Oil market is significantly oversupplied, says CIBC's Rebecca Babin

Becky Quick (Anchor) 00:00.350

joining us right now is rebecca babin cibc private wealth senior energy trader and rebecca these prices this year have been kind of phenomenal in how low the prices have been given all of the conflict we continue to see around the globe things that you would anticipate could

Becky Quick (Anchor) 00:16.230

disrupt oil markets but you say that that crude oil is kind of in a war with itself can you explain what that means

Rebecca Babin (Senior Energy Trader) 00:23.590

yeah so i think it really hit on the key point becky we've had a lot of geopolitical risk escalate this year whether it's been israel and iran russia ukraine and now with venezuela and that has at times seemed to indicate that we would see supply reductions in the market right

Rebecca Babin (Senior Energy Trader) 00:40.150

we've got millions of barrels coming out of russia and iran specifically but none of these actual escalations have resulted in barrels being off the market in fact we've really seen all of the sanctions and barrels finding their ways to buyers one way or another and so that has

Rebecca Babin (Senior Energy Trader) 00:59.310

been the kind of reason that the market has experienced these short covering rallies there's supply risk the other side of the coin and where we're doing the battle is on the fundamental side we're looking at a market that is significantly oversupplied demand is growing for

Rebecca Babin (Senior Energy Trader) 01:14.110

twenty twenty five at a million barrels a day where supply non opec supply is growing at one point six million barrels a day so this is a market that has a natural buffer built in in terms of excess supply then you add opec which came in and started unwinding their production

Rebecca Babin (Senior Energy Trader) 01:30.670

cuts and you have a significantly significantly oversupplied market so all of these geopolitical risks kind of bump up against that supply and it kind of becomes this narrative battle which narrative are we focusing on today is it supply risk or is it the fundamental oversupply

Rebecca Babin (Senior Energy Trader) 01:49.710

that's impacting prices at the end of the day the winner of the battle for twenty twenty five clearly been fundamentals proves down over twenty percent and and fundamentals have have really been won the day i think that battle will continue into twenty twenty six where we

Rebecca Babin (Senior Energy Trader) 02:05.870

continue to see fundamental weakness and potential increased geopolitical risks yeah

Becky Quick (Anchor) 02:10.590

i i it it feels a little different to me than what we've seen in the past and that's basically because normally on a supply demand situation it is the demand situation demand side that is the bigger driver if you have a down market like this it's usually because there's economic

Becky Quick (Anchor) 02:28.910

turmoil somewhere in the world what would happen to prices if we weren't dealing with all these geopolitical issues whether it be russia and ukraine or venezuela what would happen if those somehow got miraculously solved if the geopolitical tensions came down

Rebecca Babin (Senior Energy Trader) 02:44.910

really good point on that and i agree this is different demand has actually outperformed this year even though we were worrying about it in april it's going to be around a million barrels a day this year and maybe potentially one point two million barrels a day demand growth

Rebecca Babin (Senior Energy Trader) 02:58.470

next year if we start to see demand get shaky due to geopolitical or due to global growth risks and we see the geopolitical risks fade we will absolutely see crude test fifty wti maybe the forties but the key here is when we test those levels that's when we start to see a supply

Rebecca Babin (Senior Energy Trader) 03:20.550

response from US producers so the market naturally resets itself back into balance it's not going to just continue to trade lower producers are not going to produce at a loss so that's where you see that mechanism step

Becky Quick (Anchor) 03:34.030

in i mean we we already heard there was some reporting yesterday that suggested the trump administration has been looking to the US majors to find out who is interested in going into venezuela to potentially actually pump more and the answer was nobody at this point because

Becky Quick (Anchor) 03:48.590

there are more fertile fields elsewhere and because oil prices just aren't high enough to kind of incentivize them to get into this are we already at the point where some fields would be shut down or some exploration would not happen because you can't get crude above sixty

Becky Quick (Anchor) 04:04.830

dollars

Rebecca Babin (Senior Energy Trader) 04:06.550

so for most of the US shale producers fifty five is where you start to see some barrels start to be uneconomical it accelerates drastically as you get to fifty and below the supply impacts at this price point and where the curve is is actually not extreme we might see a hundred

Rebecca Babin (Senior Energy Trader) 04:24.910

thousand fifty to a hundred thousand barrels a day of production start to come off but the key here and i think this is a really important point is US producers continue to get more efficient and be able to drive down their breakevens we've expected crude to start to come off

Rebecca Babin (Senior Energy Trader) 04:41.390

we've seen rig counts come down this year pretty pretty dramatically but production hasn't responded they're drilling longer laterals they're getting more efficient so as we think about those break even points just continue to remember that we've thought they were going to

Rebecca Babin (Senior Energy Trader) 04:56.430

respond in the past and they've been very resilient so we are at that tipping point but i would say maybe we need to shade that tipping point a couple bucks lower due to efficiencies so so it's something to watch but i don't bet against US producers cutting back dramatically at

Rebecca Babin (Senior Energy Trader) 05:14.270

this crude strip i think that takes place five bucks lower from here