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Oil: OPEC+ sticking to its supply hike was ‘the right move at exactly the right time,’ analyst says

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CIBC Private Wealth Senior Energy Trader Rebecca Babin joins Yahoo Finance Live to discuss the energy market as OPEC+ decides to raise production by 400,000 barrels per day in January.

Video transcript

KARINA CONTRERAS: And we will stay on the energy sector and bring in our next guest, Rebecca Babin, senior energy trader at CIBC Private Wealth in the US. Thank you so much, Rebecca, for being here.

So I love in your note that you say using the word volatility to describe crude oil for the last couple of weeks is quite the understatement. I definitely agree with that. President Biden saying he has a lot to do with the move down in crude oil, which will hopefully translate to lower gasoline prices in time for the holidays. But there are a lot of other factors that are contributing to this volatility.

I want to start by asking you, how surprised were you at OPEC Plus' decision to hike output next month?

REBECCA BABIN: Yeah, I was one of the market participants who was surprised. I thought, kind of looking at the data set in front of me, that they had all the cover they needed to pause. But what I learned is that OPEC Plus is very savvy. And in retrospect when I reflect on it, it was really the right move at exactly the right time because it essentially bought them political cover from the US that had been very, very aggressively speaking out about their role in higher energy prices and how it impacted the US consumer, as well as internally within OPEC, with Russia not really wanting them to stall production increases, because in Russia it's much more difficult to turn dial up and back production, unlike in Saudi Arabia.

So they killed two birds with one stone there while also giving up very little. They basically said, we're going to bring it back. But we give ourselves this opportunity to come back and revisit this at any point during the next meeting. In fact, they called this meeting an open meeting until the next meeting, which would be the longest meeting in OPEC history, 33 days, if it's truly open. So it was quite savvy.

And lastly the genius, really the clincher, I think, that people may have overlooked is they did it at the end of the year. They did it at a time when US producers are looking at their budgets and looking at the crude strip and trying to figure out how much production they want to bring back. And this is a big factor for how crude trades next year is how much production is brought back.

So they kind of buffered the upside of crude going into the end of the year and maybe dissuaded some producers from bringing back more production in the US. So they caught me off-guard. I readily admit it. With time to think about it, I really appreciate how astute they were on this decision.

JARED BLIKRE: Well, and Rebecca, I appreciate your astute observation there. I hadn't really thought about the OPEC Plus looking for, potentially, political cover. But I wanted to shift gears to the price action that we're seeing in WTI crude. I have the YFi interactive here. And a year to date chart is showing recently, on the news from OPEC Plus, we tested these lows from August. And I'm just wondering, do you think we have a new trading range here, let's say, from the lower 60s all the way up to about 75 or so?

REBECCA BABIN: I do. And the reason why I think that-- and I do right now, given the data that we have in front of us on Omicron-- I'm sorry I butchered that. But essentially, that this will result in some international travel restrictions, but we don't know how much it's going to impact demand on a domestic level, driving and domestic flights. So if we take the assumption that it's going to be less impactful than the Delta variant, then we can safely say we're in a new trading range, and 60 will likely hold.

Fundamentals still look really good here, even in that backdrop. And supply is being monitored and carefully curated by OPEC Plus. The upside, obviously, is kind of closer to 75, maybe 80 in a very extreme scenario. And there are many calling for that as we look at whether OPEC Plus really has the spare capacity that they say they have and that maybe the market is tighter than people think.

I haven't bought into that supercycle idea. So I do think you're on the right track with the 60-75 range.

KARINA CONTRERAS: And then really quickly, only about 30 seconds left, what does the energy sector look like to you next year? It's been very volatile. Is it something to invest in?

REBECCA BABIN: I think it is. I think it is for a couple of reasons. I think the fundamentals in the energy sector are strong, both from a crude commodity perspective and from the equity valuation perspective. They still trade relatively cheap. They've limited their leverage. They've maintained their discipline. And I think that there are going to continue to be tailwinds in crude oil over the next several years that will help these stocks continue to perform well.

KARINA CONTRERAS: All right, Rebecca Babin, senior energy trader at CIBC Private Wealth in the US. Thank you so much for your time today.

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