Gas prices to normalize ‘to a certain extent’: Energy Trader

Rebecca Babin, Senior Energy Trader at CIBC Private Wealth, US, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss the ripple effects of the Colonial pipeline cyber attack.

Video Transcript

ALEXIS CHRISTOFOROUS: And of course, what's happening there with that pipeline is affecting mostly gas prices right now. We've got drivers up and down the East Coast filling up their tanks pretty aggressively following that ransomware attack. According to AAA, the National price at the pump hit $2.98 or $2.99 a gallon, there you see it today.

That is the highest level we've seen in nearly six years. I want to talk more about this now with Rebecca Babin. She is Senior Energy Trader at CIBC Private Wealth US. Rebecca, thanks so much for being with us. I want to talk about this spike we're seeing in gas prices. Will it turn around and come back down just as quickly as it ran up once we get that Colonial Pipeline back up online 100%?

REBECCA BABIN: Yeah, it's a great question. So the answer to that is probably not. And the reason I say that is for a couple of reasons is this timing-- the timing of this event is right before we enter summer driving season where we pull a lot of inventory out of our inventory stocks. So we're going to be really struggling to rebuild these inventories as there's a huge expectation that summer driving season is going to be gangbusters this year as we come out of COVID.

So I don't anticipate you see that bing up and come back down. Will it normalize to a certain extent? For sure, because this is an extreme case, particularly in parts of the country. But I don't think you go right back to where we were prior to this event.

KRISTIN MYERS: Rebecca, I was looking a little bit earlier at crude. It actually had been in the red, we're now seeing it's whipsawed back into the green, up about half of a percentage point. What is the cause behind some of this market reaction that we saw after that Colonial Pipeline was shut down? It actually seemed to do the opposite of what I would have expected it to do.

REBECCA BABIN: Yeah, I think a lot of people had that thought. And I think the way to think about it is this-- where you have a pull of inventory, or you have a deficit, or you have a scarcity in the United States, it is offset equally by a build in another part of the United States, like the Gulf Coast. All the crude that we're dying for on the East Coast right now is essentially trapped in the Gulf Coast.

And the refiners there are cutting runs, in effect-- not able to pull WTI into their system and produce product, because they have no way to distribute it. So what we're seeing is that the indices of a broader complex is reflecting that these kind of situations kind of offset each other.

You have a scarcity in one regional part of the country, which, unfortunately, our system of infrastructure is set up in such a way that we have a massive amount of our production being created in the Gulf Coast, whereas a large percentage of the consumption is on the East and West Coast, right? So you have to have those networks in place.

And when we lose one, we just get a build in the Gulf, and we get a draw on the East Coast. And it's more of a regional impact as opposed to pulling the entire complex higher. In fact, this is probably a net negative for crude, WTI that is, because these refineries were already running really high inventory numbers down in the Gulf, and they don't have anywhere to send it because the bid in Latin America is not strong because they're still struggling COVID. So net, it actually looks pretty negative for WTI in the near-term but it does look positive for regional gas, like New York Harbor.

ALEXIS CHRISTOFOROUS: And, Rebecca, a lot of people are saying this is an early test for the Biden administration when it comes to dealing with these cyber-attacks. And we're seeing just how vulnerable our infrastructure is in this country. What do you think Biden should be doing as he looks to the private sector to work in partnership to try to beef up our infrastructure to avoid things like this from happening in the future?

REBECCA BABIN: Yeah, I think this is the big picture conversation outside of market activity around this topic is, essentially, what do we do around a very fragmented infrastructure that's privately owned? We don't-- we're not China, we don't have everything state-owned. So how does the government standardize some of the cybersecurity for infrastructure assets?

And essentially, that's going to be one of the things that the Biden administration is going to focus on after this is, OK, each individual company, we need to figure out some standards so that we are able to monitor this as a country, as opposed to monitor as these small, different individual companies. And I think that will be the first step. And I think that will be a challenging one for a number of reasons, and it'll probably be fairly expensive.

KRISTIN MYERS: So to your point, those moves are going to be fairly expensive, probably going to be taking quite a while, especially if there's any attempts made to try to unify the system so that a cohesive cybersecurity strategy could at least be made across the board. So save that, is there the potential-- and I think a lot of people are saying this-- for some of these attacks to happen again in the future-- if not cyber-attacks, but also physical attacks on some of this infrastructure? How much are these attacks or these cyber-risks-- how much are they headwinds going forward in this market?

REBECCA BABIN: Yeah, it's a good question. So I think it's pretty well-accepted that cyber-attacks will continue. It's become something that happens not only in energy, but across retail and other sectors. And it's something we've become desensitized to a certain extent. Headwinds-- I don't know if I would technically call it a headwind directly.

It will be a headwind in this way. It increases the cost of running a pipeline. You are now going to have to shore up your cyber defenses and potentially meet a higher standard of excellence, which raises the cost of doing a project-- which are those costs are already going up for environmental reasons, et cetera.

So it certainly will be another consideration. I don't know if it's going to push the needle so far that people abandon projects, but it's certainly-- it's not a tailwind.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Rebecca Babin, Senior Energy Trader at CIBC Private Wealth US, thanks so much for putting that in perspective for us.