TRANSCRIPT

Vanguard Perspectives® Noni Robinson: John, now that oil prices have rallied a bit, how have the dynamics of the commodity market changed?

John Ameriks: Wow, it’s a great question and a really tough one. I mean, the dynamics of the marketplace, I’d actually say that, probably, that hasn’t changed too much. I think ‘boom’ and ‘bust’ were terms that were coined around oil and the oil industry. And so, in that sense, nothing’s changed. We’ve seen periods of time where you get big run-ups in oil, a doubling of prices or a halving of prices. While it’s been a while since we’ve seen something like that, it has happened in the past. So the dynamics are probably still unchanged. You know, it’s an incredibly volatile sector and an incredibly important product. And I know, the investment team at Vanguard, we’ve spent a lot of time trying to interpret what’s happening in the market and then trying to interpret the market participants’ interpretation of what’s happening in the market because, you know, oil prices having come down as far as they have, you would think is good news. You know, we all go to the gas station and fill up for a price that [we] wouldn’t have believed a year ago or a year or two ago, and that should be good news. That money should be spent in other ways. So the fact that we’re not seeing that sort of dividend from lower oil prices come through in terms of really sparking demand and a lot of consumer spending is, to some degree, puzzling. But, you know, the market’s complicated. In the last couple of years, if there had been a boom coming out of the great recession, it was probably in the oil industry. A lot of drilling, a lot of investment went on there, and a lot of capacity was created. That capacity, for the large part, is still out there. There’s still a lot of—I call it a game of chicken between different producers that needs to occur, and somebody’s going to drop out, and somebody’s going to concede market share. And, again, when that balance is restored, maybe we’ll see a little bit more stability in terms of the price. But if I’m guessing—and I don’t know where the bottom is, I don’t know where the top is—but what I can say is I do think we’re in for probably more volatility there.

Roger Aliaga-Díaz: I completely agree, John, with your assessment. The market has been really behaving as if it was a demand problem, as if oil prices are down because global demand is weak. But, in fact, we have looked into that,in some clinical models, and we see that the supply aspect of it is very, very important, actually. And not only on the U.S. side, as you mentioned, with all the unconventional methods of production, which have been so successful, but even the traditional producers have come in line producing more lately, [such as] Iran, Iraq. Countries that traditionally would produce a lot, for a while they were basically offline. And, now, they are pumping as much as they used to. And all that together has created an enormous glut of oil in the market that has put on supply-side pressure. So that’s, I agree, it’s a little bit puzzling because the market seems to be behaving as if it was a weakness on the oil demands when the supply aspect is quite important.

Joe Davis: And I think we are seeing some of this. We are seeing some, not all, John. I mean, clearly, consumer savings rates have risen. I think part was [because], you know, it was an eye-watering fall. And I think, as we all know, [we’re] not necessarily going to immediately see a consumer spending windfall unless consumers really believe, businesses believe it’s permanent, right? And I think we’re starting to actually see that realization in the commodity markets now because of that massive run-up in supply capacity, through technological innovation, we’re now seeing an awash of oil supply, despite the fact that all consumption globally is still rising, which goes to the fact that it has not been all demand.

John Ameriks: It’s not all demand.

Joe Davis: But it’s also why it’s unlikely that we’re going to see a rapid rise in oil prices. At least, that would be a surprise to me, at least over the next two years. Beyond that, who knows, because I think there is that capitulation in the energy market. I think, at some point, it’s not profitable for all the energy producers in the world to produce at $30 or $40 (U.S. dollars) a barrel. And so I would presume some consolidation. I just don’t know who blinks first.

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