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Oil prices are under pressure amid growing recession fears. And with the potential resumption of Iranian supply entering global markets, what could that mean for crude? Greg Bonnell speaks with Bart Melek, Head of Commodity Strategy at TD Securities, about the outlook for energy markets.
Transcript
Greg Bonnell: Volatility returning to the crude trade here, the price of oil back below $90 a barrel. Investors continue to weigh recession fears with concerns about tight supply. Joining us now to discuss the outlook for the energy market is Bart Melek, Head of Commodity Strategy at TD Securities. Bart, great to have you back on the show. A lot of questions about where we’re at with oil and where we are headed. Enlighten us.
Bart Melek: Well, wonderful to be here again. Well, I’m afraid that at least for the time being, there certainly looks like there will continue to be downside pressure. And part of the reason is very poor performance in China. In fact, TD Securities believes that growth for this year will probably have a two-handle on it. And 2% to 3% growth rate in China is very, very low by historical standards, and it’s certainly very low compared to what we have been used to. At the same time, I think there is a growing group of investors who believe that the world might actually be headed for a recession. The Federal Reserve may not pivot in early February like we’ve seen the bond market price, that we could have higher rates for longer. And that all means that oil demand, now currently estimated at well over 2 million barrels per day growth in 2023, may not actually materialize, indeed. TD Securities, in fact, I have modeled that to be significantly lower at maybe between 1.2 to 1.5 million barrels. And when I take that data into my model, I come up with a surplus in the third quarter and probably a balanced market in the fourth quarter. And that basically means that the crisis pricing or the big risk of disruptions get priced out of the market. And that explains much of what we’ve seen on the downside with crude markets.
Greg Bonnell: Your bottom line, some great charts for us, let’s show this one that actually illustrates the weakening commodity demand that you were just talking about. Walk us through the picture and what it means for our audience.
Bart Melek: Well, what this is, is a proprietary estimate of where demand trends are moving for commodities. And this is very much based on the — on the price signals. But those price signals don’t come out of a vacuum. This is very much based fundamentally on very poor Chinese data, as we — I think all know now, we continue to have a COVID zero policy in that country. Industrial activity is pointing to a contraction over the next few months. We’ve seen recently the stalling of movement tracking or a sense that the mobility data is also showing that mobility isn’t really recovering as much as we thought. But aside from the demand side of the equation, there is a big risk of a large increase in supply coming from Iran, and that’s you know on the potential solution to the Iran nuclear problem. Where the United States and, we quite define them as the P5, the permanent members plus one, which is Germany, are thinking of making a deal which would allow Iran access to the global market again. Of course, they would have to conform to some limitations on their nuclear program, but essentially that is thought to potentially add as much as 1 million barrel of crude within the next 12 months.
Greg Bonnell: You had a great chart on that as well. So while we’re talking about Iran and the prospects here of a deal, let’s see in terms of… because there’s a question, too. We know they have oil to put on the global market. How quickly can they return that oil to the market? It looks like from this graph, and explain to the audience, pretty quickly.
Bart Melek: Fairly quickly. We’re estimating based on history of 2015 when the fields at that time weren’t really damaged, we really see no evidence that the current fields in Iran have been damaged permanently. So they can most likely introduce 0.2 million barrels of new supply within a month, some 0.7 million barrels in the next six months, and 0.9 to 1 million barrels within 12 months. And there’s one very important element to remember. They have some hundred million barrels of inventory of petroleum products and crude that can be deployed in fairly quick order. Last time around, when the P5 plus one nuclear deal allowed Iran to reenter the global market, we’ve seen a reduction in price from 52, that was the price when the deal was announced. And just over a month after that, on August 29th, we saw a trough of around $32. And that’s something I have written about last Wednesday in the publication.
Greg Bonnell: If we didn’t get a deal, that’s it. Let’s play the other side. We didn’t get a deal because we’ve been talking about this for quite some time. Is there other areas? I think of OPEC and its ability to be that sort of swing participant. And I think we’ve even had some warnings recently for OPEC themselves saying, listen, perhaps we can’t wrap up quite as quickly as the world thinks we can in times of tightness.
Bart Melek: Well, we certainly think that is a problem. That’s been a problem for quite a long time, where OPEC has promised to deliver a lot more crude than they actually did. In fact, this time around last month, they promised 648,000 barrel increase. They didn’t deliver. And I think there is very little possibility that they could deliver as much crude as many people think they have. That could be strategic. That could be due to constraints in the oilfields. But ultimately, we know that they had the ability to keep markets quite tight for a variety of reasons, some strategic, some natural, logistical and technological reasons. The issue, of course, within OPEC is the countries that have the quotas, don’t have the supply, and the ones that don’t have the supply have the quotas. So there would have to be some sort of reordering of policy within the organization. But I don’t think at this point that that’s going to be an issue. Everyone is focusing on a slowdown in demand and certainly, the forward markets are. And we’ve seen strategic traders remove some of that positioning and we’ve seen outflows over the last month or so from long positions into more neutral stance.
Greg Bonnell: Speaking of policy, obviously heading into a midterm election cycle in the United States, the Biden administration has good reason to want to not only bring down which we’ve seen, prices at the pump come down over the past several weeks, but keep them down and push them even lower because basically, voters get angry when more and more of their money is going into the tanks. How influential has the Biden administration been in all of these dynamics we’re seeing in the crude trade?
Bart Melek: Well, they have been very influential. One, they’ve directed the Strategic Petroleum Reserve in the United States to release a significant amount of — of crude, some 1 million barrels a day. Without that, these markets would have been much, much, much tighter. And while we’re somewhat negative, you couldn’t really say we’re overly negative. We’re still looking at prices in the 80s for our quarterly forecasts going into 2022, the final three months in 2023, where we essentially think that those SPR releases will ultimately stop, as planned. And even if Iran does come in and if it does create an oversupply for a time, OPEC will strategically remove some of the promised crude increases from the plan and stabilize these markets. So while we do think for now there will be downside pressure, we don’t think it’ll be a rout.
Greg Bonnell: At these levels as you mentioned, we’re still floating around 90 bucks, it’s a far cry from where we were. Is the oil and gas industry all that concerned when you’re getting this for a barrel?
Bart Melek: No, based on what we know about the cost structure within shale and places like Saudi Arabia and Russia and in the Canadian oil sands, I think at these prices, everybody is covering their costs and then some. Would you like to make more money? I think the answer inevitably is of course they would. But are there big concerns that this is going to be a problem? I think, for now, I don’t think it’s in the cards.
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