Show Transcript
The price of crude oil has been under pressure recently as markets fret about a series of potential headwinds, including slowing economic growth, lower rates, and weak demand from China. Hussein Allidina, Managing Director and Head of Commodities at TD Asset Management, speaks with MoneyTalk’s Kim Parlee about why more price declines may be likely.
Print Transcript
* If you drive a car and have had to fill it up recently, you've probably noticed the price of gas has come down quite a bit since the middle of the summer. And that's because oil prices have been falling as well, down about 15% since early July. So what's driving crude lower? Hussein Allidina is managing director and head of commodities at TD Asset Management. He's here to explain it and also talk a bit of gold. It is lovely to see you.
* Thanks for having me.
* So let's start off with the oil market, which I understand you're describing right now as challenging.
* It is. It is challenging, Kim. If you look at balances today, so if you look at the amount of inventory we have globally, inventories are extremely tight. You ask, why is oil down 15% if inventories are very tight? I think the market is looking forward. Commodities are not anticipatory.
* The market is looking forward and is concerned about OPEC incremental production. OPEC has talked about returning barrels to the market later this year. So they're fretting about that.
* And Chinese demand, in particular, has been quite weak. And there are concerns that that weakness persists. And if that weakness persists, balances in 2025 look like they're going to build. Global oil demand is probably going to grow 1, 1.2 million barrels a day. On paper, non-OPEN is seen growing 1.4.
* So I already have a surplus of roughly 200,000 barrels a day next year. And that's without incremental OPEC production. So I think the market is kind of fretting over that.
* Is the world also concerned about-- I mean, obviously, the Fed's coming out. We're anticipating rate cuts, slower economic growth. What has more impact on oil pricing? Is it slow economic growth or China slowing down? I mean, I know one is part of the other.
* I think so. The Fed is going to cut rates, it seems, as we move through the year and as will other central banks. The Fed cutting rates, all else equal, is bearish for the dollar, which should be constructive for all commodities that are priced in dollars.
* I think one of the things that is going to be interesting to see over the course of the next 12, 16 months, as the dollar weakens, is the impact on emerging market commodity demand. We've talked before about how the strength in the dollar has made it very expensive for citizens in India, citizens in Brazil, et cetera, where they've seen local currencies depreciate what they're paying for oil. In India, they've been paying 2008 prices, $140 a barrel plus. So the weaker dollar will help demand there.
* But I think, to your point, Kim, the market is quite concerned. And I think a lot of it is backward looking, but is quite concerned about the weak demand that we've had out of China. China is a material commodity consumer on the margin. This is true for oil. This is true for copper, et cetera. And I think why we've seen some weakness in those prices.
* All right, let's bring up some charts. And you brought some. Thank you. We do like pictures. So let's take a look at US crude oil inventories. And tell me what we're looking at here.
* Yeah, so this is historical data going back, I believe, the last five years. And the dark blue line shows you where inventories are sitting today. If you were to look at that alone, I think you would have a hard time sort of squaring crude's recent price action. We're trading just north-- barely north of $70 a barrel today on WTI. And that is with a very, very tight fundamental balance. Now, again, the only way, in my mind, you can justify today's price is if growth is going to get materially weaker, allowing us to rebuild this relatively tight level of inventories.
* OK. We'll come back to the growth piece in a second as well too. But let's talk about the next chart you brought here, which is US gasoline demand. And there's always been an interesting lag. I mean, people are always like, why are oil prices down and gas isn't? But we're seeing a gasoline demand. Well, actually, you tell me what we're looking at here in this chart.
* Yeah. So market is very worried about the prospects of demand. I included this chart to show you what demand today looks like. And the dark line again shows you where demand in the US-- implied demand in the US for gasoline has been. Gasoline is a, I think, a very good barometer of the health of the consumer, the health of employment.
* Gasoline demand, notwithstanding the substitution that we're starting to see away from ICE vehicles, combustible vehicles, towards EVs, gasoline demand is still averaging well in the five-year average. So there's no material signs of weakness today. I think it's a lot of anticipation around what growth might look like moving forward.
* OK. Pricing, where do we see oil trading in around?
* Yeah, so I've been in the sort of $70-- pardon me. $70 to $90 per barrel camp for most of this year. I would not be surprised, given what the market is doing today, if crude was trading below $60. I think the market is trying. Pardon me. Below $70 in the $60s.
* I think the market is trying to press OPEC's hand. OPEC is going to meet in the next couple of weeks to talk about production decisions. And I think the market is trying to force them not to bring production back. If OPEC brings production back, we're going to trade down into the $60s, I think, and stay there until we see an improvement in the supply-demand balance.
* OK. Once we're through that, but do you see it returning back to that $70 to $90 range? Or what else do you see?
* So 2025, I think you're going to be $70 to $90, again, under the assumption that OPEC does not return barrels and growth is averaging 1, 1.2 million barrels a day. When we look further out into '26, '27, the same issue that we've talked about many times before, a lack of investment. So I am seeing growth today in non-OPEC supply from Brazil, from Guyana and from Canada. A lot of those projects, a lot of that growth is coming from money that was spent five, 10 years ago. These are long lead-time projects.
* US shale is far quicker to respond. But even there, if we look at growth, growth has started to decelerate in response to weaker price. Medium term, we're not moving away from the demand side fast enough to justify the lack of investment that's taking place on the supply side. So I think that sort of, if we're looking '26, '27, '28, prices do move higher in an effort to restrain demand and to encourage incremental supply.
* Interesting. What about-- and I always love this phrase, a demand surprise? Because often, you know, demand is something that usually builds quickly. But I'm assuming hurricanes, other things like that. But, you know, could, given the tightness of inventories right now which you see, what would be the impact of something like this?
* Yeah, so I think the areas where we could see a surprise relative to consensus, which is quite bearish right now, is on the supply side, right? We've lost 600,000, 700,000 barrels a day of production out of Libya. Libyan production has been very erratic since the demise of Gadhafi in 2012. I don't think the market is pricing that. They've, I think, kind of glossed over that.
* Yep.
* OPEC has spare capacity that they could bring back to the market. But as they bring spare capacity back, the aggregate level of spare capacity I have decreases. So I need to embed some risk premia as spare capacity decreases.
On the demand side, and I alluded to this vaguely at the beginning, I think the market has gotten quite bearish on the prospects of EM growth generally. And I think part of that is a symptom of the weakness that we've seen out of China. If the US dollar weakens, the realized price that the Indians, the Brazilians, the Middle Easterns that are not pegged to the dollar will be paying for crude will decrease. And I think that will stimulate demand. So we could see a surprise on the demand side.
Now, it's not going to be a shock. You're not going to wake up and demand is a million barrels a day. That could happen on the supply side. But on the demand side, I think it'll be more gradual. But I do think the market has become a little bit too bearish on EM growth prospects, largely because of the weakness that we've seen out of China.
* The price of gold has been surging.
* Mm-hmm.
* That has been quite a move. And a lot of this, I mean, you can tell us why in what terms of what the market's pricing in. I think partially it's rate cut expectations. But you have a number of interesting charts again-- and thank you for bringing them-- about central banks and their role in what's happening with gold right now. So maybe just take us through like, what are we looking at in terms of the outlook?
* Yeah, sure. So the piece about central banks, which I think is really interesting, is, if we had talked about gold two years ago, three years ago, most sell-side analysts, gold analysts would have said that the fair price of gold should be $1,500, $1,600, $1,700 an ounce. And that's largely because when folks are modeling gold, they're looking at real rates.
* The opportunity cost of holding gold is real rates because gold doesn't pay a dividend or give you a return outside of spot price. And real rates were headed higher, right? Rates increased meaningfully.
* So that alone should have been bearish for gold. And the strength in the dollar is the other variable that most econometric models will have in their gold forecast. And the dollar was strong.
* I think the reason why gold has outperformed-- part of the reason that we've been constructive is this sort of, I would say, relentless unsatiable demand for gold from central banks. If you look at FX reserves of central banks globally, OECD central banks hold a lot of their reserves in gold, right? Germany, the US, et cetera.
* If you look at non-OECD or emerging market central banks, the bulk of their reserves historically have been held in paper, in dollars, in euros, in IMF special-drawing rights. Over the course of the last 16 to 18 months-- I think coinciding with the US confiscating Russian reserves following Putin's invasion-- you've seen central banks buying a tremendous amount of gold. And that's what this chart here shows is the incremental buying by quarter of central banks.
* Now, this is all central banks. But if you delve into the details, it's EM central banks, China, Russia, Turkey, Poland, like, you know, smaller central banks as well. Everyone's buying gold because they're diversifying out of kind of the paper, the FX that they hold.
* On the retail side, retail has historically been a big consumer of gold. Over the course of the last 24 months, because equities have been on fire, the opportunity cost of holding gold has been de minimis, right? Over the course of the last couple of weeks, we've seen a little bit of gold buying from retail.
* And the chart should show you gold ETF open interest. So that's the amount of gold that's being held by these ETFs, which are primarily held by retail. It's starting to pick up. But again, equities are up 15% this year.
* There's a long way for that to go.
* Just to get back to where we were in '22, 2021, 2020. If you think about portfolio construction, there's a tremendous amount of research that points to the efficacy of having not only commodities in your portfolio, but gold. Because gold in your portfolio does a wonderful job of hedging the tails. When nothing else works, gold tends to hold its value.
* If you look at AUM globally, the allocation to gold is de minimis. You've seen some hedge funds-- if you look at the CFTC positioning data, you've seen some hedge funds buying gold in the last couple of weeks. By and large, if the Fed is going to start cutting rates, the real rate will decrease. The opportunity cost of holding gold will decrease. And again, Fed rate cuts are bearish the dollar, all else equal, which I think will be good for gold as well.
* So medium term, we like gold. I can't tell you what it's going to do over the course of the next week, two weeks. It is under owned by EM central banks. It is under owned by institutional and retail investors. And I think there is ample reason to have gold in your portfolio. And I think that demand will continue to support price.
* So just maybe just to go back a little bit too because I think what's interesting about you mentioned about the tails. I was going to ask you, what does this mean in terms of portfolio management? That it performs well on both sides?
* Yeah. So if you think about how different assets perform in environments of hyperinflation or deflation, typically, what you own doesn't work in those quadrants. If you look at the performance of gold in very inflationary environments or deflationary environment, store value, holds its value. So you want to have a gold allocation to protect your portfolio in the tails of that distribution.
* And I think probably it feels as though probably some-- and I'm not going to ask you to comment on cryptocurrencies and stuff. But that sometimes I think people thought was a bit of a replacement for gold. The volatility out there, like it or don't, you know? I think the gold, people are kind of coming back to gold now after they're seeing the performance as well too.
* So there's-- [INAUDIBLE] on my team calls gold the new Bitcoin.
* Yeah.
* You know? Bitcoin, I think, may have a place in your portfolio. Gold has a history that outlives all of us by a long shot. And if you look at the way Bitcoin, ethereum, et cetera, have been trading, it is levered cues, effectively. Gold has been the one asset class that has traded, I think, consistent with its historical sort of characteristics.
* Yeah. All right, let's talk about some other commodities that we often don't talk about when we have you here, but I know they're on your radar. Grains.
* Yeah, grains is something that we've been bearish for, I would say, the better part of the last 16 months and remain bearish. Broadly speaking, if you look at the supply side, especially in the US, we're going to have a record corn crop. We're going to have a massive bean crop. In South America, where conditions today are dry, they're still relatively favorable.
* So in that, we see sort of grain inventories building. As grain inventories build, that's bearish for price. We're cognizant that the market-- this is a very consensus view now. And the market is positioned accordingly. There's a big short in the market if you look at, again, that CFTC data.
* So any sort of weather-related disruption or anything kind of bullish is going to be exacerbated. Today, corn, I think, is up 2% because there was an export sale to China. Market is very short. But I think the direction for grains is, all else equal, lower from here.
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* Thanks for having me.
* So let's start off with the oil market, which I understand you're describing right now as challenging.
* It is. It is challenging, Kim. If you look at balances today, so if you look at the amount of inventory we have globally, inventories are extremely tight. You ask, why is oil down 15% if inventories are very tight? I think the market is looking forward. Commodities are not anticipatory.
* The market is looking forward and is concerned about OPEC incremental production. OPEC has talked about returning barrels to the market later this year. So they're fretting about that.
* And Chinese demand, in particular, has been quite weak. And there are concerns that that weakness persists. And if that weakness persists, balances in 2025 look like they're going to build. Global oil demand is probably going to grow 1, 1.2 million barrels a day. On paper, non-OPEN is seen growing 1.4.
* So I already have a surplus of roughly 200,000 barrels a day next year. And that's without incremental OPEC production. So I think the market is kind of fretting over that.
* Is the world also concerned about-- I mean, obviously, the Fed's coming out. We're anticipating rate cuts, slower economic growth. What has more impact on oil pricing? Is it slow economic growth or China slowing down? I mean, I know one is part of the other.
* I think so. The Fed is going to cut rates, it seems, as we move through the year and as will other central banks. The Fed cutting rates, all else equal, is bearish for the dollar, which should be constructive for all commodities that are priced in dollars.
* I think one of the things that is going to be interesting to see over the course of the next 12, 16 months, as the dollar weakens, is the impact on emerging market commodity demand. We've talked before about how the strength in the dollar has made it very expensive for citizens in India, citizens in Brazil, et cetera, where they've seen local currencies depreciate what they're paying for oil. In India, they've been paying 2008 prices, $140 a barrel plus. So the weaker dollar will help demand there.
* But I think, to your point, Kim, the market is quite concerned. And I think a lot of it is backward looking, but is quite concerned about the weak demand that we've had out of China. China is a material commodity consumer on the margin. This is true for oil. This is true for copper, et cetera. And I think why we've seen some weakness in those prices.
* All right, let's bring up some charts. And you brought some. Thank you. We do like pictures. So let's take a look at US crude oil inventories. And tell me what we're looking at here.
* Yeah, so this is historical data going back, I believe, the last five years. And the dark blue line shows you where inventories are sitting today. If you were to look at that alone, I think you would have a hard time sort of squaring crude's recent price action. We're trading just north-- barely north of $70 a barrel today on WTI. And that is with a very, very tight fundamental balance. Now, again, the only way, in my mind, you can justify today's price is if growth is going to get materially weaker, allowing us to rebuild this relatively tight level of inventories.
* OK. We'll come back to the growth piece in a second as well too. But let's talk about the next chart you brought here, which is US gasoline demand. And there's always been an interesting lag. I mean, people are always like, why are oil prices down and gas isn't? But we're seeing a gasoline demand. Well, actually, you tell me what we're looking at here in this chart.
* Yeah. So market is very worried about the prospects of demand. I included this chart to show you what demand today looks like. And the dark line again shows you where demand in the US-- implied demand in the US for gasoline has been. Gasoline is a, I think, a very good barometer of the health of the consumer, the health of employment.
* Gasoline demand, notwithstanding the substitution that we're starting to see away from ICE vehicles, combustible vehicles, towards EVs, gasoline demand is still averaging well in the five-year average. So there's no material signs of weakness today. I think it's a lot of anticipation around what growth might look like moving forward.
* OK. Pricing, where do we see oil trading in around?
* Yeah, so I've been in the sort of $70-- pardon me. $70 to $90 per barrel camp for most of this year. I would not be surprised, given what the market is doing today, if crude was trading below $60. I think the market is trying. Pardon me. Below $70 in the $60s.
* I think the market is trying to press OPEC's hand. OPEC is going to meet in the next couple of weeks to talk about production decisions. And I think the market is trying to force them not to bring production back. If OPEC brings production back, we're going to trade down into the $60s, I think, and stay there until we see an improvement in the supply-demand balance.
* OK. Once we're through that, but do you see it returning back to that $70 to $90 range? Or what else do you see?
* So 2025, I think you're going to be $70 to $90, again, under the assumption that OPEC does not return barrels and growth is averaging 1, 1.2 million barrels a day. When we look further out into '26, '27, the same issue that we've talked about many times before, a lack of investment. So I am seeing growth today in non-OPEC supply from Brazil, from Guyana and from Canada. A lot of those projects, a lot of that growth is coming from money that was spent five, 10 years ago. These are long lead-time projects.
* US shale is far quicker to respond. But even there, if we look at growth, growth has started to decelerate in response to weaker price. Medium term, we're not moving away from the demand side fast enough to justify the lack of investment that's taking place on the supply side. So I think that sort of, if we're looking '26, '27, '28, prices do move higher in an effort to restrain demand and to encourage incremental supply.
* Interesting. What about-- and I always love this phrase, a demand surprise? Because often, you know, demand is something that usually builds quickly. But I'm assuming hurricanes, other things like that. But, you know, could, given the tightness of inventories right now which you see, what would be the impact of something like this?
* Yeah, so I think the areas where we could see a surprise relative to consensus, which is quite bearish right now, is on the supply side, right? We've lost 600,000, 700,000 barrels a day of production out of Libya. Libyan production has been very erratic since the demise of Gadhafi in 2012. I don't think the market is pricing that. They've, I think, kind of glossed over that.
* Yep.
* OPEC has spare capacity that they could bring back to the market. But as they bring spare capacity back, the aggregate level of spare capacity I have decreases. So I need to embed some risk premia as spare capacity decreases.
On the demand side, and I alluded to this vaguely at the beginning, I think the market has gotten quite bearish on the prospects of EM growth generally. And I think part of that is a symptom of the weakness that we've seen out of China. If the US dollar weakens, the realized price that the Indians, the Brazilians, the Middle Easterns that are not pegged to the dollar will be paying for crude will decrease. And I think that will stimulate demand. So we could see a surprise on the demand side.
Now, it's not going to be a shock. You're not going to wake up and demand is a million barrels a day. That could happen on the supply side. But on the demand side, I think it'll be more gradual. But I do think the market has become a little bit too bearish on EM growth prospects, largely because of the weakness that we've seen out of China.
* The price of gold has been surging.
* Mm-hmm.
* That has been quite a move. And a lot of this, I mean, you can tell us why in what terms of what the market's pricing in. I think partially it's rate cut expectations. But you have a number of interesting charts again-- and thank you for bringing them-- about central banks and their role in what's happening with gold right now. So maybe just take us through like, what are we looking at in terms of the outlook?
* Yeah, sure. So the piece about central banks, which I think is really interesting, is, if we had talked about gold two years ago, three years ago, most sell-side analysts, gold analysts would have said that the fair price of gold should be $1,500, $1,600, $1,700 an ounce. And that's largely because when folks are modeling gold, they're looking at real rates.
* The opportunity cost of holding gold is real rates because gold doesn't pay a dividend or give you a return outside of spot price. And real rates were headed higher, right? Rates increased meaningfully.
* So that alone should have been bearish for gold. And the strength in the dollar is the other variable that most econometric models will have in their gold forecast. And the dollar was strong.
* I think the reason why gold has outperformed-- part of the reason that we've been constructive is this sort of, I would say, relentless unsatiable demand for gold from central banks. If you look at FX reserves of central banks globally, OECD central banks hold a lot of their reserves in gold, right? Germany, the US, et cetera.
* If you look at non-OECD or emerging market central banks, the bulk of their reserves historically have been held in paper, in dollars, in euros, in IMF special-drawing rights. Over the course of the last 16 to 18 months-- I think coinciding with the US confiscating Russian reserves following Putin's invasion-- you've seen central banks buying a tremendous amount of gold. And that's what this chart here shows is the incremental buying by quarter of central banks.
* Now, this is all central banks. But if you delve into the details, it's EM central banks, China, Russia, Turkey, Poland, like, you know, smaller central banks as well. Everyone's buying gold because they're diversifying out of kind of the paper, the FX that they hold.
* On the retail side, retail has historically been a big consumer of gold. Over the course of the last 24 months, because equities have been on fire, the opportunity cost of holding gold has been de minimis, right? Over the course of the last couple of weeks, we've seen a little bit of gold buying from retail.
* And the chart should show you gold ETF open interest. So that's the amount of gold that's being held by these ETFs, which are primarily held by retail. It's starting to pick up. But again, equities are up 15% this year.
* There's a long way for that to go.
* Just to get back to where we were in '22, 2021, 2020. If you think about portfolio construction, there's a tremendous amount of research that points to the efficacy of having not only commodities in your portfolio, but gold. Because gold in your portfolio does a wonderful job of hedging the tails. When nothing else works, gold tends to hold its value.
* If you look at AUM globally, the allocation to gold is de minimis. You've seen some hedge funds-- if you look at the CFTC positioning data, you've seen some hedge funds buying gold in the last couple of weeks. By and large, if the Fed is going to start cutting rates, the real rate will decrease. The opportunity cost of holding gold will decrease. And again, Fed rate cuts are bearish the dollar, all else equal, which I think will be good for gold as well.
* So medium term, we like gold. I can't tell you what it's going to do over the course of the next week, two weeks. It is under owned by EM central banks. It is under owned by institutional and retail investors. And I think there is ample reason to have gold in your portfolio. And I think that demand will continue to support price.
* So just maybe just to go back a little bit too because I think what's interesting about you mentioned about the tails. I was going to ask you, what does this mean in terms of portfolio management? That it performs well on both sides?
* Yeah. So if you think about how different assets perform in environments of hyperinflation or deflation, typically, what you own doesn't work in those quadrants. If you look at the performance of gold in very inflationary environments or deflationary environment, store value, holds its value. So you want to have a gold allocation to protect your portfolio in the tails of that distribution.
* And I think probably it feels as though probably some-- and I'm not going to ask you to comment on cryptocurrencies and stuff. But that sometimes I think people thought was a bit of a replacement for gold. The volatility out there, like it or don't, you know? I think the gold, people are kind of coming back to gold now after they're seeing the performance as well too.
* So there's-- [INAUDIBLE] on my team calls gold the new Bitcoin.
* Yeah.
* You know? Bitcoin, I think, may have a place in your portfolio. Gold has a history that outlives all of us by a long shot. And if you look at the way Bitcoin, ethereum, et cetera, have been trading, it is levered cues, effectively. Gold has been the one asset class that has traded, I think, consistent with its historical sort of characteristics.
* Yeah. All right, let's talk about some other commodities that we often don't talk about when we have you here, but I know they're on your radar. Grains.
* Yeah, grains is something that we've been bearish for, I would say, the better part of the last 16 months and remain bearish. Broadly speaking, if you look at the supply side, especially in the US, we're going to have a record corn crop. We're going to have a massive bean crop. In South America, where conditions today are dry, they're still relatively favorable.
* So in that, we see sort of grain inventories building. As grain inventories build, that's bearish for price. We're cognizant that the market-- this is a very consensus view now. And the market is positioned accordingly. There's a big short in the market if you look at, again, that CFTC data.
* So any sort of weather-related disruption or anything kind of bullish is going to be exacerbated. Today, corn, I think, is up 2% because there was an export sale to China. Market is very short. But I think the direction for grains is, all else equal, lower from here.
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