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The outlook for oil prices could face increased uncertainty amid the push and pull of rising geopolitical tensions and sticky inflation. Bart Melek, Global Head of Commodity Strategy at TD Securities, speaks with Kim Parlee about what he sees in the commodities space going forward.
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* Welcome to "Money Talk." I'm Kim Parlee. Thanks so much for joining us. The price of oil has been on a steady climb. It's up about 20% year to date with about half of those gains coming in just the last month. Some of that is from geopolitical tensions, but are there more fundamental market drivers having oil move higher as well? Bart Melek-- Head of Commodity Strategy at TD Securities-- has some ideas and joins us now. It is lovely to have you here in person.
* Well, it's great to be back. Thank you for inviting me.
* I will invite you again, I'm sure. Oil always about supply and demand, so I don't know which side of the equation you want to start with right now. But let's start with maybe the supply side. What's happening?
* Well the supply side has been, I think, a very material force in seeing this rally materialize. On the one end, we had Saudi Arabia and OPEC+ broadly continue to restrict supply. They committed to continue their 2.2 million barrel per day reduction I'm assuming for the rest of the year. We've seen discipline for the most part on the geopolitical front. We're seeing tensions between Iran and Israel not at a boiling point quite yet, but the market is quite fearful that what we could see is an escalation that could at some point potentially lead to disruption in oil flows. We've seen that in the Red Sea through proxies, and this could happen again. So that's another factor.
* And, of course, there is another front on the geopolitical side where we've had Ukrainian drones directly attack refining facilities within Russia, thus reducing supply of distillate that, you know, indirectly made it our way, you know, by avoiding sanctions. That means that if distillate supplies continue to be disrupted, I mean, I have no idea, but the market is worried. It could mean higher crack spreads and more feed requirements in some parts of the world, which I think is a real-- has a real potential of causing even tighter markets. And we're expecting deficits for probably the balance of the year.
* Yeah, and I guess on that front we've heard the US also trying to put some pressure on Saudi Arabia in terms of increasing what their output is right now because I think they're concerned about these deficits and what it means for them as big consumers.
* Well, and, of course, it's an election year.
* Yes.
* Washington has never been shy in asking Saudi Arabia to step up production. But it's fair to say that, I think, Saudi Arabia has very similar set of incentives as Washington does. They have easily two to three million barrels of spare capacity they can put into the market. And I think if we see prices rise anymore, you know, Brent is at around $90, just below today. They don't necessarily want to see crude go much higher than it is. They don't want to destroy long-term demand.
* And I think more importantly, they do not want to see incentives for shale producers, let's say, to put money in and eat their lunch kind of thing because--
* They're in a sweet spot right now. They're still at-- just offline.
* There is-- well, yes. But today, you know, EIA-- Energy Information Agency-- upgraded its supply forecast. I don't know if that's directly linked to that 20% increase, but I am quite sure that Saudi Arabia and OPEC+ are looking at this. And I think there is, from the Saudi perspective, aside from all the expedient market musings, you know, that they want to get a higher price.
* But I think, for them, there is a sense of fairness. They've-- for the most part-- made much of the sacrifice. Market share has eroded for them and they'd like to get it back. And they probably think that they should be the ones that capitalize on it, not anyone else. So from that perspective, I think they will-- at the time of their choosing, probably not Washington's-- [LAUGHS] choose to increase.
* And let's face it, Washington has suspended the refillment program of the strategic petroleum reserve. So Washington is, I think, concerned-- especially in an election year where it never bodes well for a party in power to have oil prices skyrocket on them.
* Well, let's-- let's kind of talk about the demand side, then, because every time we see-- I mean, we're seeing a divergent path with Canada and the US. The US just is chugging along, and you're starting to see some real momentum, some steam being gathered.
* Well, you know, we've had the payroll number last week. And it came out at 300,000 plus. I'm not even sure the market is convinced now that we're going to get a soft landing. Maybe we won't get a landing at all.
* Yeah. Still just maintain [? dip ?] in flight and back up.
* Yeah, I think things are doing pretty well. Even with this so-called restrictive monetary policy, there's, you know, there's a fiscal side here that's propping things up. Credit is still available. There's plenty of liquidity, it seems. Equity markets are on a tear. And I'm quite confident that economic theory does ultimately work where higher interest rates will slow things down. The question is, when does that happen?
* At this point, I think the market is assessing that demand globally will be just fine, thank you very much. Our forecasts were, you know, criticized sometimes for being too buoyant at 1.2 million barrels, 1.4 million barrels of new demand for this year. But we could certainly be there without any difficulty. And, you know, we were quite glad we went long and were optimistic on oil for all the reasons we've talked about previously.
* I was just going to say, I've only got about 30 seconds, Bart, but just on that, what are you looking for, then, prices to be over the next-- well, you tell me what your time period is.
* Well, let's go for the end of the year. I think for now, we could see prices go above 90, maybe even triple digits here. I don't think Saudi Arabia is going to be in any sort of hurry. We could very easily see the US Federal Reserve deliver on cuts in the middle of the year, June, July. Possibly that will probably get some speculative money in it, then the carry costs will diminish.
And probably demand expectations may go higher, and I'm really worried about Middle East tensions and problems with potential, you know, more destruction of refining facilities. And that's really my only main reason I think any escalation of tensions and actual bombing of facilities might get us there. And I think at that point, Saudi Arabia will probably delay. They'll take the higher prices. They don't think they'll affect them adversely immediately. And we'll probably inject more supply in.
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[THEME MUSIC]
* Well, it's great to be back. Thank you for inviting me.
* I will invite you again, I'm sure. Oil always about supply and demand, so I don't know which side of the equation you want to start with right now. But let's start with maybe the supply side. What's happening?
* Well the supply side has been, I think, a very material force in seeing this rally materialize. On the one end, we had Saudi Arabia and OPEC+ broadly continue to restrict supply. They committed to continue their 2.2 million barrel per day reduction I'm assuming for the rest of the year. We've seen discipline for the most part on the geopolitical front. We're seeing tensions between Iran and Israel not at a boiling point quite yet, but the market is quite fearful that what we could see is an escalation that could at some point potentially lead to disruption in oil flows. We've seen that in the Red Sea through proxies, and this could happen again. So that's another factor.
* And, of course, there is another front on the geopolitical side where we've had Ukrainian drones directly attack refining facilities within Russia, thus reducing supply of distillate that, you know, indirectly made it our way, you know, by avoiding sanctions. That means that if distillate supplies continue to be disrupted, I mean, I have no idea, but the market is worried. It could mean higher crack spreads and more feed requirements in some parts of the world, which I think is a real-- has a real potential of causing even tighter markets. And we're expecting deficits for probably the balance of the year.
* Yeah, and I guess on that front we've heard the US also trying to put some pressure on Saudi Arabia in terms of increasing what their output is right now because I think they're concerned about these deficits and what it means for them as big consumers.
* Well, and, of course, it's an election year.
* Yes.
* Washington has never been shy in asking Saudi Arabia to step up production. But it's fair to say that, I think, Saudi Arabia has very similar set of incentives as Washington does. They have easily two to three million barrels of spare capacity they can put into the market. And I think if we see prices rise anymore, you know, Brent is at around $90, just below today. They don't necessarily want to see crude go much higher than it is. They don't want to destroy long-term demand.
* And I think more importantly, they do not want to see incentives for shale producers, let's say, to put money in and eat their lunch kind of thing because--
* They're in a sweet spot right now. They're still at-- just offline.
* There is-- well, yes. But today, you know, EIA-- Energy Information Agency-- upgraded its supply forecast. I don't know if that's directly linked to that 20% increase, but I am quite sure that Saudi Arabia and OPEC+ are looking at this. And I think there is, from the Saudi perspective, aside from all the expedient market musings, you know, that they want to get a higher price.
* But I think, for them, there is a sense of fairness. They've-- for the most part-- made much of the sacrifice. Market share has eroded for them and they'd like to get it back. And they probably think that they should be the ones that capitalize on it, not anyone else. So from that perspective, I think they will-- at the time of their choosing, probably not Washington's-- [LAUGHS] choose to increase.
* And let's face it, Washington has suspended the refillment program of the strategic petroleum reserve. So Washington is, I think, concerned-- especially in an election year where it never bodes well for a party in power to have oil prices skyrocket on them.
* Well, let's-- let's kind of talk about the demand side, then, because every time we see-- I mean, we're seeing a divergent path with Canada and the US. The US just is chugging along, and you're starting to see some real momentum, some steam being gathered.
* Well, you know, we've had the payroll number last week. And it came out at 300,000 plus. I'm not even sure the market is convinced now that we're going to get a soft landing. Maybe we won't get a landing at all.
* Yeah. Still just maintain [? dip ?] in flight and back up.
* Yeah, I think things are doing pretty well. Even with this so-called restrictive monetary policy, there's, you know, there's a fiscal side here that's propping things up. Credit is still available. There's plenty of liquidity, it seems. Equity markets are on a tear. And I'm quite confident that economic theory does ultimately work where higher interest rates will slow things down. The question is, when does that happen?
* At this point, I think the market is assessing that demand globally will be just fine, thank you very much. Our forecasts were, you know, criticized sometimes for being too buoyant at 1.2 million barrels, 1.4 million barrels of new demand for this year. But we could certainly be there without any difficulty. And, you know, we were quite glad we went long and were optimistic on oil for all the reasons we've talked about previously.
* I was just going to say, I've only got about 30 seconds, Bart, but just on that, what are you looking for, then, prices to be over the next-- well, you tell me what your time period is.
* Well, let's go for the end of the year. I think for now, we could see prices go above 90, maybe even triple digits here. I don't think Saudi Arabia is going to be in any sort of hurry. We could very easily see the US Federal Reserve deliver on cuts in the middle of the year, June, July. Possibly that will probably get some speculative money in it, then the carry costs will diminish.
And probably demand expectations may go higher, and I'm really worried about Middle East tensions and problems with potential, you know, more destruction of refining facilities. And that's really my only main reason I think any escalation of tensions and actual bombing of facilities might get us there. And I think at that point, Saudi Arabia will probably delay. They'll take the higher prices. They don't think they'll affect them adversely immediately. And we'll probably inject more supply in.
[AUDIO LOGO]
[THEME MUSIC]
