Why oil demand is in question amid economic recovery

Ambrosino Brothers’ Todd Colvin, joins Yahoo Finance to discuss the impacts on oil prices amid the pandemic and Suez Canal delays.

Video Transcript

BRIAN SOZZI: Traders are closely watching the debacle continue to play out over at the Suez Canal, where a massive container ship almost as large as the Empire State Building remains stuck. With the key shipping outpost essentially closed, prices for various commodities have caught a bid higher.

Joining us now is Todd Colvin of Ambrosino Brothers. Todd, good to see you this morning here. So where are you seeing some of the largest increases in the energy patch right now off of this event?

TODD COLVIN: Well, good morning. Thanks for having me. We're watching oil prices here. And if you noticed since March 18, we saw that big decline sort of on the fears that the global economic recovery may have hit some snags. Oil prices have been very volatile.

And then you throw in a type of logistical sort of hiccup as we see here in the Suez Canal. And oil prices are going to tend to be pushing higher here, given the fact that when, as we talked about earlier, when you mess with supply, prices tend to be very sensitive to the upside. So I think at this point, it's going to be a short-dated sort of blip up if you're looking just at what we're seeing in the Suez Canal. But long-term-wise, everything goes back to that supply and demand.

And right now, demand is in question. I think at that point, that could actually suppress oil prices in the longer term, at least until we get this global reopening back underway.

JULIE HYMAN: Why to you, Todd, is demand more of a question, considering we've got some pretty high GDP forecast for the US at least this year? So that would imply that there's going to be pretty strong demand for oil.

TODD COLVIN: And I think you're seeing that. If you look at going back to the beginning of fourth quarter, oil prices have been steadily higher. A lot of that was obviously forward-looking and some of the guidance we're getting from some of the economists and the Fed and whatnot. But I think when you get past a lot of the stimulus, you're going to have kind of a lull. And I think oil prices right now, you're going to see a stagnant trade.

Will OPEC, when they meet next week, will they cut more production, or will they talk about cutting more production in the future? The OPEC plus as well, the non-OPEC members, will they play fair? And I think ultimately, it's a very key barometer for the global economy and for our domestic economy. I think the fact that we've moved so quickly on this whole optimism trade suggests that if we don't get it, we don't get a full boat recovery, if we don't see travelers getting out over the summer, which is the best traveling season, I think you're going to start to see oil prices stagnate a little bit. And then it'll be up to the supply side to prop up prices, which we've seen, pretty much going back since last March.

BRIAN SOZZI: Todd, the JPMorgan team making some waves here, no pun intended, saying yesterday afternoon that this ship could break. So if you as a trader see that ship in the Suez Canal break, what happens to oil prices?

TODD COLVIN: If the ship breaks, I think oil prices are going to shoot higher, given the fact that that is not something that is expected. When you see things coming out of left field like a ship getting lodged in the Suez Canal and then further damage to the shipping lanes, that's only going to create more of a stir and push prices higher at this point.

And again, this is not going to be a sustained long-term trade. I don't see us moving up 10 bucks and then moving up higher there just simply because of this one event. This is an in the moment type of trade. We see high volatility based on economic recovery expectations maybe not getting there as quickly as hoped.

But you throw in, again, logistics are a big part of the oil trade. And if you throw in a wrench like that, certainly you're going to see higher oil prices after.

JULIE HYMAN: Sorry, go ahead, Brian Sozzi.

BRIAN SOZZI: Yeah. But should there, Todd, be a longer-term factor here? Globalization is only picking up. These ships are only getting bigger, more boxes or containers getting put on these ships. Does a premium have to be priced into the oil markets here because of the potential for more events like this happening?

TODD COLVIN: Well, sure. And I think that logistics is already priced in to what we're seeing in a lot of these oil trades. So I think, yes, that could actually lend itself to higher prices, again, in the short term because efficiency is something that we're very good at as a global commodity giant. We do see improvements in shipping. We do see improvements in logistics, whether it be pipelines, shipping, and whatnot.

So at this point, I see a short-term upside trade here. But until we see global demand pick up, and that's really going to be the foundation for any sort of surge in prices on a longer-term basis, that's what we need to see. And right now, it's still a hope and optimism trade until we get to the other side of this whole global pandemic. And right now, we're just not there yet.

JULIE HYMAN: Hey, Todd, let's turn to metals because I know you track those also. Are there any supply implications there? Do metals tend to move through the Suez also? Because most of our attention has been focused on energy and food items to a lesser extent.

TODD COLVIN: Right. When we talk about energy, we're talking about a part of logistics. Yes, there will be effect on metals. But ultimately, I think one of metals' bigger problems here, twofold, actually, is the dollar and the love of Bitcoin, which has really taken a lot of the allure away from, say, gold, given the fact that, from an investment standpoint, that has become the new digital investment, digital gold.

So yes, I do think there will be-- any kind of shipping and logistics that go through the Suez is going to see a price bump, given the fact that there is going to be some defenses or some kind of modifications needed. And that's going to cost money.

JULIE HYMAN: Away from precious metals, I'm curious about things like copper as well, sort of the industrial metals and where we are in the economic cycle. What kind of dynamics are you seeing at play there?

TODD COLVIN: Well, copper, obviously, is another great global indicator of growth. And we've seen historically, the Chinese have been huge buyers of copper, driving prices up. And here, when we see builders in the United States, that's also another key barometer. So yes, I do believe that when we talk about any kind of improvements of global shipping, it comes at a price tag. And so when we look at copper, it's no different, given the fact that its usage is much more widespread.

BRIAN SOZZI: All right, Todd Colvin of Ambrosino Brothers, good to see you this Friday morning. We'll talk to you soon.

TODD COLVIN: Thank you very much.