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Highlights The Beirut blast calls attention to instability in the Shia Crescent. A turbulent push for political change will now ensue in Lebanon. Hezbollah’s and Iran’s political capital in Lebanon will suffer significantly. Lebanon is a red herring, but Iraq is a Black Swan. It is at risk of social unrest contagion. Iran’s financial troubles are weighing on its ability to maintain its sphere of influence. It is adopting a strategy of measured sabotage and deterrence against US interests in Iraq. The double whammy of low oil prices and pandemic is weighing on Saudi Arabia’s finances. Nevertheless it is prioritizing a cooperative relationship with Iraq. Iran could stage a major attack or President Trump’s poor election prospects could force him to “wag the dog.” Massive excess oil capacity will mute the oil market impact of a supply shortfall in Iraq. However, the risk becomes more relevant as demand recovers and markets rebalance in the second half of the year. Stay long Brent crude oil and gold. Feature The August 4 explosion at the Port of Beirut was devastating. It killed more than 220, wounded over 6000, left 300,000 homeless, and damaged buildings as far away as 9km from the site of the explosion. The blast added insult to injury to the country’s already troubled finances. Estimates for the cost of repair range anywhere between $5 billion and $15 billion. Global investors can largely write off the incident as an idiosyncratic shock. Even though emigration is likely to pick up, Lebanon’s population is only a third of Syria’s prior to its civil war. Assuming that a third of Lebanese become displaced abroad – a generous assumption more suitable to Syrian-style civil war than Lebanon’s situation – about 2 million Lebanese will be displaced, half of which will make their way to Europe or elsewhere outside the Middle East. As long as an antagonistic Turkey upholds its agreement with the EU, a mass exodus from Lebanon does not risk an unmanageable migrant crisis for Europe (Chart 1). Political tensions will rise and potentially lead to a populist backlash, given Europe’s battered economy. But Lebanon alone is not enough. The risk is broader Middle Eastern instability, which is a credible risk. Chart 1Middle Eastern Instability Could Fuel European Populism Thus Lebanon in itself is a red herring, but it is a bellwether for further unrest in the Middle East in countries that are not red herrings (Map 1). Map 1Lebanon Is A Red Herring; Iraq And Saudi Arabia Are Relevant A major conflict in Iraq is an underrated risk to global oil supply. The catastrophe calls attention to instability the Shia Crescent – a region in a tug of war between rival sectarian and geopolitical interests. Whereas the 2008 crisis led to the largely Sunni Arab states in the so-called Arab Spring, the 2020 crisis is piling pressure onto already unstable Shia states and regions: Iran, Iraq, Lebanon, Syria, and possibly eastern Saudi Arabia. Of particular significance is the fate of Iraq. Popular grievances are eerily similar to Lebanon’s. Baghdad is on shaky ground, yet the ramp up in US-Iran tensions going into the November US elections makes the threat of instability in Iraq more acute. As OPEC’s second ranked oil producer, a major conflict in Iraq poses an underrated risk to global oil supply. Supply losses are a tailwind to oil prices when market conditions are tight. However OPEC 2.0’s 8.3mm b/d of voluntary cuts means massive spare capacity is available globally to offset potential losses in Iraq, reducing the potential upside to oil prices. Nevertheless, this risk becomes more relevant as markets tighten on the back of a demand-side recovery, i.e. as balance is restored to the oil market and as excess spare capacity is eliminated. With oil markets likely rebalancing in 3Q20, unrest in Iraq poses an upside risk to our Commodity & Energy Strategy service’s expectation that 2H20 Brent prices will average $44/bbl and 2021 prices will average $65/bbl (Chart 2). Even though gold has already rallied 30% since mid-March, geopolitical risks including US-Iran tensions suggest any near-term selloff is a buying opportunity (Chart 3). The bullish gold narrative – geopolitical risks, falling dollar, and low real interest rates for the foreseeable future – remain intact even as the downturn gives way to a cyclical recovery. We continue to recommend gold on a strategic time horizon. Chart 2Oil Price Rally Remains Intact Chart 3Gold Is Due For A Breather Lebanon’s economic collapse highlights risks to other regional economies tied to the oil dependent Arab economies of the Persian Gulf. As the latter grapple with record low oil prices, production cuts, and the pandemic-induced recession, second-order effects will reverberate throughout the region, hitting economies such as Egypt and Jordan whose economic as well as political structures are intimately intertwined with Gulf Cooperation Council finances and policies. Lebanon’s Collapse Was Inevitable Lebanon was already going through an economic and financial meltdown before the explosion (Chart 4). Aside from the humanitarian loss, the economic impact is also profound. The country – highly dependent on imports of basic goods and suffering from food insecurity – must now contend with the loss of its main port and most of its grain reserves, destroyed in the explosion. As the dust settles, grief is morphing into anger on the streets. Regardless of whether the blast was due to happenstance or malice, the immediate cause was 2,750 tons of ammonium nitrate in storage for six years. The government was warned about the risks of the explosive chemicals at least four times this year – with the latest being on the day of the blast. Chart 4Beirut Port Explosion Accelerated Lebanon’s Collapse Mass protests are already taking place, calling on the government to be held accountable for criminal negligence. A controversial petition to return Lebanon to French mandate has gained more than 60,000 signatures. Prime Minister Hassan Diab’s seven-month-old cabinet has resigned. (It was put in place last year amid an earlier bout of unrest.) Official incompetence and neglect are in fact the best-case explanations for the explosion. Many questions remain unanswered. For instance, what triggered the fire? Israel swiftly denied any connection and offered humanitarian aid, while Hezbollah’s leader Hassan Nasrallah claimed to know more about the Port of Haifa than about Beirut Port. Early parliamentary elections and the cabinet’s resignation will not appease the protesters. Photos of Nasrallah, President Aoun, Speaker of Parliament Nabih Berri, and former Prime Minister Saad Hariri were among those hung by protesters in gallows in Martyrs’ Square over the weekend. Berri and Gebran Bassil are known to be the source of the cabinet’s decision-making power.1 They have veto over all decisions, large and small. During the mass protests in October 2019, Nasrallah stated that Hezbollah has two red lines:     Aoun must finish his term, which expires in 2022;     No early elections will be held, i.e. the speaker of the house will not be changed. While early elections have now been promised, these red lines highlight that corruption runs deep in Lebanon and opposition groups face an uphill battle against the establishment. A turbulent push for political change will now ensue. Hezbollah’s and Iran’s political capital in Lebanon will suffer significantly. Another Israeli confrontation with Hezbollah is not the base case but it could occur. Bottom Line: Lebanon is a failed state. As with the Arab Spring, the question is whether popular anger will prove contagious and spread to more market-relevant neighboring countries. The rally in the Israeli shekel in trade weighted terms since mid-March has already started to fizzle and may be tested further as turmoil in Lebanon raises the risk of confrontation. Contagion? In order for a geopolitical event in the Middle East to warrant investors’ attention, it must affect at least two of the following factors : (1) global oil supply, (2) geography of existential significance to a regional power, or (3) sectarian conflict which could lead to contagion. In this context, Lebanon is a red herring, but Iraq is not – therefore investors should watch to see if anything causes destabilization in Iraq. A decline in Iranian funds will weaken Tehran’s sphere of influence. Like Lebanon, Iraq is dominated by a highly corrupt sectarian system that has been plundering the wealth; people are suffering from rising rates of unemployment; and the regime is in the crosshairs of competing foreign agendas (Chart 5). Chart 5Iraqis And Lebanese Suffer Similar Grievances Iraq is in Iran’s sights because it aspires to establish a land bridge to the Mediterranean through a friendly “Shia Crescent” (Map 2). Iran’s modus operandi is to establish a presence in its neighbors’ domestic politics through Iran-backed factions. Map 2Iraq Essential To Iran’s Aspirational ‘Land Bridge’ To The Mediterranean Given the current state of Iran’s economy, it is not far-fetched to envision a significant drop in the funding of its foreign proxies (Chart 6). Historically these funds have followed the ebbs and flows of oil prices. For instance, in 2009, when faced with declining oil prices and US sanctions Iran’s funds to Hezbollah were estimated to have fallen by 40%. This happened again in 2014-16 and is not too different from today. Thus Iraq is at risk of contagion. Iran’s financial troubles are weighing on its ability to maintain its sphere of influence. Syrian fighters have reported paychecks being slashed, Iranian projects in Syria have stalled, and Hezbollah employees report to have missed paychecks and lost other benefits. Tehran’s finances are essential for Hezbollah’s survival.2 Iran’s proxies in Iraq are facing a similar fate.3 Chart 6Iran Suffering Under "Maximum Pressure" Bottom Line: Iraq faces an uptick in social unrest due to the poor living conditions and possible contagion from Lebanon. Meanwhile, Iran-backed groups there face a decline in funds from Tehran, which will send them searching for replacement funds. If Lebanon falters the world can usually ignore it but if Iraq falters the world will have to take notice. Saudi Arabia Prioritizes Revenue Over Growth Beirut’s foreign policy stances in recent years have been seen as appeasing Iran at the expense of Gulf Arab states.4 This trend coincides with a decline in Gulf Cooperation Council financing to Lebanon. Now the collapse in oil prices and pandemic have weighed on Saudi Arabia’s budget, which still depends on the energy sector for most of its revenues despite efforts to diversify. State revenues were down 49% year-on-year in Q2 pulling the budget deficit down to $29 billion (Chart 7). Riyadh is reassessing its priorities. Opting for revenue at the expense of growth, Riyadh has tightened the screws on its citizens. The government has had to pare back some of the benefits Saudis have long been accustomed to. The value-added-tax rate tripled from 5% to 15%, and a bonus cost-of-living allowance of $266 for public sector employees ended. The kingdom also announced plans to reduce spending on major projects by $26 billion – including some of those associated with Crown Prince Mohammed bin Salman’s reform agenda, Vision 2030. Chart 7Saudi Arabia Under Pressure From Double Whammy Severe economic turmoil poses a risk to the Saudi social contract in which citizens pledge allegiance to the ruling class in exchange for financial and social guarantees. The risk now is that the fiscal challenges dent Saudi citizens’ pocketbooks and thus impact social and political stability. However, oil prices are recovering to levels consistent with the kingdom’s fiscal breakeven oil price next year. The global economic recovery will begin to support the kingdom’s economy in the second half of this year (Chart 8). This will ease pressure on the budget and hence households. Moreover the slowdown is likely to hit foreign workers hardest and thus hasten the Saudization process. Foreign workers are the lowest hanging fruit and will be the first to find themselves jobless. In that sense the crisis is expediting some of Riyadh’s long-term reform targets. That said, there is still some risk of internal instability or even a palace coup. Tehran could incite sectarian tensions in the kingdom’s Eastern Province where an estimated 30-50% of the population is believed to be Shia. This is relevant given that nearly all Saudi oil production is located there. Chart 8KSA Benefits From EM GDP Growth ... Regarding the possibility of a palace coup, Crown Prince Mohammed bin Salman has spent this year cracking down on potential dissidents. Former Crown Prince Mohammed bin Nayef and King Salman’s only surviving full-brother Prince Ahmed bin Abdulaziz – both influential and well-liked – were among those detained in March. The kingdom’s contradictory policies – reform through repression – may eventually culminate in an overt political crisis. Though such a crisis may not occur until the time of royal succession. These economic and political challenges may force Saudi Arabia to adopt an inward stance. Its foreign interventions to date have been costly and come with little benefit – judging by the war in Yemen. It is also possible that Saudi Arabia, which is already the third largest defense spender globally, will try to strengthen its position vis-à-vis Iran. Crown Prince Mohammed bin Salman has already stated that the kingdom will pursue a nuclear program if Iran develops a nuclear bomb. This is relevant in today’s context with Iran no longer complying with restrictions to its nuclear program (Table 1). Saudi Arabia, like Iran, claims its nuclear program is for peaceful purposes – in order to generate nuclear power as part of efforts to diversify its economy.5 Table 1Iran No Longer Complying With 2015 Nuclear Deal Still, low oil prices tend to discourage petro states from engaging in conflict (Chart 9). Arab petro states may show restraint, at least until oil markets recover. Chart 9Low Oil Prices Discourage Petro States From Engaging In Conflict Overall weakness in oil-producing economies will hurt various countries that rely on remittances (Chart 10). The downturn will also hurt countries dependent on remittances from petro states in the region such as Egypt and Jordan. Bottom Line: The collapse in oil prices is forcing Saudi Arabia to reconsider its priorities and is expediting some long-term reforms. For now, it is adopting a pro-revenue rather than a pro-growth stance. This is likely to result in a focus inward for the kingdom. The implication is that countries that are leveraged to the petro-economies of the Gulf for remittances, bilateral aid, and capital flows will take a hit. These include Lebanon, Egypt, and Jordan. Chart 10Egypt And Jordan Also Vulnerable To Petro State Weakness Iraq Is The Prize Not unlike Lebanon, Iraq’s political class has been suffering a legitimacy crisis since protests erupted there last October resulting in the resignation of then-Prime Minister Adel Abdul Mahdi. However unlike Lebanon, Iraq is a significant geography for global investors. It is a major OPEC producer – second only to Saudi Arabia – accounting for 16% of the cartel’s production last year. The Iraqi oil minister’s first foreign trip was to the Saudi capital. This is not surprising. Iraq not only seeks Saudi leniency in OPEC 2.0 cuts, but also needs financial assistance to develop a natural gas field that will allow it to reduce dependence on Iran. Saudi Arabia also hopes to reduce Iraq’s dependence on Iranian natural gas and coax it into its sphere of influence. When it comes to crude oil, the additional 1mm b/d of voluntary cuts in June announced unilaterally by Saudi Arabia beyond its agreed OPEC 2.0 commitments are also a sign of Saudi willingness to accommodate Iraq and its non-compliance  (Chart 11).6 Saudi Arabia does not want to see Iraq’s newly elected government failing on the back of budgetary strain. In fact, al-Kadhimi is an opportunity for the Saudis. Formerly the director the National Intelligence Service with warm ties to the US, he is a champion of Iraqi sovereignty. Even though Iraq is being forced to compensate for past overproduction of oil in August and September, it was cajoled by the promise of a $500 million “bridging” loan from Saudi Arabia, to be repaid when oil markets recover. While financial assistance shows the kingdom’s commitment to Iraq, more significantly it reflects Riyadh’s desperation to revive oil markets and bring prices closer to its fiscal breakeven oil price amid the still uncertain demand outlook. Chart 11Saudi Arabia Willing To Accommodate Iraq Neither Saudi Arabia’s nor al-Kadhimi’s efforts are guaranteed to succeed in pulling Iraq out of Iran’s sphere. The prime minister received a rude awakening upon his arrest of 14 Kata’ib Hezbollah fighters in June on grounds of a plan to launch a rocket attack on US interest in Baghdad. They were swiftly released, and the case against them dropped. It is hard to curb Iranian influence. For its part, Iran stood behind al-Kadhimi’s nomination despite him being perceived as pro-Western. Tehran needed to avoid an anti-Iranian backlash on the streets of Baghdad if it had stood against him. Instead, Iran’s calculus was that it is in its best interest to swallow the pill and work with the new government at a time when Iraqi anger was targeted against US involvement rather than at Iranian interference. Prior to the US assassination of Qassem al-Suleimani and Abu Mahdi al-Muhandis on Iraqi soil, Iraqis were rebelling against Iran’s influence. That being said, Iran will maintain pressure on Iraq through continued attacks on US interests there (Table A1 in Appendix). This is also reflected in the July assassination of top Iraqi security expert Hisham al-Hashimi, who had previously advised the government on how to curb Iranian control. Iran was looking to make it to the US election in November without an escalation in tensions, hoping the US elections will result in a more dovish Democratic Party leadership averse to conflict with Iran. However, recent cyber-attacks on key Iranian infrastructure raise the likelihood that tensions will escalate ahead of the elections. The US is also threatening to maintain maximum sanctions even if the United Nations Security Council disagrees. As always, Iraq will find itself in the crossfire of any deterioration in relations. Bottom Line: Maintaining a cooperative relationship with Iraq aligns with both of Saudi Arabia’s interests there: limiting Iranian interference and supporting global oil markets through supply-side discipline. Iran will maintain pressure on Iraq’s new government through continued attacks on US interests. However, these attacks are supposed to fall short of killing US citizens and giving President Trump a reason to launch air strikes that could give him a patriotic boost in opinion polls. Nevertheless, tensions in the Gulf could escalate if Iran stages a major attack or if President Trump’s poor election prospects force him to “wag the dog.” In that case Iraqi oil supply would be disrupted. Investment Implications The Shia Crescent remains at heightened risk of instability on the back of Iran’s economic deterioration. Massive excess oil capacity will mute the oil market impact of a supply shortfall in Iraq. However, the risk becomes more relevant as demand recovers and markets rebalance in the second half of the year. Given that the Saudi loan will ensure Iraq’s commitment to compensatory production cuts in August and September, supply-side risks are a tailwind to oil prices in H2. The elevated risk of an escalation in US-Iran tensions also favors holding gold. President Trump’s polling has bottomed, yet he remains the underdog in the election – we maintain his odds of winning reelection are 35%. This raises the risk that he adopts a “war president” posture. Iran could become a target as the financial price of confronting Iran is negligible for Trump, whereas a major China confrontation could sink the stock market. The collapse in oil prices and pandemic have weighed on Saudi Arabia’s budget. It has adopted a revenue over growth posture. While this could be a risk to domestic stability, our base case is that it accelerates the kingdom’s long-term reforms. The oil market rout and economic downturn will hurt other countries in the region that are leveraged to Arab petro states – chiefly Egypt and Jordan. Investors should monitor risks to state stability in the coming years. Lebanon’s crisis will incentivize emigration, but given the relatively small size of its population, the major risk to Europe comes from any broader state failures and Middle Eastern instability rather than from Lebanon’s failure alone. If the Democratic Party wins the US election, as expected, then the US-Iran strategic détente will resume and Iran will get a lifeline. But the immediate transition will still be rocky given the Israeli and Saudi desire to exploit Iran’s extreme vulnerability and build leverage with Washington. The COVID-19 crisis heralds another round of Middle Eastern crisis, much as the 2008 crisis led to the Arab Spring. Stay strategically long Brent crude oil and gold. Also, in the wake of yesterday’s 15% pullback in silver, go strategically long silver (XAGUSD), which will continue benefiting from the same structural trends favoring gold but also outperform gold as the global economy recovers, given its greater industrial utility.     Roukaya Ibrahim Editor/Strategist Geopolitical Strategy RoukayaI@bcaresearch.com       Appendix Table A1Iran Adopting Deterrence Strategy In Iraq   Footnotes 1     Berri is of the Hezbollah-allied Amal Movement and has been parliamentary speaker since 1992, while Bassil is President Aoun’s son-in-law and president of the Free Patriotic Movement, which has the most seats in parliament. 2     Hezbollah gains legitimacy at home through its charity work that plugs the gap in services normally provided for by the government. 3    According to a commander of an Iran-backed paramilitary group in Iraq, Iran slashed its monthly funding to the top four militias by nearly half this year. Please see “Coronavirus and sanctions hit Iran’s support of proxies in Iraq,” Reuters, July 2, 2020. 4    Hezbollah has gained control over the foreign policy and Lebanon has recently taken stances that are seen as bowing to Iranian pressure. Lebanon did not attend a March 22, 2018 extraordinary Arab League meeting discussing violations committed by Iran. Prior to that, Beirut did not condemn Iranian attacks on a Saudi diplomatic mission in Tehran. 5    However an undisclosed facility for processing uranium ore in the northeast of the kingdom has recently appeared. 6    This is not unlike the US’s decision to extend sanction waivers by four months, allowing Baghdad to import Iranian energy in order to ensure that the new government of Prime Minister Mustafa al-Kadhimi can stand on its own and is not overly dependent on Iran.

Highlights The implementation of an oil-price hedging strategy by Russia’s government – consisting of put buying a la Mexico’s strategy for putting a floor under government revenues – would force us to re-consider our bullish view. On the one hand, systematically hedging forward revenues when deferred prices met the government’s budget threshold – currently $42.40/bbl for Urals crude oil – would tangibly increase Russia’s impact on forward price discovery.  This could become one of the tools available to OPEC 2.0 that allow it to influence the shape of the forward curve, perhaps supporting a backwardation benefiting member states.  On the other, hedging government revenues could free Russia and its oil companies from supporting the OPEC 2.0 framework, thus returning the swing-producer responsibilities for balancing the market to OPEC. Significant obstacles stand in the way of implementing a hedging program by the Russian government.  Hedging even volumes in futures could overwhelm the supply of liquidity in these markets, particularly in the deferred contracts: Average daily Brent volumes are ~ 700mm b/d for the entire market.1 Feature OPEC 2.0’s mostly successful production management scheme is a key factor driving our bullish view of oil. The coalition led by KSA and Russia is keeping output constrained while global demand recovers from the COVID-19 pandemic. This will tighten global supply-demand balances and reduce inventories (Chart of the Week). This dynamic drives our expectation that prices will remain around current levels for 2H20 – at ~ $44/bbl for Brent – and, based on our modeling, push prices to $65/bbl on average next year. At the end of the day, OPEC 2.0 is a quasi-cartel operating under a Declaration of Cooperation signed by the original cartel and non-OPEC producers led by Russia in late 2016 and renewed and expanded periodically since then. Without this cooperation, it is highly doubtful oil prices would have recovered from the demand-destruction visited upon the market by the COVID-19 pandemic as quickly as they have. Chart of the WeekOPEC 2.0 Production Discipline Underpins Our Bullish Oil View Nor is it likely the inventory overhang dogging markets since the end of the 2014-16 market-share war launched by KSA, then compounded by waivers on Iranian oil-export sanctions in November 2018 by the US, could have been addressed as effectively as they were prior to the pandemic’s arrival. In all likelihood, a punishing continuation of low prices would have been required to destroy enough production globally – in OPEC and ex-OPEC – into 2017 for prices to finally recover. OPEC 2.0’s Days Numbered? We have long argued the OPEC 2.0 framework benefitted Russia and KSA more than unrestrained production, which, left unchecked, would keep prices closer to $30/bbl than $70/bbl. The leadership of Russia’s oil sector has been a reluctant participant in the coalition’s production-management scheme. This was apparent in every meeting of OPEC 2.0 up to an including it March 2020 meeting in Vienna, where an extension of the coalition’s production cut advanced by KSA was nixed by Russia. A brief market-share war followed just as the COVID-19 pandemic started advancing beyond China’s borders, resulting in lockdowns and unprecedented demand destruction. OPEC 2.0 was then reconstituted, and the production cuts it agreed have restored balance to the market. However, this balance is tentative. On the demand side, a second wave of the pandemic is spreading, and with it the risk widespread lockdowns again are mandated. This would lead to another round of demand destruction if the scale of the lockdowns approached that of the first wave seen in 1H20. This is not our base case, but it is a risk we have been highlighting repeatedly in our reports. We find KSA’s GDP increases ~ 1% when EM oil consumption goes up by one percent, while Russia’s GPD increases by ~ 0.5%. On the supply side, we have long argued the OPEC 2.0 framework benefitted Russia and KSA more than unrestrained production, which, left unchecked, would keep prices closer to $30/bbl than $70/bbl.2 In the current arrangement, KSA and Russia are able to grow their GDPs as they see fit, with KSA apparently targeting EM sales, which will grow as those economies grow, and Russia apparently pursuing a strategy that centers on making its barrels available to trading markets and EM buyers (Charts 2A and 2B).3 Chart 2AKSA Benefits From EM GDP Growth ... Chart 2B... As Does Russia This arrangement can endure as long as the OPEC 2.0 members' revenues – particularly those of its leadership – are at risk from uncontrolled production – e.g., another market-share war. A New Game? If, however, one or both of OPEC 2.0's leaders is able to hedge its revenue, the game changes. If it is Russia, as President Putin has suggested, and the government is able to hedge the ~ 40% or so of the federal budget covered by oil and gas revenues, the game changes profoundly (Chart 3). The only motive for Russia to participate in the OPEC 2.0 framework is to keep prices from collapsing below the level assumed for budgeting purposes. This is $42.40/bbl for Urals, the benchmark Russian crude traded in global markets (Chart 4). At present, OPEC 2.0 production discipline is contributing to holding prices just above this level, as member states calibrate their output consistent with the recovery in global demand. Chart 3Russia's Budget Relies Heavily On Oil & Gas Revenues Chart 4OPEC 2.0 Cuts Contribute To Stronger Urals Crude Price Of course, if Russia were able to hedge the oil and gas revenues funding its budget, this production discipline would not be needed in the short term – it could produce at will knowing there is a floor under revenue. Crude-oil futures and options markets cannot handle the volume Russia likely would require to fully hedge the oil and gas revenues funding its budget. That’s a big IF, however. The demand destruction caused by the COVID-19 pandemic in the first five months of this year was responsible for the loss of up to 25% of Russia’s oil, gas and coal exports, which translated into a 50% loss of export revenues and a 25% decline in budget as prices and volumes fell, according to the Carnegie Moscow Center.4 Russia’s GDP is expected to fall by 6% this year, according to the World Bank, in the wake of the pandemic.5 Crude-oil futures and options markets cannot handle the volume Russia likely would require to fully hedge the oil and gas revenues funding its budget. Brent futures and options open interest on the Intercontinental Exchange (ICE) total 3.34 billion barrels on July 21, 2020 (Chart 5). This is spread across the whole term structure. Worthwhile considering that just 1mm b/d of production hedged for 1 year = 365mm bbls = ~ 11% of total Brent open interest. Such a large concentration of open interest accounted for by one entity – even if it is a bona fide government – would, perforce, raise regulators concerns over market manipulation.6 Chart 5Russia's Hedging Volumes Likely Would Swamp Futures Markets Broadening OPEC 2.0’s Tool Kit The successful implementation of a hedging strategy by Russia would force us to re-consider our bullish oil view. Even though we view the likelihood Russia’s government will adopt a full revenue hedging program to be low, we think the argument that it – and KSA – could hedge discrete exposures over time makes sense. These markets exist to process information via trading activities. If there are discrete exposures Russia hedges that keep Brent forward curves backwardated, for example, this would affect the hedging economics of US shale producers protecting their revenues one to three years into the future (Chart 6). Hedging in future while keeping production in the prompt-delivery months in line with OPEC 2.0 quotas would support a backwardation. Prices in the deferred part of the curve would be lower than at the front, which would produce less revenue for hedgers, while higher prices in the front of the curve would redound to OPEC 2.0 member states’ benefit, whose term contracts and spot sales typically reference spot prices. Chart 6Discrete Hedging Could Support Backwardation This would tangibly increase Russia’s impact on forward price discovery. Indeed, hedging could become one of the tools available to OPEC 2.0 that allow it to influence the economics of oil production by US shale producers, among others. Bottom Line: The successful implementation of a hedging strategy by Russia would force us to re-consider our bullish oil view – there would be little or no need for the Russian government to demand its producers adhere to an OPEC 2.0 production quota if the government is able to hedge its revenue. (Whether those producers choose to hedge is another matter entirely.) We do not give a high probability to the Russian government adopting a Mexico-style hedging program to put a floor under its budget revenues. We cannot dismiss the possibility that discrete exposures could be hedged to support a backwardated forward curve structure going forward, however.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com     Commodities Round-Up Energy: Overweight Brent prices have been remarkably steady at ~ $43/bbl in July, balancing expectations of a sustained global economic recovery and the risk of a second wave of lockdowns. Rising COVID-19 cases in the US pose a risk to oil demand as the US still represents ~ 20% of global demand. Brent futures spreads – 1ST vs. 12th – moved from -$1.38/bbl to -$3.29/bbl, suggesting the pace of drawdowns in inventories slowed in recent weeks. Nonetheless, we continue to expect a persistent supply deficit in 2H20 and 2021, pushing prices above $60/bbl next year.7 Base Metals: Neutral Base metals are mostly flat since last week after moving up 23% since March. A continuation of recent trends is largely dependent on China’s economic outlook as it represents ~ 50% of global BM demand. The IMF expects China’s GDP to reach its pre-crisis level somewhere this quarter and to resume trend growth afterward (Chart 7). Monetary policy needs to remain accommodative for such a recovery to occur. Historically, policymakers in China have favored easy monetary policy for at least three quarters following a crisis. This implies the accommodative stance should be maintained until year-end, supporting metals’ prices.8 Precious Metals: Neutral We are putting a stop-loss of $1,850/oz on our long gold recommendation at tonight’s close (Chart 8). We remain constructive on the gold market, but believe the market is out over its skis presently, as investors have realized central banks globally likely will not move to raise rates this year, or perhaps even next year. The Fed, in particular, has been consistently signaling its intent to remain accommodative in its effort to reflate the US economy.9 Ags/Softs:  Underweight The USDA this week reported 72% of the corn crop was in good to excellent condition for the week ended July 26 in the 19 states accounting for 91% of the crop last year. For beans, 72% of the crop was reported in good to excellent condition, up sharply from last year’s level of 54% in the 18 states accounting for 96% of the crop. Chart 7 Chart 8   Footnotes 1     Russia came close to setting up an oil-hedging program in 2009, following the collapse of oil prices during the Global Financial Crisis (GFC). Please see Russia considers oil price hedges modeled on Mexico’s system published by worldoil.com July 22, 2020. 2     See, e.g., How Long Will The Oil-Price Rout Last?, which we published March 9, 2020. It is available at ces.bcaresearch.com. 3    In previous research, we found KSA real GDP (in 2010 constant USD published by the World Bank) benefits more than Russia when EM GDP growth expands, while Russia benefits more from increases in Brent prices. For this report we updated that analysis and looked only at EM oil consumption, while including lagged USD and Brent crude oil prices as common regressors. We find KSA’s GDP increases ~ 1% when EM oil consumption goes up by one percent, while Russia’s GPD increases by ~ 0.5%. Please see our earlier research report entitled Sussing Out OPEC 2.0's Production Cuts, U.S. Waivers On Iran Sanctions, which we published on April 11, 2019, when KSA and Russia again were contesting the necessity of production cuts. 4    Please see The Oil Price Crash: Will the Kremlin’s Policies Change?, by Tatiana Mitrova, which was published by the Carnegie Moscow Center July 8, 2020. Russia presently exports ~ 5mm b/d of oil, which is down from earlier levels of ~ 5.5mm b/d due to the OPEC 2.0 cuts it is observing. We do not have the disposition of revenue sources funding Russia’s budget (primarily oil and gas), and therefore cannot calculate the precise hedging volume Russia’s government would need to cover to provide a floor for all of its fiscal obligations. 5    Please see Recession and Growth under the Shadow of a Pandemic published by the Bank July 6, 2020. 6    Russia’s central bank came out against the hedging proposal, citing the lack of liquidity available for large-scale programs. Please see Russia central bank opposes using wealth fund to hedge oil revenues, governor says published by uk.reuters.com July 24, 2020. 7     Please see Balance Of Oil-Price Risk Remains To The Upside, which we published last week. It is available at ces.bcaresearch.com. 8    Please see Chinese Stocks: Stay Invested published by BCA Research’s China Investment Strategy July 22, 2020. It is available at cis.bcaresearch.com. 9    Please see What A Weaker US Dollar Means For Global Bond Investors published by BCA Research’s Global Fixed Income Strategy July 28, 2020.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q2 Commodity Prices and Plays Reference Table Trades Closed in Summary of Closed Trades

Highlights The EU’s €750 billion fiscal package, along with another round of US stimulus likely exceeding $1 trillion, will support global oil demand. On the supply side, OPEC 2.0’s production discipline likely holds, and US shale output will remain depressed. These fundamentals, along with a weakening USD, will continue to support Brent prices, which are up 129% from their lows in April. China’s record-setting crude-oil-import surge during the COVID-19 pandemic – averaging 12.7mm b/d in 1H20, up 28.5% y/y – is at risk of slowing in 2H20, as domestic storage fills. Supply-side risks are acute: Massive OPEC 2.0 spare capacity – which could exceed 6mm b/d into 2021 – will tempt producers eager to monetize these to boost revenue. On the demand side, COVID-19 infection rates are surging in the US. Progress on vaccines notwithstanding, politically intolerable public-health risks in big consuming markets could usher in demand-crushing lockdowns again. Economic policy uncertainty remains elevated globally, but the balance of risks continues to favor the upside: We expect 2H20 Brent prices to average $44/bbl, and 2021 prices to average $65/bbl, unchanged from last month’s forecast. Feature We are marginally lifting our forecast of average 2020 Brent prices to $43/bbl, with 2H20 expected to average $44/bbl, and $65/bbl next year, unchanged from June. Marginal improvements to preliminary supply and demand estimates earlier in the COVID-19 pandemic support the thesis that fundamentals will not derail the massive oil-price rally that lifted Brent 129% from its April 21 low of $19.30/bbl. A weakening US dollar, and the expectation this trend will continue, also is supportive to commodities in general, oil in particular. As a result, we are marginally lifting our forecast of average 2020 Brent prices to $43/bbl, with 2H20 expected to average $44/bbl, and $65/bbl next year, unchanged from June (Chart of the Week). The three principal oil-market data providers – the US EIA, IEA and OPEC – raised demand estimates at the margin for 1H20, particularly for 2Q20, the nadir for global oil consumption. The EIA’s estimate for 2Q20 demand shows an upward revision of 550k b/d from last month’s estimate. On the supply side, the EIA estimates global output fell -8.1mm b/d in 2Q20, a -300k b/d downward revision vs. its estimate from last month (Chart 2). Chart of the WeekOil Price Rally Remains Intact Chart 2OPEC 2.0, US Shale Production Cuts Deepen We continue to expect the drawdown in storage levels to flatten – and then backwardate – the forward curves for Brent and WTI. After accounting for this better-than-expected fundamental performance, we now expect global supply to fall 5.9mm b/d in 2020 and to increase 4.2mm b/d in 2021. On the demand side, we now expect 2020 demand to fall 8.1mm b/d vs. 8.9mm b/d last month, and for 2021 demand to rise 7.8mm b/d vs 8.5mm b/d in June (Chart 3). This will keep the physical deficit we’ve been forecasting for 2H20 and 2021 in place, allowing OECD storage to fall to 3,026mm barrels by year-end and to 2,766mm barrels by the end of next year (Chart 4). Chart 3Supply-Demand Balances Tighten ... Chart 4... Leading To Deeper Storage Draws ... We continue to expect the drawdown in storage levels to flatten – and then backwardate – the forward curves for Brent and WTI (Chart 5). One caveat, though: We are watching floating storage levels closely, particularly in Asia: The current structure of the Brent forwards does not support carrying floating inventory, but it’s been slow moving lower (Chart 6). This could reflect a slowing in China’s crude-oil import surge, which hit record levels in May and June. Chart 5... And More Backwardation In Brent And WTI Forwards ... Chart 6… Even As Floating Storage In Asia Remains Elevated China’s Crude-Import Binge Ending? There is a non-trivial risk China’s crude-buying binge during the COVID-19 pandemic, which supported prices during the brief Saudi-Russian market-share war in March and the collapse in global demand in 2Q20, may have run its course (Chart 7).1 At the depths of the global pandemic in 2Q20, China’s year-on-year (y/y) crude imports surged 15%. According to Reuters, China’s crude oil imports totaled 12.9mm b/d in June, a record level for the second month in a row.2 Much of this was converted to refined products – chiefly gasoline and diesel fuel – as China’s demand recovered from the global pandemic (Chart 8). China’s 208 refineries can process 22.3mm b/d of crude, according to the Baker Institute at Rice University in Houston.3 Refinery runs in June were estimated at just over 14mm b/d by Reuters. Chart 7China's Crude Import Binge Stalls Chart 8China's Refiners Lift Runs As Imports Surge A reduction in China’s crude imports would force barrels to either remain on the water until refiners find a need for it, or demand for refined products increases in the region. China imports its oil into 59 port facilities, which can process ~ 16mm b/d. Storage is comprised of 74 crude oil facilities holding ~ 706mm barrels, and 213 refined-product facilities with capacity to hold ~ 357mm barrels of products (Map 1). By Reuters’s count, ~ 2mm b/d of crude went into storage in the January-May period, while close to 2.8mm b/d was stored in June. Official storage data is a state secret, so it is not possible to determine whether China’s crude and product storage is full. However, if crude oil imports remain subdued – and floating storage in Asia remains elevated – we would surmise the Chinese storage facilities are close to full. Additionally, any sharp and sustained increase in refined product exports would indicate storage is brimming. Map 1Baker Institute China Oil Map A reduction in China’s crude imports would force barrels to either remain on the water until refiners find a need for it, or demand for refined products increases in the region. We expect the latter condition to obtain, in line with our expectation of a global recovery in demand, even though China remains out of sync with the rest of the world presently. China was the first state to confront the pandemic and first to emerge out of it; its trading partners still are in various stages of recovery (Chart 9). Chart 9China's Demand Recovery Likely Will Be Choppy OPEC 2.0’s Remains Sensitive To Demand Fluctuations OPEC 2.0’s leaders – the Kingdom of Saudi Arabia (KSA) and Russia – also managed to secure additional “compensation” cuts from members that have missed their targets in previous months. The asynchronous recovery in global oil demand poses a unique problem for OPEC 2.0 this year and next. OPEC 2.0 will be easing production curtailments to 7.7mm b/d beginning in August from 9.6mm b/d in July, on the advice of its Joint Ministerial Monitoring Committee (JMMC). This is a decision that will be closely monitored, amid rising concern over the speed of demand recovery in the US and EM economies, due to mounting COVID-19 cases (Chart 10). The surge in US infections relative to its trading partners is of particular concern, given the size of US oil demand (Chart 11). In 2H20, we expect US demand will account for close to 20% of global demand, much the same level it was prior to the pandemic (Table 1). Chart 10COVID-19 Infections Surge In The US Chart 11US COVID-19 Infections Are A Risk To Global Commodity Demand Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) OPEC 2.0’s leaders – the Kingdom of Saudi Arabia (KSA) and Russia – also managed to secure additional “compensation” cuts from members that have missed their targets in previous months, bringing the actual increase in production closer to 1-1.5mm b/d. Together, Iraq, Nigeria, Kazakhstan, and Angola, over-produced versus their May and June targets by ~ 760k b/d. In our balances estimates, as is our normal practice, we haircut these estimates and use a lower compliance level that those stated in the official OPEC 2.0 agreement. In the case of these producers, we assume they will compensate for ~ 70% of their overproduction, bringing the adjusted cuts to ~ 8.3mm b/d. This should be sufficient to maintain the current supply deficit in oil markets that continues to support Brent prices above $40/bbl. However, the reliance on laggards’ extra cuts to balance markets adds instability. There is a lot of supply on the sidelines from the OPEC 2.0 cuts and the restart of the Neutral Zone shared by Saudi Arabia and Kuwait. The JMMC is continually assessing supply-demand balances and remains focused on making sure the totality of the cuts does not fall on a small group of countries. It reiterated its position that “achieving 100% conformity from all participating Countries is not only fair, but vital for the ongoing rebalancing efforts and to help deliver long term oil market stability.” In June, OPEC 2.0’s overall compliance was 107% – mostly reflecting over-compliance from KSA, the UAE, and Kuwait.4 There is a lot of supply on the sidelines from the OPEC 2.0 cuts and the restart of the Neutral Zone shared by Saudi Arabia and Kuwait. The US EIA estimates that within the original OPEC cartel spare capacity will average close to 6mm b/d this year, the first time since 2002 that it has exceeded 5mm b/d. On top of this, there’s the looming downside risk of a new Iran deal if Democrats win the White House and Congress in US elections in November, and a possible restart of Libyan exports this year. Watch The DUCs In The US With WTI prices averaging $41/bbl so far in July, we continue to expect part of previously shut-in US production to come back on line in July, August and September. Nonetheless, the negative effect of the multi-year low rig count will be felt heavily in 4Q20 and 1Q21 and will push production lower. The rig count appears to be bottoming but is not expected to increase meaningfully until WTI prices move closer to $45-50/bbl. On average it takes somewhere between 9-12 months for the signal from higher prices to result in new oil production flowing to market in the US. As the rig count moves back up in 2021, its effect on production will be apparent only in late-2021. However, the massive inventory of drilled-but-uncompleted (DUC) wells in the main US tight-oil basins will provide a source of cheaper new supply, if WTI prices remain above $40/bbl. DUCs are 30-40% cheaper to complete compared to drilling a new well from start. We expect DUCs completion will begin adding to US crude output in 1Q21, and that this will continue to be a source of supply beyond 2021. Bottom line: Global economic policy uncertainty remains elevated, albeit off its recent highs (Chart 12). We expect this uncertainty to continue to wane, which will allow the USD to continue to weaken. This will spur global oil demand, and will augment the fiscal and monetary stimulus to the COVID-19 pandemic undertaken globally. Chart 12Global Policy Uncertainty Remains High, Which Could Support USD Demand Nonetheless, the global recovery remains out of sync, which complicates OPEC 2.0’s production management, and markets’ estimation of supply-demand balances. Uneven success in combating the pandemic keeps the risk of lockdowns on the radar in the US. Policy is driving oil production at present, and, given the temptation to monetize spare capacity, the supply side remains a risk to prices. We continue to see upside risk dominating the evolution of prices and are maintaining our expectation Brent prices will average $44/bbl in 2H20 – lifting the overall 2020 average to $43/bbl – and $65/bbl next year. Our expectation WTI will trade $2-$4/bbl below Brent also remains intact.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Associate Editor Commodity & Energy Strategy HugoB@bcaresearch.com Fernando Crupi Research Associate Commodity & Energy Strategy FernandoC@bcaresearch.com     Commodities Round-Up Energy: Overweight Canadian oil production averaged 4.6mm b/d in 2Q20 vs. 5.5mm b/d in 2Q19, based on EIA estimates. The lack of demand from US refiners – crude imports from Canada fell by 420k b/d y/y during the quarter – and close to maxed-out local storage facilities pushed prices below cash costs, forcing the shut-ins of more than 1mm b/d of crude production. Canadian energy companies started releasing their 2Q20 earnings this week and analysts expect the results to be one of the worst ever recorded, reflecting the extent of the pain producers felt during the COVID-19 shock. Base Metals: Neutral High-grade iron ore prices (65% Fe) were trading above $120/MT this week, on the back of forward guidance from the commodity’s top exporter, Brazilian miner Vale, which suggested exports will be lower than had been previously estimated this year, according to Fastmarkets MB, a sister service of BCA Research. This is in line with an Australian Department of Industry, Science, Energy and Resources analysis in June, which noted, “The COVID-19 pandemic appears to have affected both sides of the iron ore market: demand disruptions have run up against supply problems localised in Brazil, where COVID-19-related lockdowns have derailed efforts to recover from shutdowns in the wake of the Brumadinho tailings dam collapse” (Chart 13). Precious Metals: Neutral Our long silver position is up 17.5% since it was recommended July 2. We are placing a stop-loss on the position at $21/oz, our earlier target, given the metal was trading ~ $22/oz as we went to press. The factors supporting gold prices – chiefly low real rates in the US, a weakening dollar and global monetary accommodation, also support silver prices. However, silver also will benefit from the recovery in industrial activity and incomes we anticipate in the wake of global fiscal and monetary stimulus, which will drive demand for consumer products (Chart 14). Ags/Softs:  Underweight Lumber prices have more than doubled since April lows. The uncertainty brought by the COVID-19 health emergency altered the perception of future housing demand and, by extension, lumber demand, to the point that mills responded by substantially decreasing capacity utilization rates. However, in the wake of global monetary and fiscal stimulus, housing weathered the storm better than expected. Furthermore, a surge in DIY projects from individuals working from home at a time of reduced supply contributed to the current state of market shortage. Chart 13Lower Supply Supports Iron Ore Prices Chart 14Silver Favored Over Gold         Footnotes 1     In our reckoning, a non-trivial risk is something greater than Russian roulette odds – i.e., a 1-in-6 chance of an event occuring. Re the ever-so-brief Saudi-Russian market-share war, please see KSA, Russia Will Be Forced To Quit Market-Share War, which we published March 19, 2020. It is available at ces.bcaresearch.com. 2     Please see COLUMN-China's record crude oil storage flies under the radar: Russell published by reuters.com July 20, 2020. 3    The Baker Institute’s Open-Source Mapping of China's Oil Infrastructure was last updated in March 2020. The map is “a beta version and is likely missing some pieces of existing infrastructure. The challenge of China’s geographic expanse — it is roughly the same area as the U.S. Lower 48 — is compounded by a lack of transparency on the part of China’s government,” according to the Baker Institute. 4    In our supply-side estimates, we used IEA estimates of cuts for June this month. This doesn’t change the overall estimate of cuts from our earlier analysis; however, it slightly changes how the 9.7mm b/d was split between OPEC 2.0 members. the official eased cuts are 7.7mm b/d from 9.7mm b/d in May-June-July, but it actually is closer to 8.3mm b/d accounting for the compensation from the countries mentioned above.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q2 Commodity Prices and Plays Reference Table Trades Closed in 2020 Summary of Closed Trades

Highlights Falling volatility in oil-trading markets will remain suspect while the massive economic uncertainty plaguing global markets persists. Geopolitical risk also will remain high, as the US and China return to loggerheads and India and China move closer to war. Positive consumer and employment data in the US could presage a sharp recovery in demand generally; however, it is immediately countered with fears of a second COVID-19 wave, which now is the baseline scenario of our global investment strategists. Despite lower EM oil-demand growth this year – spurred by weaker GDP growth – deeper production cuts by OPEC 2.0 will keep oil markets on track to rebalance beginning in 3Q20. Massive fiscal and monetary stimulus will bridge global economic activity to a return to normal next year, provided the second wave of the COVID-19 pandemic does not result in renewed lockdown measures. Our updated supply-demand balances keep our expectation for Brent prices at $40/bbl this year and put next year’s average price at $65/bbl, $3/bbl below last month’s forecast. We continue to expect WTI to trade $2-$4/bbl lower than Brent. Feature As the OPEC 2.0 Joint Ministerial Monitoring Committee convenes today, members will be attempting to sort out the appropriate supply response to a highly uncertain oil-demand evolution over the balance of this year and next. Indeed, global economic policy uncertainty is scaling heights unimagined even in the depths of the Global Financial Crisis (GFC) of 2007-09 or the European sovereign-debt crisis of 2010-12, which followed in the GFC’s wake (Chart of the Week). This uncertainty is driving the policy responses of central banks and governments around the world, as they attempt to bridge COVID-19-induced demand destruction and the return to normality they seek in re-opening their economies. The data informing policy are suspect, as are the responses of firms and households to the stimulus they provide. This reflects the near-complete uncertainty in re current economic conditions. This translates directly to estimates of fundamental supply and demand variables, particularly in oil, which has been hardest-hit among the major commodities (Chart 2). Chart of the WeekEconomic Uncertainty Plagues Oil Markets Chart 2Oil Hardest Hit Commodity In 2020 COVID-19 Pandemic Demand To Weaken More Than Expected In 2020 OPEC 2.0’s agreement earlier this month to extend its 9.7mm b/d production cuts into July likely were informed by weaker physical demand. Our updated oil-demand model – driven by World Bank estimates of DM and EM GDP growth – indicates global oil consumption will fall by close to 9mm b/d this year, or ~ 1mm b/d more than we estimated last month.1 For next year, we expect a stronger rebound – 8.5mm b/d vs. last month’s estimate of 8mm b/d – off a lower base this year. This change is driven by the Bank’s more pessimistic assessment of EM GDP growth for 2020 than the IMF growth estimates we used in last month’s forecast (Chart 3). DM demand will take a harder hit than EM, given the extent of the lockdowns in major systematically important economies. This will set up a stronger rebound in oil demand next year, which, among many things spawned by the COVID-19 pandemic, is rarely seen. Chart 3EM Oil Demand Growth Estimate Lowered OPEC 2.0’s agreement earlier this month to extend its 9.7mm b/d production cuts into July likely were informed by weaker physical demand – appearing as unintended inventory accumulation – reflecting slower GDP growth. Global Oil Supply Expansion Required In our updated balances, we expect OPEC 2.0 supply to contract 3.2mm b/d y/y in 2Q20, and to increase in 2H20 and 2021 to keep prices from overshooting in the event the global demand response to fiscal and monetary stimulus is underestimated. We expect US shales to contract 600k b/d this year to 9.3mm b/d of production, and to gradually rebound in 2021 (Chart 4).2 The contraction in US shales will lead non-OPEC 2.0 supply losses in our estimation (Table 1). Chart 4Cuts By OPEC 2.0, US Shales Will Remove 9.4mm b/d Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) The combination of reduced supply and higher demand growth beginning next month will produce a physical deficit in 2H20 and in 2021 (Chart 5). This will be apparent in falling storage levels (Chart 6) and in a further flattening and eventual backwardating of the Brent and WTI forward curves (Chart 7). Chart 5Physical Markets Will Tighten Chart 6... Causing Storage to Drain ... Chart 7... And Forward Curves To Flatten, Then Backwardate Chart 8Massive Stimulus Flooding Global Economy Upside Favored, But Uncertainty Dominates We reckon even a second wave of the pandemic – now our Global Investment Strategy’s base case – will not derail a recovery in commodity demand. We continue to maintain a bias toward the upside price risk prevailing over the downside – driven by our expectation the massive fiscal and monetary stimulus unleashed globally will serve as an effective bridge from the COVID-19 pandemic to normal economic activity (Chart 8). This is being picked up in BCA Research's Global Nowcast, which closely tracks current economic conditions in leading manufacturing economies (Chart 9). We reckon even a second wave of the pandemic – now our Global Investment Strategy’s base case – will not derail a recovery in commodity demand.3 But the balance could tip the other way, with downside risk dominating the upside. The unprecedented uncertainty now dominating markets makes falling price volatility in oil markets – as measured by the implied volatility of Brent crude oil options’ implied volatility – highly suspect (Chart 10). We continue to emphasize two-way price risk in commodities remains pronounced despite the decline in the implied volatility of traded crude-oil options.4 Chart 9Global Economic Activity Turning Higher Chart 10Falling Vol Does Not Mean Lower Uncertainty Investment Implications The dynamics laid out above continue to point to a tightening physical oil market this year and next and higher prices. However, that does not come without substantial two-way risk. Indeed, the evolution of supply-demand information alone can trigger sharp adjustments in prices, as data revisions – to be expected, given the uncertainty prevailing at present – upend earlier preliminary estimates. We are leaving our 2020 forecast for Brent at $40/bbl and expect 2021 prices to average $65/bbl, $3/bbl below last month’s forecast. We continue to expect WTI to trade $2-$4/bbl lower than Brent (Chart 11). We also expect forward curves to flatten and return to backwardation in Brent and WTI, as the underlying physical markets tighten and inventories draw. Chart 11Brent To Average /bbl In 2021     Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Associate Editor Commodity & Energy Strategy HugoB@bcaresearch.com Fernando Crupi Research Associate Commodity & Energy Strategy FernandoC@bcaresearch.com     Commodities Round-Up Energy: Overweight Brent prices are recovering from the dual supply and demand shocks delivered by the COVID-19 pandemic and the short-lived OPEC 2.0 internal market-share war. Brent price are now down 42% ytd vs. -72% two months ago. The contango in the Brent futures curve continues to narrow as voluntary and involuntary production cuts take effect and lockdown measures are relaxed in major economies. Continued production losses and demand recovery will force inventories lower, flattening the oil forward curves and ultimately backwardating them. Base Metals: Neutral As of Tuesday’s close, the LMEX index was up 17% since bottoming in March, 2ppt lower than the level reached last week. Positive data out of China – fueled by stimulative fiscal and monetary policies – indicates demand for industrial metals will grow: Year-on-year industrial production, infrastructure spending, and steel production grew by 4.4%, 10.9%, and 4.2%, respectively, in May (Chart 12). Moreover, y/y floor space started and sold moved up to positive territory. As government support continues to reach the economy, these sectors will encourage base metal consumption, providing further upside to the LME index. Still, fresh outbreaks of COVID-19 cases in Beijing – and associated lockdown measures – illustrate the fragility of the recovery over the short-term. Precious Metals: Neutral Gold prices remain range-bound at ~ $1,700/oz, mimicking movements in US real rates. Going forward, both the Fed and market participants expect US interest rates will remain pinned near zero through the end of 2022 (Chart 13). Our US Investment strategists expect the Fed will err to the side of providing too much accommodation as it navigates the uncertain consequences of the current economic shock. A gradual rebound in inflation next year could push real rates deeper in negative territories, which will be supportive for gold. Ags/Softs:  Underweight July soybean prices are up more than 3% since the beginning of the month. Strong export prospects going forward contributed to the strength in prices this past week. On June 4th the USDA reported new sales of soybeans of 1.21 MM MT, a huge week-on-week jump, which brought outstanding sales for the next marketing season to 4.1 MM MT. China was responsible for close to half of these sales and private exporters have since reported a little over an additional 1 million MT of exports to China. Chart 12Chinese Infrastructure Investment Rising Chart 13US Rates Expected To Remain Near Zero Until End 2022       Footnotes 1     Please see p. 3 of the World Bank’s June 2020 Global Economic Prospects. 2     We proxy US shales using the sum of crude production from the top 5 tight oil basins (i.e. Anadarko, Bakken, Eagle Ford, Niobrara, and Permian). Recent news reports suggest as much as 500k b/d of previously shut-in production will be back on line by the end of the month as a consequence of higher prices. This is slightly above our estimates shown in Chart 4. Please see US shale companies to boost oil output by 500,000 bpd by month-end published June 17, 2020, by reuters.com. 3    Please see A Second Wave Is Now The Base Case (But Stocks Will Eventually Shrug It Off) published by BCA Research’s Global Investment Strategy June 12, 2020. It is available at gis.bcaresearch.com. 4    For a discussion of how options markets price risk – i.e., known economic and political factors with outcomes that can be assigned probabilities – please see Ryan, Bob and Tancred Lidderdale (2009), Energy Price Volatility and Forecast Uncertainty, published by the US EIA October 2009. Risk can be thought of a “known unknowns” that can be measured across time and assigned a probability (conditional or otherwise), while uncertainty literally consists of unknown unknowns that cannot be measured.     Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q1 Commodity Prices and Plays Reference Table Trades Closed in 2020 Summary of Closed Trades

Highlights US refiners will raise capacity-utilization rates as demand revives, which will keep crude oil inventories draining through 2H20. Early data indicate COVID-19-induced lockdowns pushed demand for gasoline, diesel, jet fuel and other products in the US down by a massive 31.9% vs. five-year average levels between March and end-April (Chart of the Week).1 Supply destruction in the US shales, a surge in crude exports, and an import collapse catalyzed by unintended inventory accumulation kept storage from breaching operational capacity outside Cushing, OK, where NYMEX WTI futures deliver. We continue to expect WTI to average ~ $37/bbl this year and ~ $65/bbl next year. Brent will trade ~ $3/bbl higher. Two-way price risk – to the upside and downside – remains high. Feature US refiners did an extraordinary job of balancing their systems in the wake of this demand collapse, which, with impelling alacrity, propelled similarly rapid adjustments in pipeline, storage and shipping markets.  Getting a fix on the actual demand destruction in oil markets wrought by the COVID-19 pandemic is exceedingly difficult. Few regional markets track fundamental data in anything close to a timely manner, except for the US, where the Energy Information Agency (EIA) publishes early estimates of crude and refined-product output, consumption, exports and imports on a weekly basis. Of course, these data are preliminary and will be revised – perhaps substantially – post-publication. However, they are invaluable for getting an early read on the effects of an exogenous shock like the COVID-19 pandemic in an advanced economy. While this experience cannot be translated directly to the rest of the world, the analysis is useful in getting a handle on the order of magnitude of demand destruction globally. These early data flows indicate that, between March and the end of April, US refined-product demand fell a stunning 31.9% vs. its five-year average, as shown in the Chart of the Week. The collapse in US product demand led OECD demand lower by a similar magnitude, which is unsurprising, given the US accounted for ~ 20% of the 100mm b/d or so of products consumed globally prior to the COVID-19 pandemic. An analysis of these early data indicate US refiners did an extraordinary job of balancing their systems in the wake of this demand collapse, which, with impelling alacrity, propelled similarly rapid adjustments in pipeline, storage and shipping markets. These adjustments now are being reflected in forward curves for WTI and Brent, as market participants discount them. Chart of the WeekUS Refined-Products Demand Collapse Refiner Adjustments Propel Re-Balancing Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully. - Samuel Johnson2 As the extent of the demand destruction became apparent in March, US refiners in PADDs 2 and 3 – the US Midwest and Gulf Coast, respectively, where ~ 75% of US refining capacity is situated – moved quickly to throttle back operations (Chart 2).3 Average utilization rates in both districts fell from a 1Q20 peak of 96.5% in January to 71.2% in April. In volumetric terms, this represented a decline of 4.1mm b/d in US refiner crude inputs (gross), leaving total inputs at 13.4mm b/d by the end of April (Chart 3). Chart 2US Refiners Quickly Ramped Down Chart 3US Refiners Throttle Back Run Rates As Product Demand Collapses Early data indicate pipelines and storage operators let it be known their systems were rapidly filling. This sudden ramping down in operations reduced refiners’ demand for flowing crude oil, leading to a sharp unintended accumulation of crude and product inventory in the US midcontinent and Gulf Coast, and the US East coast (PADD 1), which can receive more than 3mm b/d of refined product on the Colonial Pipeline, a 5,500-mile line running from Houston, TX, to the New York Harbor (Chart 4). With crude and product storage filling, anecdotal reports now confirmed in the early data indicate pipelines and storage operators let it be known their systems were rapidly filling, and that they soon would be denying access to their transportation and holding facilities. Word reached the US shale-oil basins, particularly the Permian and midcontinent fields in Oklahoma and North Dakota, where producers were forced to lay down rigs and choke back crude flows to reduce output (Chart 5).4 Chart 4Demand Collapse Leads To Unintended Inventory Accumulation Chart 5The Word Goes Out To Cut Production, As Pipelines and Storage Fill Additional data will be required to assess how quickly crude production ramped down in the US shales, but it appears the quick-response capability of this production allowed storage operators outside of Cushing, OK, to avoid even coming close to breaching the critical 80% operating capacity threshold of storage operators in these key districts. US Ramps Crude Exports, Slashes Imports Sharply lower refiner demand forced producers and traders to move crude oil out of the US as quickly as possible. In addition to sharply curtailing production, sharply lower refiner demand forced producers and traders to move crude oil out of the US as quickly as possible, which they did (Chart 6). US crude exports are up 26.9% y/y in 1H20, and likely will continue to remain strong. At the same time, US imports of crude oil have fallen 12.6% y/y as refiners continue to manage their own storage levels and system requirements. This will allow floating storage, particularly in the US Gulf, to be drawn down, as refiners return to normal utilization rates (Chart 7). Chart 6US Crude Exports Soar, Imports Collapse ... Chart 7… And Floating Storage Soars, Particularly In The US Gulf The only outlier in all of this was Cushing, OK, where the NYMEX WTI futures contract delivers. Production curtailments in the shales, surging crude exports and sharply lower imports kept storage levels under control, for the most part, as refined-product demand was collapsing in the US. Indeed, EIA data indicate storage levels in PADDs 2 and 3 overall remained below 65% of working-storage capacity throughout March and April. The only outlier in all of this was Cushing, OK, where the NYMEX WTI futures contract delivers. Storage in Cushing breached 80% of capacity in the last two weeks of April before falling back to ~ 70% by mid-May (Chart 8). The proximate cause of this appears to be a disorderly termination of trading in the NYMEX WTI contract for May delivery in Cushing.5 Chart 8Storage In Cushing, OK, Breached 80% Of Capacity US Product Demand Revival It’s still early days, but there are indications of demand reviving in the US. The Apple Mobility Index, which tracks consumer interest in travel, appears to move in line with US refined-product demand (Chart 9). Our expectation remains demand will revive in 2H20 and will increase sharply y/y in 2021, given the massive fiscal and monetary stimulus deployed in the US and globally. This, coupled with the massive supply cuts by OPEC 2.0 and producers outside the coalition, will allow prices to continue to rebound over this period.5 Brent prices likely will average $40/bbl this year and $68/bbl next year. We expect WTI to trade $2 - $4/bbl below Brent. That said, two-way price risk remains extremely high, as we have noted before. Output cuts by OPEC 2.0 and US shale-oil producers could overshoot, and take too much supply off the market as demand is recovering, while demand could once again collapse if a second wave of the COVID-19 pandemic emerges following the lifting of lockdowns globally. Chart 9US Interest In Travel Generally Appears To Be Picking Up     Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Fernando Crupi Research Associate Commodity & Energy Strategy FernandoC@bcaresearch.com   Commodities Round-Up Energy: Overweight WTI prices increased 74% since beginning of May as economies gradually ease lockdown measures and global voluntary and involuntary supply cuts intensify. In the US, total oil rig count fell 73% to an 11-year low of 237 rigs, reflecting weak investment appetite by producers. The IEA expects investment in the oil and gas sector to fall by $400 billion this year, led by a 32% decline in oil and gas investment. In trading markets, speculators are returning to WTI markets in expectations lower supply and reviving demand will drain inventories and move prices significantly up (Chart 10). Fund managers now hold 8-to-1 long contracts in WTI vs. 2-to-1 for Brent. Base Metals: Neutral The LMEX rose 10% since bottoming on March 23. Copper, aluminum, zinc and nickel are up by 15%, 6%, 9% and 13%. Iron ore prices dropped ~$2/MT on Tuesday as ore exports from Brazil’s Vale increased by 1.5mm tons, easing concerns about COVID-19 induced supply disruption in the country, according to Fastmarkets MB. Precious Metals: Neutral Record economic policy uncertainty in the US – and globally – keeps safe assets – chiefly gold and the US dollar – well bid (Chart 11). We expect the dollar will weaken as economies reopen and uncertainty wanes. As this unfolds, the risk of a temporary pullback in gold prices remains elevated. Medium to long term, persistent accommodative global monetary policy will continue to support the yellow metal’s upward trend. Ags/Softs:  Underweight According to the USDA, private exporters reported sales of 258k MT of soybeans for delivery to China split between the current and next marketing year, which was supportive of soybean futures prices. A weaker USD also is supporting grains, and rallying corn futures. Wheat was slightly down, as a softer USD positive is being offset by favorable weather conditions in the Black Sea export regions that compete with the US. Chart 10Speculators Are Returning to WTI Chart 11USD Well Bid By High Uncertainty     Footnotes 1     “Product Supplied” is the US EIA’s measure of demand.  2     From The Life of Samuel Johnson LL.D. Vol 3, by James Boswell. 3    PADD stands for Petroleum Administration for Defense Districts. 4    US Energy Secretary Dan Brouillette estimates as much as 2.2mm b/d of crude oil production has been shut in because of the COVID-19 pandemic. Please see US oil production shut-ins top 2.2 million b/d during pandemic: DOE chief published by S&P Global Platts May 21, 2020 5    Please see our April 30, 2020, report Stand By For Heavy Rolls: June WTI Could Go Below $0.00/bbl, which examines the anomalous behavior of May-delivery WTI futures traded on the NYMEX last month, which may have contributed to this dramatic deviation from the rest of the US storage market. Markets will, at some point in the near future, be looking for a detailed post-mortem surrounding the events that occurred during the termination of trading of the NYMEX of futures delivering in May at Cushing, when WTI futures traded as low as -$40.32/bbl (i.e., negative $40.32/bbl). Part of the proximate cause of the anomaly appears to be a failure by the CME Group, which operates the NYMEX, and the US Commodity Futures Trading Commission (CFTC), which regulates US futures exchanges, to ensure an orderly termination of trading in May 2020 WTI futures contracts. See also Column: U.S. commodities watchdog issues blunt warning over oil volatility published by reuters.com May 14, 2020. In future research, we will explore the implications a non-trivial probability of negative prices in the future poses for the oil and gas markets, particularly in re capex and investment generally.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q1 Commodity Prices and Plays Reference Table Trades Closed in 2020 Summary of Closed Trades

Highlights Higher OPEC 2.0 production in 2H20 – likely beginning in 3Q20 – will be required to keep Brent prices below $50/bbl going into the US presidential elections, which arguably is the primary driver of prices in the 2020 post-COVID-19 recovery. Larger-than-expected OPEC 2.0 production cuts announced this month will force deeper inventory draws beginning in 3Q20. The re-opening of global economies and promising vaccine developments notwithstanding, we continue to expect an 8mm b/d hit to oil consumption this year, followed by an 8mm b/d recovery in demand next year. Brent prices likely will trade slightly higher than we forecast last month – $40/bbl this year, on average, vs. a $39/bbl forecast last month, and $68/bbl next year, $3/bbl above April’s forecast.  We expect WTI to trade $2 - $4/bbl below Brent (Chart of the Week). Two-way price risk is high: The likelihood demand will surprise to the upside cannot be ignored, but it could collapse with a second COVID-19 wave forcing lockdowns again.  On the supply side, the hurricane season is off to an early start in the US, with the first tropical storm, Arthur, named this week. Feature Chart of the WeekOil-Price Recovery In 2H20, 2021 Chart 2OPEC 2.0 Delivers Massive Production Cuts Political considerations – i.e., keeping crude oil prices below $50/bbl so as not to spike gasoline prices going into the US presidential elections – will drive the evolution of crude oil prices. The big driver of oil prices over the short term is what we know with the least uncertainty. Right now, that’s what's happening on the supply side over the next couple of months. Slightly further out – as November approaches, to be precise – the political economy of oil once again will dominate fundamentals. Political considerations – i.e., keeping crude oil prices below $50/bbl so as not to spike gasoline prices going into the US presidential elections – will drive the evolution of crude oil prices. That is why, we believe, the massive voluntary cuts announced by the Kingdom of Saudi Arabia (KSA) and its Gulf allies earlier this month – amounting to ~ 1.2mm b/d of cuts in addition to those agreed by OPEC 2.0 in April – are so important: The global inventory overhang produced by the COVID-19 pandemic, and the short-lived market-share war launched by Russia in March, has to be unwound as quickly as possible, before the US presidential elections kick into high gear. Holding to the schedule agreed in April would drain inventories, but not fast enough by September to prevent further distress for OPEC 2.0 member states as the year winds down.1 By then, additional cuts would be highly problematic, given US President Donald Trump almost surely will be demanding higher OPEC production to keep gasoline prices down as voters go to the polls in November. KSA announced plans to reduce production by ~ 4.5mm b/d vs. its April level of 12mm b/d starting in June, taking its output to ~ 7.5mm b/d. This cut is 1mm b/d more than what it agreed to last month to balance the oil market. The UAE and Kuwait also voluntarily added cuts of 100k and 80k b/d, respectively, to their agreed quotas. Production cuts by OPEC 2.0 as a whole – led by KSA and Russia – begun in May and extending at least to the end of June will amount to ~ 9mm b/d, or close to 9% of global production (Chart 2). Chart 3US Shale-Oil Output Cuts... Outside of the OPEC 2.0 production cuts, we expect US shale-oil output to fall sharply – down ~ 2mm b/d this year from its peak in December, 2019 (Chart 3). The shale-oil supply destruction will lead total US production down by 600k b/d y/y in 2020 (Chart 4). US production losses will account for the largest share of non-OPEC production losses globally. Along with losses from Canada, Brazil and Norway in the wake of the COVID-19 demand destruction, we expect global oil production to fall 12mm b/d y/y by the end of June. Chart 4... Lead US Production Sharply Lower Demand Could Come Back Stronger For the year as a whole, we are leaving our expected demand loss at 8mm b/d, with most of that loss occurring in 1H20. That said, demand could revive sooner than expected, if the anecdotal reports of stronger-than-expected recovery in China prove out – the level of demand there is believed to be close to 13mm b/d in May, after falling to ~ 11.25mm b/d in February and March.2 Kayrros, the oil-inventory tracking service, noted its satellite imagery indicates, “Oil demand losses appear far lower than the prevailing view in April. Measured crude oil builds are wholly inconsistent with prevailing views of a collapse in oil demand of nearly Biblical proportions.” Furthermore, “By early May, there were clear signs of robust recovery in Asian crude demand as well as earlier-stage recovery in US end-user product demand. In addition, steep, swift supply cuts helped rebalance the market, leading to surprisingly deep inventory draws. But demand had never plunged as low as widely believed in the first place.”3 Our estimate of oil-demand destruction is less than that of the major data-reporting agencies. If this performance is repeated globally in EM economies – the historical growth engine of commodity demand – markets could tighten faster than we expect (Chart 5). Our estimate of oil-demand destruction is less than that of the major data-reporting agencies. In their May updates, EIA expects 2020 demand to fall 8.1mm b/d y/y in 2020, vs. 5.2mm b/d last month; OPEC sees demand falling 9.1mm b/d y/y, vs. 6.9mm b/d last month; and the IEA has it at 8.6mm b/d y/y, vs. 9.3mm b/d last month. Chart 5EM Demand Could Revive Quickly Chart 6Massive Fiscal and Monetary Stimulus Will Boost Aggregate Demand Globally By next year, we expect global demand will rise 8mm b/d y/y, driven by the massive monetary and fiscal stimulus that will continue to boost aggregate demand higher (Chart 6). In 2H20, we see demand recovering as flowing supplies fall (Chart 7), forcing onshore inventories to draw sharply in 2H20 and into 2021 (Chart 8), as well as floating storage (Chart 9). In addition, This will flatten the forward Brent and WTI curves in 2H20, and backwardate them next year, as storage draws continue (Chart 10). Chart 7Oil Supply Falls, Demand Rises ... Chart 8... Onshore Inventories Draw More Than Expected Chart 9Expect Floating Storage To Empty Rapidly Chart 10Falling Storage Levels Will Push Forward Curves Into Backwardation Political Economy Drives Price Evolution The risk of higher gasoline prices as crude marches higher this summer is a risk President Trump already has shown he will not countenance. Following the massive production cuts being implemented this month and next by OPEC 2.0 and the large involuntary output losses outside the coalition, there is a risk prices could rise rapidly in 2H20. The fairly high likelihood demand surprises to the upside in 2H20 cannot be ignored, which would further fuel a price spike. This is a combustible political mix. The risk of higher gasoline prices as crude marches higher this summer is a risk President Trump already has shown he will not countenance, particularly not as an election looms. With this in mind, we iterated on the production required to keep Brent prices below $50/bbl in 2020 in our modeling, consistent with our view of the political economy considerations US elections impose (Table 1). Any additional volumes needed to keep Brent below $50/bbl can be returned to market fairly quickly out of OPEC 2.0 spare capacity. Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) OPEC 2.0’s production cuts have sharply increased the group’s spare capacity to ~ 6.5mm b/d – 5.5mm b/d in OPEC and close to 1mm b/d in Russia and its allies – which means these states will be capable of modulating production quickly and with fairly high precision. The Return Of OPEC 2.0 Production Discipline The budgets of the OPEC 2.0 states have endured massive hits, which can only be repaired by higher oil-export revenues, given their dependence oil sales. After the US elections, OPEC 2.0 production discipline will have to be revived, given the massive fiscal constraints these states are facing. The budgets of the OPEC 2.0 states have endured massive hits, which can only be repaired by higher oil-export revenues, given their dependence oil sales. KSA will want to manage the rate at which prices increase, so that prices rise while global markets are awash in fiscal and monetary stimulus. We believe Russia will acquiesce on this point – i.e., it will not reprise its role as a price dove arguing for lower prices against KSA’s desire for higher prices – given the damage done to its economy from the price collapse in 1H20. That said, taking inventories from historically high levels back down to their 2010-14 average levels – the storage target pursued by OPEC 2.0 prior to the COVID-19-induced price collapse – likely will keep price volatility elevated (Chart 11). An upside demand surprise while production is being aggressively curtailed could sharply raise prices. Indeed, in our modeling of 2021 prices, we again iterated on production to keep Brent prices below $80/bbl, which we believe is the level both KSA and Russia can agree on for the short term. We also believe that the massive fiscal and monetary stimulus sloshing through EM and DM economies will make such prices bearable, provided they are not the result of a supply-side shock. Chart 11Oil Price Volatility Will Remain Elevated The level of uncertainty in the oil markets remains extraordinarily high. Bottom Line: Our price forecasts are premised on a resumption in global growth in 2H20 that lifts crude oil demand, and sharper-than-expected voluntary and involuntary production cuts taking supply significantly lower over the balance of the year and into next year. As the volatility chart above shows, however, the level of uncertainty in the oil markets remains extraordinarily high: A demand surprise to the upside cannot be ignored, but it also could collapse again with a second COVID-19 wave forcing another round of lockdowns. On the supply side, Tropical Storm Arthur launched the hurricane season weeks ahead of schedule. This elevates supply risk in the US Gulf until the end of November, when the season ends. We expect 2020 Brent prices to average $40/bbl and 2021 prices to average $68/bbl. WTI will trade $2-$4/bbl lower. Two-way risk – upside and downside – abounds.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger Associate Editor Commodity & Energy Strategy HugoB@bcaresearch.com     Commodities Round-Up Energy: Overweight OPEC's May Monthly Oil Market Report noted Iraq failed to raise crude oil output in April amid the market-share war instigated by Russia’s refusal to back additional production cuts at OPEC 2.0’s March meeting. Saudi Arabia, Kuwait, and UAE managed to move their production up by 2.2mm b/d, 2.2mm b/d, and 330k, respectively. In our global oil balances, we assume Iraq will increase production along with core-OPEC 2.0 countries to balance oil markets once demand rebounds later this year. However, its declining production last month could signal Iraq’s ability to increase production is limited and that it will struggle to meet its increasing quota in 4Q20 and 2021. Base Metals: Neutral China’s policy-driven economic recovery continues. Last week’s data release provided evidence of a rebound in the manufacturing, infrastructure, and construction sectors (Chart 12). This will continue to support base metals – primarily copper and aluminum. Precious Metals: Neutral Chairman Powell’s comment that there is “no limit” to what the Fed can do with its emergency lending facilities supports our view that US real rates will remain depressed as inflation expectations move up ahead of nominal rates. Gold and silver are up 2% and 14% since last Tuesday. We believe silver slightly below its equilibrium price vs. gold and industrial metals (Chart 13). Silver could continue to temporarily outpace gold as it moves to equilibrium. Ags/Softs:  Underweight US corn planting for the 2020/2021 season is approaching the finish line, with 80% of the crop in the ground so far, as reported by the USDA on Monday. Although this figure was up 13 percentage points since last week, it didn’t meet analysts’ expectations of 82% to 84%, which provided support for corn prices. Furthermore, this week’s sharp rebound in oil prices also was positive for corn, which gained ¢2/bu since the beginning of the week. Chart 12Chinese Investment Tailwind for Base Metals Chart 13Silver Could Temporarily Outpace Gold   Footnotes 1    Please see US Storage Tightens, Pushing WTI Lower, our forecast published last month on April 16, 2020, which discussed the production cuts agreed by OPEC 2.0 in April.  It is available at ces.bcaresearch.com. 2    Please see Oil highest since March as Chinese demand reaches 13 MMbpd published May 18, 2020, by worldoil.com. 3    Please see Reassessing the Oil Demand Impact of COVID-19 published by Kayrros on medium.com May 19, 2020.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Trade Recommendation Performance In 2020 Q1 Commodity Prices and Plays Reference Table Trades Closed in 2020 Summary of Closed Trades