Show Transcript
Tensions between U.S. and Iran hit a boiling point as Iran fires missiles at U.S. forces in Iraq in retaliation for killing its top general. Could mounting pressures in the Middle East push oil prices to triple digits? And will gold be a safe haven of choice? Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities.
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[THEME MUSIC]
- Welcome to the first "Money Talk" show of the decade. We're only one week into 2020, and markets have already seen some turbulence, especially in oil and gold. Rising tension in the Middle East hit a boiling point with the US killing Iran's top general, which then triggered a missile attack from Iran. Here to break down what the latest conflict could mean for oil and gold is Bart Melek. He is Global Head of Commodity Strategy at TD Securities. It's great to have you here.
- Great to be here.
- And happy new year. Despite what's going on, we'll still say happy new year. Let me just start with, what does this mean for oil prices? Because we saw them move up with the killing of the Iranian general. Then we saw them move back down below the levels when things seemed to have subsided a bit. So what do you see?
- Well, we see maybe a bit of a pause for now. We were a little bit negative on oil in November. So we recently have increased our outlook. The reason we have is we essentially expect more risk in the oil price. Essentially, we think there is a bit of a risk premium now.
We don't think there is an escalation at this point in the hostilities between these two nations. But I think it becomes a possibility. And now the market is thinking that there could be things that happen as we go deeper into '20 too. Whether you do or not, we're not sure. But the risk exists.
KIM PARLEE: Can you give us a little more background on what those risks? I mean, there's a Middle Eastern geopolitical premium, but like what? What could we see?
BART MELEK: Well, certainly, the market was quite worried that there might be a cycle evolving of tit-for-tat type of response where the United States knocked out the general. Then Iran was feared could have gone after assets in Saudi Arabia, for example. We've seen that happen already where it have 5 million barrels per day of capacity was knocked out. So that would be a scenario that would basically leave the world short of oil, and we could easily see triple-digit WTI.
Another scenario with the markets we're worried about is potentially going against shipping in the gulf, the Straits of Hormuz, essentially knocking out tanker traffic. That too would interrupt a flow of roughly 20 million barrels a day worth of distillates and oil. That would be irreplaceable and could very much shift the market into a massive, massive deficit and certainly higher prices.
- OK, so those are the conditions of which you would see triple digits. If those did not happen, what are you seeing for oil in the next, say, year?
- Well, we're looking at about $60 for the rest of the year. We have that geopolitical risk premium, maybe $4 or so, embedded in our price for the first half and somewhat less into the latter part of the year.
KIM PARLEE: For investors who are looking to play this, there's lots of different ways they can. But what do you suggest? Yeah, sometimes it's safer to look, for people who are doing commodities like yourself-- that's not everybody's going able to do that-- but ETFs, but even the oil companies because, as you know, it's only at certain levels do they become profitable for the producers.
- Well, certainly, at these levels, a lot of the marginal companies that were having a difficult time at $50, $55, in essence where they've hedged, are now viable. So since it is based on the differential between cost and price, $60, I think, puts a lot of smaller companies in the shale, in the money, and certainly high-cost producers as well. So higher prices make them more profitable, and that should respond as a result.
- All right, we'll be watching those headlines to see what happens-- oil. Let's shift to gold, obviously, the safety haven for everyone. And we saw gold move a lot last night while we saw things move around but settling back a little bit. But what do you see? Where's gold now, and where do you see it going?
- Well, gold has been doing well before these attacks, mainly on the hypothesis that we will continue to see very low interest rates and continued monetary accommodation from the Federal Reserve and potentially other central banks. We were seeing these liquidity injections done by the Federal Reserve to help the plumbing. But nonetheless, that is providing liquidity to the whole system.
And we are also looking at an environment where, yes, growth will not move into recessionary levels, we don't think. But it will most likely be weaker than it was last year. And there exists a chance that the Federal Reserve-- in fact, TD Securities believes that the Federal Reserve cuts rates two more times.
And then we've had to enter this issue with the rocket launchers and the gold search. Well, the problem there was that we could see an economy that weakens because of the negative supply shock from oil. Higher oil prices could swell-- slow the economy. And at the same time, we could see price pressure. And the belief, I think, by most people was--
KIM PARLEE: So a price pressure with gold? No, with--
- Well, with oil.
- Oh, infla-- OK, OK.
- --with inflation. And then the assumption was that the Federal Reserve and the central banks around the world would absorb that supply shock, that negative supply shock with accommodative monetary policy. So you would have real rates that would go down and low rates. So you would theoretically have fairly high prices, slower economic activity, and rates that were forced lower, your classic stagflationary type of environment, which we think would probably be good for gold. But that reversed as those risks abated.
KIM PARLEE: Right. So right now, we're seeing gold in around like-- I think it's 15.50, 57 area. So where do you-- what do you-- I mean, I'm not going to give you-- ask for a year prediction. That's a long time. But what do you see it in next little while, the range?
- Well, I think we should probably see a bit of a correction still as those tensions get priced out. What we are looking at is essentially lower interest rates still and equity markets that are doing well. So some of that premium should be moved out of that market, in our view.
And this is a fairly crowded trade. Essentially, there's a lot of long positions out there. And I think we're going to knock some of them that'll probably be profit-taking. But longer term, we like gold. We like it at 16.50. But that's more towards the end of the year.
KIM PARLEE: OK, well, we'll have you back to see how that plays out. Bart, always a pleasure.
- Thank you.
- All right, Melek, he's Global Head of Commodity Strategy at TD Securities. And while the Middle East conflict could have a big impact on gold, Michael Craig, head of Asset Allocation at TD Asset Management says, conditions are quite supportive of equity markets right now, as he sees growth starting to accelerate. If you want to watch that whole interview, you can watch it at moneytalkgo.com.
[THEME MUSIC]
- Welcome to the first "Money Talk" show of the decade. We're only one week into 2020, and markets have already seen some turbulence, especially in oil and gold. Rising tension in the Middle East hit a boiling point with the US killing Iran's top general, which then triggered a missile attack from Iran. Here to break down what the latest conflict could mean for oil and gold is Bart Melek. He is Global Head of Commodity Strategy at TD Securities. It's great to have you here.
- Great to be here.
- And happy new year. Despite what's going on, we'll still say happy new year. Let me just start with, what does this mean for oil prices? Because we saw them move up with the killing of the Iranian general. Then we saw them move back down below the levels when things seemed to have subsided a bit. So what do you see?
- Well, we see maybe a bit of a pause for now. We were a little bit negative on oil in November. So we recently have increased our outlook. The reason we have is we essentially expect more risk in the oil price. Essentially, we think there is a bit of a risk premium now.
We don't think there is an escalation at this point in the hostilities between these two nations. But I think it becomes a possibility. And now the market is thinking that there could be things that happen as we go deeper into '20 too. Whether you do or not, we're not sure. But the risk exists.
KIM PARLEE: Can you give us a little more background on what those risks? I mean, there's a Middle Eastern geopolitical premium, but like what? What could we see?
BART MELEK: Well, certainly, the market was quite worried that there might be a cycle evolving of tit-for-tat type of response where the United States knocked out the general. Then Iran was feared could have gone after assets in Saudi Arabia, for example. We've seen that happen already where it have 5 million barrels per day of capacity was knocked out. So that would be a scenario that would basically leave the world short of oil, and we could easily see triple-digit WTI.
Another scenario with the markets we're worried about is potentially going against shipping in the gulf, the Straits of Hormuz, essentially knocking out tanker traffic. That too would interrupt a flow of roughly 20 million barrels a day worth of distillates and oil. That would be irreplaceable and could very much shift the market into a massive, massive deficit and certainly higher prices.
- OK, so those are the conditions of which you would see triple digits. If those did not happen, what are you seeing for oil in the next, say, year?
- Well, we're looking at about $60 for the rest of the year. We have that geopolitical risk premium, maybe $4 or so, embedded in our price for the first half and somewhat less into the latter part of the year.
KIM PARLEE: For investors who are looking to play this, there's lots of different ways they can. But what do you suggest? Yeah, sometimes it's safer to look, for people who are doing commodities like yourself-- that's not everybody's going able to do that-- but ETFs, but even the oil companies because, as you know, it's only at certain levels do they become profitable for the producers.
- Well, certainly, at these levels, a lot of the marginal companies that were having a difficult time at $50, $55, in essence where they've hedged, are now viable. So since it is based on the differential between cost and price, $60, I think, puts a lot of smaller companies in the shale, in the money, and certainly high-cost producers as well. So higher prices make them more profitable, and that should respond as a result.
- All right, we'll be watching those headlines to see what happens-- oil. Let's shift to gold, obviously, the safety haven for everyone. And we saw gold move a lot last night while we saw things move around but settling back a little bit. But what do you see? Where's gold now, and where do you see it going?
- Well, gold has been doing well before these attacks, mainly on the hypothesis that we will continue to see very low interest rates and continued monetary accommodation from the Federal Reserve and potentially other central banks. We were seeing these liquidity injections done by the Federal Reserve to help the plumbing. But nonetheless, that is providing liquidity to the whole system.
And we are also looking at an environment where, yes, growth will not move into recessionary levels, we don't think. But it will most likely be weaker than it was last year. And there exists a chance that the Federal Reserve-- in fact, TD Securities believes that the Federal Reserve cuts rates two more times.
And then we've had to enter this issue with the rocket launchers and the gold search. Well, the problem there was that we could see an economy that weakens because of the negative supply shock from oil. Higher oil prices could swell-- slow the economy. And at the same time, we could see price pressure. And the belief, I think, by most people was--
KIM PARLEE: So a price pressure with gold? No, with--
- Well, with oil.
- Oh, infla-- OK, OK.
- --with inflation. And then the assumption was that the Federal Reserve and the central banks around the world would absorb that supply shock, that negative supply shock with accommodative monetary policy. So you would have real rates that would go down and low rates. So you would theoretically have fairly high prices, slower economic activity, and rates that were forced lower, your classic stagflationary type of environment, which we think would probably be good for gold. But that reversed as those risks abated.
KIM PARLEE: Right. So right now, we're seeing gold in around like-- I think it's 15.50, 57 area. So where do you-- what do you-- I mean, I'm not going to give you-- ask for a year prediction. That's a long time. But what do you see it in next little while, the range?
- Well, I think we should probably see a bit of a correction still as those tensions get priced out. What we are looking at is essentially lower interest rates still and equity markets that are doing well. So some of that premium should be moved out of that market, in our view.
And this is a fairly crowded trade. Essentially, there's a lot of long positions out there. And I think we're going to knock some of them that'll probably be profit-taking. But longer term, we like gold. We like it at 16.50. But that's more towards the end of the year.
KIM PARLEE: OK, well, we'll have you back to see how that plays out. Bart, always a pleasure.
- Thank you.
- All right, Melek, he's Global Head of Commodity Strategy at TD Securities. And while the Middle East conflict could have a big impact on gold, Michael Craig, head of Asset Allocation at TD Asset Management says, conditions are quite supportive of equity markets right now, as he sees growth starting to accelerate. If you want to watch that whole interview, you can watch it at moneytalkgo.com.
[THEME MUSIC]
