Commodities & Energy Sector
Highlights OPEC 2.0 agreed to cut output by another 500k b/d at its Vienna meeting last week, bringing the total official cuts by the producer coalition to 1.7mm b/d. Saudi Arabia added 400k b/d of additional voluntary cuts, bringing its total cuts to almost 900k b/d vs. its October 2018 production level. We think the market will tighten, as a result, and are getting long 2H20 Brent vs. short 2H21 Brent; this is the backwardation trade that worked well this year, producing an average return of 180%. There was no extension of OPEC 2.0 output cuts beyond end-March, although an extraordinary meeting of the coalition was scheduled for March 5, 2020. Anti-government civil unrest in Iraq and Iran has resulted in the killing of hundreds of protesters in both countries by state security forces. The unrest raises the threat of disruptions to oil supplies from Iraq and to ships transiting the Strait of Hormuz. Clashes between pro-Iranian protesters and Iraqi nationalists in Baghdad prompted a visit to the city by Iran’s top military commander, Qassem Soleimani, over the weekend. Soleimani reportedly is participating in talks to find a new prime minister for Iraq. Soleimani’s visit drew criticism from Grand Ayatollah Ali al-Sistani, the most prominent Shia religious leader in Iraq. Feature OPEC 2.0’s deepening of production cuts to 1.7mm b/d will be largely ceremonial, unless free riders in the producer coalition – led by the Kingdom of Saudi Arabia (KSA) and Russia – fully comply with the new levels agreed last week in Vienna (Chart of the Week).1 Contrary to our expectation, the production cuts were not extended beyond end-March, although an extraordinary meeting of the coalition was scheduled for March 5, 2020, in Vienna to review market conditions prior to the deal’s expiry.2 The market was not expecting anything other than symbolism in the just-concluded discussions among OPEC 2.0 members regarding production cuts. The bulk of the cuts in the coalition’s production are the result of US sanctions against Venezuela and Iran, which have removed ~ 1.8mm b/d from the market and KSA's cuts, which will total ~ 900k b/d following OPEC 2.0's Vienna meeting. We believe this will lead to a tighter market, and will steepen the backwardation in the Brent forward curve. We are, therefore, recommending a longer 2H20 Brent position vs. a short 2H21 Brent position. The sanctions-induced cuts are squeezing the economies of both Venezuela and Iran, which, in the case of the latter, is producing a blowback on Iraq. Chart of the WeekOPEC 2.0 Raises Output Cuts To 1.7mm b/d In Vienna Iran Fights To Maintain Influence In Iraq Following an unexpected increase in gasoline prices last month, violent anti-government protests erupted around Iran, which provoked a deadly crackdown by the state. The ongoing unrest has resulted in the death of hundreds of protesters, which, by the US’s estimate, stand at more than 1,000. This claim was refuted by Iranian officials.3 It is impossible to overstate the importance of maintaining freedom of navigation through the Strait of Hormuz. The unrest that followed the gasoline price hike was the deadliest since that country’s Islamic Revolution in 1979, according to the New York Times. The Times reported that the Islamic Revolutionary Guards Corps opened fire on protestors calling for the removal of leadership, killing scores.4 Protests also erupted in states closely aligned with Iran in the past couple of months – i.e., Lebanon, Iraq.5 For the oil market, Iraq matters most: It is difficult to overstate the importance of keeping Iraq’s 4.7mm b/d of crude oil production flowing to global markets. Likewise, it is impossible to overstate the importance of maintaining freedom of navigation through the Strait of Hormuz, which connects the Persian Gulf with the Arabian Sea and the rest of the world’s oil-consuming markets (Map 1). Map 1The Persian Gulf And Strait of Hormuz More than 20% of the world’s crude oil and condensates supplies transit the Strait on any given day (Chart 2). The anti-government protests in Iraq and Iran raise the threat level to production in Iraq, and attacks on shipping transiting the Strait of Hormuz by the latter, or a direct confrontation with the US and its Gulf allies. Our colleagues in BCA Research’s Geopolitical Strategy (GPS) are following the evolution of events in Iran and Iraq closely. Following is their assessment of what led to the most recent unrest in Iraq.6 Chart 2Violence Again Threatens Gulf Oil Supply Chart 3AFertile Ground For Unrest In Iraq Deadlock In Iraq While both the grievances and demands of the protesters in Lebanon and Iraq are similar, the unrest in Iraq is of much greater consequence from a global investor’s perspective. The trigger was the removal of the highly revered Lieutenant General Abdul-Wahab al-Saadi from his position in the Iraqi army by Prime Minister Adel Abdul-Mahdi.7 The popular general was unceremoniously transferred to an administrative role in the Ministry of Defense. Iraqi protesters are united in their economic grievances, frustrated at a political and economic system that is unwilling to translate economic gains to improved livelihoods for its people. The sacking of al-Saadi – considered a neutral figure – was interpreted as evidence of Iranian influence and the greater sway of the Iran-backed Popular Mobilization Forces (PMF), an umbrella organization of various paramilitary groups. Iraqis all over the country responded by attacking the Iranian consulate in Karbala and offices linked to Iranian-backed militias. Iraqi protesters are united in their economic grievances, frustrated at a political and economic system that is unwilling to translate economic gains to improved livelihoods for its people. The May 2018 parliamentary elections, which ushered in Prime Minster Abdul-Mahdi, failed to generate much improvement. The country continues to be plagued by high unemployment, corruption, and an utter lack of basic services (Charts 3A & 3B). This has ultimately resulted in a lack of confidence in Iraqi leadership who are being increasingly perceived as benefiting from the status quo at the expense of the populace. Chart 3BFertile Ground For Unrest In Iraq Most importantly, the ruling elite has failed to respond to key trends that emerged in last year’s parliamentary elections. The extremely low voter turnout reveals that Iraqis are disenchanted with the government's ability to meet their needs. Meanwhile the success of Shia cleric Moqtada al-Sadr’s Sairoon coalition – running on a platform stressing non-sectarianism and national unity – in securing the largest number of seats highlights the desire for a reduction of foreign interference (both Iranian as well as US/Saudi) in domestic politics. Neither the US nor Saudi Arabia have an appetite to step in and provide the support necessary to counteract Iran. Moreover, Iran and its proxies in Iraq will not back down easily. Thus, the ongoing protests are to a great extent the result of the new government’s failure to heed the warnings brought about by the 2018 election and protests. They have served to deepen the rift between the rival Shia blocs, particularly those Iraqi nationalists who deeply resent the intrusion of Iran into its political structures. Iraq is in a state of deadlock. That said, Iran is unlikely to stand by idly as its influence wanes. As a result, we are likely to witness greater unrest as the rift between the two Shia blocs intensifies. Neither the US nor Saudi Arabia have an appetite to step in and provide the support necessary to counteract Iran. Moreover, Iran and its proxies in Iraq will not back down easily. At the same time, the geographical spread of the protest movement demonstrates that Iraqis are fed up with the current system.8 This points to greater instability in Iraq as no side is backing down and the only foreign power willing and able to interfere is Iran. US Sanctions Continue To Pressure Iran The Trump administration’s crippling “maximum pressure” sanctions have sent Iran’s Economy reeling. The Trump administration continues to enforce its “maximum pressure” sanctions, which have reduced Iranian oil exports from 1.8 million barrels per day at their recent peak to 100,000 barrels per day in November (Chart 4). These are crippling sanctions that have sent Iran’s economy reeling. Chart 4Iran Remains Under “Maximum Pressure” Iran’s Supreme Leader Ayatollah Ali Khamenei has ruled out negotiations with Trump. They would be unpopular at home without a major reversal on sanctions from Trump (Chart 5). Chart 5 Major US Reversal Prerequisite For Iran Talks Trump presumably aims to avoid an oil shock ahead of the election. The US and its allies have visibly shied away from conflict in the wake of Iran’s provocations, including the spectacular attack on eastern Saudi Arabia's oil infrastructure that knocked 5.7 million barrels of oil per day offline in September. However, this does not mean the odds of war are zero. Opinion polls show that the Iranian public primarily blames the government for the collapsing economy. The Americans or the Iranians could miscalculate. Both sides might think they can improve their standing at home by flexing military muscle abroad. Iran is a rational actor and would not normally court American airstrikes or antagonize a potentially lame duck president. Yet it is under extreme pressure due to the sanctions, as the riots and protests following the gasoline price hikes indicate. Iran also faces significant unrest in its sphere of influence, as discussed above. Opinion polls show that the Iranian public primarily blames the government for the collapsing economy, and yet that American sanctions are siphoning off some of this anger (Chart 6). This could tempt Iran’s leaders to continue staging provocations in the Strait of Hormuz or elsewhere in the region, perhaps with attacks on US assets or those of its GCC allies. Chart 6Iranians Blame Tehran, Tehran Blames America Hardline Iranian military leaders and politicians currently receive the most favor in polling, while the reformist President Rouhani – undercut by the American withdrawal from the 2015 deal – is among the least popular. Elections for the Majlis, or Parliament, in February will likely reverse the reformist turn in Iranian politics that began in 2012. The regime stalwarts are gearing up for the supreme leader’s succession in the coming years. While a Democratic White House could restore the 2015 deal Trump unilaterally abrogated, that ship may have sailed. Trump, under impeachment, could seek to distract the public. This was Bill Clinton’s tactic with Operations Infinite Reach, Desert Fox, and Allied Force in 1998-99. These operations were minor and not comparable to a conflict with Iran. However, Trump may be emboldened. On paper the US Strategic Petroleum Reserve – along with OPEC and other petroleum reserves and spare capacity – could cover most major oil-shock scenarios. A supply outage the size of the Abqaiq attack in September would have to persist for four months to cause enough price pressure to harm the US economy and decrease Trump’s chances of winning re-election. The simulations in Chart 7 overstate the gasoline price impact by assuming that global strategic oil reserves remain untapped, along with spare capacity. Chart 7Desperation Could Force Iran To Take Excessive Risks Thus while the Iranians may take excessive risks, the Trump administration may not refrain this time from airstrikes. Bottom Line: While the Middle East is always full of risks to oil supply, Iran’s vulnerability and Trump’s status at home make the situation unusually precarious. We continue to believe an historic oil-supply disruption is a fatter tail risk than investors realize, or are pricing in currently. Market Round-Up Energy: Overweight Following the long-awaited OPEC 2.0 meeting held last week, the group “surprised” the market by announcing it will deepen its production cut by ~ 500k b/d, pushing the total cut to 1.7mm b/d. The bulk of the additional adjustments comes from Saudi Arabia (Chart of the Week). Importantly, the group emphasizes the importance of full compliance by every member – this would imply a ~225k b/d reduction from Iraq alone. We remain overweight oil in 2020. Base Metals: Neutral Copper prices rose sharply over the past week, reaching $2.71/lb at Tuesday's close, a level last seen in July 2019. US-China trade optimism last Friday sparked the rally. Copper’s physical market remains tight, inventories are low globally, and demand is set to rebound on the back of major central banks’ accommodative monetary policy. Even so, sentiment and positioning remain weak (Chart 8). We expect this to reverse, further supporting prices over the short term. Precious Metals: Neutral Risk-on sentiment following President Trump’s upbeat comments on US-China trade negotiations pushed gold prices down by $18/oz last Friday – one of the largest single-day declines YTD. Precious metals markets continue to follow the ups and downs of trade-war headlines and global growth-related news. Nonetheless, our fair-value model suggests gold is fairly priced at ~ $1,465/oz (Chart 9). Any significant drop below that level would provide an entry opportunity for investors to add gold as a portfolio hedge in 2020. Ags/Softs: Underweight The USDA released its final crop progress update on Monday. Corn was 8% behind full harvest, with North Dakota remaining the laggard with only 43% of the corn picked. Markets ignored this as March Corn futures slid close to 1.5% on a weekly basis. Chinese purchases of at least five bulk cargo shipments of U.S. soybeans lifted prices above $9/bu on Tuesday in anticipation of the USDA monthly crop production report. Wheat prices were flat on a weekly basis, as traders awaited results of an Egyptian purchase tender on Tuesday. Chart 8Copper Sentiment And Positioning Remain Weak Chart 9Gold Fair Value Is ~ 5/oz Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Footnotes 1 Please see On OPEC 2.0’s Agenda In Vienna: More Production Cuts, Longer Deal, published December 5, 2019. We noted most of the production cuts that matter to the market already are in place – i.e., Saudi Arabia’s over-compliance of ~ 400k b/d, along with Venezuela’s and Iran’s involuntary production cuts of ~ 1.8mm b/d resulting from US sanctions, as of October 2019. Under the amended production cuts, KSA agreed to remove close to 170k b/d more, lifting its total official voluntary quota and over-compliance, which brings its total cuts to close to 900k b/d. The total OPEC 2.0 additional cuts come to just over 500k b/d. Based on media reports going into the Vienna meeting last week, it would appear Russia prevailed on the producer coalition in its effort to keep the expiry of the production deal at end-March. However, the March 5 extraordinary meeting of the coalition states indicates KSA was successful in keeping the discussion re extending the deal alive. 2 In our current modeling, we assume the original 1.2mm b/d of cuts will remain in place to year-end 2020. We will be updating our balances and price forecasts in next week’s Commodity & Energy Strategy. 3 Please see U.S. says Iran may have killed more than 1,000 in recent protests, published by uk.reuters.com December 5, 2019. Iranian leaders blamed “thugs” aligned with the US and rebels for the violence, and, in a separate report citing an Amnesty International claim that 143 protesters were killed, said “several people, including members of the security forces, were killed and more than 1,000 people arrested.” Please see Iran says hundreds of banks were torched in 'vast' unrest plot published November 27, 2019, by uk.reuters.com. The size of the price increase is difficult to ascertain: The government says gasoline costs were increased by 50% with a goal of raising $2.55 billion/year, while other reports claim the hike amounted to as much as 300% in different parts of the country last month. 4 Please see With Brutal Crackdown, Iran Is Convulsed by Worst Unrest in 40 Years, published by the New York Times December 1, 2019. 5 The extent to which these states are entwined with Iran recently came to light via a cache of leaked Iranian diplomatic cables obtained by The Intercept, a not-for-profit news organization established by Pierre Omidyar, a founder of eBay. The cables were published jointly by The Intercept and the New York Times November 19, 2019. Please see The Iran Cables: Secret Documents Show How Tehran Wields Power in Iraq, published by the Times. The article claims “The unprecedented leak exposes Tehran’s vast influence in Iraq, detailing years of painstaking work by Iranian spies to co-opt the country’s leaders, pay Iraqi agents working for the Americans to switch sides and infiltrate every aspect of Iraq’s political, economic and religious life.” 6 This analysis in the remainder of this report is an abridged version of original work published by BCA Research’s GPS service in reports entitled Iraq's Challenge To Iran Is Underrated and 2020 Key Views: The Anarchic Society published November 8 and December 6, 2019. We believe events over the past week and weekend warrant this in-depth examination of the ongoing unrest and instability in Iraq and Iran. Both reports are available at gps.bcaresearch.com. 7 Lt. Gen. Abdul-Wahab al-Saadi was recognized and respected among Iraqis for fighting terrorism and his role in ridding the country of the Islamic State. The Iran-backed Popular Mobilization Forces were uneasy with Saadi’s close relationship with the US military. His abrupt removal was likely a result of the Iraqi government’s growing concern over al-Saadi’s popularity and rumors of a potential military coup. 8 Protests are occurring in all regions in Iraq. They are supported by Grand Ayatollah Ali al-Sistani. This is a significant development from the 2018 protests which were mainly concentrated in Iraq’s southern region. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades TRADE RECOMMENDATION PERFORMANCE IN 2019 Q3 Commodity Prices and Plays Reference Table Trades Closed in 2019 Summary of Closed Trades
BCA’s Brent and WTI forecasts for 2020 stand at $67/bbl and $63/bbl, respectively. Risks are skewed to the upside if enough OPEC members produce within their quotas. Moreover, OPEC 2.0’s production-cutting deal will be extended to end-June with an official…
The last of the big projects sanctioned prior to the oil-price collapse that lasted from 2H14 to 1H16 are coming online in Norway, Brazil, Guyana and the US Gulf. For the most part, the “Other Guys” – our moniker for all producers excluding Gulf OPEC, US…
Highlights A 400k b/d addition to OPEC 2.0’s official production cut of 1.2mm b/d will have little effect on actual supplies. The market already has seen ~ 2.0mm to 2.5mm b/d of output removed from the market via excess voluntary cuts (e.g., from Saudi Arabia and others) and involuntary cuts (e.g., from Iran and Venezuela). The incremental 400k b/d would just be another target for free-rider states to ignore. However, if Iraq and other states with on-and-off compliance at the margin can be persuaded to follow through on producing at lower quotas following OPEC 2.0’s meetings today and tomorrow, markets could rally as actual output falls (Chart of the Week). A rally on the back of lower OPEC 2.0 production would support the IPO of Saudi Aramco, which is expected to price while the producer coalition is meeting in Vienna. Production from the “Other Guys” – our moniker for all producers excluding Gulf OPEC, US shale and Russia – will account for a lesser and lesser share of global output. New production – much of it from the last of the big conventional projects sanctioned prior to the 2014 price collapse – from Norway, Brazil, Guyana and the US Gulf of Mexico will come on strong in 2020 – but most of this has been priced in already. The rate of growth of US shale-oil production will slow. Feature Brent crude oil prices could get a boost from OPEC 2.0, if free-rider states – specifically Iraq and states with marginal quota compliance shown in the Chart of the Week – actually were to abide by production cuts they agree to. This would be amplified if cuts are extended to end-June, from end-March. The impact would be marginal, to be sure, given most of the production cuts that matter to the market already are in place – i.e., Saudi Arabia’s overcompliance of ~ 400k b/d, and Iran and Venezuela’s involuntary production cuts of ~ 1.8mm b/d resulting from US sanctions, as of October 2019. Ahead of the Vienna meetings today and tomorrow, the putative leaders of the producer coalition – the Kingdom of Saudi Arabia (KSA) and Russia – have been lobbying at cross purposes. KSA is seeking support for deeper cuts and an extension to mid-year of the deal. Russia is lobbying to keep the original deal’s expiry at end-March, and also is seeking to have its ultra-light crude (i.e., condensates) production excluded from its quota, as it is from OPEC members’ production calculations. Russia is creating additional volumes of condensate – ~ 800k b/d this year of its total 11.2mm b/d output – to dispose of as it ramps natural gas production to new feed markets, particularly China.1 Our expectation is the production-cutting deal will be extended to end-June with an official target of 1.6mm b/d removed from the market. Whether the new deal matters to the market will depend on the actions of heretofore free-rider OPEC 2.0 states. Prices could go up, but market share for the producer coalition will remain under pressure (Chart 2). Chart of the WeekAdditional OPEC 2.0 Cuts Could Be Bullish For Crude Oil Chart 2OPEC 2.0 Market Share Under Pressure Saudi Aramco IPO Due To Price Follow-through by all OPEC 2.0 members on additional production cuts would benefit Saudi Arabia, as it is expected to price the Saudi Aramco IPO while the producer coalition is meeting in Vienna. The Aramco IPO price is expected to value the company between $1.5 and $1.8 trillion. We recently looked at the IPO and believe Aramco will be valued closer to $2 trillion than to $1 trillion, the literal range in which the offering was being valued by banks and analysts.2 To briefly recap, in the first six months of this year, Aramco produced 10.0mm b/d of crude oil and condensates. Aramco accounted for 12.5% of global crude output in 2016 - 18 and reported in its red herring that its proved liquids reserves were ~ five times larger than the combined proved liquids reserves of the five major independent oil companies. Aramco’s 3.1mm b/d of refining capacity makes it the fourth largest integrated refiner in the world. In 2018, Aramco’s free cash flow amounted to almost $86 billion. Net income last year was $111 billion, more than the combined profits of the next six largest oil companies in the world. For its first year as a public company, Aramco has indicated it will pay an annual dividend of $75 billion. Improving compliance with the OPEC 2.0 production-cutting deal is of obvious importance for the Aramco IPO. The member states are quick to stress they support the deal and will do their part, but free riding has been a problem in terms of compliance. As we noted above, full compliance will lower OPEC 2.0 crude oil production from current levels, but Saudi Arabia’s voluntary over-compliance, coupled with the involuntary production losses from Iran and Venezuela already are doing most of the work in restraining production. The “Other Guys” Continue Treading Water Since 2010, most of the growth in world oil production came from three regions: US onshore shale-oil producers, Gulf OPEC and Russia. These regions added 14mm b/d of supply between 2010 and 2019. The “Other Guys” often are overlooked in the oil market, but they still accounted for 45% of global oil production this year on average. Production from the “Other Guys” – our moniker for all producers excluding Gulf OPEC, US shale and Russia – has been falling as a share of global production for years, due to a lack of domestic and foreign direct investment in their energy sectors. We expect their production will remain flat next year and could start falling in 2021. The “Other Guys” often are overlooked in the oil market, but they still accounted for 45% of global oil production this year on average: Their combined output was ~ 45mm b/d of crude and liquids (Chart 3). The “Other Guys’” production is mostly long-cycle projects and these countries do not possess spare capacity. Thus, they are reacting to oil prices and maximizing production now, if they can. Even so, their share of global production continues to fall (Chart 4). Chart 3The "Other Guys" Production Is Stagnant Chart 4The "Other Guys" Market Share Plummets The 3- to 5-year lag between final investment decisions and first production for projects in these states strongly suggests the global oil market is entering a period of lower supply additions from the “Other Guys,” given the last mega-projects were probably sanctioned in 2014 while prices still were above $100/bbl for both Brent and WTI. The "Other Guys’" rig count recovered, along with oil prices, since the 2016 downturn. However, this is still a low level of rigs vs. the 2010-2014 period – a period during which production from this group barely grew despite prices averaging more than $100/bbl. We expect their rig count to remain weak next year (Chart 5). Conventional production takes time to ramp up, therefore we should not expect a large increase in production over the next few years. Chart 5The "Other Guys" Rig Counts Will Remain Under Pressure Oil Supply Looks Tighter Toward 2021 Globally, the last of the big projects sanctioned prior to the oil-price collapse beginning in 2H14 and lasting to 1H16 are coming online in Norway, Brazil, Guyana and the US Gulf. Up to this year, US onshore production was the sole growing region globally. If capital discipline caps growth prospects in key US shale basins, global oil supply will grow only modestly in 2020 and 2021. For the most part, the “Other Guys” haven't been attracting the capital needed to sustain and grow their production. Given the ongoing drive by E&P companies globally to return capital to shareholders via buybacks or dividends, and the insistence of capital markets to fund only solid, profitable projects, capital likely will remain constrained for the “Other Guys.” States that were able to attract capital prior to the 2014 oil price collapse – Canada, Brazil, Norway, Guyana and the US – are expected to increase production next year; however, we believe much of this production increase already has been priced in by the market, as it has been by BCA (Chart 6). In our balances, we have oil production for Canada up 50k b/d next year vs 2019; Brazil +330k b/d and Norway +360k b/d. This is 740k b/d ex-Guyana in 2020. Guyana is still doing exploratory drilling and recently announced they expect to have their first commercial flows online this month. Oil markets are expecting initial commercial flows of ~ 120k b/d between December and 1Q20, and a ramp to 750k b/d by 2025, which would be significant. We will be updating our balances in two weeks, in our final publication of the year. Up to this year, US onshore production was the sole growing region globally. If capital discipline caps growth prospects in key US shale basins, global oil supply will grow only modestly in 2020 and 2021 (Chart 7). US shale output reaches ~ 9.35mm b/d on average next year in the Big Five basins (Permian, Eagle Ford, Bakken, Niobrara and Anadarko), in our modeling. This amounts to an 800k b/d increase in our US lower 48 production estimate for the US, vs. a 900k b/d increase we expected earlier.3 Chart 6"The New Guys" Production vs. The "Other Guys" Production Chart 7US Shale Oil Production Growth Will Slow Going forward, it is important to re-emphasize that even the prolific shales in the US are being constrained by investors demanding the shale guys either return capital to shareholders via share buybacks or steady dividends and dividend increases. If they don’t accommodate investor interests, these shale producers – and all oil producers for that matter – will simply be denied access to funding markets. Capital is, finally, the binding constraint on the growth of global oil supplies. This has not always been the case, as we’ve noted. 2020 Could See Stronger Prices Markets generally are responding as expected to more accommodative financial conditions globally, which will allow oil demand growth, particularly in the EM economies, to revive in 2020. As a result, we are maintaining our expectation for growth of 1.4mm b/d next year, which is up 300k b/d from our expectation for growth this year. The rebound in demand we expect next year will force prices higher to incentivize additional supply and the release of inventories – mostly in 2H20. This will push the entire futures curve up, especially nearby futures, which will steepen the backwardation in Brent and WTI futures. Bottom Line: Further actual production cuts by OPEC 2.0, emerging threats to US shale growth, and stagnant output from the “Other Guys” facing off against higher demand growth next year could result in higher prices than we currently expect for 2020 – i.e., $67/bbl for Brent and $63/bbl for WTI. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Senior Analyst Commodity & Energy Strategy HugoB@bcaresearch.com Market Round-Up Energy: Overweight Brent prices remain stuck between $60/bbl and $65/bbl awaiting clear signals about the US-China trade negotiations and OPEC 2.0’s decisions on its supply management beyond March 2020. Money managers are increasing their net long position, expecting bullish news on both these developments. They are increasing their Brent exposure to 414k long contracts vs. 64k short. Base Metals: Neutral SHFE copper inventories fell 11% on a week on week basis to 120k MT as of last Friday. Combined, the LME, COMEX and SHFE fell by 6%. The larger decline in Chinese inventory is partly attributed to the reduced import quotas on copper scraps, which limited the total available supply to meet domestic demand. As discussed in last week’s report, fundamentals in the two largest components of the LMEX – i.e. copper and aluminum – are tight and the rebound in demand showing up in our proprietary indicators will support prices. We remain long the LMEX tactically. Last week, we recommended getting long the LMEX index. We have subsequently learned the LME ceases trading the index. We will, nonetheless, continue to track the reported level of the index, as if it were tradeable. Precious Metals: Neutral Closing at $1479/bbl on Tuesday, gold prices broke out of the narrow range in which the metal has traded over the past month. Gold’s daily-return 1-year rolling correlation with the U.S. dollar is at its weakest level since 2011 and is below the 5th percentile of its distribution since 2004. On the other hand, the correlation with U.S. 10-year TIPS yields is strengthening and is now above the 95th percentile of its distribution. As safe-haven demand dissipates – alongside the rebound in global growth we expect – we believe these correlations will move back to their historical relationships, supporting gold as the U.S. dollar depreciates. Ags/Softs: Underweight CBOT Corn March Futures Contracts rallied at the beginning of the week on the back of a blizzard in the Midwest that stalled the already delayed corn harvest, which the USDA reported to be 89% complete as of Dec. 1, well behind the five-year average of 98%. After reaching multi-months highs last week, wheat futures fell due to profit taking and weaker than expected export figures. Soybean fell for the eighth straight day on Monday, with the most active contract closing at $8.73/Bu, the lowest in six months. A possible delay in the US-China trade deal together with expectations of a bumper crop in Brazil remain headwinds to prices. Footnotes 1 Please see Russia to press OPEC+ to change its oil output calculations published by reuters.com November 27, 2019. 2 Please see our Special Report Aramco’s IPO: The Tie That Binds KSA And China, published November 15, 2019. It is available at ces.bcaresearch.com. 3 We discuss further risks to shale oil production growth in Lingering Oil-Demand Weakness Will Fade, including the high levels of flaring in the Permian and Bakken basins. This report is available at ces.bcaresearch.com. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades TRADE RECOMMENDATION PERFORMANCE IN 2019 Q3 Commodity Prices and Plays Reference Table Trades Closed in 2019 Summary of Closed Trades
Base metals prices are more closely linked to EM activity than DM activity. Base metals prices are timely indicators of turning points in EM GDP cycles. Our proprietary indicators have been signaling a revival in commodity demand for several months. We are…
China’s domestic energy sector outperforms when oil prices and domestic headline inflation rise. However, this is a behavioral relationship rather than a fundamental one. Unlike their investable peers, domestic energy stocks underperform when the broad market…
Feature Recommended Allocation In late November, BCA Research published its 2020 Outlook titled Heading Into The End Game, an annual discussion between BCA’s managing editors and the firm’s longstanding clients Mr. and Ms X.1 We recommend GAA clients read that document for a full analysis of the macro and investment environment we expect in 2020. In this Monthly Portfolio Outlook, we focus on portfolio construction: how we would recommend positioning a global multi-asset portfolio for the 12-month investment horizon in light of that analysis. First, a brief summary of the BCA macro outlook. We believe the global manufacturing cycle is starting to bottom out, partly because of its usual periodicity of 18 months from peak to trough, and also because of easier financial conditions, and some moderate fiscal and credit stimulus from China (Chart 1). Central banks will remain dovish next year despite accelerating growth. The Fed, in particular, worries that inflation expectations have become unanchored (Chart 2) and, moreover, will be reluctant to raise rates ahead of the US presidential election. This environment implies a moderate rise in long-term interest rates, with the US 10-year Treasury yield rising to 2.2-2.5%. Chart 1Reasons To Expect A Rebound Chart 2Unanchored Inflation Expectations Worry The Fed For an asset allocator, this combination of an improving manufacturing cycle and easy monetary policy looks like a very positive environment for risk assets (Chart 3). We, therefore, remain overweight equities and underweight fixed income. We have discussed over the past few months the timing to turn more risk-on and pro-cyclical in our recommendations.2 Since we are increasingly confident about the probability of the manufacturing cycle turning up, this is the time to make that change. Consequently, the shifts we are recommending in our global portfolio, shown in the Recommended Allocation table and discussed in detail below, add to its beta (Chart 4). Chart 3A Positive Environment For Risk Assets Chart 4Raising The Beta Of Our Portfolio Chart 5Some Signs Of Risk-On Still Missing Nonetheless, we still have some concerns. China’s stimulus (particularly credit growth) remains half-hearted compared to previous cyclical rebounds in 2012 and 2016. We expect a “phase one” ceasefire in the trade war. But even that is not certain, and it would not anyway solve the long-term structural disputes. To turn fully risk-on, we would want to see signs of a clear rebound in commodity prices and a depreciation of the US dollar, which have not yet happened (Chart 5). The 2020 Outlook proposed some milestones to monitor whether our scenario is playing out and whether we should turn more or less risk-on. We summarize these milestones in Table 1. Given these uncertainties, to hedge our pro-cyclical positioning we continue to recommend an overweight in cash, and we are instituting an overweight position in gold. Table 1Milestones For 2020 Chart 6Recessions Are Caused By Inflation Or Debt How will this cycle end? All recessions in modern history have been caused either by a sharp rise in inflation, or by a debt-fueled asset bubble (Chart 6). The Fed will likely fall behind the curve at some point as, after further tightening in the labor market, inflation starts to pick up. How the Fed reacts to that will determine what triggers the recession. If – as is most likely – it lets inflation run, that could blow up an asset bubble (and it was the bursting of such bubbles which caused the 2000 and 2007 recessions); if it decides to tighten monetary policy to kill inflation, the recession would look more like those of the 1970s and 1980s. But it is hard to see either happening over the next 12-18 months. Equities: As part of our shift to a more pro-risk, pro-cyclical stance, we are cutting US equities to underweight, and raising the euro zone to overweight, and Emerging Markets and the UK to neutral. US equities have outperformed fairly consistently since the Global Financial Crisis (Chart 7) – except during the two periods of accelerating global growth, in 2012-13 (when Europe did better) and 2016-17 (when EM particularly outperformed). The US today is expensive, particularly in terms of price/sales, which looks more expensive than the P/E ratio because the profit margin is at a record high level (Chart 8). The upside for US stocks in 2020 is likely to be limited. In 2019 so far, US equities have risen by 29% despite earnings growth close to zero. Multiples expanded because the Fed turned dovish, but investors should not assume further multiple expansion in 2020. Our rough model for US EPS growth points to around 8% next year (sales in line with nominal GDP growth of 4%, margins expanding by a couple of points, plus 2% in share buybacks). Add a dividend yield of 2%, and US stocks might give a total return of 10% or so. Chart 7US Doesn't Always Outperform Chart 8US Equities Are Expensive To play the cyclical rebound, we prefer euro zone stocks over those in EM or Japan. Euro zone stocks have a higher weighting in sectors we like such as Financials and Industrials (Table 2). European banks, in particular, look attractively valued (Chart 9) and offer a dividend yield of 6%, something investors should find appealing in this low-yield world. EM is more closely linked to China and commodities prices, which are not yet sending strong positive signals. We worry about the excess of debt in EM (Chart 10), which remains a structural headwind: the IMF and World Bank put total external EM debt at $6.8 trillion (Chart 11). Table 2Equity Sector Composition Chart 9Euro Zone Banks Are Especially Cheap Chart 10EM Debt Remains A Headwind Japan is another likely beneficiary of a cyclical recovery. But, before we turn positive, we want to see (1) signs of a stabilization of consumption after the recent tax rise (retail sales fell by 7% year-on-year in October), and (2) clarification of a worrying new investment law (which will require any investor which intends to “influence management” to get prior government approval before buying as little as a 1% stake in many sectors). For an asset allocator this combination of an improving manufacturing cycle and easy monetary policy looks very positive for risk assets. We raise the UK to neutral. The market has been a serial underperformer over the past few years, but this has been due to the weak pound and derating, rather than poor earnings growth (Chart 12). It now looks very cheap and, with the risk of a no-deal Brexit off the table, sterling should rebound further. The UK is notably overweight the sectors we like (Table 2). However, political risk makes us limit our recommendation to neutral. Although the Conservatives look likely to win a majority in this month’s general election, which will allow them to push through the negotiated Brexit deal, subsequent arguments over the future trade relationship with the EU will be divisive. Chart 116.8 Trillion In EM External Debt Chart 12The UK Has Been Derated Since 2016 Fixed Income: We remain underweight government bonds. Stronger economic growth is likely to push up long-term rates (Chart 13). Nonetheless, the rise in yields should be limited. The Fed looks to be on hold for the next 12 months, but the futures market is not far away from that view: it has priced in only a 60% probability of one rate cut over that time. The gap between market expectations and what the Fed actually does is what our bond strategists call the “golden rule of bond investing”. US inflation is also likely to soften over the next few months due to the lagged effect of this year’s weaker growth and appreciating dollar. We do not expect the 10-year US Treasury to rise above 2.5% – the current FOMC estimate of the long-run equilibrium level of short-term rates (Chart 14). Chart 13Growth Will Push Up Rates... Chart 14...But Only As Far As 2.5% Within the fixed-income universe, we remain positive on corporate credit. But US investment-grade bond spreads are no longer attractive and so we downgrade them to neutral (Chart 15). Investors looking for high-quality bond exposure should prefer Agency MBS, which trade on an attractive spread relative to Aa- and A-rated corporate bonds. European IG should do better since spreads are not so close to historical lows, risk-free rates should rise less than in the US, and because the ECB is increasing its purchases of corporate bonds. Chart 15US IG Spreads Are Close To Historical Lows Chart 16US Caa Bonds Have Some Catching Up To Do We continue to like high-yield bonds, both in the US and Europe. But we would suggest moving down the credit curve and increasing the weight in Caa-rated bonds. These have underperformed this year (Chart 16), mainly because of technical factors such as their overweight in the energy sector and relatively smaller decline in duration.3 With a stronger economy and rising oil prices, they should catch up to their higher-rated HY peers in 2020. To play the cyclical rebound, we prefer euro zone stocks over those in EM or Japan. Currencies: Since the US dollar is a counter-cyclical currency (Chart 17), we would expect it to weaken against more cyclical currencies such as the euro, and commodity currencies such as the Australian dollar and Canadian dollar. But it should appreciate relative to the yen and Swiss franc, which are the most defensive major currencies. We expect EM currencies to continue to depreciate. Most emerging markets are experiencing disinflation (Chart 18), which will push central banks to cut rates and inject liquidity into the banking system. This will tend to weaken their currencies. Overall, we are neutral on the US dollar. Chart 17The Dollar Is A Counter-Cyclical Currency Chart 18Disinflation Will Push EM Currencies Down Further Commodities: Industrials metals prices are closely linked to Chinese stimulus (Chart 19). A moderate recovery in Chinese growth should be a positive, and so we raise our recommendation to neutral. But with question-marks still lingering over the strength of the rebound in the Chinese economy, we would not be more positive than that. Oil prices should see moderate upside over the next 12 months, with supply tight and demand growth recovering in line with the global economy. Our energy strategists forecast Brent crude to average $67 a barrel in 2020 (compared to a little over $60 today). Chart 19Metals Prices Depend On China Chart 20Gold: Short-Term Negatives, But Remains A Good Hedge Gold looks a little overbought in the short term, and less monetary stimulus and a rise in rates next year would be negative factors (Chart 20). Nonetheless, we see it as a good hedge against our positive economic view going awry, and against geopolitical risks. If central banks do decide to let economies run hot next year and ignore rising inflation, gold could do particularly well. We, therefore, raise our recommendation to overweight on a 12-month horizon. Garry Evans, Senior Vice President Chief Global Asset Allocation Strategist garry@bcaresearch.com Footnotes 1 Please see "Outlook 2020," dated November 22 2019, available at bcaresearch.com 2 Please see, for example, last month’s GAA Monthly Portfolio Update, “Looking For The Turning-Point,” dated November 1, 2019, available at gaa.bcaresearch.com 3 For a more detailed explanation, please see US Bond Strategy Weekly Report, “Caa-Rated Bonds: Warning Signs Or Buying Opportunity,” dated 26 November 2019, available at usbs.bcaresearch.com GAA Asset Allocation
Highlights The seemingly interminable discussions around the “phase one” deal touted by US and Chinese trade negotiators notwithstanding, base metals prices are primed for a rally. The bottoming in base metals prices indicates industrial activity, particularly in EM economies, will turn higher, which will lift aggregate demand. The signaling from base metals markets is consistent with our proprietary industrial activity models, including our EM Commodity-Demand Nowcast, which continue to show industrial activity has bottomed and is turning up. Year-on-year growth in supply and demand of aluminum and copper – the largest components of the LMEX index – is diverging: Consumption is outpacing production, which is forcing inventories to draw hard. Any increase in demand will rally prices. Given our view, we are going long the LMEX index at tonight’s close. We recommend this as a tactical position at present and are including a 10% stop-loss; however, we could move this to a strategic position. Feature Despite the seemingly interminable back-and-forth between US and Chinese negotiators working on “phase one” of the Sino-US trade deal, base metals prices are signaling a revival of global economic growth, particularly in EM economies, in 2020. This is consistent with the growth indications being picked up in our proprietary models and reflected in global PMIs. The proximate cause of this revival in economic activity is the global monetary accommodation systemically important central banks have been pursuing for the better part of 2019, and the likely implementation of the long-awaited “phase one” Sino-US trade deal. Fiscal policy space remains available for systematically important economies – e.g., China, Germany and the US – and we expect such stimulus to be deployed next year. Fundamentally, global base metals inventories continue to draw hard, as the rates of growth in consumption and production diverge. Any recovery in organic growth – particularly in EM demand – would spark a rally. Base Metals In The Role Of Leading Economic Indicators We use metals prices to confirm the signals coming from the proprietary models we use to gauge economic growth prospects. Base metals prices often are used as indicators of global economic activity, particularly EM nominal and real GDP growth (Chart of the Week). Indeed, US Federal Reserve Board economists recently noted base metals prices are “often viewed by policymakers and practitioners as early indicators of swings in economic activity and global risk sentiment.”1 These metals prices are more sensitive to changes in global growth than other commodities (e.g., oil, which has its own idiosyncratic factors driving the evolution of prices). For this reason, we use these prices to confirm the signals coming from the proprietary models we use to gauge economic growth prospects. Our research indicates base metals prices are more closely linked to EM activity than DM activity, which makes them especially useful to our analysis of commodity markets generally, particularly oil. This is true also of our proprietary models by construction – EM demand drives commodity demand. Together, the base metals prices and our models contain complementary information that is useful in gauging growth prospects, particularly for EM economies (Chart 2).2 Chart of the WeekBase Metals Often Function As Gauges of GDP Growth Chart 2Base Metals Prices, BCA's GIA Model Both Are Sensitive to EM Growth Prospects We’ve found base metals prices to be timely indicators of turning points in EM GDP cycles, similar to the Fed’s findings (Table 1). In particular, the LMEX, IMF Base Metals index, and high-grade copper prices lead nominal and real EM GDP by anywhere from one to three months. However, for the entire sample correlation, which goes from 1995 to present, our Global Industrial Activity (GIA) index and Global Commodity Factor (GCF) have the highest correlation with nominal and real EM GDP. Table 1Correlation Between EM GDP And Indicators Of Global Activity Our proprietary indicators – GIA index, GCF, EM Import Volume Model (EMIV Model) – have been signaling a revival in commodity demand for several months (Chart 3). The model we’ve developed to track freight, similar to our EMIV Model, also is signaling a recovery in global trade (Chart 4).3 Chart 3BCA's Proprietary Models Also Closely Aligned with EM Growth Chart 4EM Import Volumes Closely Follow Freight Base Metals Stocks Drawing Hard Supply in the biggest components of the LMEX – copper and aluminum – is contracting, while demand is holding up or slightly growing. This is causing global stocks to draw hard, as incremental demand is met from inventory. Any stimulus coming out of China, which accounts for more than half of global base metals demand would propel prices in these markets higher. Global refined aluminum inventories have been drawing sharply as growth rates in production and consumption diverge (Chart 5). Global ali inventories now stand at 1.76mm MT, down 24% y/y. On average, global consumption has exceeded production by 7.2k MT this year. A similar set of fundamentals is forcing copper inventories to draw hard, as well, where consumption has exceeded production by 22.6k MT this year (Chart 6). Global copper inventories are down ~ 20% y/y, and continue to fall. Chart 5Ali Consumption Outpaces Production, Forcing Stocks To Draw Hard Chart 6Copper Stocks Draw Hard On Similar Fundamental Pressure The only thing preventing a sustained rally in these markets is organic demand growth, which the global accommodation by systematically important central banks is directed toward reviving. PBOC policymakers in China have drawn attention to their capacity for additional monetary stimulus, even though they have held off on goosing money and credit supply this year. A prolonged weakening of GDP growth in China likely would push policymakers to move to a more accommodative stance on monetary policy. Net, weak demand growth is offsetting upside price pressure as production contracts in key base metals markets. That said, EM demand ex-China for base metals likely will increase, if our economic activity gauges and prices are correct in the signals they are generating. Any stimulus coming out of China, which accounts for more than half of global base metals demand would propel prices in these markets higher. Expect Higher Base Metals Demand In 2020 Both our GIA index and base metals prices are good predictors of EM economic activity – overall EM and EM ex-China – which inclines us to expect growth to revive there as well. We are expecting base metals consumption to move higher next year, given the uptick we are seeing in base metals markets and from our economic activity gauges, particularly our EM Commodity-Demand Nowcast, which is a weighted combination of the individual models we use as a contemporaneous indicator (Chart 7).4 Chart 7Base Metals Demand Set To Recover in 2020 Chart 8Global Financial Easing Will Lift Base Metals Part of this will be led by improving Chinese demand, which accounts for more than 50% of base metals demand globally (Chart 8). We expect global financial conditions to remain supportive, and for total social financing in China to provide additional tailwinds to metal prices. This will keep aluminum demand in China stable-to-higher (Chart 9) along with copper demand (Chart 10). Both our GIA index and base metals prices are good predictors of EM economic activity – overall EM and EM ex-China – which inclines us to expect growth to revive there as well.5 Chart 9Chinese Aluminum Consumption... Chart 10...And Copper Demand Will Recover Given our view, we are going long the LMEX Index at tonight’s close. Bottom Line: Base metals prices and price indexes are telling a similar story to the gauges we’ve constructed to follow EM growth prospects, hence commodity demand prospects. Fundamentally, these markets continue to tighten, as supply growth remains significantly behind demand growth and stocks continue to draw hard. The y/y changes in the metals price indexes likely have bottomed and will be moving higher. Our GIA and GCF indicators concur. Taking the information contained in our proprietary indexes and base metals prices together drives our expectation for stronger base metals demand next year, which, given the state of supply growth and inventories, points to higher prices. Given our view, we are going long the LMEX Index at tonight’s close. We recommend this as a tactical position and will await confirmation of a robust recovery in demand before moving it to a strategic position. For that reason, we are including a 10% stop-loss; however, we could move this to a strategic position. Chart 11Global Economic Policy Uncertainty Also Works Against Base Metals Demand The same forces that are hindering a strong recovery in oil demand – chiefly the elevated level of global economic uncertainty, which keeps the USD well bid – also are at play in the base metals markets. USD strength keep the cost of base metals high in local-currency terms, which retards demand, and encourages increased supply at the margin, as the local-currency cost of production is suppressed (Chart 11). It will be difficult to go all-in on a commodity price rally until this uncertainty is resolved, or at least reduced. Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Senior Analyst Commodity & Energy Strategy HugoB@bcaresearch.com Market Round-Up Energy: Overweight. Brent prices closed at one-month high on Tuesday, surpassing $64/bbl. We expect this trend to continue as demand – mainly from EM – picks up in the coming months, as signaled by our proprietary indicators. Next week will be critical for the 2020 oil market balance. OPEC’s Joint Technical Committee will meet on December 3, OPEC on December 5, and OPEC and non-OPEC countries – i.e. OPEC 2.0 – on December 6. The current market consensus seems to be that OPEC 2.0 will agree to maintain the current production curtailments for three additional months, which would take their deal to keep 1.2mm b/d off the market to the end of June. Non-complying countries – mainly Iraq – can be expected to encounter pressure to further reduce production in line with their quotas. In our global oil market balances, we assume OPEC 2.0 will extend the current quota until year-end 2020. Nonetheless, this could be announced gradually throughout the year. Base Metals: Neutral. Base metals moved higher on Tuesday following positive developments in the US-China trade talks. Top negotiators from both countries spoke by phone earlier this week and Trump signal its administration was in the “final throes of a very important deal.”6 We expect a ceasefire to be signed this year, which will revive sentiment at the margin. Moreover, copper and aluminum prices will be supported by rising EM GDP next year (see this week’s front section for details). Copper prices are up 2% since last Thursday. Precious Metals: Neutral. Gold prices held above our $1,450/oz stop-loss despite the risk-on sentiment fueled by encouraging discussions between the US’s and China’s top negotiators. For next year, we believe the Fed will remain accommodative and will not risk de-railing the recovery pre-emptively, even as inflation moves above target. This will support gold prices. The Fed will only tighten more aggressively once inflation breakeven rates are well anchored in the 2.3% to 2.5% range identified by our US Bond strategists. Appearing before the New York Association of Business Economics this week, Fed Governor Lael Brainard argued for a flexible average inflation target that would allow for a sustained period of inflation running above 2% to offset the last decade of inflation averaging far below the current 2% target.7 This is part of the undergoing review of how the Fed conducts monetary policy, led by Vice Chair Richard Clarida. Ags/Softs: Underweight. The slow corn harvest forced the USDA to delay the end of its weekly crop progress report. 84% of corn harvest was complete, below the five-year average of 96%. This season’s corn harvesting has been the slowest since 2009. Wheat rallied on Monday amid fund buying, with its most active contract for March delivery up almost 3%. The rally continued from last week when European wheat prices climbed over unfavorable weather conditions, particularly in France, where the condition of the grain was revised down to a four-year low. The soybean market has faced pressure over doubts a Sino-US trade deal will be concluded. China has turned to Brazil to lock in supplies. The January 2020 futures contract on the CME sank to its lowest level since September. Footnotes 1 In a recent study, The Fed researchers used the IMF’s Base Metals index as a leading indicator of GDP growth. The IMF’s index is highly correlated with the London Metal Exchange Index (LMEX) we use from time to time to assess base metals markets. However, the LMEX, unlike the IMF’s index, does not include iron ore, which can, at times, cause these indexes to diverge. Please see Caldara, Dario, Michele Cavallo, and Matteo Iacoviello (2016), Oil Price Elasticities and Oil Price Fluctuations, International Finance Discussion Papers 1173, published by the Board of Governors of the Federal Reserve System. 2 We find two-way Granger-causality between EM GDP and the IMF’s base-metals price index, the LMEX index, and our Global Industrial Activity Index (GIA), Global Commodity Factor (GCF), and shipping rates proxy, which we discuss below. Close to 75% of the LMEX Index is accounted for by aluminum and copper. Aluminum account for 14% of the IMF index, while copper makes up 30% of the index. 3 The GIA index uses trade data, FX rates, manufacturing data, and Chinese industrial activity statistics to gauge current global industrial activity. These statistics are highly correlated with trade-related activity, which, since most of this involve trade in manufactured goods, is important to global industrial activity. The GCF uses principal component analysis to distill the primary driver of 28 different real commodity prices. The EMIV model tracks EM import volumes which are reported with a two-month lag by the CPB in the Netherlands, which we update to current time using FX rates for trade-sensitive currencies, commodity prices and interest rates variables. We are also following shipping indexes, which are highly correlated with global trade volumes. 4 Our EM Commodity-Demand Nowcast is a coincident indicator of commodity demand, comprised of our Global Industrial Activity (GIA) Index, and our Global Commodity Factor (GCF) and EM Import Volume (EMIV) models. 5 EM GDP ex-China is more correlated with base metals prices and our GIA index, while US GDP and IP is only slightly impacted by them. 6 Please see U.S.-China trade deal close, Trump says; negotiations continue published November 26, 2019 by reuters.com. 7 Please see Fed's Brainard calls for 'flexible' average inflation target published November 26, 2019 by reuters.com. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades TRADE RECOMMENDATION PERFORMANCE IN 2019 Q3 Commodity Prices and Plays Reference Table Summary of Closed Trades
Global growth expectations for oil demand are diverging sharply in the lead-up to OPEC 2.0’s December 5 meeting in Vienna. At the low end, the US EIA expects 2019 growth of 760k b/d this year, a sharply lower estimate than OPEC or the IEA projections. We…