Road Ahead For Crude & Gold?
Crude prices dropped 5% on October 4, whereas gold has dropped 4% in the last month. What lies ahead for the commodities? XM Australia CEO Peter McGuire in conversation with BQ Prime's Alex Mathew. #BQLive
Transcript
00:00 Hi, thanks so much for joining in.
00:02 You are watching BQ Prime.
00:04 My name is Alex Matthew.
00:05 Now, if there is one market that has seen a tremendous amount of volatility in the recent
00:10 past, that is the market for crude oil.
00:13 Just last week we were looking at the Brent crude prices and they were nearing the $100
00:19 per barrel mark.
00:20 But overnight, they have slipped very quickly and are now hovering at just about $86.
00:26 A lot has changed in the interim and a lot is probably going to change heading into the
00:30 end of the year as well.
00:32 To talk about everything that could affect these prices and also the wider commodity
00:38 basket, I've got Peter Maguire, the Chief Executive Officer of XM Australia joining
00:43 me in the studio.
00:44 Peter, thanks so much for taking the time.
00:46 And let's set the context to why we've seen such a lot of volatility in this crude
00:51 basket.
00:52 What are the various factors at play right now?
00:54 Well, Alex, it's lovely to be here in Mumbai and you've got to be considerate as far
00:57 as the last 100 days approximately what we've seen as far as crude.
01:02 It's been electric to the upside.
01:04 So that very, very strongly bid up and as you mentioned, hit 95 odd.
01:08 And I think it was off to the races and everyone was saying 100 to 105 is very achievable.
01:13 And that was by the end of September.
01:15 It's had a washout since then as far as some of that hot air has been taken out of
01:19 the market.
01:20 It's a point of evaporation and any market that moves so aggressively to the upside nearly
01:26 to a point of being parabolic needs a time to consolidate.
01:30 And that's probably where we've seen that as far as profit taking.
01:33 Some figures came out as far as revised forecast moving forward for growth numbers, certainly
01:38 for Asia Pacific and more importantly for China from 4.8 to 4.4 by the World Bank.
01:44 So they're just some of the little factors as well as a raging US dollar.
01:48 Yeah, it's a pretty wild market at the moment and volatility has been dynamic over the last
01:53 quarter and I think this quarter as well.
01:56 You know, when we were near that $100 per barrel mark, we were speaking to global commentators
02:01 and they were pointing out that one aspect that comes into play when crude does reach
02:06 that point is US share in production there.
02:10 So is that an automatic cap, do you think, that $100 per barrel mark?
02:15 Well, you would think that, you know, it's a big attraction to any wildcutter out there
02:19 that he wants to, you know, $40 or $50 is probably not worthwhile getting out of bed.
02:24 But once it hits that $80 to $90 to $100, there's a real reason to turn the spigot
02:29 on and let's go back to work.
02:31 So the attraction naturally from a shale perspective and for the US to continue and to ramp up
02:38 production is always an opportunity.
02:42 But it all comes down to dollars and cents and at the moment, I'd say it's fairly
02:46 attractive.
02:47 Now, there are a couple of factors at play, of course, more than a couple of factors,
02:51 but the major ones that I can see are the supply from the perspective of OPEC and the
02:57 way that it has been controlling supply and the demand scenario as well, because question
03:02 marks about growth, but still we're heading into the winter season and that's when Europe
03:06 comes into play, US demand comes into play.
03:09 So what, according to you, are the major triggers heading into the end of the year?
03:13 Well, you've always got from a demand side, you know, heating oil and heat homes and just
03:19 general, and that's across for, you know, probably a couple of billion people.
03:24 The next part, of course, is that we haven't seen weather outages.
03:27 That's been a very mild season from a hurricane perspective, but it still has, you know, the
03:32 best part of a month and a half to go.
03:33 So anything that happened with Mother Nature.
03:36 The third part is growth numbers and what's happening as far as demand destruction or
03:43 return to higher yields from interest rate policies and what that can do with a raging
03:49 dollar can that impact and slow markets down as far as consumption.
03:54 So we're all in that tight point.
03:56 You've got to be mindful.
03:57 Also, the yen is now, from a Japanese perspective, more expensive than it was in 2008.
04:03 150.
04:04 Yeah, that's right.
04:06 And oil was then 150.
04:07 Now it's at 90 and it's more expensive than the bouses in Tokyo.
04:12 Certainly.
04:13 Now, if we're talking about the dollar, and you mentioned the dollar, it's been raging
04:18 in your words, right?
04:20 Nine and seven.
04:21 We're likely to see higher interest rates for the foreseeable future.
04:26 Yes.
04:27 And that, I think, is the base case that everybody's pointing to.
04:30 Well, they are now.
04:31 Yeah.
04:32 And if that is the case, one would assume that the dollar remains strong well into next
04:36 year.
04:37 One would think so.
04:38 So what are the implications of that?
04:39 Well, you put your mind back, you know, the best part is, say, 11 or 12 months ago, Alex,
04:43 when we were at 113, 114, and all those currencies were crushed.
04:48 You had a euro running at around about 0.98, 0.97.
04:52 You had the Japanese yen really under the pump.
04:54 We got to a point there, the pound hit 1.03.
04:58 Then it rallied to the upside at 1.3.
05:01 So if that US dollar really takes a bit of a leg up here, as far as policy is concerned
05:05 and sentiment from Jay Powell, the chairman of the Fed, then there's every chance you
05:10 could be punching on 110 to 111 before Christmas.
05:14 And that really crushes all other currencies.
05:17 So I think that's, from a trade perspective, it's very exciting for retail traders.
05:22 And naturally, it's the biggest market in the world to trade.
05:25 But it's not going to be short of opportunity.
05:28 It's going to be many, many, many days there of excitement.
05:32 Turning back to commodities, crude and the wider basket, of course.
05:38 You could call it a joker in the pack, because you don't really know what the Chinese government
05:42 is planning in terms of-- 100% stimulus.
05:44 Yeah, in terms of stimulus.
05:45 It's been talked about for some time.
05:47 But at the same time, you're seeing headlines, Peter, about Evergrande and the fact that
05:52 it's heading lower.
05:54 It's seemingly in a spiral.
05:56 There are question marks about the so-called real estate crisis there, implications for
06:00 metal demand, implications for commodities in general.
06:03 Of course.
06:04 On the downside as well as the upside, how could that factor work in the near term as
06:10 well as heading into next year?
06:11 Well, I think it's got to be a point in time that you've got to see something very, very
06:16 decisive from the Chinese government in the sense of how it bails out or does some form
06:21 of policy statement or action with the property sector.
06:25 That's such a huge component of their GDP and massively involved in all consumption,
06:31 as you mentioned, from commodities, cement, steel, copper, you name it, everything.
06:36 So the other side, of course, is that who's holding the debt?
06:41 You've got 120 banks internationally that are holding all that property debt and about
06:46 180 or 190 domestic banks in China.
06:50 So if it unravels, and you said more or less your words are spiral, is it a death spiral?
06:55 It seems to bounce, then it seems to crater.
06:57 And then all of a sudden, Evergrande's back on, it's going well again.
07:01 And then you've got issues as far as the chairman and whatever happens there with their executive
07:08 team.
07:09 So I think that it's far from over.
07:13 And yeah, watch this space carefully because you hear the numbers of there's 90 million
07:17 approximate apartments or homes that are uninhabited in China.
07:21 So there's obviously overbilled and someone's holding that debt.
07:25 So it's not just that one would assume that because there's so much unused inventory,
07:30 as you pointed out, the prospects for real estate, even in the next few years, is not
07:35 very good.
07:36 And so therefore, from that perspective, would you expect softness in the base metals?
07:40 Well, you would from a consumption side, I would think from China, but I'll look at the
07:44 other part of the world, there's a place I'm currently in called Mumbai, and everywhere
07:49 I look at construction.
07:50 Now, you know, I drove in here last night, it amazes me every time and here we are today,
07:56 and it is just crane central.
07:59 You've got that much demand for all forms as far as construction.
08:04 And have a look at the concrete and the steel, what you'd be putting in here on a daily basis
08:07 is enormous.
08:08 So it's a little like there are different times of commodity cycles, and probably China's
08:14 grown to where it has to grow.
08:16 But India is just game on.
08:18 And I think it's going to be electric for the rest of this decade.
08:21 From a consumption standpoint, go to Africa and have a look, go to Abu Dhabi, I was in
08:25 Abu Dhabi yesterday.
08:26 You know, the construction there is just enormous.
08:29 So it all takes base metals to make things work.
08:32 And I don't see that drying up anytime soon.
08:36 If you so you are in India.
08:37 And so that presents an opportunity for me to ask, yeah, you've been looking at this
08:42 market in this country, indeed, for quite a while.
08:45 What are the opportunities for you per se, when you look in, and you look at opportunities
08:49 to invest, if at all, where do you see those opportunities?
08:53 Well, I just think you've only got to look at the different as far as if you're looking
08:57 at the economy, you'd have to say construction companies, you probably have to say the financials,
09:03 probably health, because the amount of people here is just enormous.
09:08 And nearly everything from everything rolling into all the services.
09:14 So electricity, you'd be looking at, I just think, you know, energy companies, you name
09:20 it, there's I think there's plenty of upside yet.
09:22 And, you know, and if you're going to be a stockholder, it's something that you probably
09:26 put in the bottom of the drawer and come back in, you know, 20 years time, and you give
09:29 it to your kids.
09:31 That's the sort of thing.
09:32 I mean, there's a difference as far as your risk perspective, are you looking at short
09:36 term or are you looking longer term, some of those big conglomerates in India have been
09:40 extraordinary over the last 20 years.
09:43 And so I don't think that that's storylines going away.
09:46 I think there's going to be greater opportunity moving forward because of more consumption.
09:50 Certainly.
09:51 Okay, to close out that conversation on commodities, and then I have another exciting question that
09:57 I want to ask you, but rent crude, what is the range that you expect, not just obviously
10:04 in the remainder of the year, very little left of it, but heading into next year?
10:08 Well, we've got three months and I think this three months is going to be very, very wild
10:12 from a volatility standpoint.
10:14 So leading up to Christmas, I won't be surprised if it takes 100 hours.
10:18 Now we're at the momentum there.
10:19 If you a week and a half ago, you would have said, oh, yeah, sure, Pete, well, we're at
10:23 95.
10:24 That's a big call.
10:25 But today we're at 85 or 86.
10:26 So I think there's upside there.
10:29 But I would be very, very surprised if it falls below $80.
10:35 So I'm going to say between 80 and 100.
10:38 And I think it's more to the upside than the downside.
10:42 And that's my view at the moment.
10:43 Rolling into 24, there's a lot of things can happen in 24.
10:46 We're in an election year in the States.
10:49 We're 13 months away from an election.
10:51 We've got a lot of major concerns globally.
10:55 And I think governments will have to be proactive as far as offering, because it's election
11:01 years in many countries, you'll have to look at subsidies for their consumers and their
11:06 population as far as energy consumption.
11:10 To that point of 2024 being a year of major events, one would assume that at some point
11:17 in 2024, at least that's the base case, there will be a change in the interest rate cycle.
11:22 What happens then in the US?
11:24 We're going to get to that point.
11:28 And I really, I don't know.
11:31 I mean, two things.
11:33 There was a big chance that we would have seen, and everyone was saying going back six
11:36 months ago, that you'll be seeing possibly a rate cut at the end of 23.
11:39 But it didn't happen.
11:40 It didn't happen.
11:41 Well, there's going to be a rate hike at the end of 23.
11:44 So that's against everyone's mindset.
11:47 So how does that roll into 24?
11:49 If you have energy prices between 90 and 100, you'll be seeing higher inflation, and you'll
11:53 see probably a more aggressive Fed and central bankers to try and tackle it.
11:57 And the only way to do that will be raising of rates.
12:00 So I want to get through to probably the end of first quarter and see what the Fed cycle
12:07 is going to be, where the dot plot is.
12:09 And of course, what happens as far as employment numbers, the strength of the consumer in the
12:14 states, where are we with equities and the risk as far as you know, you're getting,
12:18 you're back at 2006 levels for the 10 year and the two year, how much further can it
12:23 go if it goes up another percent?
12:25 That's really going to be a big attraction.
12:27 And people will be saying, I don't want to be in equities.
12:29 I'm just going to put the money in the bank by treasuries.
12:31 And it's fantastic.
12:32 Another percent, my goodness.
12:33 Well, I'm not saying that that can happen.
12:35 But if you go 25 basis points and oil goes to 100 or 105, then that's going to be a major
12:40 concern for central bankers.
12:41 Certainly.
12:42 Okay.
12:43 So you're in Mumbai.
12:44 I would contend, Peter, that you've seen less traffic today than you would normally do because
12:50 the World Cup is kicking off today.
12:52 Australia here to win.
12:54 No, that's what I'm asking.
12:56 I'm asking you.
12:57 So you predicted where crude prices are likely to be.
13:00 It's a range of 80 to 100 dollars.
13:02 But what's the score going to be on Sunday?
13:04 I don't know.
13:06 I've got no idea.
13:07 I just I sit here and I don't want to go out on a limb.
13:11 I just hope that we play well and that's all I want.
13:15 You know, it's it's it's dynamic.
13:17 It's exciting.
13:18 And yeah, you guys are the team to beat.
13:22 Interesting.
13:23 All right.
13:24 So we'll see how that pans out, Peter.
13:25 Pleasure speaking with you.
13:26 Thank you so much for speaking to BQ Prime.
13:28 Thank you, Alex.
13:29 Viewers, there you have it.
13:31 Everything that you need to watch out for in the commodity space.
13:34 If you've got questions or comments, don't forget to write to us on any one of our social
13:39 media platforms.
13:40 And do stay tuned.
13:41 This is BQ Prime.
13:42 Thank you.
13:42 Bye.
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