It’s been a rollercoaster ride for commodities and big price swings have scared some investors. All but one commodity is expected to tick higher in 2017. Bart Melek, Head of Global Commodity Strategy at TD Securities speaks with Sara D’Elia about how commodities are fashionable again.
00:00:00.000 [MUSIC PLAYING]
00:00:09.380 2016 was a roller coaster ride for commodities.
00:00:12.110 We started the year, and oil was around $27.
00:00:14.810 But by the fall, prices had almost doubled.
00:00:17.450 Should investors buckle up for another roller coaster ride?
00:00:20.270 Joining me to share his top commodity trades for 2017
00:00:23.150 is Bart Melek, global head of commodity strategy at TD Securities.
00:00:27.240 Now, in your report Bart, you give all of your 2017 price targets, which we're
00:00:30.530 going to get up on the screen right now.
00:00:32.196 But I want to start with oil.
00:00:33.470 Lots of developments, from OPEC production cuts to yesterday some pipelines approved.
00:00:38.660 What are you watching right now?
00:00:40.070 Well, we're certainly watching President Trump.
00:00:42.710 We're watching how his directives turn into actual action.
00:00:48.920 We're taking a look and trying to assess of what it actually
00:00:53.930 means when he says he's going to renegotiate conditions with Trans-Canada.
00:00:58.550 We're wondering what it means when he says American-only steel.
00:01:03.400 All those things could very well slow progress.
00:01:06.410 Regardless of that, you say you're expecting the price of oil to rise.
00:01:10.190 We do expect the price of oil to rise.
00:01:12.370 We see OPEC as being quite disciplined and cutting
00:01:17.270 the promised 1.8 million barrels per day.
00:01:20.060 That, we think, will result in a fairly robust deficit in the first six months
00:01:25.370 of the year to the tune of some 950,000 barrels
00:01:29.150 per day, which should tighten the market and lift prices to our $60 target.
00:01:34.580 You say it's going to go up, but it's not going to be a smooth ride.
00:01:37.910 No, it is not going to be a smooth ride, certainly if you
00:01:40.670 look at what has happened so far this year.
00:01:43.180 It has been pretty bumpy.
00:01:44.630 The market is very much responding to communiques from Mr. Trump.
00:01:50.940 We are seeing the market respond to analyst doubts
00:01:55.880 that OPEC is fulfilling its promise to cut production.
00:01:59.630 And we are seeing a response to signs that there is a bit of a rebirth in the US shale.
00:02:07.330 That's oil.
00:02:08.039 I want to shift gears a little bit and move into base metals.
00:02:10.580 What are you expecting to see there?
00:02:12.320 Well, we like base metals longer term quite a lot.
00:02:16.170 But I think there is a danger in the very short run
00:02:18.800 that we'll see some of those metals correct.
00:02:22.820 But longer term, the supply-demand fundamentals
00:02:25.310 are looking much more robust than they have for quite a while.
00:02:28.610 And there is a dual reason for that.
00:02:33.780 One, we see supply being quite constrained, particularly the side of zinc,
00:02:39.050 and increasingly lead.
00:02:41.270 And demand is looking fairly healthy.
00:02:44.000 In terms of zinc, that's your favorite, what do you like about it?
00:02:47.360 Well, we like the fact that there is likely to be a very deep deficit.
00:02:52.160 And this is in the aftermath of two major mine shutdowns last year.
00:02:57.620 We are not seeing any new investments.
00:02:59.940 So capacity is not going to grow very much at all.
00:03:02.810 Meanwhile, demand should be pretty decent.
00:03:06.200 And that's globally as global industrial production shifts gears higher.
00:03:12.080 And your story on gold and silver is a little bit of a different one.
00:03:15.440 You say both could be at risk.
00:03:17.330 You prefer silver over gold.
00:03:19.550 But depending on what Donald Trump does, you may actually like gold.
00:03:22.769 What do you mean by that?
00:03:23.810 Yeah, we think gold does fairly well.
00:03:27.140 In our opinion, the market has been a little bit too optimistic about--
00:03:32.120 we call it Trump perfection.
00:03:34.490 We think he's going to get a bumpy ride through Congress.
00:03:37.010 And it may not be smooth sailing for him in passing all his initiatives.
00:03:43.370 The risk, of course, is that everything is going to turn out just fine.
00:03:47.030 And he will be able to add the significant amount of fiscal stimulus
00:03:52.340 in the form of lower taxes and new infrastructure expenditures
00:03:57.170 without any trouble.
00:03:58.190 And that would, of course, mean that this US economy is getting stimulus at a time
00:04:04.565 that it is already nearing full capacity, which
00:04:07.850 would suggest the Federal Reserve might very well act a lot more hawkishly,
00:04:12.750 meaning increase interest rates a lot more than otherwise.
00:04:16.610 On the theme of Donald Trump, we've heard him target the auto industry
00:04:20.600 in a number of his recent tweets.
00:04:22.670 And in your report, you say sales, and more specifically it's Chinese auto sales,
00:04:27.230 could have an impact on commodities.
00:04:28.970 Which commodities?
00:04:29.840 And what are you watching for?
00:04:32.090 China is the key user of most commodities in terms of base metals.
00:04:37.070 It uses some 50% of all consumption in the world
00:04:42.590 and is responsible for a vast majority of the incremental changes in demand.
00:04:47.000 So China is very, very important to commodity.
00:04:51.110 We think China drives zinc.
00:04:53.480 And on the precious metals side, palladium in particular,
00:04:57.000 as auto production continues to be fairly robust there,
00:05:02.042 it suggests that we will see a lot more auto catalysts being constructed.
00:05:06.380 And that means tighter markets.
00:05:09.010 This market is already in a primary deficit.
00:05:12.730 And with most buyers in emerging markets like China being first-time buyers,
00:05:18.310 there is very little recycling that goes on.
00:05:21.250 So most of that demand is net demand.
00:05:23.980 Now, we've talked gold.
00:05:25.090 We've talked oil, zinc, silver.
00:05:27.550 If you had one pick for an investor watching this for 2017?
00:05:31.240 I think oil continues to be our call.
00:05:34.600 We think oil moves to $60 a barrel probably not in the too distant future.
00:05:40.750 But I think most investors are very much from Missouri these days.
00:05:44.710 It's a situation where they want to see evidence.
00:05:49.750 They're in a "show me" kind of state of mind where
00:05:53.590 they need to see that OPEC is in fact delivering the cuts.
00:05:58.780 And they want to kind of make sure that we're not
00:06:01.810 going to see a repeat of the early 2013s, 2012s,
00:06:07.840 when we saw massive amounts of oil being pumped out of the shale facilities.
00:06:12.780 We think data will show that there is a surplus building--
00:06:18.430 deficit building, rather.
00:06:19.690 And we will see the draining of inventories.
00:06:22.990 And that is our big argument for why oil should see $60.
00:06:27.550 Thank you very much.
00:06:28.460 Thank you.
00:06:29.530 [MUSIC PLAYING]