Oil Outlook Still Bullish Despite Recent Weakness

In recent months, oil prices have fallen as fears about a possible shortage of supply outweigh concerns over demand. Bart Melek explains to Greg Bonnell, Global Head Commodity Strategy, TD Securities why crude oil prices are still likely go up over the long-term.

Greg Bonnell: Crude prices have fallen in recent months despite concerns about supply and geopolitical unrest. Oil prices are impacted by the global economy, but traders may be overly pessimistic. Bart Melek is the Global Head of Commodity Strategy for TD Securities. Bart, it’s always a pleasure to have you on board.

Bart Melek :Great To be Here. I appreciate you inviting me back.

Greg Bonnell: I’m looking on my screen at crude oil American standards that is just below 70 dollars. It’s down this year and I think it will be down for the entire quarter. Bart Melek : I think traders are most concerned that China is not performing up to expectations. We thought a few month ago that China would reopen and there would be a surge in demand. This was going tighten the markets. We thought a possible slowdown would materialize, but not to the extent that we believe now. And we thought that proposed cuts by OPEC were going to help tighten up that market. This hasn’t happened yet, so traders who had been long decided to either take their profits or exit. It is obvious that there are concerns about a possible recession in Western countries. This implies a slower growth. There is still a problem with Chinese growth. We still believe that we will have deficits at the end of the year due to the cuts. And yes, Chinese growth is probably a bit weaker than what we had hoped. In the end, however, the rebound from COVID will be a robust one, with everything from industrial demand to air travel and other fuels contributing to it. When we look at the demand growth for the year 2023, it’s still north of 2 million barrels a day. We continue to expect OPEC to be disciplined in the supply. At this point, I’m not convinced that they are convincing all traders. I believe some traders have been a bit too bearish about oil. We do expect crude prices to rise in the second half. We think that approaching $90 is possible in the next few months as fears of a recession begin to ease and the Federal Reserve begins its pivot towards the dovish. But, of course, this is not the case right now. The pivot is more towards a hawkish Federal Reserve policy. We hear Jerome Powell continue to beat those hawkish cymbals and the market has started to rethink its previous position, that the FOMC may not be kidding when it says that two more hikes by the end the year are possible. The Federal Reserve may be able to raise rates even higher. There is the distinct possibility that rates could remain higher for a longer period of time than many had anticipated. Many risk assets, especially on the commodity market, have traded lower. Over the course of one weekend, we saw some pretty dramatic events in Russia. By the time I returned to work Monday morning, the oil markets were almost as if nothing had happened. Bart Melek : Yes, we certainly had that interesting march from a Russian mercenary. Russia is, of course, a major global producer. You would normally expect some volatility in the market. You might position yourself in gold. You might worry about the oil markets not providing enough material or vice versa. But you should expect some risk. In a single day, the whole thing was over. The market shook its head and yawned. No one seemed to care. Even geopolitical issues for gold are not important in the long run. It is important to determine if geopolitical developments will have an impact on global economies or core performances of economies across the globe. These markets, and gold in particular, tend to react to policies and underlying demand and supply trends. If a political event does not change this, there is no reason to react in the long term. This is also true of oil. The market concluded that there was no impact on oil supply and the global economy. They looked at it and saw it. And they didn’t care about it. Greg Bonnell: This is an important perspective. It’s important in the long run, if you think about it. In the oil sector, I have read conflicting news headlines. The International Energy Agency feels that demand will drop off before you reach peak oil, while OPEC+ seems to sing a different song. They say that oil demand will continue to grow for many years. What do you think about oil’s role in the economy in the short, medium and long term? It’s difficult to predict beyond a couple of years. We have a forecast for the next two to three years. We believe that oil demand will increase by 2 million barrels in the next few years. That’s probably north of 1 million barrels. This is a net rise. In the medium term, these rates will probably moderate as more people switch to electric vehicles and take a greater share of the transport sector. We have a few significant limitations on the grid and power generation. Also, we are running out of critical minerals. The transition to EVs or carbon-free energy sources may not happen as quickly as we had hoped. Oil prices will probably start to drop. The need for hydrocarbons will diminish as we transition to primarily electric-driven vehicles. Is that in 5 years, or 20? It’s hard to say. I believe we will have to track the critical minerals, as well as where government and private investment goes to make these changes. It’s still a bit murky, but I do think that it is a good idea to follow the investment of governments and private industry.

Original Post