OPEC Doesn't Want to Be Behind SPR Release: CIBC's Babin

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Bloomberg Apr 9 05:27 · 21.4k Views

Rebecca Babin, CIBC Private Wealth Group senior equity trader, says the increasing geopolitical risks are forcing oil prices higher and OPEC will want to be ahead of any planned release from the Strategic Petroleum Reserve on Bloomberg Television.

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Transcript

  • 00:00 We're talking about geopolitics in the context of gold buying.
  • 00:03 How much of that is driving the geopolitics is driving
  • 00:06 the moves that you've been seeing in crude oil.
  • 00:07 I'd say the last five to $10 has been a fair amount of geopolitical risk being repriced into crude.
  • 00:13 When we initially had the attack on October 7th between Hamas and Israel, we saw
  • 00:20 a $5 move in crude pricing in some geopolitical risk and potential supply disruption.
  • 00:26 That kind of got sucked out of the market as people realize supply isn't really at risk is
  • 00:30 as long as that conflict is contained.
  • 00:33 What's happening now with the latest move by Israel to attack
  • 00:37 a a consulate in Iran is this is re established that fear that this may escalate and draw Iran directly into this conflict.
  • 00:45 And in that case you do actually see a higher degree of potential of supply being impacted.
  • 00:50 So it's really kind of put that geopolitical risk back in.
  • 00:53 So, so that's the part that I'm curious about.
  • 00:55 I mean, in that hypothetical, where is that supply disruption?
  • 00:59 Are we talking about actual production?
  • 01:01 Are we talking about export routes being affected?
  • 01:03 What's, what's the actual effect?
  • 01:05 That's a great question and that's why we're not a lot higher than we are because the line of sight to a direct supply disruption is a little murky.
  • 01:12 The way it plays out is maybe Iran gets drawn into the conflict and some of their production gets impacted as Israel potentially goes after their exports.
  • 01:22 The other way that it happens is supply routes are more impacted through the Red Sea right now.
  • 01:27 Russia is still able to move all their barrels through the Red Sea, right?
  • 01:31 Because it's a kind of controlled chaos.
  • 01:34 You get a wider disruption
  • 01:35 out of the out of
  • 01:37 Russia is no longer able to ship.
  • 01:38 You get another kind of potential to supply disruption there.
  • 01:42 Worst case scenario,
  • 01:43 and this is very low probability, Iran fully involved full escalation.
  • 01:47 They potentially blocked the Strait of Hormuz.
  • 01:50 That's that's the very extreme outcome, very low probability.
  • 01:53 All right.
  • 01:53 Well, thank you explaining for explaining through those different possibilities.
  • 01:56 So you've got these increased geopolitical risks.
  • 01:59 You've also got an unexpected drop in Mexican exports.
  • 02:02 You've noted that normally would that be a big deal on its own or is it just because as you've got the geopolitical angle
  • 02:07 tied to it that it, it's got people thinking, great question.
  • 02:11 So normally it wouldn't be as big of a deal, but it's not necessarily the geopolitical risk that's hurting
  • 02:18 that potential
  • 02:19 supply disruption.
  • 02:20 It's the fact that those sour barrels are also being disrupted in Russia through the Ukraine drone attacks.
  • 02:27 So we've actually seen some of their refineries get hit cut a little bit of their heavier crude exports making that impact of Mexican exports which is heavy crude have an outsized impact.
  • 02:38 Now there is something to be said that Mexico has an election coming up and some of their promises have been that they will keep more of their product internal lower domestic prices.
  • 02:48 So there's there's a little bit of kind of posturing in this and people think that these deep cuts that we've seen will actually start to get unwound as the after the election.
  • 02:57 So this may be a short term disruption, but it's impacting the market
  • 03:01 I'd say to a fair degree at this point.
  • 03:03 Well Speaking of the election, there's going to be similar concerns here in the US as well.
  • 03:07 And we already know that the US has the option to perhaps release barrels from the SPR
  • 03:11 if that's already priced in because it is an election year and we know that the White House wants to do what it can to reduce consumers worries.
  • 03:17 Would actually releasing barrels materially move price since we know that it's probably going to happen.
  • 03:23 So I don't think it is priced in.
  • 03:24 I think people are talking about it being a potential, but since we've already drawn down so much of the SPR 180 million barrels in our last release and we're at a low level, there's kind of this will he push the envelope to do more
  • 03:39 and he can only Biden the bite administration can only do between 30 and 50 million barrels on this next release, far less than he was able to do when we had the Russian invasion of Ukraine which was a true supply disruption.
  • 03:51 He'd be relying on doing an exchange to get these barrels out.
  • 03:55 So I think the markets a little hesitant to price that in.
  • 03:58 But I think what is going to happen is OPEC is priced thinking.
  • 04:03 I don't want to be behind
  • 04:04 an SPR release like I was in 2022 because guess what, I haven't brought a barrel back in years.
  • 04:10 I've been still cutting.
  • 04:11 So if SPR is coming, I'm coming first.
  • 04:14 I'm not going to be aggressive,
  • 04:15 but my goal as OPEC is to maintain control of the market,
  • 04:19 not to lose it to the SPR.