TD Securities is lifting its price outlook for both WTI and Brent crude because of what it expects will be tightening supplies. Greg Bonnell speaks with Bart Melek, Head of Global Commodity Strategy at TD Securities, about the supply and demand fundamentals going forward.
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[AUDIO LOGO] It's been a choppy ride for oil, despite a recent production cut from OPEC and its allies. But as global supply remains tight, TD Securities has boosted its price forecast for crude. Joining us now with more, Bart Melek, Head of Commodity Strategy at TD Securities. Bart, always a pleasure to have here. You have a new outlook for the oil market. Give it to us. Well, it's fantastic to be here. Yes, we do have an upgraded oil outlook. It's just too bad that the market hasn't been cooperating a day after we've moved our forecast higher. We do like the oil market, going into the latter part of the year. And as we approach 2023, we think that the supply-demand fundamentals will get significantly tighter, mainly because we're expecting OPEC to cut 1.1 million barrels of actual production. Yes, I know everyone is talking about 2 million production, but that is referring to the quota. And a lot of OPEC producers have been under-producing. So the actual decline will be about 1.1 million barrels. Now, obviously in the short-term, pretty much every asset class has been pretty volatile this year. Oil doesn't escape that. Other concerns about what the global economy looks like next year? Is that really where the push-pull is here in terms of, OK, we might have some hemmed-in production by choice and by design? But at the same time, what will the demand look like in 2023? Well, demand is the big unknown, of course. But there are other very technical set of factors that are preventing traders and portfolio managers from acquiring long positions at the time. One, volatility has exploded to the upside as the Federal Reserve is committing itself to fairly aggressive tightening. We're seeing problems in the gilts market, so that is creating volatility in the fixed income space. Yields are moving higher all over the place. And there is the real, real fear that we could have a very deep recession that could result in outsized declines in oil consumption. So taken all together, the lack of risk appetite and just an awful lot of volatility and uncertainty, no one is really, at this point, committed in going long what is a volatile and historically risky asset class, like oil. Now, on top of pure supply concerns, pure demand concerns, you also have a bit of a butting of heads here between Saudi Arabia and the United States. It appears, from some of the missives fired out of the Biden administration, they weren't too pleased with this announced production cut at this particular time. Well, certainly. Saudi Arabia and OPEC, in general, and OPEC Plus, now that the Russians have been active in this producer group for a while now, has always said that they are trying to match supply with demand. When you look at the supply-demand fundamentals as they are now, it's probably incorrect to say that there is an oversupply of oil. We haven't really seen a significant deterioration on the demand side. What is a little unusual for OPEC at this stage is they're actually acting proactively ahead of any potential declines in demand. As we've seen over the last few days-- OPEC being one of them-- they've downgraded their expectations of demand for 2023. Energy Information Agency has as well. And I think as time goes on, a lot of players and followers of this market will downgrade their demand. Now, we still think that this OPEC action will tighten up the market and will put us into a deficit situation next year. Now, the risk is we could be wrong, and things could be a total disaster on the economic front. And there won't be a tightening of markets. But that is precisely that the reason that risk markets aren't really willing to go long quite yet. Today we have a lack of risk appetite broadly. And that is, I think, the main mover of crude markets for now-- liquidity issues, volatility, and then just aversion to risk broadly. We think fundamentals will tighten up. And we think that OPEC will stay true to its word and make the cuts. And we don't expect a taller route in demand next year. In fact, we don't see a decline at all. We're still seeing growth of well over 1.4, 1.5 million barrels per day. That's below consensus. And there are some who are much more negative. And until such time as these uncertainties get settled, I don't think we will see big moves to the upside in oil. And that is why in our report, we've said that we don't see a three-figure price. You don't see crude going into the $100 price range because of that uncertainty. We think that is a risk later on in the year, once the Fed ultimately pivots and we stop worrying about a decline in the economy and start talking about a recovery. Premature for that now, and I guess we're hoping that our forecast is right. When it comes to China's zero-COVID policy, how much of a wild card is that? If, for some reason, they decided to back off of that, I guess you could make a case that China would get very hungry again for a lot of the commodities the world has to sell, including oil. And that has been a bit of a problem for us, and I'm sure other forecasters as well. We certainly expected an easing up of those lockdowns sooner rather than later. And I think it was yesterday, we're again hearing that major urban centers-- Shanghai, I think, in this case-- was again entertaining some sort of a lockdown. Well, China is very much underperforming expectations in terms of economic growth. And that means the energy consumption growth is probably not going to materialize anywhere near to the extent that we thought. Asia, including China, is probably responsible for 1.1 million barrels or so, even maybe slightly less, slightly more, of next year's growth because still consensus is around 2 million, a little under. And if that doesn't happen, we could get significantly slower demand. And in fact, that is what OPEC is reacting to. OPEC has had a gripe with the market for a while now, saying that the market has discounted oil way ahead of a deterioration of the fundamentals, mainly in the futures markets-- speculative traders and money managers taking bets off and funds flowing away from that asset class. They probably have a point, that we saw a futures market react ahead. But on the other hand, that is the very nature of future markets. They look into the future, and as do most traders and managers. And right now I think all of us are worried about demand and what that will look like. And OPEC is taking that to heart and signaling to the market that they are unwilling to see significant surpluses built. I think do we have these deficits that bring prices too high and there is an imbalance, I suspect OPEC will reverse itself as needed. But right now they're taking preactive action to signal to the market that they will not allow that imbalance to continue. And that, of course, means that they are unlikely to allow a massive decline in prices as well.
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