Will Delta variant fears continue to dent oil prices?

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- The price of oil has been coming under pressure recently, hitting its lowest level in three months, although we've had a bit of a bounce back today. And traders are reacting to rising COVID-19 cases as well as strengthening US dollar. For more, we're joined by Bart Melek, Global Head of Commodity Market Strategy at TD Securities. Bart, what's your take on what's happened with the price of oil at the moment?

- Well, let me say, first of all, it's great to be here. Thanks for inviting me. Well, I think the big worry continues to be COVID and this particular new variant that seems to be everywhere, the Delta variant. The problem is we're seeing data across Asia, and now increasingly in North America, that suggest that the demand we expected in the third quarter and probably in the early part of the fourth quarter may not materialize to the same extent. And that means these markets may be a lot less tight than we thought.

- And how close is the correlation between oil and COVID? If case counts continue to worsen globally, are we looking at a prolonged period of oil weakness?

- I'm not so sure for a long period. But I think the reaction so far in China has been pretty severe. They've had some significant lockdowns where mobility data suggests that there was a lot less driving, and that's resulting and will continue to result in less imports. I think we're much better equipped to deal with COVID. So no, we're not going to see the same type of shutdowns we did over a year ago where everything was shut down, we were sheltering in place. But I think on the margin, we will see the growth reductions in demand.

And look, we've already seen that with the International Energy Agency downgrading the forecast. And this is all coming at a time where OPEC Plus is committing to increase supply by some 400,000 barrels a day. And who knows? We could see more supply from Iran as well. So a lot of things are conspiring against crude. Let's also mention that a lot of people in the market are musing about taper. The US dollar may work against it. So a lot of variables here.

- OK. Now, the drop in prices comes at a time when inventories are also falling, and stockpiles have been lower for months because of the economic rebound. But that's now in question. So what's your outlook for inventories going forward?

- We still think inventories are going to be well placed, perhaps some more declines. We've seen the rate of decline diminished last week, but they're still pretty robust. And we're also seeing fairly decent so-called crack spreads or the premium for fuel versus oil. The problem is that pressure will likely abate. We're going to see less driving as people go back to school and the summer ends, so the summer driving season is going to peter out.

And I think we could see some seasonality in these inventories, or we could see more of it. And we could very well have a problem with refiners no longer willing to increase supply as much as we thought, so that would be less demand on the product. I think it's still decent because the supply side isn't growing very much. But I think we're not going to see the same dynamics as we did over the last few months.

- And what about the price of oil overall? Where do you see it headed in the fourth quarter?

- We still like it around $66, $68, and perhaps even much higher into the new year. The reason is we continue to expect OPEC to be extremely well disciplined. I don't imagine them oversupplying the market for a prolonged period, and even with this commitment to 400,000 barrels a day increase monthly. If OPEC, in my view, sees demand peter out and things not going well and there is an even sharper price drop, I think they're going to make changes. And certainly, that's what they've done previously, and I fully expect them to do so. So we're still optimistic that we're seeing the lows now. We could still see them hang around for a while. But ultimately, we should see fairly-- somewhat higher prices.

- OK. I want to quickly shift to gold, which remains under the $1,800 level with all the economic uncertainty out there. Where do you see gold headed?

- Well, we still like gold. In fact, we've seen it today over $1,800, I think $1,803. We think we can go into the mid-1,800s for now. The problem with gold has been the idea that the taper might happen. In essence, the US Federal Reserve reducing the amount of liquidity it injects into the market spooked a lot of people away from gold, and we've seen it correct significantly. But now we're up well-- I think close to $100 from the lows. And my expectation is that the Federal Reserve is very unlikely to be overly aggressive in how it reduces accommodation. I continue to expect real interest rates to be well in negative territory across much of the yield curve.

And the worry for me is that the economy will not bounce up as quickly as we have hoped because of this Delta variant hitting the world globally, even vaccinated parts of the world. And so I think gold still remains one with prospects to the upside. And I think we're going to see that whole idea that interest rates are going to spike and move away for a while once bad data starts manifesting from COVID in the next few months.

And let's not forget, the US Federal Reserve is putting full employment as a priority. That means by our estimates, some 340,000, 360,000 new jobs need to be created every month over the next 24 months. That's a tall order. And it's going to be very difficult to tighten conditions on the monetary side if you were to do that. So I think they'll be very cautious, which is OK for gold.

- Bart, thank you very much for your time.

- It was my pleasure. Thank you for inviting me.

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