying crude.

Supply side we've had-- Saudi Arabia came out last week in their OPEC meeting and decided to maintain their output restrictions and not bring crude oil back onto the market, which was a definite positive surprise on the supply side, in addition to the fact that we had that cold freeze in Texas, which kept some of US production offline for a couple of weeks. So we've had a demand shock, two supply shocks.

We've also had the reflation trade and the dollar weakening is not happening today, and this increase in rates and the reflation of a lot of different commodities propelling money into commodity-type investments including crude oil. So we've had a technical aspect. And then finally, over the weekend, we had geopolitical, which was an attack on Saudi Arabia's export facilities which export a huge amount of their crude oil. It did not result in any output reduction. However, it highlights the risk in the region. So that's what I call kind of the super-fecta of crude oil which took us from negative last year to trading this morning over $70 a barrel in Brent. So that's kind of the backdrop of how we got here.

ADAM SHAPIRO: So specifically with oil, before the pandemic, though, we had started to see a slowdown with oil. And there was an article last week, talked about OPEC is hoping that they can get back to $100 a barrel. Is that realistic? And as an investor, we saw some of the giant oil companies cut dividends at the worst of the pandemic, and they've not moved to restore those dividends. So it seems, as a long term play, while the world will still need oil, the growth for oil looks constrained.

REBECCA BABIN: So that's a really great point and I would just highlight one thing. The mismatch is between when the growth for oil starts to decline, which is kind of in that 2030 range when renewables can get a stronger foothold and have the infrastructure built to become more reliable providers of energy. But there is a cycle to be had in between here and there. And essentially, we need crude oil to build the infrastructure that will drive that renewable transition.

And I would say the second part that's crucial to understand about what's happening in this cycle, and I think you did touch on it, you're seeing capital discipline from the oil majors. They are not going out and trying to pump and drill excessively right now. They're maintaining dividends and working on their balance sheet. And that means there's a little bit of an underinvestment situation happening, which is allowing the crude price in the shorter or medium term horizon to look a little bit more positive.

On the flip side of that I'd say we've come a really long way really quickly from turning negative last year to where we are here, and we've priced in a lot of good news. So I'd be really surprised that the market doesn't start to discount good news and focus a little bit more on how quickly the demand really starts to catch up with those expectations.

JEN ROGERS: Rebecca Babin, senior energy trader at CIBC Private Wealth. We'll have to have you back before 2030 when we figure out where this cycle is going. Thanks a lot.