Gulf countries recently cut diplomatic ties with Qatar and President Trump exited the Paris Climate Accord. Thomas George, Portfolio Manager, TD Asset Management, talks to Kim Parlee about the possible ripple effects on an already shaky oil market.
All right, there's been a slew of headlines that could have both short and long-term impact on the energy sector. This week, five Arab Gulf countries cut diplomatic ties with Qatar, sparking fears that the OPEC agreement would fall apart. And last week, President Trump announced the US will pull out of the Paris Climate Accord. Here with his take on what these events could mean for oil, Thomas George. He's portfolio manager for the TD Energy Fund. Great to have you here. There's a whole lot of stuff going on including today, oil is down 5%.
Qatar whatever, right?
Exactly. I just feel as though there's such a-- yeah. We'll get to Qatar, we'll get the Paris Climate Accord. But there's a whole boatload of oil out there, isn't there?
Yeah, so when OPEC came back and said, oh we're going to do this again. We're taking this over to 2018. The biggest challenge for the market was, oh no, the price kept going down, right? And so what was the culmination of that is just irrespective of OPEC continuing the production cuts. The biggest elephant in the room is if they continue these production cuts, but the US keeps going up, this is going to be a challenge. And today's inventory increase in the US-- both crude and gasoline-- it was just a very challenging spot.
Yeah. Just saying, again, OPEC is losing relevancy. It's hugely important. But when you've got the spigots open in these States, it's hard.
So what we really need to see-- if you went back last year, the pivot points for oil last year were really around drill counts falling and US production falling. US production is rising, drill counts are rising. So bottom line is in an oversupplied market, this is going to be a challenged place, unless we start to see that rollover in US production-- I think, in the near-term. All things equal, the OPEC cuts are real and they're big, but it's just going to take some time to work through for inventory.
What about then-- let's get to some of other news there, Qatar. How does that impact OPEC? How relevant is it to oil?
Not. Short answer, not. They produce something around 600,000 barrels, rounding error, based on whatever their OPEC cuts are. And irrespective is when you're in a challenge-type oil market, if you're ISIS in Libya, you can still get barrels on the market. Qatar is going to get barrels to the market, there's no question about that. They made a statement this does not impact their production.
You know, I would state does this raise geopolitical tensions?
Absolutely. And this is all just proxy Iran/Saudi again. This is all just all of that in culmination.
Right. Yeah, kind of rhymes. It's not the same song, but it rhymes with what we've seen before. Let me ask you, then-- let's shift a bit to the Paris Climate Accord. The US is out. What does this mean? Kind of pull above it strategically. What does this mean for renewables? Because I know you've covered this in the past. What does it mean for oil moving forward? What is the real-world impact of this?
So-- call me skeptical-- at the end of the day, I don't have a whole lot of faith in voluntary accords. These are feel-good mechanisms. Not to say that they're wrong, but--
The intent is there--
The intent is there.
There's no teeth. So you know, unless everyone says these are the specified targets, everyone is going to have the same, but if you kind of look at the letter of this, these are voluntary commitments, and you set your own targets, right? So there's just a bit of-- these are aspirational goals. The biggest thing is just around US leadership, and this whole concept of is climate change real or not?
Everything in America comes back to this you're either on one side of--
It's partisan, it's not separate.
It's a theology, right? And that's the problem, right? At least in England-- in respect to what side of the bench you're on, you understand the science and market forces are how you want to play them.
Right. OK then, boil this all down. Given everything that's going on right now, it sounds as though really for oil, what matters is this comes back down to just production levels in the states and supply. So where do you see oil prices going?
Well, this is a very challenged environment. I'll tell you, in the near term, the sentiment is bad, very bad. Because all things equal, when you're not in a tight market and marginal cost pricing doesn't inflict itself, then you're just in a speculative market. So you're anywhere between-- which is cash cost of somewhere around $40 per barrel, and marginal cost of somewhere around $60 to $65, right?
So you know, everywhere in between is just pure speculation. So until we start to see some real US plateauing, I think would be a challenged market to work through. And ultimately, we need to see global inventories come down. There's no question about that. Until global inventories start to really start to dent, that would be a second half 2017 event, that's when we start to see some real potential constructive action in oil. But that still is just on the edge.
All right. Thomas, thanks so much.
Thomas George. He's portfolio manager with TD Energy Funds.