Oil and gold: More downside on the horizon?

- Bart, it's always great to have you with us. I want to start with just the volatility in oil. We're seeing a pretty deep sell-off. I think WTI was down 6% just a couple of days ago. Why? What's going on?

- Well, first of all, great to be here. Thank you for having me here. Well, the big problem is, of course, that these COVID variants are shutting down a good part of Europe. And that is limiting the growth prospects for demand for oil over the next three months. So second quarter isn't looking as robust as we thought on the demand side.

And also on the supply side, OPEC-Plus just announced that they will slowly phase in production increases after, of course, cutting sharply a while back. Now they're bringing that supply back in. And the combination of more supply and demand worries has prompted some folks who were very long to get out. And on top of that, we have a geopolitical issue where Iran may very well export a lot more crude to China, as China seems to be a bit belligerent with respect to the sanctions against it. And there could be a deal of the nuclear file between China and the P5+1. So it's more supply and demand worries, at least from an interim.

- It's interesting, because the supply side-- I'll come back to that-- but the demand side, the demand and the pandemic lockdowns, I think people do think it is transitory-- one hopes. Those of us who are living in Canada are feeling it still quite a bit. But it looks as though the equity markets actually seem to look through the lockdowns a bit more easily than the commodity markets do. And I'm not sure, maybe, if you have that perspective or if you're concerned that demand is going to get shut in because we're being shut in.

- Well, we still look at demand to increase about 1 million barrels a day in the second quarter. The big jump is going to be the quarter after that in the third quarter, where we're seeing 3 million barrels per day increase. And that's going to tighten things up. But I think you may be correct that equity markets are more comfortable to look forward, but there's a reason for that.

Commodity markets are very much physical. Once you move the product-- it's in the middle of the ocean on a tanker, and once inventories rise, you have to make adjustments. And it's not the case in inventories for equities or bonds, for example. And this is why we saw negative prices, if you recall, about a year ago, where inventories were so high, you had nowhere to put this stuff, then you have to pay people to take it off your hands.

- Excellent point. OK, so what's your outlook? What do you see the range for oil in the next, say, six months?

- Well, we still think oil is going to do fairly well-- probably trading a little bit above $62, $60 for the next six months or so. And our reasoning is that demand will definitely improve quite a bit. We think that year-over-year in 2021, we'll see 5.5 or so million barrels per day more being used than in 2020. And we also see OPEC as being quite disciplined in how they bring about their excess capacity into the market.

So far they've been exemplary. A bit of a disappointment for the market that they're phasing in the production cuts, but I think all set, OPEC has been extremely restrained. And they are very much keeping their eye on where supply demand fundamentals are. And our view is that they will try to precipitate a bit of a deficit and keep prices fairly high, but not so high as to incentivize, let's say, shale producers to eat their lunch again.

- I want to shift to gold. I've only got a couple of minutes here, Bart, but I want to get that in there. Gold, if we think about last summer, I think it was in around 2,000. Now we're around 1,700. And what's been fascinating, and probably frustrating, for a lot of gold bulls, I think, is we hear about inflation, and we've been seeing lots of inflation and commodities-- gold has traditionally been the place to go to-- hasn't been working. So what's happening with gold?

- Well, I'm not so sure it hasn't been working exactly. Gold has several things going against it right now-- first, bond markets. We've seen a pretty sharp increase in yields-- the 10-year yields on that part of the curve. We're seeing 170 basis points. So that's sharply higher than we thought six months ago. We're seeing the US dollar stronger than expected.

And typically, there is an inverse relationship between the two. And at the same time, we've had an awful lot of risk appetite. Equities are in record territory, doing very well, and that is also opportunity cost for gold. If you think you can make 10%, 20%, 30% in equities, you might not want a zero yielding asset. We do think gold does well.

There's a bit of a rebound going on right now, although we think it's range-bound short-term. I wouldn't be surprised if we see 1,760, 1,780 over the next few weeks, maybe a month or so. Beyond that, in the latter part of the year, we see 1,900 as very possible. The Fed will still keep short-term rates at 0% for years-- we'll see how long, but for a while. We'll know better when the minutes come up what they're thinking.

We do see some inflation. So in real terms, real rates will be quite low. And that should help gold. We think that ultimately, the dollar will likely stop being strong, or may weaken somewhat, as other parts of the world start getting vaccinated, and do well, and start performing better in relative terms than they are now. And I'm not sure the equity markets can last forever, and there will be some move into gold as a hedge, as it has traditionally been.

But I do agree. But for now, it doesn't look like that's the case. We think that may change, at least in the next six months and a little bit beyond.

- Excellent points, and great things to think about. Bart, always a pleasure. Thank you so much.

- Thank you so much.

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