Show Transcript
After seeing the biggest one-day loss in three years, and oil prices went from four-year highs to a bear market in just six weeks, OPEC scrambles to stop the price slide. Kim Parlee talks with Bart Melek, Global Head of Commodity Strategy, TD Securities about the steep decline and the outlook for oil prices.
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Hello, and welcome to the show. October was a brutal month for equities, and it's been tough on commodities too. Oil prices went from four-year highs to a bear market in just six weeks. Precious and base metals all showed weakness as well. And joining me for a look at what's driving the market is Bart Melek. He's Global Head of Commodities Strategy at TD Securities. Great to have you here.
In September, oil was at, what, $73 and change? Today we're at-- I'm looking down here-- $56 and change. Can you just dissect for me what actually happened?
Sure. Well, it's great to be here. I will agree it has been a terrible week, particularly if you are long crude. So what happened? Well, I think the market got very much discouraged by, one, very large increases from OPEC, which last month, totaled about 430,000 barrels per day. We had unexpected jump in US shale production. And if that wasn't enough, we started to get very concerned about demand side of the story.
Things looked pretty bad at the time. Prices dropped for 11 consecutive days. Then on Sunday, we had OPEC come up. And many analysts such as myself thought, well, this should give us a bit of a reprieve. OPEC essentially committed to cut 1 million barrels out of the supply chain, which would very much mean that the market is back in balance and probably headed towards tightness as Iranian sanctions bite.
But then President Trump piped in on Twitter and essentially said that he doesn't like prices where they are and they ought to be, well, lower. This triggered technical selling. And I suspect we had a lot of long liquidations and speculative funds taking short positions in probably the form of puts, which dropped us for the 12th consecutive trading day, which was, I think, the worst sequential performance since 1984. So by all measures, it has not been a very good week.
I was going through your note here. And again, you talk about the steep rise in OPEC and shale output, which you just mentioned, a whole bunch of everything else. You also talk about the sanctions against Iranian crude also met with the issuance of waivers for those at the same time. Can you explain what that is?
Well, yes. That's right. Well, when the US announced sanctions against Iran, they were quite adamant that not a drop of oil is going to come from that country to the rest of the world. But the reality of the matter is that the world needs Iranian crude. And I think in a pinch the US administration in Washington decided to allow, at least for the time being, for some key users of the Iranian product to be allowed to import it. And I think that was yet another shock to the market, where OPEC built up supply in anticipation of significant tightness and then had to walk it back, essentially, because that supply isn't going to disappear. It will continue.
Not that there's more bad news, but why not? Let's throw more on there. Unusually sharp reductions in refinery runs, another thing that you cited.
Well, that's right. Well, crack spreads, the basically profitability of making distillates, has been quite good for the last little while. That meant that refinery operators kept those facilities going for as long as they could in order to capitalize on the high premiums. But of course, very much like your car, if you don't maintain it, the next time you do it, you're going to have to do more maintenance than you normally would have.
So they shut down globally I think as much as 1.7 million barrels. In the United States, some 900,000 barrels of capacity went away. And in Indiana alone, one refinery reduced Canadian imports by some 350,000. So what we've seen is a big seasonal drop in demand for crude. And that was yet another bit of bad news for the crude market, which precipitated longs to get short.
I want to get to where you think it's going, but I think we have to talk about Western Canadian Select because it's a double-take when you see the price right now. I mean, I think we're trading, what, at-- is it $24 or $24 and change right now?
I think it might be lower. I think right now we're trading at over a $40 discount to WTI benchmark.
I'm seeing a 15.75 right here, so pardon me if I'm getting this wrong. So normally the discount, I understand, is about $10 from-- historically.
Yeah, it reflects the transportation costs and a little bit of a quality issue. You know, this is a wound that's self-inflicted. We simply ran out of pipeline capacity. And the seasonal factors bit in as well, where we needed to import less Canadian crude into the United States. And that has basically collapsed the Western Canadian Select price.
An interesting factoid is this product is still very desirable in the Gulf Coast. Many of those refineries, in fact, much of the refining capacity is too old for heavy. And if you manage to get a barrel of Western Canadian Select to a Texas hub, you will only get maybe a $6 discount on it. So it's still very highly valued. It's just there is an oversupply, a glut, at Canadian locations.
I think investors and every Western producer just threw something at the television when you said that. So tell me what's going to turn this around. Or are we hitting a new level of support for where oil is right now?
Well, we are of the view that this was very much a sentiment-driven move. Yes, there were fundamentals involved. But the severity of the decline is probably much more than the fundamentals warrant. So what will turn it? One, OPEC very likely, particularly since we had such a bad day-- well, a bad few weeks-- will no doubt agree to cut as much as 1.2, 1.4 million barrels out of the supply chain. Certainly the minister of oil from Russia, Mr. Novak, has signaled that this could happen. And I think we're probably going to get a consensus after the most recent rout.
That will certainly, by the first quarter, rebalance this market and create tightness. And as sanctions bite on Iran, we will likely turn into a deficit in the second half of next year. And we think demand will continue to grow at a very strong clip, 1.3 million barrels.
OK, can I get what price that you're forecasting for the next-- I've only got about 10 seconds here.
Sure. We're looking at WTI to move to just under $70 and Brent at $80.
Always a pleasure. Thanks so much, Bart.
It was my pleasure. Thank you.
Bart Melek, he's Global Head of Commodity Strategy at TD Securities.
In September, oil was at, what, $73 and change? Today we're at-- I'm looking down here-- $56 and change. Can you just dissect for me what actually happened?
Sure. Well, it's great to be here. I will agree it has been a terrible week, particularly if you are long crude. So what happened? Well, I think the market got very much discouraged by, one, very large increases from OPEC, which last month, totaled about 430,000 barrels per day. We had unexpected jump in US shale production. And if that wasn't enough, we started to get very concerned about demand side of the story.
Things looked pretty bad at the time. Prices dropped for 11 consecutive days. Then on Sunday, we had OPEC come up. And many analysts such as myself thought, well, this should give us a bit of a reprieve. OPEC essentially committed to cut 1 million barrels out of the supply chain, which would very much mean that the market is back in balance and probably headed towards tightness as Iranian sanctions bite.
But then President Trump piped in on Twitter and essentially said that he doesn't like prices where they are and they ought to be, well, lower. This triggered technical selling. And I suspect we had a lot of long liquidations and speculative funds taking short positions in probably the form of puts, which dropped us for the 12th consecutive trading day, which was, I think, the worst sequential performance since 1984. So by all measures, it has not been a very good week.
I was going through your note here. And again, you talk about the steep rise in OPEC and shale output, which you just mentioned, a whole bunch of everything else. You also talk about the sanctions against Iranian crude also met with the issuance of waivers for those at the same time. Can you explain what that is?
Well, yes. That's right. Well, when the US announced sanctions against Iran, they were quite adamant that not a drop of oil is going to come from that country to the rest of the world. But the reality of the matter is that the world needs Iranian crude. And I think in a pinch the US administration in Washington decided to allow, at least for the time being, for some key users of the Iranian product to be allowed to import it. And I think that was yet another shock to the market, where OPEC built up supply in anticipation of significant tightness and then had to walk it back, essentially, because that supply isn't going to disappear. It will continue.
Not that there's more bad news, but why not? Let's throw more on there. Unusually sharp reductions in refinery runs, another thing that you cited.
Well, that's right. Well, crack spreads, the basically profitability of making distillates, has been quite good for the last little while. That meant that refinery operators kept those facilities going for as long as they could in order to capitalize on the high premiums. But of course, very much like your car, if you don't maintain it, the next time you do it, you're going to have to do more maintenance than you normally would have.
So they shut down globally I think as much as 1.7 million barrels. In the United States, some 900,000 barrels of capacity went away. And in Indiana alone, one refinery reduced Canadian imports by some 350,000. So what we've seen is a big seasonal drop in demand for crude. And that was yet another bit of bad news for the crude market, which precipitated longs to get short.
I want to get to where you think it's going, but I think we have to talk about Western Canadian Select because it's a double-take when you see the price right now. I mean, I think we're trading, what, at-- is it $24 or $24 and change right now?
I think it might be lower. I think right now we're trading at over a $40 discount to WTI benchmark.
I'm seeing a 15.75 right here, so pardon me if I'm getting this wrong. So normally the discount, I understand, is about $10 from-- historically.
Yeah, it reflects the transportation costs and a little bit of a quality issue. You know, this is a wound that's self-inflicted. We simply ran out of pipeline capacity. And the seasonal factors bit in as well, where we needed to import less Canadian crude into the United States. And that has basically collapsed the Western Canadian Select price.
An interesting factoid is this product is still very desirable in the Gulf Coast. Many of those refineries, in fact, much of the refining capacity is too old for heavy. And if you manage to get a barrel of Western Canadian Select to a Texas hub, you will only get maybe a $6 discount on it. So it's still very highly valued. It's just there is an oversupply, a glut, at Canadian locations.
I think investors and every Western producer just threw something at the television when you said that. So tell me what's going to turn this around. Or are we hitting a new level of support for where oil is right now?
Well, we are of the view that this was very much a sentiment-driven move. Yes, there were fundamentals involved. But the severity of the decline is probably much more than the fundamentals warrant. So what will turn it? One, OPEC very likely, particularly since we had such a bad day-- well, a bad few weeks-- will no doubt agree to cut as much as 1.2, 1.4 million barrels out of the supply chain. Certainly the minister of oil from Russia, Mr. Novak, has signaled that this could happen. And I think we're probably going to get a consensus after the most recent rout.
That will certainly, by the first quarter, rebalance this market and create tightness. And as sanctions bite on Iran, we will likely turn into a deficit in the second half of next year. And we think demand will continue to grow at a very strong clip, 1.3 million barrels.
OK, can I get what price that you're forecasting for the next-- I've only got about 10 seconds here.
Sure. We're looking at WTI to move to just under $70 and Brent at $80.
Always a pleasure. Thanks so much, Bart.
It was my pleasure. Thank you.
Bart Melek, he's Global Head of Commodity Strategy at TD Securities.
