Rising geopolitical tensions have the Middle East on edge. Alleged sabotage attacks on oil tankers and other facilities in the region are straining already tense relations between the U.S. and Iran. Michael O’Brien, Portfolio Manager at TD Asset Management looks at the implications for oil prices.
- A sharp rise in tensions in the Middle East, mainly between the US and Iran, have been pushing oil prices higher, and Washington has beefed up its military presence there and imposed tough new sanctions on Tehran, targeting its oil exports. Here to discuss the implications is Michael O'Brien. He's League Manager with Private Investment Council Canadian Blue Chip Model and Private Canadian Equity Fund at TD Asset Management.
The news just keeps on going on. We saw the bulletins that non-emergency US personnel are being asked to leave. There's a lot of nastiness, attacks on four oil tankers. What is-- I know you don't have a crystal ball, but where do you see this playing to? What should we be preparing for?
- Yeah, well, the Middle East has always been a very difficult region, but clearly, things are escalating a little bit quicker than most people would have anticipated. I think, at the end of the day, it just puts a bit of a risk premium into the oil price. So whatever you thought the range for oil was going to be two weeks ago, I would say bump it up by a few dollars.
- What do you see the range of oil right now?
- I don't see it going a whole lot lower in the short-term, unless we get some really bad news on the trade front. Right now, the fundamentals of supply and demand seem to be pretty nicely balanced, and at the end of the day, it comes down to inventories. Inventories will tell you how tight the market is. Right now, it looks like inventories are set to draw.
- Part of this, of course-- and again, this is at the margin because Iran is not a huge supplier of oil in the world market, I'd say. But we know that their output has basically been cut in half. And I think we got supply disruptions for Venezuela, as well, on top of that. The Saudis have said that they're not interested in increasing their output at this point. I mean, things can change. So we're seeing oil, right now, at about $62. You're saying that's-- you see that as a floor?
- Well, I think it's a pretty solid price right now.
- Yeah. Any thoughts on where it could go from here?
- Well, I think what's different now versus 10, 15, 20 years ago, is there is an ability for the industry to respond reasonably quickly. By reasonably quickly, I mean six, nine, 12 months, which is-- the US shale producers, if prices get to a level where they can't resist the temptation, then they will drill, and they can increase production. It takes time. I think the more reasonable or more realistic path, in terms of keeping that balance so that oil doesn't get too hot is, really, the OPEC producers themselves, and in particular, Saudi Arabia.
Because to your point, Iran itself-- the incremental oil coming out of-- because of these sanctions-- isn't an enormous part of a 100-million-barrel-a-day oil market, but it is a meaningful part of the effective spare capacity that OPEC has, and that's where-- on the margin, that's where it really affects the price. So right now, it's going to be dependent on Saudi and, potentially, the Russians as to how much and when they let some of that oil back into the market.
- It is, I guess, good news for those who are producing oil right now, in terms of where the prices were. Take Canada. Good to have oil prices up. It's good for-- it brings up WCS prices, as well, but we're still faced with the same old "can't get it out."
- Yes. Well, in Canada, yes. It's been a great frustration, obviously, and you think about the potential. If we could, if we had a pipeline, there are a lot of places in the world that would love to get their hands on that oil.
- Yeah, there's a look right now at the differential between WTI and WCS. A lot less than it used to be, obviously. There's been some things put in place. Where do you see this playing out here in Canada? There's a lot of people I've talked to who said, look, we've missed the window, so to speak, on this because by the time-- this is a very big picture-- by the time we actually can get oil to market and build a pipeline, the world may have transitioned into something else at that point, you know? No?
- I'm not in that camp at all.
- Tell me more. Why?
- Well, I think in terms of the demand outlook-- global demand has been very resilient for a long, long time. And so I think longer-term, as in decades from now, one day there will be peak oil, but I think that's a long way out in the future. In the here and now, I think the challenge for Canada is simply to get its oil to market and, specifically, to Tidewater or to the US Gulf Coast.
Just as one example, so the heavy Canadian barrel today-- the screen there, the differential is around $14 today. I think, realistically, that range should be $15 to $20. That would be a nice range for Canada, but just to give you a sense, a similar Mexican barrel that sells into the US Gulf Coast today actually trades at $1.50 more than WTI. So $15 more than the same Canadian barrel. It's just a question of access.
- Yeah, blood pressure just went up in the west part of the country when you said that, for sure. In terms of-- you mentioned you see decades of demand coming from oil in the next little while. In just, I'd say, the next six to seven months, any concerns about China, and just trade, and what that's going to mean for oil demand?
- Clearly, if you have the world's two economic heavyweights going at it with each other, that's not conducive for demand, clearly. It creates uncertainty. A lot of disruption. So on the margin, that can't be construed as a positive. So you want to hope that cooler heads prevail there.
KIM PARLEE: Yeah. Great insights, as always. Thanks so much.
- Great. Thank you.