Russia

The odds of Russia cutting oil output will rise going into 4Q23, as Ukraine’s endgame increases pressure on it, and it actively seeks to undermine President Biden’s re-election. We reckon a 2mm b/d cut would push Brent above $140/bbl by December 2024. This would push inflation and inflation expectations higher and raise the odds of more Fed rate hikes. BCA Commodity & Energy Strategy will remain long the COMT and XOP ETFs. At tonight’s close, we will be getting long December 2024 $100/bbl Brent calls.

Global oil demand growth is tracking with our estimate of ~ 1.8mm b/d for this year. Supply discipline is being maintained by OPEC 2.0, where the core (KSA and the UAE) and Russia have reduced production by ~ 240k b/d yoy in 1H23. In addition, KSA extended its unilateral production cut of 1mm b/d from July into August. We expect inventory draws in 2H23 as supply stays below demand. Our Brent forecast remains unchanged at $92/bbl this year, and $120/bbl next year. We remain long the COMT and XOP ETFs.

Falling inflation enables central banks to pause rate hikes, which is good news. But time goes on. Restrictive monetary policy, Chinese debt-deflation, energy supply shocks, US and global policy uncertainty, and extreme geopolitical risks will undermine hopes of a soft landing and beautiful disinflation.

Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.

China’s economic and diplomatic interests in the GCC region will expand, as will its military presence. Whether or not this stabilizes the region is yet to be determined, particularly if tensions in the South China Sea and other international waters traversed by both the US and China escalate. Underlying risk in energy markets will remain elevated. We remain bullish energy generally, and continue to favor equity ETF exposure to energy (XOP and XME), and commodity exposure via the COMT ETF.

The Russian mutiny reveals the underlying trend of domestic instability. Russian instability is negative for global stability. The endgame of the war in Ukraine is exacerbating the problem, likely pushing up the equity risk premium.

The attempted coup in Russia produced subdued short-covering rallies in oil, gas, and grains markets, as markets over time have observed that coups, rarely result in loss of production and exports. Markets await Putin’s next move. Unless and until a viable threat to the Putin government emerges, markets will continue pricing in fundamentals prevailing prior to Saturday’s attempted coup. We are keeping our base case brent and henry hub natgas price expectations unchanged.

We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).

In response to the first-ever federal indictment of a former President, investors should focus on the state of the economy and not on Trump’s legal trouble. They should also use the current market rally to stock up on protection, as a recession is still likely, albeit delayed.