commodity market outlook - numera analytics

Numera Analytics |

Commodity market outlook

Crude oil focus – Summer 2020

August 2020

Numera Analytics |

Investment recommendations

2

• All commodities – Overweight. Raw material prices should recover

further on improved global mobility, stronger industrial activity in China

and a weaker US dollar. We maintain absolute and relative overweight

positions for one-year holdings.

• Crude oil – Overweight. OPEC production cuts have helped restore the

market balance. A recovery in road traffic and stronger industrial activity

should lift consumption to ~ 98M / bbl by 2021. We now expect Brent to

exceed $60 / bbl by mid-2021.

Numera Analytics |

1. All commodities

Numera Analytics |

Broad commodity outlook

4

• Demand for industrial commodities has improved markedly in June

and July, fueled by stronger cyclical conditions in China. This also

helps explain differences in performance across commodities.

• A pick-up in global mobility and stronger industrial activity in China

should support commodity prices over the next 12 months.

• The dollar is weakening on stronger risk sentiment and monetary

stimulus. USD depreciation is now the most likely outcome.

• Both factors should lift overall commodity prices. There is a 76%

chance that the S&P GSCI benchmark will strengthen 12M out.

Numera Analytics |

Commodities demand is on the rise

5Source: Numera Analytics

Commodities activity index

Deviations from trend

Note: Index isolates common fluctuations across a panel of 18 industrial commodities, thereby abstracting

from market-specific (idiosyncratic) supply shocks. Index adjusts for USD moves.

-6

-4

-2

0

2

4

90 93 96 99 02 05 08 11 14 17 20

Sta

ndar

d de

viat

ions

Inflationary (↑)

Deflationary (↓)

Numera Analytics |

Fueled by stronger activity in China

6

China real activity index


Source: Numera Analytics

Note: Index isolates common fluctuations across a panel of 20 CN economic indicators, thus

abstracting from industry-specific (idiosyncratic) supply shocks.

-8

-4

0

4

03 05 07 09 11 13 15 17 19

Sta

ndar

d de

viat

ions

Numera Analytics |

Which explains differences in performance

7Source: S&P; Numera calculations

S&P commodity price index


-16%

-26%-10%

5.8%

24%

-80%

-40%

0%

40%

S&P GSCI Energy Agriculture Industrialmetals

Preciousmetals

Current Trough

Note: Energy represents 62% of the S&P GSCI index (of which crude oil is 59%). Agriculture

and metals are roughly 15% each.

Numera Analytics |

Given China’s greater influence on metals

8Source: WBMS, World Steel, USDA, BP; Numera calculations

China raw materials demand

% of global consumption

15%

28%

28%

51%

54%

Crude oil

Grains

Gold

Iron ore

Base metals

2019 2000

Note: Base (non-ferrous) metals are the sum of aluminum, copper, nickel,

lead and zinc. Grains include corn, wheat, soybean and rice.

Numera Analytics |

The US dollar continues to weaken

9Source: JP Morgan; Numera calculations

USD during deep recessions

Broad dollar appreciation

Note: Change in US dollar against currencies of major trading partners. Grey line shows change

versus mid-February. Green line shows evolution following Lehman bankruptcy.

Dollar has depreciated

4% since mid-May on

improved risk sentiment

1%

15%

-4%

1%

6%

11%

16%

0 15 30 45 60 75 90 105

Days following peak

2008/09

COVID-19

Numera Analytics |

And should depreciate further 12M out


USD appreciation probabilities

12-months ahead (%)

Note: Likelihood of USD strengthening against the CAD, EUR and GBP 12M out. Probabilities

above 50% indicate USD appreciation is the most likely outcome.

US dollar appreciation

much less likely than

early in the pandemic

30%

63%61%

34%

41% 42%

0%

20%

40%

60%

80%

CAD vs. USD EUR vs. USD GBP vs. USD

March July

Numera Analytics |

Overall commodity prices should recover

11


2010 = 100

Note: Fan chart shows 50 / 80 / 95% prediction intervals.

Source: History: S&P; Forecast: Numera Analytics

0

45

90

135

180

00 02 04 06 08 10 12 14 16 18 20 22

95% P.I.

Numera Analytics |

High likelihood of positive returns 12M out

12


12M probability forecast (%)

Note: Expected returns are the mean of the predictive distribution. Black dot is the 5% conditional value-

at-risk, expected future losses below the 5% quantile. Shaded area denotes likelihood of positive returns.

Source: Numera Analytics

-100% -70% -30% 0% 40% 70% 110% 140%

12M

pre

dict

ive

dist

ribut

ion

76%

22%

Positive

returns

-63%

Very high chance of

positive returns on

12M holdings

Left-tail risk:

Numera Analytics |

2. Crude oil

Numera Analytics |

Market review

Numera Analytics |

Oil market review: Demand

15

• Global oil consumption has increased sharply since bottoming out in

April, but remains ~7M bbl / day (6.7%) below pre-COVID levels.

• The pick up in demand is directly related to stronger global mobility, as

transportation accounts for 60% of worldwide oil usage.

• Within transportation, the bulk of the improvement reflects a recovery

in road travel, although traffic levels are far from normalizing. Jet fuel

demand is exceptionally low due to a collapse in air travel.

• Global industrial activity (16% of demand) also bottomed out in April,

improving in May and June as production in China normalized.

Numera Analytics |

Demand still far from pre-COVID levels

16

Change in global oil consumption (SA)

Mbbl / day and % (vs. 01/20)

Source: Energy Information Agency (EIA); Numera calculations

-6.7%

-10%-12%

-5.5%-5.9%

-11%

-2.3%

-8

-6

-4

-2

0

World US EZ JP Other DM CN Other EM

Mill

ion

bbl /

day

In April, consumption

down 19 Mbbl (-18%)

Note: Chart breaks down change in global oil consumption (SA) between January and July 2020.

Bars measure change in million bbl / day.

Numera Analytics |

Evolution mirrors global mobility trends

17

Mobility and COVID deaths

World ex. Latin America

Note: Green line shows changes in retail and recreation traffic versus Jan. 2020. Red line shows new

COVID deaths per million. Figures correspond to global aggregate excluding Latin America.

Source: ECDC, Google Mobility; Numera calculations

0

0.25

0.5

0.75

1

-64%

-48%

-32%

-16%

0%

07/03 04/04 02/05 30/05 27/06 25/07

Away-from-

home traffic (L)

New COVID

deaths (R)

Numera Analytics |

As 60% of demand tied to transportation

18

Global oil demand by end-use

% of total, 2019

60%

16%

10% 15%

TransportationIndustry

OtherBuildings

98M bbl/d

CN

Jet fuel

Source: BP Statistical Energy Review; Numera calculations

51%

8%

Gasoline

/ diesel

Numera Analytics |

Road traffic has yet to fully recover

19

Traffic congestion in metropolis

Year-on-year (%)

Source: TomTom Traffic Index

-57% -57%-52%

-36% -34%

-24%-17%

-12%

-100%

-75%

-50%

-25%

0%

S. Paulo CDMX NYC Paris N. Delhi London Shanghai Tokyo

Latest (02/08) Trough

Numera Analytics |

While dismal auto sales restrict growth

20

Vehicle sales by country

6M year-to-date, SA (%)

Source: Government agencies, Numera Analytics

-5%

-6%

-10%

-17%

-18%

-21%

-25%

-25%

-29%

-33%

-34%

-36%

JP

CN

EM

RU

World

US

DM

EZ

IN

MX

BR

UK

Note: Bars compare seasonally adjusted change in light vehicle (car + truck) sales

by country between 12/19 and 06/20.

Numera Analytics |

Jet fuel is the hardest hit end-use

21Source: International Civil Aviation Organization (ICAO)

COVID impact on global air traffic

Change in seating capacity (%)

Note: Bars compares seating capacity in international and domestic flights in June 2020

versus ‘business as usual’ (the ICAO baseline).

-90% -91% -91% -89%-100%

-75%

-50%

-25%

0%

World Asia Europe N. America

Domestic International

Numera Analytics |

Industrial activity is slowly recovering


COVID impact on industrial activity

Global output losses (%)

Note: Chart shows the realized performance of global industrial production during

deep recessions. Output losses measured as deviations from a no-shock baseline.

-20%

-15%

-10%

-5%

0%

0 2 4 6 8 10 12 14

Months after initial shock

Great

Recession

At the peak,

losses of 15%

COVID-19

Baseline

Numera Analytics |

Oil market review: Supply

23

• Oil production has fallen sharply since the OPEC+ April agreements.

OPEC output is now roughly 9M / bbl below capacity.

• In combination with stronger consumption, pledged and voluntary

production cuts have now restored the market balance.

• Despite tighter market conditions, above-ground inventories remain

exceptionally high, continuing to weigh on oil prices.

• Shale production in North America is down 2M bbl / day since March,

reflecting a sharp decline in active drilling rigs. With WTI in the low

$40s, shale producers are still at a high risk of bankruptcy.

Numera Analytics |

Production down sharply since April

24

Change in global oil production

April – July (million bbl/day)

Source: EIA; Numera calculations

Oil production 12%

lower than in April

-8.4

-2.4

-0.8 -0.5

+0.4

-11.9

-15

-10

-5

0

OPEC RU US CA RoW World

OPEC production

down 8.4M bbl /

day (-24%)

Numera Analytics |

OPEC operating well below capacity

25

OPEC crude oil supply

Million bbl / day

Source: EIA

Surplus capacity at an all-

time high of 9M bbl / day

due to OPEC+ agreement

20

24

28

32

36

06 08 10 12 14 16 18 20

Oil crisisGreat Recession S. Aramco attack

Production

Capacity

Numera Analytics |

Supply cuts have helped restore balance

26

Global crude oil balance

Millions of bbl / day

The crude oil balance is computed as the difference between global consumption and production.

Positive figures indicate excess demand.

Source: Energy Information Administration (EIA)

In April, excess oil

supply of 21M bbl

Balance restored

on rising demand,

falling supply

-27

-18

-9

0

9

97 99 01 03 05 07 09 11 13 15 17 19

Excess demand (↑)

Excess supply (↓)

Numera Analytics |

Inventories remain exceptionally high

27

OECD crude oil inventory

Millions of barrels, SA

Note: Commercial inventories only (excludes US Strategic Petroleum Reserves).

Source: EIA

United States

Other OECD

800

1200

1600

2000

97 99 01 03 05 07 09 11 13 15 17 19

Numera Analytics |

Although days of supply now diminishing

28

US crude oil inventories

Weekly days of supply



20

25

30

35

40

45

J F M A M J J A S O N D

2020

2015

2010-19

Much higher stock levels

than during 2015 oil crisis

Numera Analytics |

NA supply impacted by low oil prices

29

NA oil rigs and WTI spot

Rig count (SA) and USD / bbl

Source: Baker Hughes, World Bank; Numera calculations

0

30

60

90

120

0

500

1000

1500

2000

11 12 13 14 15 16 17 18 19 20

WTI spot (R)

Active oil

rigs (L)

Numera Analytics |

Shale production has been hard-hit

30

US oil production by region

March - July (millions bbl/day)


-11%

-24%-18%

-14%

-19%

5%

-2.4

-1.6

-0.8

0.0

0.8

US Bakken Eagle Ford Permian Other shale Non-shale

March-May May-July

WTI fell below break-even

on existing wells ($25-30),

prompting shut-downs

Numera Analytics |

Bankruptcy risk is still very high

31

US high yield bond spreads

Basis points (bps)

Source: ICE BofAML, Moody’s; Numera calculations

0

500

1000

1500

2000

01 03 05 07 09 11 13 15 17 19

Energy

high yield

High yield

Note: Spreads computed against the Moody’s Aaa investment-grade benchmark.

Very high premium, which

given ample Fed liquidity

implies high default risk

Numera Analytics |

Oil market review: Prices

32

• Oil prices have risen $25 since late April as improved mobility and

OPEC production cuts have helped restore the market balance.

• Trader sentiment remains bearish (as indicated by e.g. net short

positions), but is less of a drag on prices than in March and April.

• Weak economic activity and ample inventories explain most of the

drop in real oil prices year-to-date (-37% through 6M).

• We estimate Brent is currently trading at a ~ $10 discount versus its

‘fair’ value. The wedge is explained by bearish sentiment and low

precautionary purchases by end-users, given high stock volumes.

Numera Analytics |

Oil prices up $25 since late April

33

Oil market events timeline

Brent spot price (USD / bbl)

Source: FRED, Numera Analytics

0

20

40

60

80

28/08 27/09 28/19 26/11 26/12 27/1 25/2 25/3 27/4 5/28 25/6 7/27

2. Iranian General

Soleimani killed

1. Drone strike

Saudi Aramco

3. WHO first reports

COVID transmission

4. OPEC talks fail 5. OPEC+

agreement

6. Negative

WTI futures

7. Peak COVID

deaths globally

Numera Analytics |

Market volatility has diminished

34

Oil volatility and economic uncertainty

OVX index and World EPU

Source: CBOE; Baker, Bloom & Davis

0

150

300

450

600

0

45

90

135

180

07 09 11 13 15 17 19

Economic

Uncertainty (R)Oil market

volatility (L)

Note: Red line is the CBOEs crude oil ETF volatility index (OVX). Green line shows the GDP-weighted

global economic policy uncertainty index of Baker, Bloom and Davis.

Numera Analytics |

But trader sentiment remains ‘bearish’

35Source: Commodity Futures Trading Commission (CFTC)

Net long positions – Crude oil

Thousands of contracts

Net short positions suggest

bearish sentiment, but less

so than early in the pandemic

-60

-30

0

30

02 04 06 08 10 12 14 16 18 20

COVID-19

Note: Net long positions are the difference between long and short crude oil positions by traders

in the New York Mercantile Exchange (NYMEX).

Numera Analytics |

OPEC cuts are helping stabilize prices


Drivers decomposition – Oil prices

Year-to-date (%)

Note: Contribution of market drivers to change in real Brent prices vs. December 2019. ‘Demand’ captures changes

in broad economic activity and oil-specific demand shocks. Speculation is proxied by net long NYMEX oil positions.

-14%

-24%

-61% -60%-43%

-37%

-80%

-60%

-40%

-20%

0%

20%

01/20 02/20 03/20 04/20 05/20 06/20

Demand USD Production Stocks Speculation / prec.

Cuts helping

stabilize prices

Sentiment less of a drag

than in March and April

Numera Analytics |

Low demand remains the biggest drag


Drivers decomposition – Oil prices

6M year-to-date (%)

Note: Contribution of market drivers to change in real Brent prices 6M YTD (right-hand bar in previous chart).

-37%

-20%

-2%

10%

-15%

-10%

-48%

-36%

-24%

-12%

0%

12%

Real oilprices

Demand US dollar Production Stocks Speculation /precautionary

Weak demand still

the biggest drag

Numera Analytics |

Oil prices trading at a ~ $10 discount


Brent spot vs. ‘fair’ value

Risk premium – USD / bbl

Note: The oil risk premium is obtained by comparing the Brent spot price to its modelled ‘fair’ (or equilibrium) value. A

positive gap indicates oil is trading at a premium, e.g. due to geopolitical risk. A negative gap signals bearish sentiment.

Brent trading at

a ~ $10 discount

-50

-25

0

25

50

03 05 07 09 11 13 15 17 19

US

D /

bbl

Premium (> 0)

Discount (< 0)

Numera Analytics |

Market outlook

Numera Analytics |

Oil market outlook

40

• We expect global oil consumption to recover further, averaging ~ 98M

bbl / day in 2021. Given depressed air travel, however, it is unlikely

that oil will exceed 100M bbl (its Q4/19 level) before late 2021.

• Financial markets expect oil prices to rise 6% ($3 / bbl) by mid-2021.

In our view, prices have greater upside. There is a 78% chance that

Brent will exceed the July 12M futures contract ($46 / bbl). This

improves its relative appeal versus other risky assets.

• The high probability reflects further improvements in transportation

demand, alongside limited oil investments and a weaker USD outlook.

The fact that oil is still trading at a discount also improves its upside.

Numera Analytics |

Demand factors dominate at a 12M horizon


12M variance decomposition – Brent

Share of variability, 1986-20 (%)

39%

17%

11%

4%

12%16%

Demand US dollar

Production

Stocks

PrecautionarySpeculation

Note: Pie chart breaks down the contribution of market drivers to 12M (YoY)

fluctuations in real Brent prices. ‘Sentiment’ encompasses both precautionary

purchases by consumers (e.g. refineries) and speculative moves by traders.

Numera Analytics |

Oil demand should continue recovering


Global oil consumption

2020-21 outlook (Mbbl / day)

80 84 88 92 96 101 105 109

Pre

dict

ive

dist

ribtu

ion

Million bbl / day

2021

> 100M bbl

28%

2020

92

98

Demand should recover

further, but will likely fall

short of 100M bbl

Note: Chart shows probability distributions for average oil consumption worldwide in 2020 and 2021. Base scenario is

the mean of each distribution. Shaded area denotes the likelihood of oil demand exceeding 100M bbl / day in 2021.

Numera Analytics |

Aided by stronger economic activity


DM GDP outlook

Trillions of (2010) USD

35

45

55

65

06 08 10 12 14 16 18 20f 22f

95% P.I.

Note: Fan chart corresponds to 70% and 95% prediction intervals. Grey bars are OECD recession dates.

Numera Analytics |

Air travel is the weakest link

44Source: ICAO

Global air traffic seating capacity

Deviations from baseline (%)

Note: Chart compares global air traffic seating capacity relative to ‘business as usual’.

-100%

-80%

-60%

-40%

-20%

0%

20%

1/20 4/20 7/20 10/20 1/21

Projection

Domestic

International

ICAO expects air travel to

be down 25% 12M out, a

loss of ~ 2M bbl / day

Numera Analytics |

Inventory overhang should diminish

45Source: EIA Short-term Energy Outlook (STEO)

OECD crude oil inventories

Monthly days of supply

40

50

60

70

80

90

100

00 02 04 06 08 10 12 14 16 18 20

Interquartile range

Expect an inventory

drawdown as demand

strengthens


Numera Analytics |

Low CAPEX should keep NA supply tight

46Source: US BEA; Numera calculations

Largest declines in US oil investment

Quarter-on-quarter, SAAR (%)

-84%

-66%

-58% -55%

-78%

-66%-61%

-56%

-100%

-75%

-50%

-25%

0%

Q4/86 Q2/20 Q4/09 Q1/16 Q1/02 Q2/15 Q1/81 Q3/91

Oil-specific Recession

Note: Bars show the eight largest quarterly declines in US oil mining investment since 1970. Green

bars represent oil market-specific events. Blue bars correspond to declines during recessions.

Numera Analytics |

Markets expect Brent to hit $46 12M out

47Source: CME Group

Brent NYMEX futures

USD / bbl

Markets expect Brent

to rise by 6% to $46 /

bbl one-year out

39

42

46

20

30

40

50

1 3 5 7 9 11

US

D /

bbl

Contract maturity (months)

March 2020

May 2020

July 2020

Numera Analytics |

But market view is quite conservative


Crude oil price outlook

Baseline and probabilities

Brent Outlook Baseline

(USD / bbl)

Probabilities (%)

Horizon > July ($43) > Futures < $30 > $70

3M ahead $49 66% 64% 9% 5%

6M ahead $55 78% 75% 11% 16%

12M ahead $61 81% 78% 9% 35%

Note: Baseline forecast is the mean of the predictive distribution. Probabilities show the likelihood of exceeding specific thresholds over

a given horizon. These include the July month-end price (in red) and the futures price for a specific maturity.

Numera Analytics |

High probability of oil price inflation


Likelihood of higher Brent prices

12M ahead probability (%)

Note: Chart tracks the probability of Brent spot prices rising over a one-year period. Probabilities

above 50% (dashed red line) indicate oil price inflation is the most likely outcome.

81%

50%

0%

30%

60%

90%

05 07 09 11 13 15 17 19

Numera Analytics |

Improving the upside for oil investments


Crude oil vs. DM stocks

Excess returns probability

60%

50%

30%

40%

50%

60%

Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q1-20

12M

out

perf

orm

ance

pro

babi

lity

Note: Chart plots likelihood of crude oil investments outperforming DM stocks over a 12M

holding period. Probabilities above 50% indicate most likely outcome.

Numera Analytics |

Favourable risk-reward trade-off 12M out


Risk-reward comparison

12M investments

EM bonds EM stocksUS stocks

US bonds

EU stocks

Oil

0%

7%

14%

21%

0% 3% 6% 9% 12%

Rea

l exp

ecte

d re

turn

s

Downside risk

5

5

1

2

6

Worse risk-reward

4

3

Better risk-reward Despite being a very risky

investment, oil offers higher

risk-adjusted expected returns

Note: Numbers in red rank assets by their Omega ratio, a measure of investment quality

that compares expected returns to downside risk (defined as average expected losses).

commodity market outlook - numera analytics

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