2024-01-09 23:20:00 ET
Summary
- The outlook for oil: Geopolitics vs economic uncertainty.
- Saudi Arabia's price cuts and what it means for markets.
- Are oil markets pricing in a potential widening Middle East conflict?
A price cut from Saudi Arabia as well as geopolitical and economic concerns are just some challenges facing the oil market in 2024. Bart Melek, Global Head of Commodity Strategy at TD Securities, discusses what to expect in the year ahead with MoneyTalk’s Greg Bonnell.
Transcript
Greg Bonnell: Higher OPEC production levels and price cuts from Saudi Arabia are weighing on the price of oil. But our featured guest today says the bigger issue is whether fears about slowing economic growth will outweigh concerns we have about the conflict in the Middle East.
Joining us now to discuss is Bart Melek, Global Head of Commodity Strategy at TD Securities. Bart, always great to have you back on the program.
Bart Melek: It's great to be here. Happy New Year, everyone.
Greg Bonnell: Happy New Year to you indeed. We have some big issues to talk about. But I want to talk about, just briefly, about the here and now and take a look at the price of crude. At the start of the week, it's down substantially. It's Saudi Arabia, price cuts. What's going on in the market right now?
Bart Melek: Well, I think one, today in particular, it's a reaction to Saudi Arabia dropping prices for its crude that it is supplying. Now, the worry, of course, in the market broadly is - and when you look at the CFTC data, that investors have reduced long exposure and have tilted towards the short end of exposure on crude oil.
They're worried that we will get a significant slowdown in demand as the year unfolds. And that, of course, is due to the restrictive monetary policy lagged effects and its impact on the economy, though we haven't really seen that occur to a great extent. But the concern is certainly out there.
The other big worry is that US supplies continue to surprise to the upside. And, of course, that OPEC report showed that the cartel produced some - I think, 70,000 barrels more at the end of the year, the last month of the year, than I think people expected.
And now, of course, there is worry that perhaps they may not be as committed to future cuts. There is talk that they will extend potentially to the end of the year.
But if you're seeing production move higher at a time where you're worried about less demand and US production still going strong, you may, just as a matter of course, take whatever profits you might have had or try to reduce losses and see what happens.
And in the meantime, we continue to have multi-decade increase in risk in the Middle East. We're continuing to see problems in the Red Sea. We now have, potentially, two navies facing off each other.
I'm talking about potential problems between the Iranians and the American fleet. I'm not saying that's going to happen, but certainly there is the risk.
We are worried about the extension of the current Israeli conflict beyond where it currently is involving maybe rest of the region, which could logically impacts supply of oil over the next few months.
That, in my opinion, has not really been priced in. And the market is very, I would judge, dismissive of those risks at this point.
Greg Bonnell: Is that the longer-term thing that we have to start thinking about is the diameter? We're very early into 2024. We have some here-and-now issues before us.
But over the holidays, the only headlines I saw came out of the Middle East were concerning headlines. So it's surprising to come back to the office and find crude down. Longer term, do we need to be thinking about these geopolitical pressures?
Bart Melek: Absolutely. I think we also have to be thinking about what OPEC will do and thinking about what demand actually looks like for 2024. In our estimate, we're looking at demand to still grow about 1.2 or so million barrels a day for the year.
And I'm quite confident that at the next OPEC meeting, Saudi Arabia and the rest of the cartel will commit to extending the cuts, and they'll come to some sort of accommodation to keep supply from overwhelming the market.
We project maybe a balanced market in the first three months of this year. I was very tempted to say next year. But we're in 2024 right now.
Greg Bonnell: We flipped the calendar.
Bart Melek: And we do see substantial deficits for the balance of the year, certainly for the next six months or so, if OPEC does commit and execute. And we're not all that confident that the very strong pace of production increases from US shale is going to continue.
When we look at CapEx, that has moderated. And I don't think the price environment is probably conducive to as much activity as we've seen last year. And if that's the case, then I think OPEC's ability to move prices higher will be successful probably into the second quarter of the year.
Greg Bonnell: Let's talk price then. I mean, with the pullback we're seeing right now, a little over $70 a barrel for West Texas Intermediate on my screen, where could we see oil prices later this year if some of those factors play out?
Bart Melek: We've been formally saying that mid to high-eight - mid-80s or so for WTI, a little higher for Brent here is very possible. But we're going to have to get off - we're going to have to inflect higher here. We're going to have to start talking about a potential recovery and when that might be, as opposed to just entering a trough on the macro side.
And I think we're going to need a bit more timing specificity on when the Fed is likely to ease because we've been going back and forth on that front here. The market is probably a lot more optimistic with regards to when the Fed is going to cut and how much they're going to cut than the Fed itself.
Over the last few days, we've seen some adjustment where the market has been pulling back, where the equity side - and I'm not projecting equities - but I think the expectations have grown a little less.
And the implication for markets like oil and broader commodity markets is here - that when that risk appetite wanes a little bit, it impacts [inaudible] market as well. So it's all very much interconnected. Interest rates, risk appetite for equities, and, of course, commodities respond within that framework.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Why Oil Prices Could Face Increased Volatility In The Year Ahead