Why Gold Is Surging And Oil Is Not, And What It Means For Markets

seekingalpha11-01

Why oil prices are dropping.Does oil still have a bullish outlook in the longer term?What the US election could mean for crude. cogal The price of gold has continued to hit record highs, while ...

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So a lot of geopolitical risk premium, I think, has come out of the market on the heels of the apparent de-escalation in Middle East tensions - Israel attacked Iran. The response seems to have been relatively muted. I don't know that risk premia should be zero. There's still quite a bit of risk, I think, in the region. But I think the move that we saw yesterday was entirely on the heels of a reduction in positioning. A lot of call options have been bought in anticipation of, you know, something unfortunate happening that hasn't happened as yet, and I think that's largely what's driven the weakness in price. And today I think the market is now focusing on forward balances. 2025 is expected to be softer. Supply has seen exceeding demand. And I think that's kind of what the market is focused on here today. 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Hussein Allidina, Managing Director and Head of Commodities at TD Asset Management, speaks with MoneyTalk’s Anthony Okolie about the forces at play in the commodities space, including the state of global demand and the upcoming U.S. presidential election. Transcript Anthony Okolie: All right. We've seen some interesting moves in the commodities market recently, with the price of gold sitting at record highs, while oil is coming off its worst one-day decline in more than two years. Joining us now to discuss where things may go from here is Hussein Allidina, managing director and head of commodities at TD Asset Management. Hussein, thanks very much for joining us. We're going to jump right in. So let's start with a drop in oil. What's happening here? Hussein Allidina: Yes. So a lot of geopolitical risk premium, I think, has come out of the market on the heels of the apparent de-escalation in Middle East tensions - Israel attacked Iran. The response seems to have been relatively muted. I don't know that risk premia should be zero. There's still quite a bit of risk, I think, in the region. But I think the move that we saw yesterday was entirely on the heels of a reduction in positioning. A lot of call options have been bought in anticipation of, you know, something unfortunate happening that hasn't happened as yet, and I think that's largely what's driven the weakness in price. And today I think the market is now focusing on forward balances. 2025 is expected to be softer. Supply has seen exceeding demand. And I think that's kind of what the market is focused on here today. Anthony Okolie: OK, so what do the fundamentals look in the long term for oil? Do you see any catalysts there? Hussein Allidina: So the long term, I think, is quite constructive, right? We have issues around the ability to move away from crude and product in the time frame that we are discouraging supply on the supply side. And, of course, this is happening in the context of a broadly speaking 10-12 year bear market in commodities, where you've discouraged investment. So the medium term is, I think, quite constructive. The challenge is that in 2025, the market expects, consensus expects non-OPEC supply to handedly outpace demand growth. Demand growth estimates are somewhere in the 800-900 a million barrel per day range. Ultimately, do I think demand average is that weak? No, but the market is pricing that today, and on the non-OPEC supply side, estimates are somewhere in the tune of 1.1-1.5 million barrels a day. If non-OPEC supply grows 1.5, global demand grows - and I'm picking at the ends. But if we grow by 1.5 supply, non-OPEC supply, and demand only grows by 800, I have a 700,000-750,000 barrels per day surplus, which takes a lot of premium out of the market. Ultimately, I want to caution that historically the market has overestimated non-OPEC supply growth. If you look at the IEA's initial forecast for 2024 and where we are today, that number has come down because supply generally does not deliver the way we anticipate. But ultimately, 2025 is going to be weaker than '24. When you look ahead to 2026-27, it does start getting tight again, so we can't allow price to fall too meaningfully because we have to encourage and we're not at current prices encouraging capex. It's a long lead time commodity - I can't get supplied tomorrow if I need it. And I think that's kind of what the market is grappling with today. Anthony Okolie: OK, so we talked about the fundamentals. Now we have a US election coming up in a couple of days. How could this impact the price of crude going forward? Hussein Allidina: Yes, there's a lot of uncertainty around, obviously, who wins the election and then what the policies of the respective candidates are. I think a lot of folks assume that a Trump victory would be bearish for energy, bearish for oil in particular because he and his party or his team have talked about growing US production from 12-13 million barrels a day to 16 million barrels a day. I think that's very hard to do. I think there are companies who make these decisions. The economics of production don't look great today. The reserve life in the Tier 1 assets is declining. So I'm not sure that that bearishness is warranted. And the elephant in the room, which I don't think is getting the focus, is Iranian production. Iranian production, which is sanctioned, has been allowed to grow by over a million barrels a day in the last 16 months. I think regardless of Trump or Harris, there probably is more of a focus on Iranian sanctions post-January or maybe even sooner. Today, they're keeping that production available to the market because it keeps retail gasoline prices, all else equal, subdued - and it's very difficult to win an election when gas is north of $4 a gallon. Anthony Okolie: That's right, those prices actually might pull gas prices down before the election. Let's turn to gold, which has been hitting new record highs throughout the year. What's been driving that strength? Hussein Allidina: Yes. So we've talked before about the structural case for gold. I think the driver of gold over the course of the last 16-24 months very much has been emerging market central bank buying of gold. If you look at emerging market reserves, their reserves are north of 80-85% in paper - US dollars, euros, IMF SDR... Anthony Okolie: So there's a move to diversify their reserves... Hussein Allidina: ... and Anthony, the catalyst for that, I think, was when the US confiscated or seized Russian assets very easily, and I think that was the catalyst that got the central banks thinking. When I look at that trade, although EM central banks have been buying gold, the amount of gold that they have as a percentage of their reserves are de minimis compared to what OECD central banks hold. So, I think that trade continues for years. I think over the course of the last couple of months we've seen renewed interest in gold from institutional investors, on the margin from retail investors. And I think part of this is the overwhelming theme of debt and deficits. If we look at the level of debt in the developed world and how quickly that's growing and how it's expected to grow going forward, regardless of Trump or Harris, it's quite concerning. Anthony Okolie: OK. Looking ahead, do you think this run in gold can continue regardless of who wins the US election? Hussein Allidina: I do. I think - Look, I would not at all be surprised to see gold pull back $100-200 an ounce. I think there's a lot of pent-up demand at 2500-2600. So I would be surprised if we fell below that. But let's be honest, right? Gold has rallied 35% year to date. It's outperforming even the S&P, which is up probably far more than most thought. So could you have some sort of tactical pullback because everyone thinks gold is going to work almost regardless of the outcome of the election? Absolutely. Do I still want to hold gold as part of my portfolio construction? I do, because I worry about the risks that I anticipate moving forward. And a lot of those risks are highlighted by the level of deficit and debt that we see in the US, but broadly speaking, globally. Anthony Okolie: OK. And again, you probably touched on this already, but how could the presidential election impact gold? Hussein Allidina: Well, I think that, again, regardless of whether Kamala wins or Donald Trump wins, both of them have plans to increase spending. And if the deficit is running at 6%, 7%, 8% of GDP, debt levels are - in the US, the CBO is predicting that debt levels are going to be at 100% of GDP. Twenty years ago, that number was 60%. That's a bit of a problem. I think we're seeing, you know, when I meet clients, there is a view or a discussion around, \"Should my fixed income allocation look as elevated as it is today?\" Historically, 60/40 has worked well. But of late, fixed income is not doing what it's supposed to be doing in the portfolio. And I think there is - Again, when you're starting from a very low allocation - if you look at how allocated folks are to gold, we're talking about 0%, 1%, maybe 2% of their portfolio. It doesn't take a lot of that capital to continue to support gold.  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