Anthony Okolie: Bart, great to have you with us. I want to start with oil prices, which have been hovering near seven-year highs as the Russia-Ukraine crisis continues to escalate. Is $100 US a barrel pretty much priced in at this point? Or could it go higher?
Bart Melek: Well, I think we already priced it in. Certainly, the Brent benchmark was very near $100 the other day. So I think $100 could happen on this side of the Atlantic as well. Won’t take very much. Any sort of negative news on the supply side would most certainly get us there. So I think priced in, certainly the risk is.
Okolie: And I know you’ve said previously that oil prices could hover around the mid-$80 range in the second half of this year. But if the conflict between Russia and Ukraine continues to escalate, what does that do to your forecast for oil?
Melek: Well, you know, sadly, it would probably make me wrong. As a strategist, that’s a hard thing to admit. The W-word is not great. But look, realistically, if we see an escalation of tensions between Ukraine and Russia and there is a robust sanction response which would limit the delivery of energy products, ranging from natural gas to petroleum products to crude oil itself, that certainly would put the world in a very, very tight spot.
So supply-demand fundamentals would tighten up. Our projections are now that ex-OPEC production will likely increase. But if we don’t see supply from Russia, all bets are off, I think. And the adjustment to the mid-80s or so would not materialize. We would be significantly higher.
And I would say triple-digit oil price would very much be in the cards. The question will be, how severe will the sanction regime be? And what sort of escalation will there be? In times of war, you just simply never know.
Okolie: Yeah, there’s certainly a lot of uncertainty. Let’s talk about natural gas. Of course, Germany recently confirmed that it’s halting the Nord Stream 2 gas pipeline project which is meant to bring Russian gas to the country. And of course, Europe is running short of natural gas. So where do you see natural gas prices going?
Melek: Well, natural gas has been a problem for the Europeans, certainly through 2021, continues to be an issue now. Several things leading to the problem – one is, of course, the most obvious on the supply side, but there are demand side issues as well, where we’re seeing demand probably stronger than seasonality would normally suggest.
Europe had an unfavorable set of wind patterns, which basically meant that renewables such as windmills, wind power generators didn’t produce the capacity. That meant there was more reliance on natural gas – and inventories, as a result, were down. And any time you have low inventories and high demand, there’s a lot of volatility and upward price pressure.
Now, onto that geopolitical risk and potential lack of supply from Russia – as I said, anything is possible during war. These supplies could dry up inadvertently for whatever reason, and I think prices stay elevated. And that includes North America, because certainly, the Americans are shipping every natural gas molecule they can through the LNG.
Okolie: And let’s talk about commodities, because certainly, Russia’s move into Ukraine is also affecting other commodity prices – gold, aluminum, nickel – which have rallied to multi-year highs over the past few weeks. What’s your take on these recent spikes in these metals?
Melek: Well, I think, certainly, they are already in a tight supply configuration. You look at copper – could very well be in a deficit this year. You look at aluminum and we are projecting a deficit of some 2 million tons. Plus, for the year, there is, of course, nickel. Russia is a big producer of nickel, very big producer of aluminum.
And not only are they a big producer, but globally all these commodities are very energy-intensive. And we have seen the shutdown of smelters already in Europe because of natural gas. I’m imagining that supplies could get tight if these sanctions are material. And if prices of energy remain robust, that is a cost side factor that’s pushing prices higher. And already, as I said, we’re already in a tight supply-demand configuration, which means probably high commodity prices for the foreseeable future.
Our base case is that we’ve seen the highs for aluminum, over 3,300. We’re seeing very high copper prices, we’re seeing very high nickel prices. And our base hypothesis is that things stabilize and production rebounds from the COVID period.
But if it doesn’t, if there is an escalation in these geopolitical tensions which impact supply, I think, again, we could see prices move over and above the current highs. And palladium is another one – Russia is a big producer, about 40% of global mined palladium, that could be caught up with this. Fertilizer as well.
Okolie: OK, so given all this volatility uncertainty in the markets, what’s the key takeaway for investors?
Melek: Well, be prepared for volatility, I guess. Even if you like the idea that prices and believe that prices are going higher, I think people should remember that it’s never an uninterrupted upward trajectory. Be prepared for up and downs. And people have to do a lot of soul searching and determining just how comfortable they are with risk when looking at these sectors.
Okolie: Bart, thank you very much for joining us.
Melek: It was my pleasure. Thank you for having me on.