Crude prices could surge to around US$150 per barrel: TD

Let's swing back to oil. Uh it's a

massive story today. The straight of

Hormuz essentially closed. Our guest

says that we could be looking at

significant physical shortages of fuel

by the summer. There's a risk that crude

prices reach $150 US a barrel. He says

we are joined by BNN regular Bart Melik,

global head of commodity strategy at TD

Securities. Bart, great to see you.

Thanks for joining us.

>> Wonderful to be back with you. Um, so

the market, I mean, the central bankers

for official consumption don't sound too

worried, but the market's worried that

we could be in for a significant bout of

inflation here, certainly in

commodities.

>> Absolutely. Uh, we're already

[clears throat] looking at $120,

you know, almost right now. Uh, we're

looking at skyhigh fertilizer prices.

You've mentioned nitrogen, but it's also

ammonia. It's also sulfur. uh it's

sulfuric acid for production of uh uh

metals and the list goes on and on and

ultimately what it means is there will

be a negative supply shock that's going

to last for you know quite a while and

it's going to get more difficult on the

oil side we're seeing inventories erode

particularly um in Asia and there was a

lot on ships and you know the so-called

floating inventory

But in the next month or so that will be

depleted to critical levels and there is

a bit of a dichotomy here between uh

futures markets and physical markets.

It's very difficult to get crude uh WTI

prices anywhere else in the world if

you're actually needing barrels. So it's

going to be an issue I think

>> and we could actually hit physical

shortages in some parts of the world of

of energy of fuel.

Absolutely. In fact, the uh we're read

I'm reading about reports in places uh

like Australia where farmers are not

putting crops in because of lack of

diesels. There are fleets in Thailand u

uh of boats that aren't going fishing

because they're facing constraints. So

it is already happening and I think uh

if this continues for another

month, month and a half into the summer,

I think we will have de facto shortages.

Now uh that means demand destruction and

the only way you can do it in the short

run is prices because you can't adjust

behavior that quickly.

I mean, I know we're straying into

politics here, but it sure does sound

like good news for Canada as a major

energy producer and exporter.

>> Oh, I think Canada is benefiting uh a

great amount. It's pity we don't have uh

much more export capacity, but Canada is

benefiting from higher prices. Uh the

pipeline that we do have uh is filled up

with crude destined for China. And we're

seeing the Western Canadian select and

WTI differentials uh erode, meaning more

money for us, which is a very good

thing. Uh but you know, good things for

energy aren't good for gold and metals.

>> Yeah. Touch on copper if you would. Um,

I mean, there's ongoing talk about a a

built-in shortage of copper as big mines

struggle to produce enough, but you

where do you see copper prices going for

the balance of the year?

>> Well, you know, our official forecast is

we're still looking at 14,000 uh for the

second quarter and an average around

13,000 or so. But that came with uh a

view that this conflict in the Middle

East would be resolved by now and we

would start to rebuild inventories and

capacity and the way it's looking it's

not going to happen. uh you know we we

we haven't formally changed anything yet

but I think risks are out there that the

current 3 to 400,000 ton deficit in

copper market may well come to a much uh

you know much smaller deficit maybe even

balance uh and perhaps who knows a

surplus if there is stackflation which

is inflation accompanied by sharply uh

lower growth which means less copper

demand. So there is a big risk for

metals here.

>> What about gold? Um gold obviously

inflation in theory is good for gold but

not if central banks hike interest

rates.

>> Well look uh inflation is said to be you

know very positive for gold and usually

it is but it's not inflation in

isolation. It's inflation in combination

of how central banks react to inflation

particularly the Federal Reserve. and

we're ready today. Uh, you know, based

on what I've seen from the FOMC, um,

there are dissenters, uh, in the in the

committee who, you know, were

disagreeing with holding things steady.

Um,

>> and we could very well be that the next

Fed move is not a cut, but it could very

well be certainly holding still, but it

could even be a hike. And that means

that we're going to see significant

increases in carry costs in the forward

markets. And we're also seeing yields

jump across the yield curve as well,

making it very difficult to hold gold.

Gold is always been a play about

inflation, dolorization,

uh loss of purchasing power. That's

true. But if bonds compensate for all

that, you might want something that

gives you a lot of cash flow. So

monetary policy and how you respond to

it is key. Case in point is in 7982

period when Mr. Vulkar really rapid up

interest rates. Gold fell and inflation

was quite high but real rates were

really high

>> isn't it? Before we let you go Bart I

mean over the years we see conflict in

the Middle East and then oh there are

fears over supply but supply hasn't been

jeopardized certainly in the past decade

or two. This time it has and the market

is shocked.

>> It it has we're we're looking at uh

pretty significant shortfalls globally

six to 8 million barrels right now

depending what estimates you want to uh

take. you know, we we can't go there to

check well by well. Uh we're we're we're

seeing this, you know, refineries

destroyed. And at the end of it, I think

the common consensus is we're going to

be a few million barrels short once

everything stabilizes with very low

inventories and there's going to be a

race to satisfy demand and to fill

inventories at the same time. So,

elevated energy prices for quite some

time, I think.

>> Bar, thank you very much. Um, my last

day is tomorrow. Over the years, I've

loved talking to you on commodities.

Thank you very much indeed.

>> It was my pleasure as well and good

luck.

>> Thank you very much. Bart Melik, global

head of commodity strategy at TD

Securities.