Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities, about recent moves in the price of gold and oil, as well as the factors investors should watch for that could drive the prices of those commodities higher.
Given this call, I'd say, on peak oil, I understand that you are still-- and TD Securities is still-- long oil. You see about $45 a barrel in six months. Can you tell me why? Is this a demand or supply story?
- Well, that's right. We've recently taken-- have entered a long trade in our model portfolio. And so far we're in the money, so it's looking OK. The reason we're still positive and think that crude oil, WTI in particular, will move into the mid-40s over the next three to six months is because we do see demand recovery-- perhaps not to the all-time highs this year that we've seen back in 2019, and north of 100 million barrels per day. But we do think we will recover 6 million barrels of demand after the big, big declines that we've seen recently.
And, at the same time, we're certainly standing witness to a massive decline in US shale oil output. And OPEC and Russia, OPEC+, as they're affectionately known, are quite intent on making sure that everybody follows the restrictions on production. They came out very forcefully last week to those who were, quote, unquote, cheating, or not following the rules, and warned them to follow the rules. And market took that very well. And we've seen the rise.
- Now, it's interesting because you're saying, given all that, $45 in the next six months. But you're actually calling for, I think, $50 by the end of 2021.
- That's right. But it will be a very slow trajectory, or a flat trajectory getting us there. I think we have so much excess supply because, if you recall, a while back, OPEC cut a significant amount to rebalance the market.
What OPEC will want to do is gradually increase output as to satisfy demand, but not to overload demand. And, at the same time, they don't want to undersupply the market, so as not to drive prices too high, in order not to incentivize their nemesis, US shale producers and other nonconventionals to sort of eat their lunch or take market share from them. So they are going to be very guarded. And, so far, they've been very, very disciplined-- and quite clear that they will continue to match demand with supply.
- It's got to be tough, though, managing that demand supply because demand is a tricky one here. I mean, are you concerned about resurgence in COVID could really impact demand and really derail your upside case here?
- We absolutely are quite cognizant of it. We've just seen an example of it the other day, where risk appetite melted. We had volatility shoot up. We had S&P 500 up 1 point, down over 2 and 1/2%. And oil dropped quite severely, I think around 4 1/2% to 5%.
It rebounded since. But this is very much a possibility, anything that will tell the market that the current trajectory of demand recovery is not on. A second wave could be one reason. Political flux or political instability ahead of the US election, or maybe even after it, could be another risk. All those are factors that could very well derail the idea that demand is going to return on some ordinary path towards at least levels that we've seen previously.
- Let's shift if we could. I'd love to get your thoughts on gold. We broke the $2,000 barrier back in August. I understand TD Securities also has a long position on gold. You've got a 12-month target of $2,200.
We've backed off now. We're in around 19 now. So tell me through your thesis why you see that moving up.
- Well, we have been playing, or investing, that market for quite a while in our model portfolio. We've recently have taken profits. We were in at $1,200 at some point. We thought it was appropriate to take a profit. And now, we thought it was appropriate to get long again.
Over the last day or so, we've had a bit of a setback. We are not stopped out or anything. And we do continue to believe that we're going to get our $2,200.
And this is why. One, we think, ahead of the election, there will be a pretty significant amount of volatility. So there is that one upside risk where there is a contested election in the United States, some saying that President Trump may not leave, may declare victory before the mail-in ballots.
We don't have an opinion whether or not that is going to happen or not. But we do think that, if markets start talking about it, that is a risk to the broad economy. And that would mean that, as a safe haven, we could see more investment in gold.
And there is a hypothesis that the Democrats or the really left-leaning part of the Democratic party will dominate, meaning modern monetary theory could be something that's touted as the way to fund all these deficits and all the expenditures. And the corollary to that is that we could very well see inflation move higher. In fact, the Fed said that they expect inflation to move higher. Yet they've also promised not to lift rates until 2023 or maybe even beyond.
So that means real interest rates are very likely to drift lower. And that is a very good recipe for higher gold. And we do think the US dollar migrates a little lower as well, as the rest of the world starts recovering as well. Because, at this point, we judge that the US is a bit-- ahead of the curve a bit.
- Bart, we'll leave it there. A great insight as always. Thanks so much.
- My pleasure. Thank you.