Commodity market outlook - Crude oil focus - Summer 2020 August 2020 - Numera Analytics

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Commodity market outlook
Crude oil focus – Summer 2020

                                August 2020

                                    Numera Analytics |
Investment recommendations

 • 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 |   2
1. All commodities

                     Numera Analytics |
Broad commodity outlook

 • 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 |   4
Commodities demand is on the rise
                                                                                                                                                 Commodities activity index
                                                                                                                                                             Deviations from trend
                                                     4
                                                                                                                               Inflationary (↑)
                                                     2
                           Standard deviations

                                                     0

                                                    -2
                                                                                                                                Deflationary (↓)
                                                    -4

                                                    -6
                                                         90      93       96      99       02       05       08      11       14       17      20

                                                 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.

Source: Numera Analytics                                                                                                                                             Numera Analytics |   5
Fueled by stronger activity in China
                                                                                                                                               China real activity index
                                                                                                                                                 Deviations from trend
                                             4

                                             0
                       Standard deviations

                                             -4

                                             -8
                                                  03        05        07         09        11        13        15         17        19
                                                  Note: Index isolates common fluctuations across a panel of 20 CN economic indicators, thus
                                                  abstracting from industry-specific (idiosyncratic) supply shocks.

Source: Numera Analytics                                                                                                                                  Numera Analytics |   6
Which explains differences in performance
                                                                                                                       S&P commodity price index
                                                                                                                                Deviations from trend
                                                                Current             Trough
                         40%
                                                                                                                     24%

                                                                                                 5.8%
                          0%

                                    -16%                                     -10%
                                                        -26%
                         -40%

                         -80%
                                   S&P GSCI            Energy            Agriculture          Industrial          Precious
                                                                                               metals              metals

                                   Note: Energy represents 62% of the S&P GSCI index (of which crude oil is 59%). Agriculture
                                   and metals are roughly 15% each.

Source: S&P; Numera calculations                                                                                                        Numera Analytics |   7
Given China’s greater influence on metals
                                                                                                                      China raw materials demand
                                                                                                                         % of global consumption
                                                                     2019        2000

                                                                                                              54%
                            Base metals

                                                                                                          51%
                                Iron ore

                                                                               28%
                                   Gold

                                                                               28%
                                 Grains

                                                               15%
                               Crude oil

                                           Note: Base (non-ferrous) metals are the sum of aluminum, copper, nickel,
                                           lead and zinc. Grains include corn, wheat, soybean and rice.

Source: WBMS, World Steel, USDA, BP; Numera calculations                                                                            Numera Analytics |   8
The US dollar continues to weaken
                                                                                                                     USD during deep recessions
                                                                                                                            Broad dollar appreciation

                                16%
                                                                                                                         15%
                                                             2008/09

                                11%
                                                                                                                                   Dollar has depreciated
                                 6%                                                                                                4% since mid-May on
                                                                                                                                   improved risk sentiment
                                                                        COVID-19
                                 1%                                                                                      1%

                                 -4%
                                         0        15        30        45        60        75        90        105

                                                                    Days following peak

                                  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.

Source: JP Morgan; Numera calculations                                                                                                         Numera Analytics |   9
And should depreciate further 12M out
                                                                                                                    USD appreciation probabilities
                                                                                                                               12-months ahead (%)
                                                                      March        July

                           80%

                                                                        63%                           61%
                           60%                                                                                               US dollar appreciation
                                                                                                                             much less likely than
                                                                                41%                           42%
                           40%
                                                                                                                             early in the pandemic
                                                  34%
                                          30%

                           20%

                           0%
                                        CAD vs. USD                   EUR vs. USD                   GBP vs. USD

                                 Note: Likelihood of USD strengthening against the CAD, EUR and GBP 12M out. Probabilities
                                 above 50% indicate USD appreciation is the most likely outcome.

Source: Numera Analytics                                                                                                                   Numera Analytics | 10
Overall commodity prices should recover
                                                                                                                  S&P commodity price index
                                                                                                                                 2010 = 100
                         180

                         135                                                                           95% P.I.

                          90

                          45

                            0
                                00      02       04      06       08       10      12       14   16   18   20     22

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

Source: History: S&P; Forecast: Numera Analytics                                                                               Numera Analytics | 11
High likelihood of positive returns 12M out
                                                                                                                                               S&P commodity price index
                                                                                                                                              12M probability forecast (%)
                                                                                                   22%

                           12M predictive distribution

                                                                                                                    Very high chance of
                                                                                                                    positive returns on
                                                                             Positive                               12M holdings
                                                                             returns

                                                                                                   76%
                                                         Left-tail risk:
                                                                  -63%

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

                                              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                                                                                                                                     Numera Analytics | 12
2. Crude oil

               Numera Analytics |
Market review

                Numera Analytics |
Oil market review: Demand

 • 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 | 15
Demand still far from pre-COVID levels
                                                                                                              Change in global oil consumption (SA)
                                                                                                                                 Mbbl / day and % (vs. 01/20)

                                            0
                                                                                         -5.5%
                                                                                                      -5.9%
                                                                                                                                -2.3%
                                            -2                              -12%                                    -11%
                                                               -10%
                        Million bbl / day

                                            -4

                                            -6                      In April, consumption
                                                                    down 19 Mbbl (-18%)
                                                 -6.7%
                                            -8
                                                 World          US            EZ           JP      Other DM          CN       Other EM

                                                 Note: Chart breaks down change in global oil consumption (SA) between January and July 2020.
                                                 Bars measure change in million bbl / day.

Source: Energy Information Agency (EIA); Numera calculations                                                                                    Numera Analytics | 16
Evolution mirrors global mobility trends
                                                                                                                            Mobility and COVID deaths
                                                                                                                                      World ex. Latin America
                                 0%                                                                                          1

                                                                            New COVID
                               -16%                                                                                          0.75
                                                                            deaths (R)

                               -32%                                                                                          0.5

                               -48%                                                                                          0.25
                                                                             Away-from-
                                                                             home traffic (L)

                               -64%                                                                                          0
                                   07/03             04/04           02/05           30/05          27/06           25/07

                               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                                                                                             Numera Analytics | 17
As 60% of demand tied to transportation
                                                                                       Global oil demand by end-use
                                                                                                     % of total, 2019
                                    Buildings
                                                              Other
                                                10%     15%
                         Industry
                                      16%
                                                                      Transportation

                                                98M bbl/d
                                                                                               Gasoline
                                                                                                CN
                                                                                               / diesel
                                                                        51%
                                                      60%

                                                                                          8%
                                                                                               Jet fuel

Source: BP Statistical Energy Review; Numera calculations                                                 Numera Analytics | 18
Road traffic has yet to fully recover
                                                                                     Traffic congestion in metropolis
                                                                                                   Year-on-year (%)

                                                 Latest (02/08)     Trough

                      0%

                                                                                           -12%
                     -25%                                                           -17%
                                                                             -24%
                                                       -36%        -34%
                     -50%
                                               -52%
                                -57%   -57%

                     -75%

                    -100%
                               S. Paulo CDMX   NYC     Paris      N. Delhi London Shanghai Tokyo

Source: TomTom Traffic Index                                                                           Numera Analytics | 19
While dismal auto sales restrict growth
                                                                                                                     Vehicle sales by country
                                                                                                                     6M year-to-date, SA (%)
                                    UK                      -36%
                                    BR                         -34%
                                   MX                          -33%
                                     IN                              -29%
                                    EZ                                  -25%
                                   DM                                   -25%
                                    US                                      -21%
                                 World                                          -18%
                                    RU                                           -17%
                                   EM                                                    -10%
                                    CN                                                         -6%
                                    JP                                                          -5%

                                Note: Bars compare seasonally adjusted change in light vehicle (car + truck) sales
                                by country between 12/19 and 06/20.

Source: Government agencies, Numera Analytics                                                                                   Numera Analytics | 20
Jet fuel is the hardest hit end-use
                                                                                                               COVID impact on global air traffic
                                                                                                                   Change in seating capacity (%)
                                                                Domestic            International

                              0%

                            -25%

                            -50%

                            -75%

                                             -90%                    -91%                    -91%                    -89%
                           -100%
                                         World                    Asia                  Europe               N. America

                                      Note: Bars compares seating capacity in international and domestic flights in June 2020
                                      versus ‘business as usual’ (the ICAO baseline).

Source: International Civil Aviation Organization (ICAO)                                                                            Numera Analytics | 21
Industrial activity is slowly recovering
                                                                                                    COVID impact on industrial activity
                                                                                                                       Global output losses (%)
                             0%
                                                                                                      Baseline

                            -5%                                                      Great
                                                                                     Recession

                            -10%

                            -15%          At the peak,                COVID-19
                                          losses of 15%

                            -20%
                                        0         2         4          6         8        10        12        14
                                                         Months after initial shock

                                   Note: Chart shows the realized performance of global industrial production during
                                   deep recessions. Output losses measured as deviations from a no-shock baseline.

 Source: Numera Analytics                                                                                                         Numera Analytics | 22
Oil market review: Supply

 • 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 | 23
Production down sharply since April
                                                                        Change in global oil production
                                                                               April – July (million bbl/day)
                        0

                                       OPEC production
                                       down 8.4M bbl /
                                       day (-24%)
                        -5
                                                                                      Oil production 12%
                                                                                      lower than in April

                               -8.4
                       -10
                                                                +0.4
                                      -2.4
                                               -0.8      -0.5          -11.9

                       -15
                              OPEC    RU        US       CA     RoW    World

Source: EIA; Numera calculations                                                                Numera Analytics | 24
OPEC operating well below capacity
                                                                             OPEC crude oil supply
                                                                                        Million bbl / day

              36               Great Recession        Oil crisis     S. Aramco attack

                    Capacity
              32

              28                                                            Surplus capacity at an all-
                                    Production                              time high of 9M bbl / day
                                                                            due to OPEC+ agreement

              24

              20
                   06     08   10     12         14   16       18   20

Source: EIA                                                                                Numera Analytics | 25
Supply cuts have helped restore balance
                                                                                                                                  Global crude oil balance
                                                                                                                                      Millions of bbl / day
                             9          Excess demand (↑)

                             0

                                                                                                                                     Balance restored
                                                                                                                                     on rising demand,
                            -9
                                        Excess supply (↓)                                                                            falling supply

                           -18                                                              In April, excess oil
                                                                                            supply of 21M bbl

                           -27
                                 97      99      01      03      05      07      09      11      13      15      17      19

                                 The crude oil balance is computed as the difference between global consumption and production.
                                 Positive figures indicate excess demand.

Source: Energy Information Administration (EIA)                                                                                                Numera Analytics | 26
Inventories remain exceptionally high
                                                                                                     OECD crude oil inventory
                                                                                                        Millions of barrels, SA
              2000

                                     Other OECD

              1600

              1200                         United States

              800
                     97 99 01 03 05 07 09 11 13 15 17 19

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

Source: EIA                                                                                                      Numera Analytics | 27
Although days of supply now diminishing
                                                                                                                       US crude oil inventories
                                                                                                                        Weekly days of supply
                             45

                             40

                                                                        2020
                             35
                                                                               Much higher stock levels
                                                                               than during 2015 oil crisis
                             30
                                                                                               2015

                             25
                                                             2010-19

                             20
                                    J      F      M      A      M       J       J      A      S      O       N     D
                                   Note: Commercial inventories only (excludes US Strategic Petroleum Reserves).

Source: EIA; Numera calculations                                                                                                  Numera Analytics | 28
NA supply impacted by low oil prices
                                                                                                  NA oil rigs and WTI spot
                                                                                           Rig count (SA) and USD / bbl

                          2000                                                               120

                          1500                                                               90
                                                                  WTI spot (R)

                          1000                                                               60

                           500                  Active oil                                   30
                                                rigs (L)

                             0                                                               0
                                 11   12   13   14    15     16      17    18    19   20

Source: Baker Hughes, World Bank; Numera calculations                                                        Numera Analytics | 29
Shale production has been hard-hit
                                                                                            US oil production by region
                                                                                         March - July (millions bbl/day)
                                                 March-May        May-July
                      0.8
                                                                                           5%

                      0.0

                                                  -18%                        -19%
                                     -24%
                      -0.8                                     -14%

                      -1.6                    WTI fell below break-even
                              -11%
                                              on existing wells ($25-30),
                                              prompting shut-downs
                      -2.4
                               US    Bakken    Eagle Ford     Permian       Other shale Non-shale

Source: EIA; Numera calculations                                                                          Numera Analytics | 30
Bankruptcy risk is still very high
                                                                                                                   US high yield bond spreads
                                                                                                                              Basis points (bps)
                          2000

                          1500

                                                   High yield
                                                                                  Energy                               Very high premium, which
                          1000                                                    high yield                           given ample Fed liquidity
                                                                                                                       implies high default risk

                           500

                             0
                                 01      03      05       07       09      11       13      15       17       19
                                 Note: Spreads computed against the Moody’s Aaa investment-grade benchmark.

Source: ICE BofAML, Moody’s; Numera calculations                                                                                     Numera Analytics | 31
Oil market review: Prices

 • 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 | 32
Oil prices up $25 since late April
                                                                                                  Oil market events timeline
                                                                                               Brent spot price (USD / bbl)
                      80                      2. Iranian General
                                              Soleimani killed
                                                             3. WHO first reports
                                                             COVID transmission
                      60
                            1. Drone strike
                            Saudi Aramco
                      40
                                                  4. OPEC talks fail       5. OPEC+
                                                                           agreement

                                                                                        7. Peak COVID
                      20                                                                deaths globally

                                                                                    6. Negative
                                                                                    WTI futures
                       0
                        28/08 27/09 28/19 26/11 26/12 27/1         25/2   25/3   27/4   5/28   25/6   7/27

Source: FRED, Numera Analytics                                                                                 Numera Analytics | 33
Market volatility has diminished
                                                                                                        Oil volatility and economic uncertainty
                                                                                                                            OVX index and World EPU

                      180                                                                                                         600

                      135                                                                                                         450

                                                                                             Economic
                                                Oil market                                   Uncertainty (R)
                       90                       volatility (L)                                                                    300

                       45                                                                                                         150

                        0                                                                                                         0
                            07            09            11            13             15            17            19
                            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.

Source: CBOE; Baker, Bloom & Davis                                                                                                      Numera Analytics | 34
But trader sentiment remains ‘bearish’
                                                                                                                          Net long positions – Crude oil
                                                                                                                                Thousands of contracts
                        30
                                                                                                            COVID-19

                         0

                                                                                                                                  Net short positions suggest
                                                                                                                                  bearish sentiment, but less
                        -30                                                                                                       so than early in the pandemic

                        -60
                              02       04        06         08        10         12         14        16         18        20

                              Note: Net long positions are the difference between long and short crude oil positions by traders
                              in the New York Mercantile Exchange (NYMEX).

Source: Commodity Futures Trading Commission (CFTC)                                                                                            Numera Analytics | 35
OPEC cuts are helping stabilize prices
                                                                                                                 Drivers decomposition – Oil prices
                                                                                                                                 Year-to-date (%)
                                     Demand            USD         Production           Stocks         Speculation / prec.

                           20%
                                                                                                                                            Cuts helping
                            0%                                                                                                              stabilize prices

                           -20%        -14%
                                                       -24%
                                                                                                                                            Sentiment less of a drag
                           -40%
                                                                                                                                            than in March and April
                                                                                                                         -37%
                           -60%                                                                          -43%
                                                                        -61%            -60%
                           -80%
                                       01/20           02/20            03/20           04/20            05/20           06/20

                       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.

Source: Numera Analytics                                                                                                                             Numera Analytics | 36
Low demand remains the biggest drag
                                                                                                              Drivers decomposition – Oil prices
                                                                                                                           6M year-to-date (%)
                    12%                                                                  10%

                     0%
                                                                     -2%
                   -12%                                                                                                         -10%
                                                                                                            -15%
                   -24%                         -20%
                                                            Weak demand still
                   -36%                                     the biggest drag
                            -37%

                   -48%
                           Real oil           Demand             US dollar          Production             Stocks         Speculation /
                           prices                                                                                         precautionary

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

Source: Numera Analytics                                                                                                                    Numera Analytics | 37
Oil prices trading at a ~ $10 discount
                                                                                                                                          Brent spot vs. ‘fair’ value
                                                                                                                                         Risk premium – USD / bbl
                                         50

                                                                                                                       Premium (> 0)
                                         25
                             USD / bbl

                                          0                                                                                                           Brent trading at
                                                                                                                                                      a ~ $10 discount

                                         -25

                                                                                                                         Discount (< 0)

                                         -50
                                               03    05         07         09          11         13         15         17          19

                           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.

Source: Numera Analytics                                                                                                                                      Numera Analytics | 38
Market outlook

                 Numera Analytics |
Oil market outlook

 • 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 | 40
Demand factors dominate at a 12M horizon
                                                                                           12M variance decomposition – Brent
                                                                                                    Share of variability, 1986-20 (%)

                           Demand                                                          US dollar

                                                                             17%

                                      39%

                                                                                      11%            Production

                                                                                     4%
                                                                                                   Stocks
                                                                           12%
                                                      16%

                              Speculation                                           Precautionary

                            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.

Source: Numera Analytics                                                                                               Numera Analytics | 41
Oil demand should continue recovering
                                                                                                                                        Global oil consumption
                                                                                                                                   2020-21 outlook (Mbbl / day)
                                                                           92

                      Predictive distribtuion

                                                                                                           Demand should recover
                                                                                                           further, but will likely fall
                                                                                                           short of 100M bbl
                                                             2020
                                                                                                98
                                                                                                          > 100M bbl

                                                                                                                         2021
                                                                                                             28%

                                      80        84           88             92             96            101            105            109

                                                                                 Million bbl / day
                              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.

Source: Numera Analytics                                                                                                                             Numera Analytics | 42
Aided by stronger economic activity
                                                                                                                                         DM GDP outlook
                                                                                                                                  Trillions of (2010) USD
                           65

                                                                                                    95% P.I.

                           55

                           45

                           35
                                06         08        10         12        14        16         18        20f       22f

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

Source: Numera Analytics                                                                                                                    Numera Analytics | 43
Air travel is the weakest link
                                                                                                  Global air traffic seating capacity
                                                                                                     Deviations from baseline (%)
                20%
                                                              Projection

                 0%
                                                                                                              ICAO expects air travel to
                                                                  Domestic                                    be down 25% 12M out, a
               -20%                                                                                           loss of ~ 2M bbl / day

               -40%

               -60%                                                       International

               -80%

               -100%
                       1/20             4/20             7/20            10/20             1/21

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

Source: ICAO                                                                                                                 Numera Analytics | 44
Inventory overhang should diminish
                                                                                                                   OECD crude oil inventories
                                                                                                                      Monthly days of supply
                        100

                         90

                         80                                                                                           Expect an inventory
                                                                                                                      drawdown as demand
                                                                                                                      strengthens
                         70
                               Interquartile range
                         60

                         50

                         40
                              00      02      04      06      08       10      12      14       16      18    20

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

Source: EIA Short-term Energy Outlook (STEO)                                                                                       Numera Analytics | 45
Low CAPEX should keep NA supply tight
                                                                                                        Largest declines in US oil investment
                                                                                                              Quarter-on-quarter, SAAR (%)
                                                               Oil-specific         Recession
                           0%

                         -25%

                         -50%

                                                                                             -58%        -56%        -55%
                                                                                  -61%
                         -75%                              -66%       -66%
                                               -78%
                                   -84%
                        -100%
                                   Q4/86 Q2/20 Q4/09 Q1/16 Q1/02 Q2/15 Q1/81 Q3/91

                             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.

Source: US BEA; Numera calculations                                                                                               Numera Analytics | 46
Markets expect Brent to hit $46 12M out
                                                                                         Brent NYMEX futures
                                                                                                   USD / bbl

                                50
                                             July 2020                                   Markets expect Brent
                                                                                    46   to rise by 6% to $46 /
                                                                                         bbl one-year out
                                                                                    42
                                40           May 2020
                                                                                    39
                    USD / bbl

                                30                       March 2020

                                20
                                     1   3          5          7       9       11

                                                  Contract maturity (months)

Source: CME Group                                                                                     Numera Analytics | 47
But market view is quite conservative
                                                                                                                             Crude oil price outlook
                                                                                                                           Baseline and probabilities

          Brent Outlook                   Baseline                                           Probabilities (%)
          Horizon                        (USD / bbl)            > 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.

Source: Numera Analytics                                                                                                                         Numera Analytics | 48
High probability of oil price inflation
                                                                                                                         Likelihood of higher Brent prices
                                                                                                                                12M ahead probability (%)

                            90%
                                                                                                                                  81%

                            60%
                                                                                                                                  50%

                            30%

                            0%
                                   05         07          09          11          13          15         17          19

                                  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.

 Source: Numera Analytics                                                                                                                   Numera Analytics | 49
Improving the upside for oil investments
                                                                                                                                                          Crude oil vs. DM stocks
                                                                                                                                                        Excess returns probability

                                                      60%                                                                                              60%
                     12M outperformance probability

                                                      50%                                                                                              50%

                                                      40%

                                                      30%
                                                            Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q1-20

                                                            Note: Chart plots likelihood of crude oil investments outperforming DM stocks over a 12M
                                                            holding period. Probabilities above 50% indicate most likely outcome.

Source: Numera Analytics                                                                                                                                             Numera Analytics | 50
Favourable risk-reward trade-off 12M out
                                                                                                                                               Risk-reward comparison
                                                                                                                                                      12M investments
                                                   21%
                                                              Better risk-reward                                   1       Oil               Despite being a very risky
                                                                                                                                             investment, oil offers higher
                                                                                                                                             risk-adjusted expected returns
                                                                                               5
                           Real expected returns

                                                   14%

                                                                                             EU stocks
                                                   7%                                    4
                                                                                  5 US stocks
                                                                               EM bonds      6                   EM stocks
                                                                       3
                                                           2      US bonds                               Worse risk-reward
                                                   0%
                                                         0%            3%               6%              9%              12%

                                                                                      Downside risk

                                                    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).

Source: Numera Analytics                                                                                                                                        Numera Analytics | 51
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