ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Thursday, March 31, 2022. I'm Ash Bennington, joined today by Bart Melek, Global Head of Commodity Market Strategies at TD Securities. Welcome, Bart. Let's take a real quick look at what's happening right now in markets. Obviously, last day of the fiscal quarter, first losing quarter since the pandemic. Let's take a look because it's been a down day in general.

Dow Jones Industrial Average off about 1.56%. Final print here on the day looks like 34,677. S&P 500 also off on the day, exact same percentage, 1.56%, closing out the day at 4,350. NASDAQ off 1.54% so market's basically moving in lockstep here. Closing out the day, final print on NASDAQ, 14,220.

Lots to talk about. Lots of stories happening in the energy sector. Bart, welcome to Real Vision Daily Briefing. Your first time on the show. It's a pleasure to have you.

BART MELEK: Great to be here. Thank you for inviting me.

ASH BENNINGTON: So Bart, lots of news happening right now in energy markets. US releasing 1 million barrels from the strategic reserve. Oil prices moving around a bit. Big picture, Bart. Where are we right now?

BART MELEK: Well, look, we had a bit of a correction today, some 6% or so and that's on the news I think in part because we're seeing the US government releasing that 1 million barrels that you mentioned. We're also thinking that perhaps OPEC will continue to increase supply by some 400,000 barrels. This is what they're saying. We'll see for sure what is happening tomorrow.

Ultimately, I think the reserve release is probably not enough. That strategic reserve will get quite lean as we move into the second half of 2022. And I'm certainly making the assumption that the sanctions on Russian supply will continue. We, of course, have no idea what is happening on the negotiation side aside from what is reported in the media. But chances are that the sanctions are going to be here for a while. And of course, Russia exports roughly 5 million barrels equivalent a day of supply.

When you account for that shortfall, there are very few opportunities, at least in the interim, that I see that can replace that crude. Yes, the US government has dipped into its reserves and that's going to certainly help some. But if we do see even stricter sanctions and oil will not make its way into the refineries as it did just a few months ago, then moving past the third, into third quarter, and into fourth quarter, if demand continues to run up the current rate of about 2 million barrels a day, we will see a tight market.

And I think we will continue to see risk being priced in. And we certainly expect for the next quarter or two to have crude trading above $100. Beyond that, things should improve as capital flows into supply formation. But still, probably it's going to take a while to compensate, or refill, all those inventories we're going to bleed.

ASH BENNINGTON: Yeah. Well that's very well framed in terms of the big picture of what's happening here. You touched on price. Let's run through those numbers real quick. So oil, WTI, WTI, this is May '22 contract CL.1 on the New York Merc, trading at $100.73 right now. So hovering right around the $100 a barrel level on WTI. That's off about 6.6% on the day.

Coming over to ICE Brent Crude May '22 contracts on the Intercontinental Exchange in Europe, this is LCO.1, trading right now at $107.29. This, of course, is the global price of oil, off on the day 5.4%. So a little bit more movement, perhaps as one might expect from a US strategic petroleum reserve release on the WTI number, the number that's benchmarked for US oil prices.

It's curious-- you talk about this big picture, the framework for the US strategic petroleum reserve release. In the past, historically, I remember dating back whatever it is, some number of months, when the US released petroleum from the reserve, there was this paradoxical impact where price went up rather than down, markets somewhat balking. This really brings up the point that you framed so eloquently which is this question of, how much of an impact is the strategic petroleum reserve really make when there are a release? I mean, this looks like kind of an eye dropper in a bathtub, doesn't it?

BART MELEK: Well, maybe not exactly an eye dropper. But the US consumes some 20 million barrels a day, give or take. There's some seasonal variability. 1 million barrels of additional supply is material because after all, all commodities and assets tend to trade on the margin. And if this market was short 750,000 barrels a day, this would be material and you would have a very large adjustment, and a sustainable one.

However, we're talking a potentially significant bigger deficits going forward. And much will depend on how the politics unfolds here, how quickly Russia is going to be able to move crude destined for European markets into the Asian markets. We don't think that's going to be as quick

or as robust as people think. You've got a lot of geography and a lot of infrastructure that will need to be constructed for those flows to be redirected as I think some are expecting.

So this is a long term project. I think for the next 3 to 6 to 9 months, it is going to be very tough to increase supply materially from both sides. On the demand side, oil is price inelastic. Once you have a vehicle that consumes X amount, you're probably not getting a new one anytime soon. So you're just going to-- you have to use it. You're not going to ship to transit quickly. That might not exist. And on the supply side, it takes a while to build new capacity. So we're kind of stuck.

And if Russian oil doesn't come back, which it is unlikely to, this market is going to be fairly tight.

ASH BENNINGTON: Yeah. So maybe it's like a pint glass in a bathtub?

BART MELEK: Yes. Maybe. Maybe that's probably more accurate.

ASH BENNINGTON: So you talk about this sort of the structural picture for oil. You mentioned the inelasticities on the supply side, on the demand side. What do you look at to understand where these prices are moving, where demand and supply are, other than obviously just the price of front month contracts?

BART MELEK: Well, we certainly look at the aggregate, global economic picture where US economy is doing. And very importantly, we look at Asia, and we look at China. And part of the reprieve that we're seeing in oil today, of course, you know the SPR announcement and the OPEC announcement are, of course, important. But on the demand side, let's remember, Shanghai is in lockdown. And that is probably as much as 1 million barrels a day of demand, which is going to come back. Which, as we move past the pandemic crisis in China, that is going to very much negate what the Biden Administration has done with the SPR. And I think that's very key to remember.

We've already seen pretty significant downgrades of demand. But I'm not so sure we're going to continue to have demand destruction anytime soon. So we're going to see demand continue firm by historical standards. And supply, as I said before, having a difficult time increasing.

And even more, as importantly, inventory levels will be whittled down. Certainly the OECD inventory levels are as low as they were in 2008, 2014 where crude was over $100. And if Russian crude doesn't come back, which we think it doesn't in any meaningful way, then those inventories get lower. And typically speaking, as inventories relative to total demand decline, that means volatility rises and upside risk increases. So any negative news, anything traders might see across their screen that points to some sort of supply risk, could have the potential to spiking crude again.

That's what we look at, one. And, of course, we also look at what algos are doing. We very daily close CTA. We have an algorithm that tracks what these folks do and tries to predict where they're going. And, of course, we look at technical signals as well.

ASH BENNINGTON: Yeah. You mentioned the global demand picture, GDP growth. What's your baseline outlook for where we are right now on a global basis for GDP growth for 2022?

BART MELEK: Well, I think GDP growth is probably consistent with 2 million barrels, 2.2 million barrels of demand growth for 2022, which is a very robust number. That's been downgraded from over, from around 3 million, before the Russian development. And that's taking into account that Russian economy is going to tank, probably European economy is not going to perform anywhere near as strongly as it was prior to this conflict.

And certainly we're going to see an impact in America as well where there will be, I think, a material impact on consumer spending, and broadly, because the money that you were going to spend on discretionary goods, on travel services and things of that nature, now you're going to have to plank down and put it in your tank and spend at the grocery store as well.

And that's the other aspect of energy prices. Food prices, fertilizer, which is a key element in food production, have all spiked as well because of this Russia conflict. And, of course, big input for nitrogen fertilizer, urea, is natural gas. And much of it is produced in Europe. And those prices have spiked. So this has ripple effects through the entire economy here.

ASH BENNINGTON: Are we still seeing snapback effects from the reopening trade, or is this moving into a new phase in your view as you do this estimation and analysis for energy consumption?

BART MELEK: I think we're pretty much priced things in at this point. It's been long enough, I suspect.

ASH BENNINGTON: Yeah. So you mentioned a lot of other points. I know you cover commodities more broadly. Talk to us a little bit on where you are like, for example, with base metals which also have obviously significant tie-ins to aggregate global GDP.

BART MELEK: Sure. Base metals typically should be slowing down quite significantly in this portion of the cycle. They are now--. We're seeing the Federal Reserve and other central banks around the world voicing a much more hawkish narrative. So we are at the start of a tightening cycle. And who knows how much this is going to be, probably true to what the [INAUDIBLE] have said. Other central banks as well.

And China has slowed down as well because of the pandemic. And we are seeing all sorts of supply chain issues, and logistic issues around the world. But commodity prices on the base metal sides have done very, very well. Much better than I think many have expected. And those are negative supply shock share. For example, the sky high energy prices in Europe and in China last year basically meant that energy had to be redirected to consumers and other industries and away from smelting.

The pandemic has prevented mining activity. So there have been pretty significant impacts all over the base metals space. In aluminum, it's a very energy intensive metal. And we see that as in a very sharp, very deep deficit this year. And it's been trading much, much higher than we have expected. Same with nickel. And let's add another element to it. Russia is a big exporter of aluminum and nickel.

So the base metals we do think move off the highs. But we're not going to see a correction as deep as we would normally expect when the cycle is tightening on the monetary side, and economic growth is moderating.

ASH BENNINGTON: Yeah, Bart. Now that you mention it. Not to turn too fine a point on it, but what the hell is happening in nickel market?

BART MELEK: I'm not sure I can answer that with any level of confidence.

[LAUGHTER]

ASH BENNINGTON: I'm not sure anybody can.

BART MELEK: We've had interruption of trading. We had the-- I guess in other worlds, we call it force majeure where trades were invalidated. And I think that's as much as I want to say about that because I frankly don't want to delve into exactly what happened and what triggered it because it would be just speculation on my part.

ASH BENNINGTON: I'm going to have to buy you a pint the next time you're in town, and get the off the record answer because I'm sure you have thoughts. I mean, it's just been such a surreal, sort of dislocated market to watch. And I think that there are, as exactly as you suggest, just an incredible number of open questions about what's happening there.

BART MELEK: Yeah. It's-- I can say one thing. I think for many participants in the market it is disturbing, or at least a bit of alarm has to be sounded among credit people and risk management folks when these type of things happen because if this happens, whether valid or not, the questions are going to arise, what other markets can be interrupted in this way?

Yes, some markets are more liquid than others. And there are a lot of reasons to say why one particular market had this done with it. But I think it raises the risk profile broadly for all markets. And I think makes us think that prudence is probably the order of the day these days if things like that are happening.

ASH BENNINGTON: Yeah, very well said. Talking about base metals, moving on from base metals to precious metals. Gold right now trading at $1937 an ounce. What are your thoughts on the gold market? It's obviously been an interesting few weeks there.

BART MELEK: We've been quite out of consensus on gold for a while. We've been positive. And the main reason here is this. We ultimately think, I think, that the Federal Reserve is continuing to be behind the curve here. And they will probably continue to be so for at least the next 3 to 6 months. Why? Well, we've got inflation around 8% or so. We have grain prices skyrocketing. We have fertilizer prices skyrocketing. 61% of the CPI components out of the 200 are 5% plus year on year, even higher proportion of 2% plus.

So this is an aggregate inflation problem. And even if you believe that the Fed will do exactly what its dots are implying, in real terms, the Fed funds is still quite negative. And it will continue to be so. I don't know where the neutral rate, or the terminal rate, should be. But I'm pretty sure it's not 2 and 1/2. It's probably higher. And I think, at this point, central banks--

ASH BENNINGTON: This is, by the way for folks who may not know, this is the rate that you're talking about where effectively, it is neither inflationary nor deflationary. The natural neutral policy rates, sometimes called R-star by economists, this idea of the rate at which basically things are flat.

BART MELEK: Yes. So the question is, when inflation is in the aggregates, Milton Friedman and folks who are predisposed that way will say it's really a monetary phenomenon. And I think it negates the argument that this is very much a phenomenon that has a lot of transitory properties. And what does that mean in normal person talk?

It means that it may not come down as quickly as people think, particularly since food is 20% of the index and food is probably going to be quite high. And not to inflation. I that's not policy related, quite often, because we're looking at core PCE. But that does-- your normal American household cares about food and fuel because people eat and they have to drive.

So it is material. And that's what drives wage demands, and other things, and government budgets for social programs and so on. So we like gold mainly because we think the Fed will remain behind the curve. Ultimately, we do believe that the Fed will discover religion, if you like. Essentially, once they decide that the negatives, particularly for the lower end of the income distribution-- inflation impact is more negative than a slower economy, then I think they get more aggressive.

But we could certainly see more heroic action from the Fed, maybe a couple of 50's and see where it takes us and where the rhetoric takes us. But it's going to be tough to get restrictive quickly. They certainly can't, don't, want to be too restrictive too quick. I think they're going to play it by ear. They do of the elasticities of all this. And the only real solution is to slow the economy down. And I think they're going to try to do the best for Americans they can.

Meanwhile, slow things down just enough so they can control inflation, but not so much that it affects negatively your average household.

ASH BENNINGTON: Yeah, by the way, PCE, personal consumption expenditures, this is the measure preferred by the Fed. Core meaning, ex, food, and energy, right now at 5.4%, a percent change from one month a year earlier. This is February 2022 number. By the way, this is lagged pretty dramatically. CPI which is at 7.9%, and PPIFD, the final demand for producer price index, now in the double digits.

BART MELEK: Yeah. Certainly, I think there is a good probability that will see that higher. The Fed, I think in the last FOMC, is talking about a 4.6% target for that metric this year. We'll see. They have a two handle of for that inflation measure next year. Well, we will see. And the year after that, they're very close to target of 2%. And again, we'll see.

I would bet that inflation may be with us at higher levels for longer. And that's not a bad story for gold. But once we start getting restricted, and the market is convinced that the Federal Reserve will sort of pull a Volcker on us here, in fact that gold will move lower. We don't expect a route because we don't think they're as committed as Mr Volcker would be. And I don't think we're quite there yet. But ultimately, in order to control inflation, rates have to rise and they probably have to rise a little bit more than the market is pricing.

And a slow start is good for gold. As this accelerates, it'll probably mean a correction from the highs. But we could still get 2000 plus over the next 3 months or so.

ASH BENNINGTON: Hey, by the way, do you guys over at TD Securities have a price target on gold right now?

BART MELEK: We do, actually. We, I forecast quarterly averages. I think $1975 to $1950 for this quarter, and moving it down as the year ends.

ASH BENNINGTON: , Yeah. By the way, for those of just joining us, we've been talking, not surprisingly, about oil, and now, about inflation. Talking of which, I just wanted to cut very quickly to a clip. Surging oil and inflation may outlast the war. This comes to us from Traci Shughart, hosted by Michael Nicoletos on Real Vision on every tier, essential, plus, and pro. Let's take a look at that clip right now.