We are still closer to the ceiling than the floor in crude prices: CIBC’s Rebecca Babin

We are still closer to the ceiling than the floor in crude prices: CIBC’s Rebecca Babin

[Music]
welcome back to trading day we’re
tracking oils hanging around $83 per
barrel as it recalculates geopolitical
risk premiums our next guest says
headwinds could push crude down another
2 to 4% but the risks are still skewed
to the upside Rebecca Babin senior
energy Trader at CIBC private wealth
joining us now Rebecca thanks so much
for joining us let’s just talk about all
the factors that led to this most recent
Dr down draft and why we could see a
couple percent more
downside yeah so I think you know
generally Traders or investors were very
well positioned um for the escalation
that happened in the Middle East and
that was through options positioning
there was an explosion of call option
volume in the several in in the last two
weeks leading up um to what was the
Israeli response to um Iranian Iran’s
attack on Israel and and that really
caused an unwind of all of those extreme
tail Hedges when we did not really ize
the worst case scenario so we’ve seen
kind of Hedges being Unwound and we’ve
also seen the macro kind of hedge fund
Community look at what is driving crude
higher and saying okay we’re in this
trade for the reinflation trade there’s
a lot of geopolitical risk premium built
into this maybe I need to take some
profits here and reestablish those Longs
when we’re trading closer to
fundamentals as opposed to the5 to7 of
geopol iCal risk premium that’s
currently priced in so I think the
market was positioned for the event and
I think secondly we’ve seen some of the
fundamental softening particularly The
High Frequency data in China has started
to slow down and we’ve seen analysts
really ramp up their expectations of
demand growth this year so we’ve we’ve
got a situation where expectations are
high and now the market needs to deliver
and the delivering on high demand growth
is still kind of Uncertain and I think
there’s been a little bit of hes resy to
continue to um buy crude close to that
$90 level in Brent as we feel like we’re
closer to the ceiling than we are to the
floor that’s really interesting analysis
talking about the dollars that are on
top of a fundamental price so as you see
it right now what is the fundamental
price excluding those geopolitical
risks yeah I think the fundamental price
um is $80 Brent kind of maybe 8082 Brent
um in the high 70s in WTI I think if we
look at demand growth of 1.4 to one.5
million barrels a day which is very
solid and Supply growth um looking at
around a million barrels a day we do see
the market in a deficit so that’s a very
healthy price we would see inventory
draws but we don’t see excessive
inventory draws and keep in mind if we
get into the 90s we have a ton of spare
capacity on the sidelines from OPEC and
OPEC plus that can be brought back
online that wants to be brought back
online they have held their supply back
for so long and seeded so much market
share to us producers to Canadian
producers to Brazilian producers to
Iranian barrels they do want to try to
regain some of their market share and
they will use that opportunity in the
90s so I think 80 Brent
7776 and WTI is where fundamentals are
strong were supported and at these
levels were much closer to that to that
ceiling than the floor well I think
that’s really interesting because if if
you’re looking at buying an energy stock
today you do want to kind of know what
is that floor outside of all the the
geopolitical risk that I’m going to see
and that’s like still a very robust
price for most energy producers on the
planet that’s a great it’s a great price
um for energy producers on the planet
the and the other thing about that price
is it’s good for producers they’ll
continue to produce they’re not going to
overproduce they’re not going to go well
over their skis and start pumping away
it’s also a very fair price for
consumers so when we start to breach
above 90 in brand we start to see
consumers respond to prices at the pump
to Emerging Markets who are also
impacted by the dollar so that’s a price
where we don’t see demand being hit we
have producers who are active but not
overly active and we kind of it’s a nice
equilibrium um when we start to get
higher and higher obviously the age old
saying of the the best thing for high
prices and commodities is high prices
that’s what makes it Go lower it it it
does tend to be true obviously there is
a geopolitical element here that has not
fully resolved so there’s going to
continue to be a premium in the market
for that I think it’s come down from $10
kind of closer to eight it could
probably continue to fade closer to
three to five over the coming months
depending how things play out and I
think the real buyers the people looking
at fundamentals really start to engage
when we get closer to 80 in Brent and is
the crude calculus of the geopolitics
basically such that you know anytime
things look peaceful you get a couple
dollars off and anytime things don’t
look peaceful you get a couple dollars
on I mean is that how people are trading
right
now so a little bit um I think that when
you have periods of limited headlines
right it becomes not top of mind anymore
it doesn’t mean the risks are not are
not there it just means it’s not a
constant barrage in your in your face
all day about those growing risks and so
you might not see as much of that
speculative bid um kind of driving crude
higher um and on the flip side when you
have the headlines even if it doesn’t
mean Supply is going to be impacted as
is as is most likely the case in the
Middle East you see the re acceleration
higher just on the fear of it and the
fact that it’s so top of mind for
everyone I think those couple of dollars
here and there kind of do respond to
that headline risk the real risk under
the surface I do think is closer to that
four to five dollars um of of
geopolitical and we’ve kind of extended
to that eight or N9 dollar um where
we’re at now

We have seen an unwind in hedges following geopolitical tensions between Israel and Iran avoided the worst-case scenario. That is according to Rebecca Babin, senior energy trader at CIBC Private Wealth. She says we will start to see investors reestablish long positions once we get closer a fundamental price of $80 Brent and $77 WTI.

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