Oil prices steady as economic fears offset Saudi output cut

OPEC+ decided to cut oil production by one million barrels a day. Rebecca Babin, CIBC Private Wealth, US Senior Energy Trader, joins Yahoo Finance Live to discuss the economic impact of the decision, the EIA reporting that crude oil inventories fell 452,000 barrels, how this will impact the summer travel season, and the geopolitical impact.

Video transcript

- Oil price is pushing higher today as investors weigh the deep output cuts from Saudi Arabia with an unclear economic backdrop. Our next guest says, despite the ability for OPEC plus to tighten balances, it can't change the macro picture. Rebecca Babin, CIBC, Private Wealth US Senior Energy Trader, joins us now here live in Living Color on set. Great to see you.

REBECCA BABIN: Thank you so much for having me.

- So let's go back to the decision from OPEC plus and how significant of a decision that was in really setting the framework for now the pricing and how that may move forward from here.

REBECCA BABIN: So it was a very significant decision for them to cut a million barrels. That is something that typically would have a significant impact on markets. You were talking 5% to 6% to 7% impact in normal environments. 1 million barrels typically is $5 to $7 of Brent or TI pricing. So this wasn't a quantity issue. They came out big. They came out aggressive.

The things that are working against it, they said they were going to do it for one month and revisit. We don't have a long duration on how long they will actually continue these cuts. So that's one thing that took away from the impact. But the bigger, broader picture of why it didn't have the impact is even with those cuts, the focus of every trader and every commodity focused person is on the macro.

The granular under the surface data in crude hasn't been horrible. Demand figures, four week rolling average of US consumption from the DOE data has been strong, over 9 million barrels a day. So the numbers out of China have been OK, not quite as good as expected, but not as bad as what the market's pricing. Is this macro overhang of? Is there going to be a deep recession in the US? Is the entire China recovery going to stall out based on the warning signals of the industrial demand side? So that's why we had a limited response to those cuts.

- And I'm just looking at the EIA, inventory report. Because as you pointed out to us, 10:30 on Wednesdays is when this typically hits from the Energy Information Administration. And we are looking at a drop in crude oil inventories of 452,000 barrels, which I believe was unexpected. Gasoline build bigger than estimated of about 2.7 million barrels. And I know you were looking at what refinery utilization--

REBECCA BABIN: And implied demand.

- And implied demand. Not seeing implied demand on here. So I'm going to keep looking for that headline. I mean, I know these numbers are incredibly volatile on a week to week basis. But it is interesting to see that drop in crude inventories when a build was expected, and a larger than expected build it looks like in both gasoline and distillates.

REBECCA BABIN: So I think people are going to look at that gasoline build pretty closely and under the surface implied demand factors. There may be some lag as in response to the Memorial Day driving, when people filled up their tanks and kind of came back. So I think more importantly than just like the week over week number is that four week rolling average of where demand is.

The draws in crude, that's somewhat bullish, but I think the meat of the report comes in those product inventories at this point. Because we're going into summer driving season and that's really where you get the pull of that product and starts to rip the commodity higher. So not seeing the numbers, I'd want to see that implied demand and see where that shakes out.

- I guess broad strokes, what should travelers be prepared for this summer driving season?

REBECCA BABIN: Yeah, great question. So I think you're looking at right now $3.55 on the national average of gasoline prices. I think you're probably going to see that come up to the high threes, maybe low fours. The reason I say this is if I look at the forward looking estimates for where flight demand is going to be over the next four weeks.

In China, it's up 7%. In the US and Europe, you're going into a very heavy period. You're going to go summer driving season. And I think that that's going to absolutely pull the market into a deficit and you will start to see those gas prices rise.

- Aren't those contracts though for purchasing from some of the airline operators typically done months in advance of time? So why would that, for my own edification, trickle over into what drivers are experiencing to?

REBECCA BABIN: Right. So there is some of that that's pre-set and hedged, but not all of it. So if you get this ramp and expectations of-- demand above those expectations, you see the draws. Not every single gallon is going to be hedged. So it still has a read through. So what you look at to compare that is above seasonal averages. And so when they hedge to a seasonal average, and then you go above the seasonal average, you get that pull.

- To go back to the macro picture for just a second and outside of the US, we just got that China export data that was disappointing. And of course, that's been a big area of focus and a big swing for what we're going to see for global oil demand. So how are you factoring that into the equation?

REBECCA BABIN: So the overnight numbers for China on a macro level were weak. For crude oil, they were up 17% month over month, and 12% year over year. The crude import numbers were over 12 million barrels, which is a really strong number. The month prior had been a weak number. And that was mostly due to destocking of their inventories.

So again, you have this fight between the macro, the big picture numbers not delivering, but the consumption numbers, gasoline demand in China is delivering. The question is, how long can gasoline either be the outlier, does industrial debt drag it lower, or do you get stimulus out of China, which is probably why crude is up today, on the hopes that those weaker numbers that came out on a big picture level put forth more pressure for them to stimulate. And then you see the reversion in industrial demand higher. So that's the rub.

- There's, of course, a large geopolitical overhang when we talk about all of these things too. How much of that, if we continue to see, an extended or long term amount of uncertainty in the geopolitical situation and agreements more broadly about production and output, how much does that continue to leave prices at elevated levels like we're seeing right now?

REBECCA BABIN: The geopolitical picture is always a factor. But it's been a factor for a long time. There's a lot of reporting right now that there's friction between Saudi Arabia and Russia. Russia hasn't delivered its supply cuts as needed. Saudi Arabia just came out and unilaterally cut. So they've made statements that they're going to trust but verify Russia's data, which tells me they're going to apply a little more pressure to Russia.

So I think the geopolitical backdrop continues to be supportive of crude, but there are a lot of-- there's a lot of chatter and a lot of noise about maybe that relationship not being as strong. And if OPEC plus shows any signs that relationship is not strong, it will weigh on crude prices. So it's a factor. And it's something that I think traders are definitely watching.

- Interesting. Rebecca, thanks for coming in. It's so good to see you in person. Usually you're in Texas, I believe, right?

REBECCA BABIN: I'm in New York.

- You're in New York?

REBECCA BABIN: Far away,

- I just assumed-- you're the second person today who I assumed was in a different state, and instead, it's just down the road. So come in more often. That's Rebecca Babin, CIBC Private Wealth US Senior Energy Trader. Thank you so much. I appreciate it.

REBECCA BABIN: Thank you.