As the Russia-Ukraine conflict intensifies, Kim Parlee speaks with Hussein Allidina, Head of Commodities at TD Asset Management, on why oil prices may climb above $180 a barrel.
And Kim, thanks for having me. There's there's definitely a concern around balances and the ability to meet the demand, given how tight underlying balances were to start with before we moved into this war, frankly. There's a tremendous amount of concern about getting supply. Russia is not a trivial producer of commodities. They produce all the commodities that we consume, broadly speaking. And you know, there are challenges associated with getting that supply out, even though there aren't sanctions on the supply, there seems to be an unwillingness of participants to hold or move Russian molecules, Russian bushels because of concerns around what sanctions might look like tomorrow.
So let's maybe just dial into one of those, the molecules, as you put it, the oil. Let's talk about where's oil going from here. I mean, I know you and I talked earlier about triple digits. I mean, what should we be bracing for?
And it's really hard to because we started the year tight. Inventories have been drawing for the better part of the last 16 months. We've talked about how there isn't a tremendous amount of spare capacity to meet any disruptions. Russia produces 10 to 12 percent of the world's production. They're responsible for seven million barrels a day of exports. We don't have the cover. So as far as what that means for price, it's difficult because you've got a rationed demand. In the short term if you can't bring on additional supply the only way to balance the market is by rationing demand. We look back to 1974 during the Airborne lombargo, 1979 during the Iranian Revolution, when we lost supply, prices moved to a level that was consistent with about six percent of GDP. So the oil burden, the amount of oil we're consuming relative to GDP six percent. That means we still have 20-25 percent to go from here and in real terms we're not at the highs that we saw in 2008. I think that depending on the magnitude of the disruption, depending on how long it continues, it's quite plausible that we move up into north of one hundred and fifty, one hundred eighty dollars a barrel. I don't think we can sustain those levels. But to clear the market, you do need to see prices move materially higher. You're seeing crude do that today. You've seen European natural gas move to record highs overnight. And all this is to ration demand because that's the only thing you can do in the short run to find equilibrium.
What about the bushels? I mean, you mentioned other commodities. I mean, we know wheat has been moving up significantly. Corn? What? What are you seeing? And again, I'm assuming it's the same thing that there's knock on impacts to all this. So what are you hearing?
Yeah. So with respect to the grains, Russia, Ukraine, collectively, are large, large producers, exporters of wheat. Pretty meaningful, Ukraine's a pretty meaningful producer of corn as well. There are some bushels sitting in Ukraine that haven't been able to get out, so there is a bit of a physical disruption there. The bigger issue that we see in the grains, Kim, is if this war continues into the spring planting season, which starts in May, you run the risk of having materially lower supply because the farmers aren't able to get into the fields to sow their crops. Exacerbating that is what's happening with, as we talked about fertilizer prices, energy prices, those are an input into the production of these commodities. And on the consumer side, if you're a China or if you're an Egypt or if you're a Jordan, that depends on this food and in many cases you subsidize food in your country. A higher food price is a material issue. We had exports, U.S. exports this morning, very, very robust because I think you have a bit of a panic forming on the part of consumers. You need to get supply at any cost. Very hard to ration food demand, as we saw in 2006, 2007, 2008.
Hussein, given all that, where do you see things going or what are you watching to understand where things are moving or what are some the red flags you're going to be paying really close attention to?
Sure. I mean, it's really it's really hard, frankly, given that we've got to forecast, frankly, the geopolitics. We have to watch carefully how the sanction regime with respect to Russia-Ukraine plays out. Europe and the US have both been very methodical in the way that they are imposing sanctions not to further tighten already tight energy and food balances. There is a buyer strike right now because people have uncertainty around how that sanction regime might change. But we've got to watch that. I think we also have to watch the high frequency data on both the supply and demand side. On the demand side, we need to see if $4 gasoline is starting to challenge gasoline demand in the U.S. We've got to watch the high frequency data on U.S. corn, soybean, wheat exports that comes out every week to see how these consuming countries are responding. And I think, very important to watch, if the U.S. producer responds to the higher price. In 2008 and 2009, we saw material increase in U.S. shale production, which helped balance the market. We haven't seen that yet. That is something to watch because that is the only sort of short term relief that we might have. And even when I say, just to be clear Kim, when I say short term, I'm talking three, four, six, seven months at the earliest to bring production on line, so we're in frankly, we're in a bit of a pickle where the balances are tight. Prices, I think, need to stay elevated to ration demand so that we can find equilibrium.
Hussein, always a pleasure, thanks so much for joining us.
Thanks for having me.