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Commodities prices have bolted out of the gate in 2021, with silver in the spotlight. The question is, can this fast start continue for the rest of the year? Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy at TD Securities.
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- Bart, thanks so much for joining us. I want to start off with just, if I could, the kindling, the conditions, if you will, to which this fire has gotten started. What is the macro condition for commodities? And how long do you expect that to last?
- I think this year when commodities really surged, I think we can attribute it to, one, the US elections turning blue in a sense with the Georgia race turning Democrat with now President Biden controlling both houses and the presidency. The hope is that he will institute significantly higher expenditures and stimulate the economy more. And that means better demand for commodities. And also, the hope is that he'll invest trillions of dollars for green infrastructure, which also means commodities.
- So off to a good start. Again, we'll have to see what actually happens, to your point, in terms of whether these things can move in Congress. We are seeing hints of things getting stopped up a little bit. But under the assumption that it does and that we do get some solidarity behind some of these fiscal moves, let's talk about some of the commodities and what you see for each one. Copper has been one that people have been watching very closely and has really broken out.
- Well, sure, copper has done phenomenally well. When you compare it to the collapse of March, where we hit around $4,300, now we are well above $8,000. We moved over $1,000 since November. And we moved very, very strongly in the new year, as well.
The predication here was we are getting pretty decent growth from China, so industrial activity is returning. The hope is that with vaccine programs starting to be ramped up around the world, Canada not so much, but the rest of the world, like the US, we're going to see strong demand. Now, I would caution that a lot of this copper action has been predicated on very strong macroeconomic numbers. There, it could be weaker, and we could see some easing of strategic buying in China. So while we do like copper, we think there is a chance that copper rally could pause and reverse partially, at least in the short run.
- And do you see that, tell me a bit about that pause. How long could that last? Do you see it picking up again, or is the pause, could it turn into something longer?
- Certainly, it could turn into something longer if we were to have disappointments on the macro side. But at this point at $8,000, it looks like the market is pricing in a lot of scarcities. We've lost about 400,000 tons of production last year. Some of it, actually, most of it returned. And we will have a fairly decent-sized surplus in 2021.
So this pause could last a bit. But as we move further into 2021-22 and beyond, those markets are going to tighten up. It could very well be that investors would look past the fundamentals that may be moderating a little bit as this pace of the recovery moderates in China and continue to go along that metal. There's still uncertain there. We're betting there might be a bit of an easing.
- OK, let's move on to oil, another one we're watching. We've seen, oil's actually had a pretty big move, trading above $50 a barrel. But before I get to the outlook for oil, can I just ask you about the canceling of Keystone Pipeline? We could spend an entire topic, or an entire show, I should say, just on this topic. But what are some of the key takeaways from that decision we should be paying attention to?
- Well, certainly we're going to lose some 880,000 barrels of export capacity from Canada to the United States. So the first implication is that this will bridle or anchor the growth of the Canadian oil sands, at least until we get something to the Pacific. And we'll see what timeline that actually is.
We certainly need export capacity to tight waters, less export capacity to the United States. That will probably mean that the Western Select differential versus WTI will be elevated. It's going to be difficult to see how we're going to grow exports by a huge amount there.
There's, of course, always trains, but the bet was that we could supply Canadian heavy to the accomplished refineries in the Gulf. The problem with it for the US is they still will need that crude as supplies from Venezuela, from Mexico are on the way. It's not at all clear how they're going to substitute that material.
But clearly, the presidential permit was taken away. And certainly, it was done on the first day. So it's going to be very difficult to see that reverse, no matter what the economic merits are. It seems to be a political commitment close to the president's heart.
- All right, then, so we're handicapped by that. But then let's talk about just oil, the overall outlook. What do you see?
- Well, we were very positive oil for much of last year, as we moved from negative territory into 30s, then 40s. Now we've seen a very strong rally in the early days of 2021. And that was on the back of surprise oil production cuts by Saudi Arabia.
Saudi Arabia decided unilaterally, by the way, to cut some one million barrels per day of supply, February, March. That will continue to bring this market into a deficit, even though the second wave of COVID, which is turning out to be a little bit worse for demand growth than I think we thought. So demand, I think, now globally will be only about five and a half million barrels per day in 2021, versus six, so less demand. But good on OPEC-plus, they've agreed to keep supply under wraps and to have it into a deficit for, I think, for the balance of 2021 to unwind this massive inventory that was accumulated in 2020.
- Bart, I've only got about a minute here. But I do want to squeeze in gold and silver if I could. Gold not seeing as much attention, I would say, as we're seeing with other commodities, although it's not really a commodity. But I'm curious. How much of that do you think is that Bitcoin is stealing gold's thunder?
- I think there might be some of it. But I think to a large extent, they are different investors. And there is a lot of flow, enough for everybody at this point.
I think gold came out strong immediately in the new year, hitting 1960s-plus. We quickly fell on one thing, mainly US election basically turned out to be dominated by the Democrats, meaning more spending and potential inflation. That's steepened up the yield curve, which reversed a lot of the arbitrages that were in this market, and also lifted the dollar.
We think those are temporary. We don't think we're going to get as much stimulus as many had expected, as you've mentioned earlier, Kim. They're not exactly holding hands and singing kumbaya in the Senate. There're going to be tough fights, and they may not deliver the $1.9 trillion, and the infrastructure might not be as much.
So these curves have flattened out since. And we don't expect real rates or the curves to steepen up much. So we do like gold. We still think it's going to be tricky for a while, but we'd like it up $2,000 by the end of the year. And I think silver will follow suit.
- I've only got, give me 15 seconds on silver, Bart. I do want to hear because I think you're pretty bullish on it right now, aren't you?
- Yes, we are. We think it will test $30 in the last few months of this year. Two things are driving it. One, we think the environment is positive for gold, and, therefore, silver. It's got double the volatility of gold.
So gold does well, silver does twice as good, historically. And we are getting a reflation trade going, and we're getting the return of industrial activity. And 60% of silver demand is industrial, be that capacitors, or electronic boards, or other things, or silver used in circuitry both for vehicles, for solar panels.
So industrial activity return and the greening of the economy all point in silver's direction. So silver is looking good. We're looking at strong demand on the investment side, industrial side, and fairly lackluster supply, potential deficits.
- Bart, always a pleasure. Thanks so much for the overview.
- It was my pleasure. Thank you for having me.
[HOPEFUL ELECTRONIC MUSIC PLAYING]
- I think this year when commodities really surged, I think we can attribute it to, one, the US elections turning blue in a sense with the Georgia race turning Democrat with now President Biden controlling both houses and the presidency. The hope is that he will institute significantly higher expenditures and stimulate the economy more. And that means better demand for commodities. And also, the hope is that he'll invest trillions of dollars for green infrastructure, which also means commodities.
- So off to a good start. Again, we'll have to see what actually happens, to your point, in terms of whether these things can move in Congress. We are seeing hints of things getting stopped up a little bit. But under the assumption that it does and that we do get some solidarity behind some of these fiscal moves, let's talk about some of the commodities and what you see for each one. Copper has been one that people have been watching very closely and has really broken out.
- Well, sure, copper has done phenomenally well. When you compare it to the collapse of March, where we hit around $4,300, now we are well above $8,000. We moved over $1,000 since November. And we moved very, very strongly in the new year, as well.
The predication here was we are getting pretty decent growth from China, so industrial activity is returning. The hope is that with vaccine programs starting to be ramped up around the world, Canada not so much, but the rest of the world, like the US, we're going to see strong demand. Now, I would caution that a lot of this copper action has been predicated on very strong macroeconomic numbers. There, it could be weaker, and we could see some easing of strategic buying in China. So while we do like copper, we think there is a chance that copper rally could pause and reverse partially, at least in the short run.
- And do you see that, tell me a bit about that pause. How long could that last? Do you see it picking up again, or is the pause, could it turn into something longer?
- Certainly, it could turn into something longer if we were to have disappointments on the macro side. But at this point at $8,000, it looks like the market is pricing in a lot of scarcities. We've lost about 400,000 tons of production last year. Some of it, actually, most of it returned. And we will have a fairly decent-sized surplus in 2021.
So this pause could last a bit. But as we move further into 2021-22 and beyond, those markets are going to tighten up. It could very well be that investors would look past the fundamentals that may be moderating a little bit as this pace of the recovery moderates in China and continue to go along that metal. There's still uncertain there. We're betting there might be a bit of an easing.
- OK, let's move on to oil, another one we're watching. We've seen, oil's actually had a pretty big move, trading above $50 a barrel. But before I get to the outlook for oil, can I just ask you about the canceling of Keystone Pipeline? We could spend an entire topic, or an entire show, I should say, just on this topic. But what are some of the key takeaways from that decision we should be paying attention to?
- Well, certainly we're going to lose some 880,000 barrels of export capacity from Canada to the United States. So the first implication is that this will bridle or anchor the growth of the Canadian oil sands, at least until we get something to the Pacific. And we'll see what timeline that actually is.
We certainly need export capacity to tight waters, less export capacity to the United States. That will probably mean that the Western Select differential versus WTI will be elevated. It's going to be difficult to see how we're going to grow exports by a huge amount there.
There's, of course, always trains, but the bet was that we could supply Canadian heavy to the accomplished refineries in the Gulf. The problem with it for the US is they still will need that crude as supplies from Venezuela, from Mexico are on the way. It's not at all clear how they're going to substitute that material.
But clearly, the presidential permit was taken away. And certainly, it was done on the first day. So it's going to be very difficult to see that reverse, no matter what the economic merits are. It seems to be a political commitment close to the president's heart.
- All right, then, so we're handicapped by that. But then let's talk about just oil, the overall outlook. What do you see?
- Well, we were very positive oil for much of last year, as we moved from negative territory into 30s, then 40s. Now we've seen a very strong rally in the early days of 2021. And that was on the back of surprise oil production cuts by Saudi Arabia.
Saudi Arabia decided unilaterally, by the way, to cut some one million barrels per day of supply, February, March. That will continue to bring this market into a deficit, even though the second wave of COVID, which is turning out to be a little bit worse for demand growth than I think we thought. So demand, I think, now globally will be only about five and a half million barrels per day in 2021, versus six, so less demand. But good on OPEC-plus, they've agreed to keep supply under wraps and to have it into a deficit for, I think, for the balance of 2021 to unwind this massive inventory that was accumulated in 2020.
- Bart, I've only got about a minute here. But I do want to squeeze in gold and silver if I could. Gold not seeing as much attention, I would say, as we're seeing with other commodities, although it's not really a commodity. But I'm curious. How much of that do you think is that Bitcoin is stealing gold's thunder?
- I think there might be some of it. But I think to a large extent, they are different investors. And there is a lot of flow, enough for everybody at this point.
I think gold came out strong immediately in the new year, hitting 1960s-plus. We quickly fell on one thing, mainly US election basically turned out to be dominated by the Democrats, meaning more spending and potential inflation. That's steepened up the yield curve, which reversed a lot of the arbitrages that were in this market, and also lifted the dollar.
We think those are temporary. We don't think we're going to get as much stimulus as many had expected, as you've mentioned earlier, Kim. They're not exactly holding hands and singing kumbaya in the Senate. There're going to be tough fights, and they may not deliver the $1.9 trillion, and the infrastructure might not be as much.
So these curves have flattened out since. And we don't expect real rates or the curves to steepen up much. So we do like gold. We still think it's going to be tricky for a while, but we'd like it up $2,000 by the end of the year. And I think silver will follow suit.
- I've only got, give me 15 seconds on silver, Bart. I do want to hear because I think you're pretty bullish on it right now, aren't you?
- Yes, we are. We think it will test $30 in the last few months of this year. Two things are driving it. One, we think the environment is positive for gold, and, therefore, silver. It's got double the volatility of gold.
So gold does well, silver does twice as good, historically. And we are getting a reflation trade going, and we're getting the return of industrial activity. And 60% of silver demand is industrial, be that capacitors, or electronic boards, or other things, or silver used in circuitry both for vehicles, for solar panels.
So industrial activity return and the greening of the economy all point in silver's direction. So silver is looking good. We're looking at strong demand on the investment side, industrial side, and fairly lackluster supply, potential deficits.
- Bart, always a pleasure. Thanks so much for the overview.
- It was my pleasure. Thank you for having me.
[HOPEFUL ELECTRONIC MUSIC PLAYING]
