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The price of oil has been weighed down recently by concerns about geopolitics and global demand. Bart Melek, Global Head of Commodity Strategy at TD Securities, tells MoneyTalk’s Greg Bonnell why he believes crude could climb to $90 a barrel in coming months.
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[AUDIO LOGO]
Price of oil is well off the highs of recent weeks, despite continuing conflict in the Middle East. Joining us now to discuss, Bart Melek, Global Head of Commodity Strategy at TD Securities. Bart, great to have you back on the program.
Wonderful to be back.
All right, so the past couple of days, oil is stabilizing right now. But the past couple of days, a pretty dramatic pullback, despite the fact that we do have heightened geopolitical risk. What is happening in the oil trade?
Well, I think several things. One, I think to your comment on geopolitical risk, I think the market has gotten used to the conflict in the Middle East, with Israel now operating in Gaza, their military force doing what was mandated. And really, we're not seeing signs at this stage that this is going to be morphing into a broader conflict which could involve its neighbors like Iran, for example.
There were concerns when this conflict started that there could be a problem in the Straits of Hormuz, where the traffic of crude through the Straits of Hormuz, roughly 17 million barrels per day, depending on what time of the year, could be interrupted. At this point, with US military presence there, and I think no signs that this is going out of control, no signs that this is spreading into Saudi Arabia, conflict potentially interrupting their flows, or pipeline issues because of the conflict, the market is a little bit more relaxed. And that premium, I think, is for the most part gone.
The other thing that is being a negative factor is crack spreads have been easing off. There is concern that demand for product-- diesel, gasoline-- has eroded somewhat. And of course, we're worried that China continues to perform weakly, and weakness in Chinese economy. And we're looking at a potential recession in the United States because of the significant tightening in monetary policy.
And Europe, in some places, already looks like it already is in a recession. So there are very, very well defined demand concerns.
So I have West Texas intermediate right now on my screen at about $76. You said stabilizing after losses of several days. In the coming months, what are you anticipating for the price of crude? Could it move higher from here, or is this sort of its resting place for a while?
Well, we still think that oil can do a lot better, whether it's in a month or whether it's two months. You can never be sure. These markets can take you for a ride sometimes. But we do think that into the first quarter of next year, around $90 level is very possible. And we're basing this on several variables.
I'm wondering what would take us there. What would take us there?
One, we do expect Saudi Arabia and Russia, as they've announced recently, to limit their supply. They're going to extend their cuts for the foreseeable future, as far as I'm concerned. And that implies, for this quarter, we're going to probably have as much as 900,000 barrels of deficit per day, which means that already very, very low inventories globally could drop even further. We're likely to have, according to Sinopec, the Chinese oil company, a 10% increase over the next few months in demand there.
And once we're convinced that the Federal Reserve will pivot to a more dovish policy, or a less hawkish policy, if you like, we could see speculative money back in. And with that, we think as the economy rebounds, probably in the second half of the year, maybe in the second quarter-- so we bottom. Prices go down ahead. But as we think that the economy starts rebounding and supplies are tight, we see speculative money coming back and bidding it higher again.
So we think around $90 is still very possible because of the supply fundamentals on the production side and on the inventory side, all leading us to believe that this very well may be the worst of it for now. It will be rangebound for a bit, but we expect better times for oil.
You mentioned Fed policy interest rates. There have been times this year where what the Fed was telling the market-- the market, especially, the bond market, didn't seem to agree. What about the commodities market? How has the commodities market been reading what's been coming out of the Fed's mouth?
Well, the commodity market, I think, is looking past through for what the Fed has been saying, maybe not really buying into the idea that we're going to stay higher for longer, maybe not buying into the idea that there is another one or two hikes ahead. In the oil market, for example, in spite of the fact that we're expecting a recession, in spite of the fact that China is underperforming expectations in the post-COVID world, we're still looking at around a million barrels of demand growth.
So we're not looking at declines in demand. We're looking at slower rates of growth. And that's very important, because what it will mean, essentially, is that when inventories are low and demand continues to be strong, during that restocking period, there could be stresses and higher prices. That also applies for copper, silver, and others. So the market, I'm not sure, is buying into a prolonged restrictive monetary policy from the Fed.
And we also see it along the yield curve as well, where we've seen those yields come off on the longer end of the curve. Expectation is that the economy is going to slow, rates will likely fall, and so will inflation. And that ultimately means that probably, on the short end of the curve, policy rates may not be as restrictive as the Fed is saying. But they have no choice. They have to say it until they're closer to target.
You talked about demand continuing to grow, just not at the aggressive pace. I see so many conflicting headlines as to peak oil, demand peaking at this time or that time. How should we-- if we step back and think about the next couple of years for oil, what should we be thinking about growth and demand?
I don't think it's going to be 2 million barrels plus, but next year, maybe 900,000 barrels to a million barrels; the year after that, probably something similar; the year after that, maybe a little less. Structurally, I don't think we can say that we have reached peak demand for quite a few years.
It's not exactly like EVs are flying off the shelf, or-- we're hearing constraints by-- Volkswagen, I think, was the latest, where they're running out of electric motors. I think it was Volkswagen. There have been reductions. The sales haven't been great.
I remember the automakers are saying, we're going to take a little bit-- we'll take our foot off the pedal, if you forgive the cheesy analogy, when it comes to EV production, because we're not seeing the robust demand we thought at this point, right?
Yeah, and then you look at the rest of the world. These are expensive vehicles. There are challenges in terms of infrastructure. It's not like you can charge it everywhere. And let's face it. As the emerging world, emerging economies grow and demand vehicle increases, they're not necessarily going to be EVs. So we might see slower growth rates. But we're not transforming just yet.
I have no doubt eventually that will happen. But I am not so sure it's going to happen on the schedules that people were hoping for. And there is such a thing as a shortage of critical mineral capacity going forward, where even if you had all the good intentions, you had all the generating capacity, the charging, the infrastructure, you may not have the metals that you use for batteries to be able to build them all in the amounts you want.
Copper is one, not necessarily for the batteries, but for everything from electric motors to wiring to transformers that you need. It may very well be scarce in six, seven-- and actually, we think in three, four years, there might be problems. So the idea that we're going to have this exponential growth in copper demand because of switching into a net-zero carbon environment may be more optimism than reality, because there are some real constraints across the entire supply chain that would make that possible.
So for now, I think oil continues to be the alternative for the transportation sector. Yes, I think there will be diminishing growth rates, but still positive over the next few years, for sure. Over the very long-- over the medium to long term, yeah, we could peak. But how will prices be impacted will very much depend on what happens to the supply side. [AUDIO LOGO]
[MUSIC PLAYING]
Price of oil is well off the highs of recent weeks, despite continuing conflict in the Middle East. Joining us now to discuss, Bart Melek, Global Head of Commodity Strategy at TD Securities. Bart, great to have you back on the program.
Wonderful to be back.
All right, so the past couple of days, oil is stabilizing right now. But the past couple of days, a pretty dramatic pullback, despite the fact that we do have heightened geopolitical risk. What is happening in the oil trade?
Well, I think several things. One, I think to your comment on geopolitical risk, I think the market has gotten used to the conflict in the Middle East, with Israel now operating in Gaza, their military force doing what was mandated. And really, we're not seeing signs at this stage that this is going to be morphing into a broader conflict which could involve its neighbors like Iran, for example.
There were concerns when this conflict started that there could be a problem in the Straits of Hormuz, where the traffic of crude through the Straits of Hormuz, roughly 17 million barrels per day, depending on what time of the year, could be interrupted. At this point, with US military presence there, and I think no signs that this is going out of control, no signs that this is spreading into Saudi Arabia, conflict potentially interrupting their flows, or pipeline issues because of the conflict, the market is a little bit more relaxed. And that premium, I think, is for the most part gone.
The other thing that is being a negative factor is crack spreads have been easing off. There is concern that demand for product-- diesel, gasoline-- has eroded somewhat. And of course, we're worried that China continues to perform weakly, and weakness in Chinese economy. And we're looking at a potential recession in the United States because of the significant tightening in monetary policy.
And Europe, in some places, already looks like it already is in a recession. So there are very, very well defined demand concerns.
So I have West Texas intermediate right now on my screen at about $76. You said stabilizing after losses of several days. In the coming months, what are you anticipating for the price of crude? Could it move higher from here, or is this sort of its resting place for a while?
Well, we still think that oil can do a lot better, whether it's in a month or whether it's two months. You can never be sure. These markets can take you for a ride sometimes. But we do think that into the first quarter of next year, around $90 level is very possible. And we're basing this on several variables.
I'm wondering what would take us there. What would take us there?
One, we do expect Saudi Arabia and Russia, as they've announced recently, to limit their supply. They're going to extend their cuts for the foreseeable future, as far as I'm concerned. And that implies, for this quarter, we're going to probably have as much as 900,000 barrels of deficit per day, which means that already very, very low inventories globally could drop even further. We're likely to have, according to Sinopec, the Chinese oil company, a 10% increase over the next few months in demand there.
And once we're convinced that the Federal Reserve will pivot to a more dovish policy, or a less hawkish policy, if you like, we could see speculative money back in. And with that, we think as the economy rebounds, probably in the second half of the year, maybe in the second quarter-- so we bottom. Prices go down ahead. But as we think that the economy starts rebounding and supplies are tight, we see speculative money coming back and bidding it higher again.
So we think around $90 is still very possible because of the supply fundamentals on the production side and on the inventory side, all leading us to believe that this very well may be the worst of it for now. It will be rangebound for a bit, but we expect better times for oil.
You mentioned Fed policy interest rates. There have been times this year where what the Fed was telling the market-- the market, especially, the bond market, didn't seem to agree. What about the commodities market? How has the commodities market been reading what's been coming out of the Fed's mouth?
Well, the commodity market, I think, is looking past through for what the Fed has been saying, maybe not really buying into the idea that we're going to stay higher for longer, maybe not buying into the idea that there is another one or two hikes ahead. In the oil market, for example, in spite of the fact that we're expecting a recession, in spite of the fact that China is underperforming expectations in the post-COVID world, we're still looking at around a million barrels of demand growth.
So we're not looking at declines in demand. We're looking at slower rates of growth. And that's very important, because what it will mean, essentially, is that when inventories are low and demand continues to be strong, during that restocking period, there could be stresses and higher prices. That also applies for copper, silver, and others. So the market, I'm not sure, is buying into a prolonged restrictive monetary policy from the Fed.
And we also see it along the yield curve as well, where we've seen those yields come off on the longer end of the curve. Expectation is that the economy is going to slow, rates will likely fall, and so will inflation. And that ultimately means that probably, on the short end of the curve, policy rates may not be as restrictive as the Fed is saying. But they have no choice. They have to say it until they're closer to target.
You talked about demand continuing to grow, just not at the aggressive pace. I see so many conflicting headlines as to peak oil, demand peaking at this time or that time. How should we-- if we step back and think about the next couple of years for oil, what should we be thinking about growth and demand?
I don't think it's going to be 2 million barrels plus, but next year, maybe 900,000 barrels to a million barrels; the year after that, probably something similar; the year after that, maybe a little less. Structurally, I don't think we can say that we have reached peak demand for quite a few years.
It's not exactly like EVs are flying off the shelf, or-- we're hearing constraints by-- Volkswagen, I think, was the latest, where they're running out of electric motors. I think it was Volkswagen. There have been reductions. The sales haven't been great.
I remember the automakers are saying, we're going to take a little bit-- we'll take our foot off the pedal, if you forgive the cheesy analogy, when it comes to EV production, because we're not seeing the robust demand we thought at this point, right?
Yeah, and then you look at the rest of the world. These are expensive vehicles. There are challenges in terms of infrastructure. It's not like you can charge it everywhere. And let's face it. As the emerging world, emerging economies grow and demand vehicle increases, they're not necessarily going to be EVs. So we might see slower growth rates. But we're not transforming just yet.
I have no doubt eventually that will happen. But I am not so sure it's going to happen on the schedules that people were hoping for. And there is such a thing as a shortage of critical mineral capacity going forward, where even if you had all the good intentions, you had all the generating capacity, the charging, the infrastructure, you may not have the metals that you use for batteries to be able to build them all in the amounts you want.
Copper is one, not necessarily for the batteries, but for everything from electric motors to wiring to transformers that you need. It may very well be scarce in six, seven-- and actually, we think in three, four years, there might be problems. So the idea that we're going to have this exponential growth in copper demand because of switching into a net-zero carbon environment may be more optimism than reality, because there are some real constraints across the entire supply chain that would make that possible.
So for now, I think oil continues to be the alternative for the transportation sector. Yes, I think there will be diminishing growth rates, but still positive over the next few years, for sure. Over the very long-- over the medium to long term, yeah, we could peak. But how will prices be impacted will very much depend on what happens to the supply side. [AUDIO LOGO]
[MUSIC PLAYING]
