The price of oil has been trending higher recently amid speculation crude could soon approach $100 a barrel. Kim Parlee speaks with Hussein Allidina, Head of Commodities at TD Asset Management, about supply and demand trends and the outlook for prices going forward.
* The price of oil has been rallying lately as investors focus on potential supply issues. Right now, crude is at around $90 a barrel, as you can see. That's up about 30% since the beginning of July. So what's driving those supply concerns, and what are the implications for prices going forward? Here to give us his thoughts, Hussein Allidina, head of commodities at TD Asset Management. Lovely to see you.
* Thanks for having me.
* So let's talk about just what's happening with prices. I know demand has been coming down, in some senses, I think, because of people concerned about recession, or maybe not. You can tell me. But supply is coming down more.
* Is that correct or not?
* So I think there has been a lot of focus on supply.
* I think there's been a lot of focus on Saudi and Russia's decision to cut production, and potentially hold that production offline into year-end. But I think the piece that is interesting is that demand has actually been remarkably strong, especially in the context of this idea that growth is slowing. You know, the last time we spoke, I was quite concerned, and I'm still concerned, that the economy is going to slow and the impact that that will have on the demand side.
* But when you look at the data, the data even that was released this morning by the DOE, it shows very robust gasoline demand, very robust distillate demand, notwithstanding the fact that prices are north of $4 a gallon in the US. China's demand has been relatively robust, as well. Maybe not as much as we anticipated earlier in the year.
* So it's a combination, Kim, of the supply and the demand. It's clear that OPEC has cut production, and that has played a role in tightening the market and sending inventories to the low levels they are and, by extension, prices where they are today.
* Interesting. I want to come back to the demand. But let's just talk about OPEC. And they've been shying away, I think, from any changes to the production levels. So there's some speculation, I think some people are saying you could see oil over 100 soon. Is that realistic?
* I don't think it's out of the sort of normal possibility.
* I do think that there will be concerns when we get to triple digits about the ability for the consumer to wear that. But ultimately, you know, when I look at the supply/demand balance, it's tight. It's continuing to tighten. Demand does seasonally weaken in sort of October, November before the peak of demand in the fourth quarter, December, January.
* But balances are tight, Kim. And it's not just crude. If you look at refinery margins, so what the refinery gets paid to run that crude through their refinery and produce the gasoline or diesel that we consume, refining margins are extremely, extremely elevated.
* So when you look at the reason retail prices, for example, are at the levels they are, notwithstanding the fact that crude is cheaper than where it was at the peak during Russia-Ukraine, it's the expansion of the refining margin which has contributed to increasing retail prices. Refinery margins cannot be so wide unless demand is strong or if there's a hurricane in the Gulf of Mexico that takes refineries offline. You've had some refinery disruptions this year for sure, but on the whole, demand is quite robust.
* Interesting. What do you then see happening if you look ahead and say, there's things that could maybe, in theory, push demand down? You've got China, we keep hearing--
* Worrying about, yeah.
* Yeah, and you're saying, though, it's still robust. And then just a recession, if it was to cup. And where do you see things going from here?
* Yeah, so I think as we get to $100 a barrel, north of $100 a barrel, I think there is a desire on the part of Saudi and Russia to bring some of those barrels back to the market. I don't think that their base case is I want $150 oil because that stokes recession. That stokes structural demand destruction. And that encourages others to invest on the margin.
* I think that they are trying to get the market to a place that is more justified by fundamentals, which is not the $70 that we were trading at in the summer, or even lower around the regional banking crisis in March. I think when I look at inventories, when you look at balances, when you look at margins, it does say that oil should be closer to $85, $90, $95 a barrel. I think that as you get into year-end, if prices are north of 100, you will see OPEC relax their sort of production restraint.
* Your question on if we move into recession, what's the downside, how ugly can it get, I think the starting point that we have to remember is that inventories today, and I sound like a broken record, but inventories today are sitting at their tightest level in a very, very long time. And it's even tighter, materially tighter when you adjust for demand, which is averaging at record levels.
* Hm. So that sounds to me, and I don't want to put words in your mouth, but it sounds like it's a tighter range, then, in terms of what you're seeing as you move ahead.
* I think that the downside on the heels of a slowing in growth, not a material contraction, not the world stops like it did around COVID, I think the downside is probably more limited.
* And I think the upside risk is probably greater, given how tight balances are.