Energy prices, such as oil and natural gas, are surging as China takes steps to do “whatever it takes” to secure supplies for winter. Anthony Okolie speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about the potential impact on global supply lines.
ANTHONY OKOLIE: Bart there's lots going on with commodity markets. We'll start off with news that China has ordered its top energy companies to secure energy supplies at all costs. So what is this going to do for natural gas prices?
BART MELEK: Well, certainly, on the margin, it'll tighten this market up that is already quite tight. When we're talking about securing natural gas, we're really talking most likely about LNG, Liquefied Natural Gas. That means exports of LNG from the United States and other places around the world will likely be tighter. Prices are continuing to be sky high. And ultimately, that probably also means that petroleum product demand should go up as well because of the scarcities in the natural gas market.
ANTHONY OKOLIE: And of course, there's also a lot of anxiety about natural gas prices. And if we get a cold winter, particularly in Europe and Asia, how much of a factor could that be on future natural gas prices?
BART MELEK: Oh, I think could be quite significant. What we're seeing is accumulation of events that have gotten prices sky high in-- on UK markets and European markets. Of course, there is COVID. But we've had a move more towards durable goods, which are more energy-intensive than a lot of services. We're restarting air travel to the United States. Jet demand has moved higher. Other demand has moved higher as well.
And at the same time, what we're seeing is the scarcity on the supply side where the wind trends aren't as power-generating as expected at the same time. In Europe, we're seeing the wind down of some nuclear capacity and coal capacity. And then inventories are down as a result. Demand was high during the summer, certainly in North America, because of the massive heat. If we get even a normal winter, we're working from a position of low inventories and a lack of investment in shale, which byproduct is natural gas. That could tighten it up and we could see prices move still higher over and above where they are today.
ANTHONY OKOLIE: Anthony, what about oil? Of course, OPEC Plus has already met with prices sitting at near three-year highs. Do you see oil prices going higher?
BART MELEK: I think there's certainly that chance. Right now, Brent, the global benchmark, is around $80. Market still isn't comfortable in moving it above that, but we can certainly envision a situation. We've had OPEC just now saying they are pretty much committing to where they were increasing 400,000 barrels per day of production in each of the future months. If we see more substitution of natural gas for distillate products-- in fact, the Saudi Arabian oil company already is saying that the impact could be as much as an additional half a million barrels a day of demand-- we could easily see that price move above $80, and who knows? Maybe even into the hundreds or so.
ANTHONY OKOLIE: Oh. OK, let's switch gears. We'll talk about gold, which is sitting around $17.50 US. But it's still well off its levels back in the start of June. What's driving the weakness in gold? And what's your outlook?
BART MELEK: Well, certainly, gold hasn't performed very well. But I will put a little caveat on this. It's probably doing a little better than most people thought. Today has been a bit of a good day for gold.
What's driving it? Well, we had the Federal Reserve at the last FOMC and their pressers basically say that they are more likely to have a taper sooner rather than later. So the market thinks that it could very well be in November. In fact, it's very likely it is November. At the same time, they've adjusted their so-called dots from the various members pointing to again, sooner than expected rate hike.
What that ultimately did is move the yields higher across the curve from 2s to 10s to 30s with the 10-year benchmark moving to around 150 basis points. That had the effect of basically getting people out of gold. And we've seen speculators reduce their long positions and increase short exposure. At the same time, any time that the US rates rise relative to other countries, the spreads basically mean that the US dollar gets bid. And we had a fairly robust US dollar.
Not so the case today, I believe. But generally, the trend has been and the belief is that the US dollar will firm. And there is a very strong inverse relationship between the US dollar and gold. The weaker the US dollar, the stronger gold tends to be. And of course, the opposite, which is the case recently.
Stronger dollar begets a weaker gold. Ultimately, we think gold does OK, because in the end, we think that the Federal Reserve will continue to be very accommodative for the foreseeable future well into 2023.
ANTHONY OKOLIE: And what about the other precious metal, silver? You mentioned the US dollar. The silver has come down. What's your view on silver?
BART MELEK: Well, silver, I think for now, is going to face weakness. Several things behind that. One of course, is slower than expected manufacturing activity in China. Weakness there. And of course, there is the potential for some negative impact on the financial system from their potential default of the-- well, defaulting to on foreign debt already of their real estate company.
So silver industrial demand isn't particularly robust. And that is slowdown in China. We have an energy issue, as we just talked about, in Asia and Europe. That will likely contribute to less activity on the industrial side. And we also on top of all this, we have a situation with the microchip market, where everything from vehicles to some electronic goods that are using a lot of silver are not using it because of these supply chain issues that are plaguing the market.
So silver is getting hit by two things. One, a weaker environment for gold because of tapering and higher rates and a stronger US dollar. And its unique industrial side negatives that are, I, think hurting it right now.
ANTHONY OKOLIE: Bart, thank you very much for your insights.
BART MELEK: It was my pleasure.