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As the Russia-Ukraine conflict deepens, Kim Parlee speaks to Hussein Allidina, Head of Commodities at TD Asset Management, about why oil prices could spike above $180 a barrel.
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Kim Parlee: The Russia-Ukraine crisis had a far-reaching impact on markets that many are still trying to understand, but one thing that was very clear was the impact on commodities. Asset prices are rising across the board and oil along with natural gas is hitting its highest level in years. Here to tell us what he sees in the market and what to look out for is Hussein Allidina. He is Head of Commodities at TD Asset Management. Hussein, nice to see you. I know you’re coming to us from Miami. You’re at a commodities conference. I just want to start by saying, what do you hear from the people you listen to and deal with about what is happening in Russia and Ukraine right now?
Hussein Allidina: And Kim, thank you for having me. There are definitely concerns about balance sheets and the ability to meet demand given how tight the underlying balance sheets were before we openly entered this war. There is an enormous concern for supply. Russia is not a trivial commodity producer. They produce, by and large, all the goods that we consume. And you know there are challenges in getting these shipments out, while there are no sanctions on the shipments, there seems to be an unwillingness on the part of participants to hold or move Russian molecules, Russian bushels, because they are concerned about it , what sanctions might look like, tomorrow.
Kim Parlee: So maybe let’s just pick one of them, the molecules, as you put it, the oil. Let’s talk about where the oil goes from here. I mean I know you and I was talking about three digit numbers earlier. I mean, what should we brace ourselves for?
Hussein Allidina: And it’s really hard because we started the year tight. In the last 16 months, inventories have been drawn almost completely. We’ve talked about not having a lot of spare capacity to handle disruptions. Russia produces 10 to 12 percent of world production. They are responsible for seven million barrels of exports per day. We don’t have the cover. What that means for price is difficult because you have rationed demand. If you can’t muster additional supply in the short term, the only way to balance the market is to ration demand. We look back to 1974 during Airborne Lombardo, 1979 during the Iranian Revolution when we lost supply and prices rose to a level that was about 6 percent of GDP. So the oil load, the amount of oil we use relative to GDP, six percent. That means we’re still about 20-25 percent from here, and in real terms we haven’t reached the 2008 highs. I think depending on the extent of the disruption, depending on how long it’s going on, it’s pretty plausible that we’re going north of $150, $180 a barrel. I don’t think we can maintain this level. But to clear the market you need to see the prices go much higher. You see crude oil doing today. You’ve watched European natural gas soar to record highs overnight. And all of this is to ration demand, because that’s the only thing you can do in the short run to find balance.
Kim Parlee: What about the bushels? I mean you mentioned other commodities. I mean, we know that wheat is up significantly. Corn? What? What do you see? And again, I assume it’s the same thing, that all of this has an impact. So what are you hearing?
Hussein Allidina: Yes. As for grains, Russia and Ukraine together are big, big producers and exporters of wheat. Quite significantly, Ukraine is also a fairly significant corn producer. There are a few bushels sitting in Ukraine that couldn’t get out, so there’s a little physical disruption there. The bigger problem we see with the grains, Kim, is if this war continues into the spring planting season, which begins in May, you risk having a significantly lower supply because the farmers are unable to come to the fields sow their crops. This is exacerbated as we have discussed fertilizer prices and energy prices which are an input to the production of these commodities. And on the consumer side, if you’re a China, an Egypt, or a Jordan, that depends on those foods, and in many cases you’re subsidizing foods in your country. A higher food price is a material problem. We had exports, US exports this morning, very, very robust because I think there’s a bit of a panic setting in with consumers. You must provide for yourself at all costs. It is very difficult to ration food demand as we saw in 2006, 2007, 2008.
Kim Parlee: Hussein, given all of this, where are you looking at things or what are you observing to understand where things are going or what are some of the red flags that you will be really paying attention to?
Hussein Allidina: For sure. I mean, it’s really very difficult, frankly, given that, frankly, we have to predict geopolitics. We must closely monitor the effects of the sanctions regime on Russia-Ukraine. Europe and the US are both very methodical in imposing sanctions to avoid further tightening already tight energy and food balances. There is a buyers strike going on right now because people are unsure how this sanctions regime might change. But we have to watch that. I think we also need to watch the high frequency data on both the supply and demand sides. On the demand side, we need to see if $4 gas challenges US gas demand. We need to watch the high-frequency data on US corn, soybean and wheat exports that are released each week to see how these consumer countries are reacting. And I think it’s very important to see whether the US manufacturer reacts to the higher price. In 2008 and 2009 we saw a significant increase in US shale production which helped balance the market. We haven’t seen that yet. That’s something to watch out for, because that’s the only kind of short-term relief we could have. And even if I say, just to be clear, Kim, when I say short-term, I’m not talking at the earliest in three, four, six, seven months to get production up and running, so to be honest we’re a bit of a pickle about it , where balances are tight. I think prices need to stay adjusted to rationing demand so we can find a balance.
Kim Parlee: Hussein, always a pleasure, thank you for joining us.
Hussein Allidina: Thanks for the invitation.
