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Speaker 1: Welcome to the Fear and Greed Business Interview. I'm Sean Alma.

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Speaker 1: There's plenty going on in commodities right now. Turmoil in

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Speaker 1: the Middle East has sent the price of oil and

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Speaker 1: gold surging. The situation is very fluid, or we can

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Speaker 1: really be sure about is plenty of volatility in the markets.

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Speaker 1: Even before the latest escalation of the conflict in the region.

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Speaker 1: The price of other metals like platinum and silver have

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Speaker 1: been rising too. Vect is Director Mining and Energy Commodities

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Speaker 1: Research at Commonwealth Bank VEC. Welcome back to Fear and Greed,

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Speaker 1: My pleasure. I want to talk about oil and gold

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Speaker 1: and platinum and silver. But have you and your experience

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Speaker 1: seen such a volatile period for commodities.

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Speaker 2: Look in terms of how this year has started, I

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Speaker 2: would say there has been so much volatility. Like look,

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Speaker 2: it's not that oil is any stranger to that beast.

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Speaker 2: Like if we go back to you know, what happened

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Speaker 2: in the Ukraine War, then we had the you know,

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Speaker 2: Israel Hamas swore in late twenty twenty three. This is

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Speaker 2: all like something that oil gets used to, but it

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Speaker 2: certainly is something that this week it really has become

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Speaker 2: another risk that we're all considering, and this is on

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Speaker 2: the back of having to deal with everything on the

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Speaker 2: Trump tariff. So, you know, if I had to see,

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Speaker 2: you know, this commodity complex has gotten used to volativity.

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Speaker 2: I just thought it would it would have a breather

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Speaker 2: by now, but it just doesn't seem to be the case.

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Speaker 1: So let's talk about oil. It's been relatively low prices

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Speaker 1: in recent weeks, in part because OPEC and Saudi have

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Speaker 1: suggested they're going to increase production going forward. Then we

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Speaker 1: had the crisis in the Middle the latest round of

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Speaker 1: the crisis in the Middle East. Is how we should

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Speaker 1: put it? Is there any why I've known where it

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Speaker 1: goes from here? I mean, maybe that's asking me impossible question,

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Speaker 1: but how do you think about it?

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Speaker 2: So look, in terms of how we've analyzed it, and

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Speaker 2: as best as we really try to look at it,

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Speaker 2: is that when when we think about who has been

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Speaker 2: the primary driver of oil prices, it has very much

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Speaker 2: been OPEC plus and their strategy in terms of setting

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Speaker 2: a price which is conducive to their longer term view

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Speaker 2: of the market. Now, if you told me last year

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Speaker 2: what oil prices were OPEC plus really trying to target,

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Speaker 2: you know, as a group, I would have said something

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Speaker 2: for brand futures at about seventy dollars a arrow. But

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Speaker 2: what became clear this year, particularly on the back end

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Speaker 2: of what Trump's policies were doing on the demand side,

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Speaker 2: we saw OPEC plus embark on a strategy where they

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Speaker 2: said to the market, we're going to punish those members

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Speaker 2: in our group that are producing more than what they

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Speaker 2: have said, and in that they then did this unusual

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Speaker 2: move of boosting production a lot more rapidly than people thought.

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Speaker 2: Now I look at what OPEC plus has done and

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Speaker 2: I don't see it as punishing the over producers. I

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Speaker 2: see it more as they are almost looking at a

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Speaker 2: new price level which they think is sustainable in the future.

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Speaker 2: And I think that is closer for Brent between sixty

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Speaker 2: to sixty five dollars a barrow, And I say that's

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Speaker 2: been the dominant driver. And then now this whole situation

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Speaker 2: with Iran has been the key risk in our view,

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Speaker 2: upside risk for pricing, and this is something that has

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Speaker 2: really become now a big topic, and prices as we

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Speaker 2: currently sit here hover around seventy five dollars a barrow.

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Speaker 1: Irana is a major oil producer, but what is occurring

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Speaker 1: between Israel and Iran at the moment, it kind of

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Speaker 1: affects the other producers too, Is that right?

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Speaker 2: Yeah? Absolutely. Look, I think the way to look at

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Speaker 2: the levels of escalation where the concerns have heavily sat

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Speaker 2: is Iran is a country that has been sanctioned heavily

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Speaker 2: in the past, and that has resulted in their oil

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Speaker 2: exports plumbting. But what we saw through the Biden administration

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Speaker 2: was they were quite lax and enforcement and Around's oil exports,

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Speaker 2: which predominantly go to China, lifted to about one and

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Speaker 2: a half to two million barrels a day roughly, We're

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Speaker 2: talking one and a half to two center global supply. Now,

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Speaker 2: when we look at what's happened now, right, is that

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Speaker 2: so far enforcement of US sanctions and talks about, you know,

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Speaker 2: what is going to happen with US and Iran in

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Speaker 2: terms of the nuclear accord and what does Iran need

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Speaker 2: to do to comply with what the US wants. So

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Speaker 2: far that has gone nowhere. But the risk that everyone

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Speaker 2: was worried about was enforcement of those US sanctions, which

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Speaker 2: would limit around the world exports. A direct attack on Iran,

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Speaker 2: one which Iran sees as This is you know, a

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Speaker 2: threat to the around kingdom and the state and what

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Speaker 2: it can do. It opens up the door to a

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Speaker 2: lot more supply disruption in the region. And what everyone

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Speaker 2: is worried about is particularly the key waterways that around controls.

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Speaker 2: So it exports like say one and a half to

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Speaker 2: two percent of global supply, but the Straits of Hormus,

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Speaker 2: which you know is a very narrow waterway that controls

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Speaker 2: about nearly nineteen percent of global oil supply. And so

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Speaker 2: because of that control of that key street, you know,

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Speaker 2: data is a risk that opens up that everyone is

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Speaker 2: now thinking is this something we should be pricing in?

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Speaker 2: And that's where the volatility in oil can be quite severe.

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Speaker 2: Now we think of that as a last resort, but

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Speaker 2: clearly if you start attacking nuclear sites in Iran, you

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Speaker 2: can't help but feel that there has been a significant

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Speaker 2: escalation in the entire you know, Iran Israel relationship.

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Speaker 1: Say with me, VIVEC will be back in a minute.

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Speaker 1: I guess this morning is FORVEC from Commonwealth Bank. Before

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Speaker 1: the break for VEC, we were talking about oil gold.

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Speaker 1: It's hard to say a gold price of you know,

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Speaker 1: thirty three hundred or more has come off the boil,

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Speaker 1: but in a sense it has kind of tempered somewhat

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Speaker 1: though late last week Friday, last week it rose again.

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Speaker 2: That's right that if we look at what has happened

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Speaker 2: with gold, you know, the biggest driver has been safe

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Speaker 2: have in demand, and we talk about safe having demand historically,

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Speaker 2: and it's something that traditionally we've been like, this is

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Speaker 2: positive for a number of asset classes, and your gold

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Speaker 2: has benefited from this. But what has made it very

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Speaker 2: different this year has been its position in the batting order.

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Speaker 2: If I go back to the global financial crisis in

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Speaker 2: two thousand and eight or I go to the pandemic

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Speaker 2: in twenty twenty, what we saw was, yes, gold was

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Speaker 2: a safe haven asset, but it was under US dollar

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Speaker 2: and under US treasuries. So what has changed this year

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Speaker 2: is because of Trump's policies and shift away from US assets,

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Speaker 2: we've actually seen gold get promoted to number one, and

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Speaker 2: that has seen gold really surge to begin the year.

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Speaker 2: And that's a key reason why even if we look

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Speaker 2: at the current situation playing out between Israel and Iran,

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Speaker 2: gold has benefited from that and it is something that

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Speaker 2: we think will be the case going forward. So right now,

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Speaker 2: prices are you know, we're talking above thirty four hundred

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Speaker 2: dollars an ounce as we currently sit here. Our view

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Speaker 2: is that this tailwind on safe having demand can lift

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Speaker 2: it by the end of the year to about three

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Speaker 2: thy seven hundred and fifty.

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Speaker 1: Wow. So is that the story onset on commodities like

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Speaker 1: platinum and silver? Are they kind of being dragged along?

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Speaker 2: Look? I like I would say, what separates gold from

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Speaker 2: platinum and silver is that on the goal side, it

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Speaker 2: is very much safe having demand and central bank demand hopes,

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Speaker 2: which have been really strong tailwinds in terms of that

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Speaker 2: price story. But with silver and platinum, they actually play

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Speaker 2: also into the industrial commodity space because such a large

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Speaker 2: component of demand is comprised of industrial So you look

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Speaker 2: at silver, you know, say the photovoltach industry they use

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Speaker 2: quite quite a bit, you know, and talking overall, you know,

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Speaker 2: the whole industrial side, say it's fifty percent plus for silver,

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Speaker 2: and it's closer to sixty five to seventy percent for platinum.

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Speaker 2: So in terms of what really drives at least when

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Speaker 2: we talk about silver and platinum, what makes it very

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Speaker 2: unpredictable as well is it's also a call on what's

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Speaker 2: happening with the macroeconomy. So if you move from deep

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Speaker 2: recession fears and safe having demand strong there to one

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Speaker 2: where you think actually the global economy will be okay,

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Speaker 2: that actually gives a good tailwind into silver and platinum.

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Speaker 2: And that's really what we're seeing is if US data

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Speaker 2: holds up and global data holds up, and we see

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Speaker 2: Trump walk away from the threats of tariffs, if you

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Speaker 2: look at it incrementally, that's more beneficial to silver and

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Speaker 2: platinum than go okay.

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Speaker 1: Then finally battery metals generally, we have had Donald Trump

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Speaker 1: saying that they're close to a deal, the US and

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Speaker 1: China are close to a deal. Where Earth comes into

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Speaker 1: that again, how do you play some of those lithium

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Speaker 1: rare eers, some of those sorts of commodities.

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Speaker 2: Look, I would say both are very different risk categories.

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Speaker 2: If you look at rare Earth's, it's very much more

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Speaker 2: a play on defense and defense spending and the rearmament

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Speaker 2: of we're seeing globally, and so there is a need

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Speaker 2: to have secure supply chains and that's been the really

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Speaker 2: big push. So any restrictions that the China puts, we're

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Speaker 2: going to see pricing increase x China because of those

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Speaker 2: restrictions and fears of those restrictions. What we're seeing in

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Speaker 2: lithium though, is a very different story. Like we've seen

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Speaker 2: lithium come off, and it's come off quite a bit.

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Speaker 2: But if we really play out what's been pushing it,

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Speaker 2: it's an EV price war that has really started now

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Speaker 2: with BYD in China. So you know, we saw this

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Speaker 2: last year and this also led to lithium prices dropping.

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Speaker 2: But I can't stress how an EV price war, even

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Speaker 2: though it's the other end of the supply chain, it

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Speaker 2: forces margin compression all the way from that EV side

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Speaker 2: to battery makers, then to the upstream chemicals and then

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Speaker 2: finally to the commodity and so that is the risk

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Speaker 2: that we're facing. And eventually, you know, the cure for

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Speaker 2: low prices is low prices. So this should start seeing

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Speaker 2: litine demand pick up, but that margin impression story so far,

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Speaker 2: that's been the dominant player.

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Speaker 1: We're eternally out of time. But I have to ask

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Speaker 1: you because we're in Australia here, you're in Singapore, Edasavik,

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Speaker 1: but we're in Australia, iron Ore. What's the outBut for

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Speaker 1: iron Ore?

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Speaker 2: Yeah, look of you and I know is that it'll

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Speaker 2: average about ninety five dollars a ton in the second

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Speaker 2: half of this year, and that's that's very much where

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Speaker 2: it's been. But I'd say the key thing to watch

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Speaker 2: there is Chinese demand and if we look at what

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Speaker 2: Trump's policies have done overall, it has meant that Chinese

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Speaker 2: demand has weakened since the beginning of this year, and

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Speaker 2: infrastructure property it has turned south. But what I think

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Speaker 2: could be a positive surprise, and this is upside risk

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Speaker 2: to our forecast, is the composition and size of any

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Speaker 2: stimulus in the second half of this year. So I

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Speaker 2: would be watching, and this is across the industrial commodity

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Speaker 2: complex of base metals as well, is what does China

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Speaker 2: do on the stimulus side, because if you believe they're

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Speaker 2: serious about getting to their target of around five percent

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Speaker 2: growth this year, it's going to need stimulus in the

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Speaker 2: second half of this year.

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Speaker 1: VEC, thank you very much for talking to Fear and Greed.

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Speaker 2: My pleasure. Thank you.

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Speaker 1: That was Vector, Director Mining and Energy Commodities Research at

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Speaker 1: Commonwealth Bank. This is the Fear and Greed Business Interview.

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Speaker 1: Join us every morning for the full episode of Fear

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