OPEC has scaled back its forecast for oil demand, citing growing economic challenges. Greg Bonnell speaks with Hussein Allidina, Head of Commodities at TD Asset Management, about what that may mean for the sector and prices going forward.
We begin tonight with the challenges facing the energy space. Just earlier this week, OPEC scaled back its forecasts for global demand for this year and next. It's citing what it called global economic challenges. So what does that mean for prices? Joining me now to talk about it all, Hussein Allidina, head of commodities at TD Asset Management. Always great to have you here. Let's talk about yet again another lower forecast. Is this the end of them? So OPEC lowered their demand forecast, as you highlighted. IEA has done the same. EIA has done the same. I think a host of sell side banks are revising their sort of demand estimates lower. I don't think it's the end of it, Greg, to be honest. Economic growth is is slowing. I think the thing that is important to keep in mind, though, is that the forecast for next year is still constructive. It's still positive. We're still talking about growth of 1.5, 1.6 million barrels a day, which is down from the two and change that we've seen this year, but still positive in the context of a very, very tight balance. Four times since 1970 have we seen aggregate demand contract in absolute terms. We're not talking about that yet, at least for 2023. The last two times that you saw demand contract in absolute terms was around the pandemic. March 2020, demand collapsed because the world stopped. And similarly, around the financial crisis, when you couldn't get a credit line to move a car, go anywhere around the world, you had a contraction in demand. We're still forecasting still anticipating positive growth next year, which is concerning, really, given the tightness on the supply side, given where inventories and spare capacity are. I did know when OPEC bought down its forecast and yet again, it also said because of that, then we can see having a tremor was a little more than 500 and... 500,000 barrels day. 500,000 barrels a day. So OPEC seems to say, well, if the demand is going to be lower than we want to be sure the supply sort of comes down to meet that can, do they have, does the cartel still have that power to sort of make that? Yeah. And they've been they've been well they've struggled earlier this year, they struggled to meet the production quota that they had. More recently, they've been able to do a better job of meeting it. And I think they are trying their level best to manage the market and to to keep prices in a range, whether it's 80 to 100 or 75. I don't know. But they are trying their level best to manage supply. Yes, that's OPEC's efforts on the supply side as well. Of course, there are challenges. Let's talk about them. I think you have geopolitics and some operational challenges on your mind. Let's start with the geopolitics. Yes. So, you know, we do have this sort of December 5th sanction date of Russian crude. I think the number or the magnitude of supply that's going to be lost out of Russia is unclear. Janet Yellen came out last week or the week before and said she was okay if China and India were taking supplies. And I think that has lent to an increase in expectations around how much Russia could do. But incrementally, from here, I have a hard time believing that we're not going to see some lower level of supply coming out of Russia. Maybe it's not a reduction in exports of 1.5 million barrels a day, as some people have thought might be the case earlier on in the year. Maybe it's 200,000, 300,000. We can't really afford any contraction in supply from here, given how tight the balance already is. What about the operational? I mean, over the years and I think you and I probably had this discussion over the course of this year, a lot of investment has been put in to the energy space given the climate. Yeah. So so the commodity space broadly has not seen investment because the return on capital employed for the last ten years was zero or negative given we were in this sort of commodity bear market. When I look at the supply side, when we look at the supply side for 2023, folks are expecting growth out of the US, out of Canada, Brazil and Norway. Now, you know, if you look at US producers, and they're going through earnings right now, they have indicated that they are spending more. But a lot of that spend is to address the cost inflation that they're seeing. There is still a very pronounced desire on the part of US producers to return cash flow as the President of the US has talked about, to return cash flow to investors because they're getting rewarded for doing that. They're not getting rewarded like they did, you know, ten years ago to grow production at any cost. If we look in Canada, if you look at WCS prices, they're trading at a material discount to WTI or BRANT prices because there are midstream issues in Canada associated with moving this crude. So even though production may increase, are we going to be able to get that crude to market? That's a question mark. Brazil has its issues. They've gone through an election right now, even outside of the sort of politics in Brazil. You know, deep sea production is not without challenges. And again, when I when I look at the picture in the context of how tight the balance is, you know, if I get 800, 900, a million barrels a day out of non-OPEC, that would be a boon for sure, but doesn't change the story, the structural story that I don't have enough investment. I don't have enough supply growth given demand. Let's talk about demand a little bit more. We talk about the fact that OPEC cut its demand forecast. At the same time, is there a risk that a great deal of demand could come back online and say some big country decides to put some of their COVID restrictions aside? So, you know, for much of the year, China has been closed. Zero COVID. The demand data out of China has been quite weak. About a fortnight ago there was a potential change in their policy around Zero Covid. But you saw metals prices move meaningfully on that news and have continued to remain supported on that news. I think, again, incrementally, like the Russian supply story, I don't know how many barrels we're going to lose, but it feels like we might lose some barrels there on the demand side, if China returns to the market, that's a net positive for demand. And, you know, the higher frequency data over the course of the last several weeks is pointing to increased imports into China, which again is a positive signal. Obviously, the price of crude can bounce around quite dramatically in this climate from day to day. Where do you see prices going and what do you think it means for the companies in the space? We've been talking about the commodity itself, but it's definitely a relationship between the price of crude and how some of these stocks perform. So on crude, Greg, when I look at the balance here and we've talked about this, I think before. As you move into the end of the year, sequentially, demand increases just because of the normal seasonal. You know, before the show started, we were talking about the weather. We haven't seen weather yet. If that weather does turn colder, which it typically does as you enter the winter, you'll see a boon or a boost in demand there. On the supply side, OPEC, as you mentioned, is cutting production. I said Russia probably we'll see less volume come out of there. So the balance into your end looks quite constructive from an already very, very tight position. This morning, the daily reported inventories lower by 10 million barrels on the week. That's a massive number. And, you know, we've shown these charts before. Inventories are at their lowest level in the US since 2004. So I'm quite constructive into your end. I am concerned, however, and I think the market is concerned about how weak economic growth is going to get heading into 2023. You know, we've talked about the demand side. You need to see a material contraction in growth to see demand contract meaningfully. But we are going to see slower growth. And I think that's what's kind of keeping the oil price contained over the course of the medium term. Not to bore viewers, but we have not spent the money on the supply side. We're still consuming oil. Demand is going to reach 100 million barrels a day, which is a record this year, and it's going to continue to grow. We talked about demand growth being lowered next year, but still a million barrels a day of growth. And that sort of picture collectively with the lack of CapEx, with the desire not to spend because of energy transition, because of ESG, I think points to higher prices in the medium term for sure. I've got about 30 seconds left. Maybe we can't do it justice, but what does it mean for some of the stocks in the space? So the stocks have performed really, really well. If you look at, for example, XLE versus crude, XLE is outperforming crude in a meaningful way. I don't know if that is the equity market looking forward to brighter days or if that is a symptom of the fact that energy has been under-invested. And we're seeing people rotate out of sectors that aren't performing as well into a sector which has worked remarkably well this year.