With oil trading near a seven year high, Bart Melek, Head of Commodity Strategy at TD Securities, joins MoneyTalk to discuss whether the rally will continue and what it means for Canada.
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- Oil has slid from the seven-year highs that it had hit earlier this week. But it is still over $90 a barrel. Joining us to discuss whether the rally will continue and what he's watching is Bart Melek. He's head of commodity strategy at TD Securities. Bart, it's always great to have you with us. I want to talk about what you see going forward. But maybe you could just back up and tell us about the drivers that got us to this point, and there's been a lot of them.
- Well, thank you, for being here, for having me here again. Well, the big driver, of course, is mainly on the supply side at this moment. What we're seeing is basically the market quite concerned that there could be an interruption of supplies from Russia. And that is on top of concerns that OPEC may not deliver as much new supply as they are promising. Certainly, that has been the case over the last few months. And the concern is that, given that the recovery is continuing and demand is surprising on the upside, the supply side will just not keep up.
KIM PARLEE: Hmm. If we can get to some of the geopolitical issues right now, I know one of the things I know you're watching as well is the US and whether it might be getting closer to some sort of deal with Iran. Can you just talk about the significance of this? And could that also put some downward pressure on oil prices if that happens?
- I think that absolutely could. Much will depend on how quickly any return of full-blown uranium exports to global markets is. How quickly that happens will matter. But that could easily take $10, maybe even more, off the price. As we estimate right now, we could quickly see half a million barrels coming into the market from Iran and then more over time as capacity builds up and contracts are made. So that could be quite material if that does occur.
- I guess so much of this depends on what you talked from the beginning. I mean, things are so tight right now that at the margin when things happen, you really do get these big price swings. And I know that even weather, which is always an issue, but bad weather in Texas is really playing into this as well too.
- It sure is. We've seen again this year freeze up of facilities, and the Permian Basin wasn't working at full capacity. And I think that was one of the major catalysts that saw crude move to the seven-year high recently. But we also have a European natural gas crisis. And that is substituting demand of natural gas for oil, which is yet another factor. And then OPEC simply is not delivering as much as markets wanted them to.
- And do you see OPEC stepping up further, or are they kind of-- are they where they can be? Can they actually do more?
- I think they probably can do more now, specifically since the recent troubles in a couple of countries may have seen the worst of it. But I'm not so sure they really want to provide a lot of oil to put downward pressure on prices. And the main reason is they're not really facing an awful lot of competition for market share from traditional swing producers like shale producers in the United States.
I think at this point, this current price is not really destroying demand in any way. So if you're not going to lose market share, if you're not going to lose demand, why not move the prices as far as you can get away with to maximize national revenue? But I think there's also an impact of disruption from Russia due to potential sanctions against that country and its exports. That is also adding a bit of a geopolitical premium to crude prices right now.
- We certainly have seen a number of oil companies reaping the benefits, I'll say that, from an earnings and revenue standpoint, and shareholders benefiting too. I mean, Canadian companies have seen a real boost from these prices.
- Well, yes, they have. And I think for the first time in quite a while, we're hearing global oil majors talk about exploring and increasing capacity. But let's be frank, that isn't going to happen overnight. This will take a while to materialize. As it stands now, the investment in Permian and other major shale areas of the United States simply has not materialized. And when you factor in the cost of labor and other input costs, we probably haven't seen very much increase at all even as prices were over $82 to $90, which should make most of those facilities quite profitable indeed.
We haven't seen the supply-side response. All we're really hearing is that there are intentions down the road. But if there is a bit of a crunch because of, let's say, an interruption of flows from Russia or if OPEC continues to not deliver as promised, that's not going to help us very much over the next couple of months anyway.
KIM PARLEE: What's your outlook, Bart? Because I feel as though, as I watch-- probably a couple months ago, we had lots of people calling for triple-digit oil prices as we move forward. I'm starting to hear more bears, though, now, saying that we could start to see oil prices come down. Where do you sit?
- Well, we think there is still an upside risk if supplies get interrupted, given the very low inventory levels across the OECD and the United States. But I think after we get through the winter, OPEC still has sufficient supplies to balance this market. And if we're talking about Iran coming into this, we're looking at crude prices probably around $80, $85 for the balance of the year after this quarter is done.
KIM PARLEE: Hmm. Bart, always a pleasure. Thanks so much.
- Pleasure. Thank you very much.
[MUSIC PLAYING]
- Oil has slid from the seven-year highs that it had hit earlier this week. But it is still over $90 a barrel. Joining us to discuss whether the rally will continue and what he's watching is Bart Melek. He's head of commodity strategy at TD Securities. Bart, it's always great to have you with us. I want to talk about what you see going forward. But maybe you could just back up and tell us about the drivers that got us to this point, and there's been a lot of them.
- Well, thank you, for being here, for having me here again. Well, the big driver, of course, is mainly on the supply side at this moment. What we're seeing is basically the market quite concerned that there could be an interruption of supplies from Russia. And that is on top of concerns that OPEC may not deliver as much new supply as they are promising. Certainly, that has been the case over the last few months. And the concern is that, given that the recovery is continuing and demand is surprising on the upside, the supply side will just not keep up.
KIM PARLEE: Hmm. If we can get to some of the geopolitical issues right now, I know one of the things I know you're watching as well is the US and whether it might be getting closer to some sort of deal with Iran. Can you just talk about the significance of this? And could that also put some downward pressure on oil prices if that happens?
- I think that absolutely could. Much will depend on how quickly any return of full-blown uranium exports to global markets is. How quickly that happens will matter. But that could easily take $10, maybe even more, off the price. As we estimate right now, we could quickly see half a million barrels coming into the market from Iran and then more over time as capacity builds up and contracts are made. So that could be quite material if that does occur.
- I guess so much of this depends on what you talked from the beginning. I mean, things are so tight right now that at the margin when things happen, you really do get these big price swings. And I know that even weather, which is always an issue, but bad weather in Texas is really playing into this as well too.
- It sure is. We've seen again this year freeze up of facilities, and the Permian Basin wasn't working at full capacity. And I think that was one of the major catalysts that saw crude move to the seven-year high recently. But we also have a European natural gas crisis. And that is substituting demand of natural gas for oil, which is yet another factor. And then OPEC simply is not delivering as much as markets wanted them to.
- And do you see OPEC stepping up further, or are they kind of-- are they where they can be? Can they actually do more?
- I think they probably can do more now, specifically since the recent troubles in a couple of countries may have seen the worst of it. But I'm not so sure they really want to provide a lot of oil to put downward pressure on prices. And the main reason is they're not really facing an awful lot of competition for market share from traditional swing producers like shale producers in the United States.
I think at this point, this current price is not really destroying demand in any way. So if you're not going to lose market share, if you're not going to lose demand, why not move the prices as far as you can get away with to maximize national revenue? But I think there's also an impact of disruption from Russia due to potential sanctions against that country and its exports. That is also adding a bit of a geopolitical premium to crude prices right now.
- We certainly have seen a number of oil companies reaping the benefits, I'll say that, from an earnings and revenue standpoint, and shareholders benefiting too. I mean, Canadian companies have seen a real boost from these prices.
- Well, yes, they have. And I think for the first time in quite a while, we're hearing global oil majors talk about exploring and increasing capacity. But let's be frank, that isn't going to happen overnight. This will take a while to materialize. As it stands now, the investment in Permian and other major shale areas of the United States simply has not materialized. And when you factor in the cost of labor and other input costs, we probably haven't seen very much increase at all even as prices were over $82 to $90, which should make most of those facilities quite profitable indeed.
We haven't seen the supply-side response. All we're really hearing is that there are intentions down the road. But if there is a bit of a crunch because of, let's say, an interruption of flows from Russia or if OPEC continues to not deliver as promised, that's not going to help us very much over the next couple of months anyway.
KIM PARLEE: What's your outlook, Bart? Because I feel as though, as I watch-- probably a couple months ago, we had lots of people calling for triple-digit oil prices as we move forward. I'm starting to hear more bears, though, now, saying that we could start to see oil prices come down. Where do you sit?
- Well, we think there is still an upside risk if supplies get interrupted, given the very low inventory levels across the OECD and the United States. But I think after we get through the winter, OPEC still has sufficient supplies to balance this market. And if we're talking about Iran coming into this, we're looking at crude prices probably around $80, $85 for the balance of the year after this quarter is done.
KIM PARLEE: Hmm. Bart, always a pleasure. Thanks so much.
- Pleasure. Thank you very much.
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