CRAK - Why Oil's Recent Rally May Have Staying Power
2023-07-26 19:25:00 ET
Summary
- Why oil suddenly found its legs in the market.
- The impact improving macro sentiment is having on commodities.
- Potential risks to oil's rally.
The price of oil has climbed to a three-month high amid signs of tighter supplies. Hussein Allidina, Head of Commodities at TD Asset Management, tells Anthony Okolie with demand also rising globally, that upward trend is likely to continue.
Anthony Okolie: Well, the price of oil is hovering around three-month highs amid improving sentiment. But is that trend set to continue? Joining us now to discuss is Hussein Allidina, Head of Commodities at TD Asset Management. Hussein, thanks very much for joining us.
Hussein Allidina: Thanks for having me.
Anthony Okolie: OK, so talk to us about what's been pushing the price of oil up to these multi-month highs, because you say that there's been some improvements on the macro side, which have been helping.
Hussein Allidina: Yeah, so I think that the fundamental picture in oil has been constructive for most of this year. If you take a look at refinery margins, the shape of the forward curve, inventories, demand-- things are reasonably constructive. But I think that over the course of the last couple of months, uncertainty around macro, uncertainty around the health of the economy -- hard landing, soft landing, et cetera -- has really tempered risk appetite and challenged sort of the willingness of participants to hold oil exposure.
I think over the course of the last couple of weeks, with the decrease in CPI and the reduction in the value of the dollar, you've seen a bit of interest return back to oil. And I think that's largely what has contributed to the increase in price we've seen in recent weeks.
Anthony Okolie: Because we've talked about the macro side. What about on supply? What are you seeing there?
Hussein Allidina: So the fundamentals of supply demand are quite constructive. If we look at where inventories are sitting globally, whether it's oil on water, or the data that's released by the DOE, or data that you get out of Europe on a relatively high frequency basis, inventories for crude and product are drawing. Part of that is because of stout demand. Part of that is because you're now starting to see, finally, a reduction in volumes from Russia and Saudi.
Saudi has committed to curtailing volumes. Russia has talked about it for some time. If you look at the most recent data out of Russia, it looks like June, July, exports are down some 400,000 or 500,000 barrels a day relative to what we saw earlier in the year. So the supply picture outside the US is, I think, constructive.
And even within the US, we can see that the rig count is rolling lower. There's concerns about drilled but uncompleted wells and, ultimately, what US production will do. So I think the fundamental picture is constructive, Anthony has been constructive. It is the improvement, I think, in the macro, though, that has actually gotten focus back to the market.
Anthony Okolie: OK, now, what are some of the potential risks to this trend? What could drive oil prices lower?
Hussein Allidina: So if I'm right and some of the increase has come from the macro, if there is any wobble in the macro, we could see that risk appetite fleet again. From a micro point of view, I'm a broken record here, but from a micro point of view, the fundamentals look quite good. Demand, we talked about it before the show started, gasoline demand in Europe is up year-on-year.
Gasoline demand in the US is up year-on-year. Even in China, where the recovery has been a little bit slower, you're seeing an improvement in their imports and their demand. So I think the biggest risk is a change in sentiment around sort of the macro, because I don't see anything specific in the oil balance that lends any concern near term.
Anthony Okolie: And what about OPEC and the OPEC+? Do you think there can be discipline around the production targets?
Hussein Allidina: Yeah, I don't know that they're going to bring production back extremely quickly. I think they're going to be measured about it. There are some who believe that OPEC is doing this to push the price of oil to triple digits. I don't think that's their motivation at all. I think they are trying to stabilize the downside.
They're very focused. They actually had a report out over the weekend that talked about the lack of investment that is flowing into the energy space. And they believe that if the investment rates continue at the clip that they are, well below where they should be, we end up, in 10, 15 years, with a 10, 15 million barrel per day supply-demand deficit. So I think they're very interested in stabilizing price at a sort of elevated level -- $70, $80 $90 a barrel. I don't think they're going to rush to bring supply back. And they're trying their level best to manage the market.
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Why Oil's Recent Rally May Have Staying Power