Commodities & Energy Sector

Highlights Base metals are rebounding faster than oil in 2Q20, reflecting China’s first-in-first-out recovery from the global GDP hit caused by the COVID-19 pandemic (Chart of the Week). By 3Q20, the rebound in oil markets could be stronger than expected and surpass the base metals’ recovery, if the IMF’s latest EM GDP growth projections prove out. We examine a higher-growth scenario for non-OECD oil consumption – our proxy for EM demand – using the Fund’s projections. In it, EM oil consumption rises to 54.9mm b/d by 4Q20 and 56.4mm b/d by 4Q21. This would exceed our current estimates by 6.6% this year and 2.1% in 2021, if realized. Stronger EM consumption, coupled with global crude-oil production cuts would cause crude and product inventories to draw sooner and faster than expected, if these trends continue. Global policy uncertainty – economic and political – remains the critical risk to our metals and oil price outlooks, as it could retard a revival of growth and trade. The US and China appear to be on a collision course once again. Serious risks to global public health remain, particularly in light of a recently disclosed mutation to COVID-19. Feature Base metals are rebounding faster than oil in 2Q20, reflecting China’s first-in-first-out recovery from the global GDP hit caused by the COVID-19 pandemic. Prices for base metals likely will continue rebounding from the global hit to GDP caused by COVID-19 and its associated lockdowns, recovering more of the ground lost to the pandemic in 2Q20 than crude oil prices. This is largely a reflection of China’s first-in-first-out recovery from the global pandemic and the aggregate demand destruction following in its wake. This is the signal coming from our updated market-driven indicators shown in the Chart of the Week.1 China accounts for ~ half of the demand for refined base metals worldwide, and a comparable share of the supply side for refined metals and steel (Chart 2). Chart of the WeekBase Metals Rebounding Faster Than Crude Oil We use principal components analysis to extract common factors driving industrial commodity prices in real time from trading markets, which allows us to get a preliminary estimate of the recovery in base metals and crude oil demand. The two indicators shown in the Chart of the Week use daily stock and commodity prices, and other daily economic data. These indicators are called the Metals Demand Component and the Oil Demand Component. The former is largely dependent on the recovery in China/EM industrial activity, and also affects all cyclical commodities, including oil. Chart 2China Dominates Base Metals Supply And Demand Chart 3Policy Stimulus Will Restore Profitability In China The base metals’ rebound likely will continue throughout 2H20 as China’s economic activity gradually normalizes, fiscal and monetary stimulus kick in, and firms’ profitability recovers (Chart 3). “China’s industrial sector should get a boost from an acceleration in infrastructure investment and producer prices should turn moderately positive later in Q3,” based on the analysis of our colleagues in BCA’s China Investment Strategy.2 A weaker USD will start showing up in stronger indications of global growth – particularly in the EM markets – which will reverse the downtrend in our data-driven indicators of economic activity (Chart 4). However, given the lags in the release of these data, this will take time. Currently, our Metals Demand Component suggests the trend in base metals demand is upward and established, while our Oil Demand Component is still quite volatile and not yet decisively upward. Nonetheless, our oil indicator does highlight what appears to be a bottom in oil demand. Chart 4A Weaker USD Will Reverse Lagging Indicators Of Activity EM Demand Surge Will Revive Oil Prices The EM oil-demand growth forecast derived from the IMF’s GDP projections indicate growth could rise to as much as 54.9mm b/d by 4Q20 and 56.4mm b/d by 4Q21. This would exceed our current estimates by 6.6% this year and 2.1% in 2021, if realized. Over the short term, oil prices could diverge from demand until storage builds are contained and the market moves into a deficit. The logistics of moving and storing oil remains the primary driver of its price over the very short term, especially for landlocked crudes. The drain in storage could occur earlier than we expected in our forecast last month, if the IMF’s global growth trajectory play out in line with its latest projections.3 Using the Fund’s projections for EM GDP, we examine a scenario in which non-OECD oil demand grows significantly more than we estimated last month. Indeed, the EM oil-demand growth forecast derived from the IMF’s GDP projections indicate growth could rise to as much as 54.9mm b/d by 4Q20 and 56.4mm b/d by 4Q21. This would exceed our current estimates by 6.6% this year and 2.1% in 2021 (Chart 5), if realized. EM growth is the critical variable for global oil-demand growth, accounting for ~ 80% of global consumption growth in the past five years. As we’ve noted for some time, the massive fiscal and monetary stimulus being deployed globally will fuel the recovery of commodity demand (Chart 6). The oil-demand scenario driven by the IMF’s latest GDP projections, and the EIA’s April forecast share a common view of a sharp recovery in the level of non-OECD demand, with the former seeing demand destruction reversed by September, and the latter expecting EM consumption to return to pre-COVID-19 levels toward the end of this year, slightly ahead of us.4 Chart 5EM Oil Demand Could Surge On The Back Of Massive Global Stimulus Chart 6Global Fiscal and Monetary Stimulus Will Surge In 2020 And 2021 A surge in EM oil-demand growth – should it play out as expected – will occur against the backdrop of sharply lower global production levels this year. OPEC 2.0 pledged to cut ~ 8mm b/d starting this month vs. its 1Q20 levels, with its putative leaders – KSA and Russia – accounting for ~ 1.5mm b/d and 2mm b/d, respectively, of the reductions. (Based on OPEC 2.0’s October 1, 2018, reference level – except for KSA and Russia, both of which are cutting from a nominal 11mm b/d level – the cuts amount to almost 10mm b/d for May-June, and 7.7mm b/d for 2H20).5 In addition, the US likely will lose close to 2.5mm b/d from involuntary cuts between now and the end of 2021 due to the global oil price collapse (Chart 7).6 Chart 7US Shale-Oil Output Could Fall ~ 2.5mm b/d OPEC 2.0 Might Have To Lift Production The demand surge implied by the IMF’s expected EM GDP recovery this year and next almost surely would be met by higher output in OPEC 2.0 production. The demand surge implied by the IMF’s expected EM GDP recovery this year and next almost surely would be met by higher output in OPEC 2.0 production, to keep prices from charging ahead too sharply in 2H20 and in 2021. The increase in the coalition’s spare capacity – consisting of the production taken off the market through production cuts and the 2.5mm b/d or so that it had prior to the COVID-19-induced demand destruction – will allow OPEC 2.0 to quickly meet any supply shortfalls as demand recovers before the US shale-oil producers can ramp production. All the same, the market could experience episodic volatility on the upside, if our EM demand calculations based on IMF GDP projections and those of the EIA are correct. It is highly likely, in our view, OPEC 2.0 will be the direct beneficiary of the massive fiscal and monetary stimulus of the DM and EM economies– oil being a derived demand that depends on the income available to firms and households. This means the odds of seeing $80/bbl Brent is more likely than not next year: Importantly, EM and DM consumers will be better equipped to absorb higher oil prices with the massive stimulus sloshing around the global economy next year. For now, we are maintaining our expectation of $65/bbl average prices for Brent next year, but we will continue to watch EM GDP growth in upcoming World Bank and IMF research (Chart 8). Chart 8Upside Risks in Oil Prices As GDP Growth Prospects Improve Oil Price Risks Abound An upside surprise in EM oil-demand growth – consistent with the IMF’s revised GDP projections – could cause us to increase our demand expectation when we update balances and forecasts this month. Two-way price risk abounds in the oil markets. Even if options volatility on the CBOE is considerably lower than its recent record-setting peak, it still is close to 100% on an annualized basis (Chart 9). On the upside, as we’ve discussed above, if EM GDP growth is in the neighborhood projected by the IMF, demand could surge, based on our calculations. We have no doubt OPEC 2.0 can cover any shortfall, but it can’t do it immediately, so we would expect episodic volatility this year and next. Chart 9Oil Price Risk Abounds On the downside, the COVID-19 pandemic could enter a second wave just as governments around the world are removing lockdown orders and phasing in a return to normal commerce. Of particular note in this regard is the emergence of a mutation of the original strain of the COVID-19 virus that is more contagious, and now constitutes the dominant strain in the world. The mutated form of the virus appeared in Europe and quickly spread to the US east coast, and then the rest of the planet.7 Also, the risk that “animal spirits” will not re-emerge in businesses and consumers globally remains elevated. Despite the large increase in global money supply, confidence needs to be restored for the money multiplier to move up. In addition to that, signs of another round in the Sino-US trade war in the offing could restrain growth and trade. Bottom Line: Our base case remains a resumption in global growth in 2H20, with base metals recovering most of their lost ground in 2Q20 and oil following in 3Q20. An upside surprise in EM oil-demand growth – consistent with the IMF’s revised GDP projections – could cause us to increase our demand expectation when we update balances and forecasts this month. However, serious risks to global public health remain, and trade tensions between the US and China once again are percolating.   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 Refinery runs in the US collapsed by 25% this year in the wake of the COVID-19-induced economic shutdown. Still, WTI prices rose 30% this week – from a very low level – as oil supply in the US – and globally – is adjusting rapidly to lower demand (Chart 10). Wells shut-ins are accelerating throughout North America. In the Bakken Basin, shut-ins reportedly reached 400k b/d this week.8 Moreover, the effect of the 50% YTD decline in US rig count will be visible over the coming weeks. The rig count is now well below the level necessary to keep production flat. Precious Metals: Neutral Gold prices remained above $1,700/oz as of Tuesday’s close, supported by elevated economic uncertainty. Virus-related uncertainty will gradually wane as economies reopen. This could pull gold down temporarily as safe-asset demand is reduced. Nonetheless, our Geopolitical team believes risk and uncertainty will partly shift to the geopolitical arena in the run-up of the US election.9 Additionally, the massive stimulus by the US Fed and Treasury will become an important driver of the yellow metal’s price going forward. Gold will trend higher as US rates remain stuck at zero, as it did in 2008 (Chart 11). Ags/Softs:  Underweight Following lockdown easing measures in different parts of the world, hopes of a rebound in ethanol demand helped push CBOT Corn futures 0.5% higher on Tuesday. Additionally, continuing drought conditions in Brazil will limit the country’s yields and support corn prices in the near term. Soybeans climbed 3¢/bu on Tuesday, backed by China’s booking of 378k tons of the oilseed as it seeks to fulfill the US trade deal obligations. Gains throughout corn and soybeans were mitigated by a strong planting progress as reported by the USDA. Wheat ended slightly higher after field assessments conducted by Oklahoma State University Extension projected the state harvest down by 13.5 Mn bushels year-on-year. Chart 10Crude Recouping Some Ground Chart 11Fed Rates Stuck At Zero Will Push Gold Higher   Footnotes 1     Given the importance of the daily prices in these indicators, we are explicitly assuming trading markets are continually processing fundamental information on supply, demand, inventories, and financial and economic conditions in industrial commodity markets and reflecting them in prices. This is especially important when an exogenous event like the COVID-19 pandemic hits global markets. Market participants have to work out the implications of the shock and its resolution in real time, which can make for exceptionally volatile prices. Lags in the economic data provided by the likes of the World Bank, the IMF, EIA, IEA and OPEC make the time series we typically rely on to model fundamentals and their expected evolution less effective in estimating the current state of commodity markets. Their forecasts, however, remain extremely useful, as they are developed by analysts with particular expertise in global macroeconomic forecasting, in the case of the World Bank and IMF, and oil markets, in the case of the EIA, IEA and OPEC. 2     Please see A Slow And Rocky Path To Recovery published by BCA Research’s China Investment Strategy April 29, 2020. It is available at cis.bcaresearch.com. 3    Please see US Storage Tightens, Pushing WTI Lower for our most recent supply-demand balances and oil price forecasts, which were published April 16, 2020. We use the global growth forecasts of the IMF and the World Bank as inputs to our fundamental modeling to estimate oil demand. In particular, we’ve found a parsimonious relationships between OECD, non-OECD and world oil demand and DM and EM GDP. Chapter 1 of the Fund’s advance forecast was published last month in its World Economic Outlook under the title “The Great Lockdown.” 4    Assuming the Fund’s projections of EM GDP are approximately correct, the impact on oil demand is quite large as can be seen in the comparisons shown in Chart 5. However, the IMF’s estimate for oil prices is sharply below our estimate, which was made last month assuming lower levels of EM oil demand. We expect Brent crude oil prices to average $39/bbl this year and $65/bbl next year, vs. the Fund’s estimate of $35.61/bbl in 2020 and $37.87/bbl in 2021. The EIA’s estimate of non-OECD demand is comparable to our, as seen in Chart 6, but its price forecasts for this year and next – $33/bbl and $46/bbl – also are below ours. 5    Please see US Storage Tightens, Pushing WTI Lower, where we outline OPEC 2.0’s cuts. 6    Please see our April 30 report entitled Stand By For Heavy Rolls: June WTI Could Go Below $0.00/bbl for additional discussion. 7     Please see The coronavirus has mutated and appears to be more contagious now, new study finds published by cnbc.com May 5, 2020. 8    Please see 'Like watching a train wreck': The coronavirus effect on North Dakota shale oilfields published by reuters.com May 4, 2020. 9    Please see #WWIII published by BCA Research’s Geopolitical Strategy May 1, 2020. It is available at gps.bcaresearch.com.   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

Yesterday our 10% rolling stop got triggered on the long S&P oil & gas exploration & production (E&P)/short global gold miners pair trade. We are compelled to reinstate this intra-commodity pair trade, despite the explosive one week return, as neither the macro backdrop nor relative profit fundamentals changed. Importantly, the Fed’s determination to quash volatility is a powerful source of further gains in the relative share price ratio as the oil/gold ratio should regain its footing (volatility shown inverted, bottom panel). In addition, more and more states and a rising number of countries are setting the groundwork to reopen their economies. This should absorb some of the excess oil supply and also push real yields higher, both of which are a boon for relative share prices.  Bottom Line: While we locked in gains of 10% in a mere week on the long S&P E&P/short global gold miners pair trade, we are compelled to reinstate this intra-commodity pair trade. When it hits the 20% return mark anew, it will trigger a 10% rolling stop as a way to protect profits for our portfolio. For additional details please refer to the April 27th Weekly Report.  

Highlights WTI futures contracts delivering into Cushing, Oklahoma, in June could trade or go off the board below $0.00/bbl next month, just as the May contracts did this month, when they changed hands at a low of -$40.32/bbl last week.  Oil storage at this critical hub is approaching its practical limit of 80% full, raising the odds of sub-zero pricing (Chart of the Week). Pricing pressures will accelerate the rate of oil-supply destruction in the US, particularly in the prolific shale-oil basins.  We are revising our estimate of US production losses upward to 1.6mm b/d this year, and to 2.3mm b/d from January 2020 to December 2021. Retail speculation – in the US via ETFs and long-only index exposure, and in China via bank wealth-management products – is compounding WTI price volatility. The CME Group, which operates the NYMEX WTI futures and options markets, will be forced to address storage constraints in Cushing, and will have to better manage retail-spec positioning: These factors increase the probability of negative pricing and exacerbate price volatility as contracts go off the board. Feature The stunning -$40.32/bbl print for May 2020 WTI futures last week marks the first time this global oil benchmark has traded below $0.00/bbl. Negative prices are nothing new to non-storable commodities. In electricity markets, for example, wholesale prices go negative to force generation offline to balance supply and demand so that markets clear.1 Negative pricing also is seen in natural gas markets. It is occurring in the Permian basin with greater frequency, due to insufficient pipeline take-away capacity for all of the associated gas being produced there as oil output in the basin soars. This leaves no alternative to producers but to either shut in oil production or flare the associated gas. Indeed, forward natgas prices at the Waha Hub in Pecos County, Texas, recently have traded below zero for prolonged periods, owing to the surge in Permian oil production (Chart 2).2 Chart of the WeekCushing Approaches Crude Storage Limit Chart 2Lack Of Storage Pushes Natgas Prices Below Zero   Markets once again were reminded WTI futures are far more than electronic blips on computer screens: They are binding legal contracts to physically deliver light-sweet West Texas Intermediate (WTI) crude oil into the Cushing, Oklahoma, pipeline and storage hub. The stunning -$40.32/bbl print for May 2020 WTI futures last week marks the first time this global oil benchmark has traded below $0.00/bbl since the 1983 introduction of the NYMEX crude oil futures (Chart 3). Markets once again were reminded WTI futures are far more than electronic blips on computer screens: They are binding legal contracts to physically deliver light-sweet West Texas Intermediate (WTI) crude oil into the Cushing, Oklahoma, pipeline and storage hub. Going off the board long requires contract holders to take delivery into a pipeline or storage facility; going off short requires contract holders to make delivery. Chart 3WTI June Futures Could Go Below $0.00/bbl Owing to structural flaws in the delivery mechanism for WTI futures, and what appears to be a lapse in monitoring positions in the spot-month contract as May 2020 WTI was going off the board last week, the likelihood June 2020 WTI contracts pricing below $0.00/bbl is high. These flaws must be addressed by the CME Group’s NYMEX division and federal regulators, given the WTI futures contract’s importance to the global physical market and the capital at risk. Implications Of Negative WTI Prices Storage at Cushing is, for all intents and purposes, full. Cushing accounts for ~ 15% of the total 653mm barrels of US crude oil storage, which was only at 60% of capacity in mid-April, based on the US EIA’s reckoning. However, Cushing is the delivery point of the physically settled WTI futures contracts traded on the NYMEX. With close to 80% of capacity filled – ~ 58mm barrels of the total capacity of ~ 76mm barrels – the operational limit of storage has been reached at Cushing. This is amply seen in the June-vs-July intermonth spread between futures, which, earlier this week, settled at more than $5/bbl – i.e., more than 10x the then-elevated 50 cents/bbl/month being charged to store oil in Cushing in March (Chart 4). Intermonth spreads are used as proxies for the cost of storage for physically delivered contract that actually can be stored, like oil. If physical surpluses cannot be moved out of regions where storage is full – and pipelines also are full – prices are forced lower and lower until enough production is shut in to allow storage to drain and inventories to return to normal levels. This is happening now in Oklahoma and the prolific Texas shale basins, and other shale basins in the US where horizontal rigs are being laid down and drilling crews are being laid off (Chart 5). Chart 4Intermonth-Spread Blow Out Indicates Full Cushing Storage Chart 5Texas Horizontal Rig Counts Collapse We are revising our estimate of US production losses upward for this year, and to 2.3mm b/d from January 2020 to December 2021. In our most recent modeling of US shale-oil production, we expect these pricing pressures to accelerate the rate of oil-supply destruction, particularly in the prolific shale-oil basins. In fact, we are revising our estimate of US production losses upward for this year, and to 2.3mm b/d from January 2020 to December 2021 (Chart 6). Depending on how long WTI prices stay depressed in the key producing basins, this supply destruction could be even more pronounced. The same is true of global storage: Kpler, the oil-storage tracker, last week estimated global onshore inventories were 85% full.3 Until sufficient supply destruction occurs to offset the COVID-19-induced demand destruction, inventories cannot draw. Floating storage also is surging, as the crude and product forward curves fall deeper into contango, and incentivize holding stocks on the water (Chart 7). Chart 6Lower Prices Will Push US Oil Output Lower Chart 7Floating Storage Volumes Surge Price will go low enough – negative if needs be – to clear surplus supply to rebalance markets. Storage acts as a shock absorber for physical commodities like crude oil – when there is more supply than demand, the physical surplus is moved to storage until it is needed, and vice versa when there is a physical deficit. When inventories fill in Cushing – arguably the most important crude-oil delivery hub in the world, given WTI is the most liquid crude oil futures contract in the world – it is as if there is no storage at all there. At this point, market for WTI behaves a lot like electricity, which cannot be stored (at least at utility scale), or natgas at Waha, where storage and pipeline takeaway capacity are in very short supply. In such circumstances, price will go low enough – negative if needs be – to clear surplus supply to rebalance markets. This appears to be what spooked markets last week when WTI futures for May delivery traded as low as -$40.32/bbl. Retail Specs Push WTI Volatility Higher Speculators perform a vital and necessary function in futures markets – they willingly accept risk hedgers want to shed. Natural longs – i.e., producers – do not want to sell when prices are low, which is when natural shorts want to buy. Likewise, natural shorts – i.e., consumers – don’t want to buy when prices are high, which is when natural longs want to sell. Speculators provide the liquidity that allows producers and consumers to hedge. When prices are relatively high, they can provide a bid to oil producers looking to hedge production – they may be short-term traders or have a view prices are going higher, or they may be getting out of short positions they put on earlier. When prices are low, speculators provide offers – selling futures because they are short-term traders, or have a view prices are going lower, or they are getting out of long positions. Speculators trade on information and typically never stand for delivery of futures like WTI, which means they typically are out of prompt-month contracts before they are getting ready to go off the board. At that point, only physical-market participants – producers, consumers and physical traders – are left in the market balancing their physical books. When speculators find themselves trading WTI futures as they are getting ready to go to delivery, something in their risk-management systems has gone terribly wrong. Not only do they not trade the physical oil, but they don’t know who to call to take them out of their risk. Something also has gone terribly wrong at the regulatory level: At the CME, which, as the operator of the NYMEX oil trading markets, and at the US Commodity Futures Trading Commission (CFTC) in Washington, D.C. The CME is the self-regulatory organization responsible for ensuring its rules are followed and markets trade in an orderly fashion, and, at the federal level, the CFTC exercises oversight and enforces laws and regulations. It appears Bank of China (BOC), the fourth largest bank in China and the world, has found itself holding long positions in WTI futures delivering in May on the last two days of trading last week. These contracts supported wealth-management products – known as “bao” or treasure – the state-owned bank offered its retail clients.4 Other banks in China also offer such products, but it appears BOC was the only one that did not roll out of its delivery exposure in a timely manner.5 The exposure BOC was trying to trade out of was not huge by normal standards, but after settling its open May futures at -$37.63/bbl, BOC clients apparently lost close to $1.3 billion.6 How the CME or the CFTC allowed a commercial bank with no capability to take delivery of WTI in Cushing against a long NYMEX WTI futures contract as it was going off the board is a mystery. Markets will have to wait for a detailed post-mortem to determine what exactly happened, and how. Retail Piles Into WTI Exposure The experience of BOC – and, most likely, the shock of such deeply negative WTI prices realized upon settlement of these contracts – and a change in US regulations on spot-month position limits for futures used by commodity-pool operators prompted a wholesale exodus from spot-month WTI futures – the June 2020-delivery WTI futures that deliver in Cushing – this week. As a result, the commodity-pool operator running the United States Oil Fund (USO) ETF and S&P Dow Jones, which designs and markets long-only commodity index products for investors – e.g., the S&P GSCI index – rolled their June WTI futures into July and later months in an effort to avoid holding length in the June contract out of fear these futures could trade negative.7 USO is geared to retail investors, and inflows are negatively correlated with front-month WTI futures prices – when prices tank retail investors pile into the ETF (Chart 8). This can dramatically increase the number of futures the fund has to buy to provide its product to retail investors. Chart 8Retail Piles Into WTI Futures Exposure Markets were exceptionally volatile early in the week as these fire sales were being executed. The $3.6 billion USO ETF, in particular, apparently was ordered to spread its spot-month exposure (June WTI) across the forward curve by the CME over the first three days of this week. This action was taken to keep the USO ETF from exceeding new position-limit levels in the spot-month contract, which go into effect May 1, and state no entity can have more than 25% of total open interest in the WTI spot contract.8 Markets were exceptionally volatile early in the week as these fire sales were being executed. This rolling out of June WTI exposures should reduce – but not eliminate – the selling pressure on front-month WTI futures contracts by providers of retail and institutional commodity exposure as June goes off the board next month. However, if storage at Cushing remains at tank tops, the rolling by these ETFs that source futures liquidity to hedge their exposures could again push spot prices below $0.00/bbl as the June WTI futures go off the board May 19.9 That said, it is difficult to ascertain exactly what exposure retail investors are getting now when they buy the USO ETF – its WTI futures now span contracts into next year, based on news reports. This could prompt investors to jettison positions, setting up another round of fire sales in WTI futures. Markets also will expect a post-mortem explaining how the CME and CFTC allowed this retail-focused fund could exceed position limits in spot-month WTI futures contracts so significantly at any point in time, let alone when Cushing infrastructure is so extraordinarily taxed. WTI Futures Contract Flaws Contribute To Volatility The CME has failed to find a way to ensure those holding futures that are going off the board are bona fide hedgers capable of making and taking delivery, as the BOC experience showed. The CME Group has not acquitted itself well in the termination of May 2020 futures trading. And, as researchers at the Oxford Institute for Energy Studies note, the past couple of weeks have exposed deep flaws in the WTI futures contracts’ physical-delivery mechanisms, which have been persistent.10 The lack of sufficient storage at Cushing to accommodate the volume of trading in WTI futures is not a new problem. In 2009, the Kingdom of Saudi Arabia changed its pricing benchmark for US sales to the Argus Sour Crude Index for its crudes sold into the US Gulf, because the WTI contract detached from fundamentals then owing to infrastructure constraints at Cushing. The CME has failed to find a way to ensure those holding futures that are going off the board are bona fide hedgers capable of making and taking delivery, as the BOC experience showed. In addition, the CME has shown it has no institutionalized automatic delivery procedures that kick in when Cushing storage is full – e.g., making and taking delivery, say, in the US Gulf using a WTI contract loaded for export, as the OIES researchers observe. Lastly, as of April 22, the CME is using an options-pricing model based on the original theory on random walks developed by the great Louis Bachelier in 1900, which assumes prices are normally distributed and can go below zero, vs. its previous methodology using Fischer Black’s commodity option pricing model, which assumes prices are log-normally distributed and have a lower boundary of zero.11 We’ll be exploring this in further research.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com     Commodities Round-Up Energy: Overweight Exports from OPEC countries increased by more than 2mm b/d in April – led by Saudi Arabia and UAE – according to Petro-Logistics – a seaborne oil trade analytics company. This is flooding global markets while global demand is expected to drop to its lowest level since 2Q03 this month. Separately, we are revising up our Canadian oil sands shut-in estimates to ~ 800k b/d in 2Q20 from ~ 500k b/d, as US demand for Canadian oil will be hit more severely than we previously anticipated and local storage is filling rapidly. Rystad Energy now expects Canadian capex to fall 41% y/y in 2020. This will have a lasting impact on the industry’s production capacity. Base Metals: Neutral The LMEX rose 3% since the start of April – led by nickel and copper prices moving up by ~ 6%. Base metals – chiefly aluminum and copper – are poised to rebound in 2Q20 if China’s economy continues to improve and is not hit by a second wave of COVID-19 infections. According to BCA’s China Investment Strategy, the country’s fiscal response is now expected to reach 10% of its GDP this year. This will support further upside in base metals prices (Chart 9). Precious Metals: Neutral Despite the record fiscal and monetary stimulus deployed globally, consumer and market-based inflation expectations remain low, as markets focus on the deflationary effects of the COVID-19 shock and the uncertainty about the speed of the recovery (Chart 10). The low realized inflation post-GFC stimulus could influence investors’ expectations down. We see inflation risks as materially higher which will warrant larger protection in a diversified portfolio over the coming year. Inflation expectations will normalize later this year and next, boosting inflation hedges. Nominal bonds’ protection will remain expensive as rates in major DM countries are expected to stay low for a prolonged period. Chart 9 Chart 10       Footnotes 1     Please see Bajwa, Maheen and Joseph Cavicchi, “Growing Evidence of Increased Frequency of Negative Electricity Prices in U.S. Wholesale Electricity Markets.” IAEE Energy Forum, 4th Quarter 2017. 2     Please see U.S. Gas Prices Turn Negative at Texas Waha Hub published by the Pipeline & Gas Journal March 3, 2020. The article notes, “The first swing to negative spot prices in almost seven months occurred due to pipeline constraints and as mild weather cut heating demand. Prices in the forward market have been trading below zero for weeks on expectations there will not be enough pipelines to transport record amounts of gas from the region’s shale oil fields. That gas that comes from oil wells, called associated gas in the industry, helped propel U.S. gas output to record highs, driving prices to their lowest in years as production outpaces demand for the fuel. Analysts expect gas prices in 2020 to fall to their lowest since 1999.” 3    Please see Oil prices sink as world runs low on storage capacity amid frail demand published by reuters.com April 28, 2020. The IEA estimates total onshore storage globally at close to 7 billion barrels, according to the Center for Strategic & International Studies in Washington, D.C. Please see The Oil Inventory Challenge published by the CSIS April 20, 2020, which notes the US has ~ 1.3 billion barrels of storage, while China has an estimated 1.5 billion barrels. Of that ~ 7 billion barrels of nameplate capacity, ~ 80%, or ~ 5.6 billion barrels, represents the operational limit. 4    Please see The world's 100 largest banks published by S&P Global Market Intelligence April 5, 2019. 5    Please see China's ICBC closes commodity-linked products to new investment published by reuters.com April 27, 2020. 6    Please see Bank of China says main investors to settle crude oil product at -$37 published by reuters.com on April 22, 2020. 7     Please see Futures contract moves endangering WTI prices again published by worldoil.com April 28, 2020. 8    Please see USO ETF pushes oil futures exposure out to June 2021 published by etfstrategy.com April 27, 2020. Earlier this month, the USO ETF has accounted for close to 30% of June WTI futures. Please see Biggest Oil ETF Shakes Up Structure published by etf.com April 17, 2020. 9    The USO ETF is not the only fund sourcing futures liquidity to provide retail exposure to WTI, but it is by far the largest. Please see Oil ETF roils already volatile crude markets published April 27, 2020, by investmentnews.com. 10   Please see Oil Benchmarks Under Stress published by OIES April 28, 2020. 11    Please see Davis, Mark, and Alison Etheridge. Louis Bachelier's Theory of Speculation: The Origins of Modern Finance. Princeton University Press, 2006; and Black, Fischer, “The Pricing of Commodity Contracts,” Journal of Financial Economics, Vol. 3, (1976), pp. 167-79, reprinted with permission in Interrelations Among Futures, Option, and Futures Option Markets (1992), the Board of Trade of the City of Chicago publisher.     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 Even as a net oil importer, China loses more than it gains when oil prices collapse. An oil price collapse generates a formidable deflationary force, which will further depress China’s industrial pricing power and profit growth in Q2. There are early signs that demand in some sectors is gaining traction in the first three weeks of April. A full removal of travel restrictions in late May in China should help speed up the return of domestic business activities. We maintain our view that China’s economic recovery will pick up momentum in H2, underpinning our cyclical overweight stance on Chinese risk assets. Feature The nosedive in oil futures last week was a rude awakening of the enormous and unpredictable impact the pandemic has on the global economy and financial markets. WTI futures for May 2020 delivery fell to -$40.40 per barrel on April 20, an unprecedented event.  The collapse in oil prices since March will generate substantial deflationary headwinds to China’s economy in the months ahead (Chart 1). Producer prices are already in contraction. An imported deflation from low oil prices will weaken industrial pricing power even more, pushing up real rates. China’s industrial profit growth also moves in lockstep with producer prices. A deepening in PPI contraction means industrial profit growth will remain underwater, underscoring our view that the near-term outlook for Chinese stocks is yet to turn sanguine (Chart 2). Chart 1Falling Oil Prices: A Substantial Deflationary Force Chart 2Deflation Weakens Industrial Profit Growth   Oil prices will likely rebound in Q3 when the global economy re-opens, oil supply cuts take hold and the US dollar peaks. Our Commodity and Energy strategist estimates that WTI spot prices will reach $38/barrel by end-2020.1 A modest recovery in oil prices alone will not be enough to lift Chinese producer prices back to positive. The substantial reflationary efforts from China’s policymakers since Q1 should start to have an impact on the real economy in H2. The exponential credit growth should effectively prop up investment and consumption growth, and reduce inventory overhang in the industrial sector. We expect industrial producer prices and profits to turn slightly positive in Q3/Q4, underpinning our constructive view on Chinese stocks in the next 6- to 12-months. Oil Price Collapse: A Bane, Not A Boon China, as a net oil importer, stands to lose more than gain in an oil price war. This is contrary to commonly held economic theory that net oil importing countries are winners from cheaper oil. In theory falling oil prices reduces import prices, improves net oil importers’ term of trade, and in turn contributes positively to their GDP growth. In reality oil prices rarely fall in isolation. A precipitous fall in oil prices is almost always triggered by a sharp decline in global demand, accompanied with a spike in the US dollar, and results in a turmoil in the global financial markets (Chart 3). Therefore, depending on where an economy is positioned in the global value chain, a net oil importer may lose even more than a net oil exporter when oil prices collapse. Chart 3Global Trade Remains Under Pressure Until Dollar Peaks Chart 4China Loses More From Falling Trade Than Gains From Falling Oil Prices At only 14% of world oil consumption, China’s demand for oil alone is not enough to support a price recovery. But as a global manufacturing powerhouse, the benefits China has gained from cheaper oil in the past cycles were often more than offset by the economic and financial shocks from an oil price collapse (Chart 4). The small positive contribution to China’s GDP growth via savings on oil import bills is further discounted by losses from China’s own oil and oil-product exports (Chart 4, middle panel). China’s oil and gas sector does not necessarily benefit from collapsing oil prices. The country’s domestic oil exploration becomes deeply unprofitable when international oil prices collapse. Falling domestic demand for finished oil products and rising competition in the industry when prices are low squeeze out any extra profits for oil refineries (Chart 5). Chart 5China’s Energy Sector Suffers Too In An Oil Bear Market Chart 6Energy Costs: A Small Part Of Chinese CPI Chart 7US Consumers Benefit Much More From An Oil Price Decline Than Chinese Consumers Furthermore, unlike the US, Chinese household consumption does not get a boost from cheaper oil. Food prices, rather than energy, drive the overall consumer price inflation in China (Chart 6). In addition, China’s domestic petrol market is heavily regulated and retail prices for energy are set by the Chinese government. China does not pass on the entire benefit of an energy price decline to its consumers, a rigid policy that has not been changed since 2016.2 As such, the current reduction in oil prices will not have the same “tax cut” benefit as it does for US consumers (Chart 7). Bottom Line: Low oil prices, accompanied by a strong dollar and depressed global trade, create a self-feeding deflationary feedback loop to China’s industrial sector, reducing the effects of the existing reflationary measures on its economy. Budding Signs Of Reflation A modest recovery in oil prices in Q3 will not be enough to return China's PPI to positive territory. Even when the global economy re-opens, the initial recovery in business activities and demand will likely be gradual, a situation China has experienced in the past two months (Chart 8). Thus, China’s domestic demand will bear most of the brunt to shore up inflation in produced goods, by propping up investment and consumption growth. We expect China’s substantial reflationary measures to start filtering into the real economy in H2. China’s industrial sector should get a boost from an acceleration in infrastructure investment and producer prices should turn moderately positive later in Q3 (Chart 9). Chart 8China’s Export Growth Set To Decline Further In Q2 Chart 9Huge Credit Wave Should Start Lifting Industrial Profits In H2 High-frequency data point to some early signs of a rebound in China’s domestic demand. The annual growth in the transaction volume of rebar steel rebounded from an 8% decline in March to 4% growth in the first three weeks in April.3 The contraction in passenger car sales also narrowed from -38% in March to -7.3% so far in April.4 China is ramping up its COVID-19 antibody testing to prevent a second-wave outbreak and is preparing for the National People’s Congress (NPC), which may take place in mid-May. Inter-provincial travel restrictions have limited the speed of recovery in business operations, but we expect such cautionary measures to be fully lifted in late May. The removal of logistic restrictions will help to accelerate a return to normal in both domestic production and demand. As we noted in our last week’s report,5 the April 17 Politburo meeting confirmed a policy shift to maximum reflation. President Xi’s new slogan, “The Six Stabilities and The Six Guarantees,” sets the tone that the government will increase investments to ensure that China’s post-pandemic economic growth is strong enough to stabilize employment. Bottom Line: Chinese business activities continue to inch up.  The recovery in domestic demand should pick up momentum in H2 to offset imported deflationary pressures on China’s industrial profits.  Investment Conclusions In the near term, a strong US dollar is a key risk to the recovery of China’s industrial profits.  The greenback not only generates downward pressure on oil prices and global trade, but also puts the RMB in a poor position of depreciating against the dollar but at the same time appreciating against China’s export competitors (Chart 10). All are creating headwinds to China’s economic recovery. We recommend that investors stay on the sidelines in the near term until the dollar peaks and oil prices rebound, probably in Q3.  However, on a cyclical time horizon, as the global economy re-opens and demands slowly recovers in H2, the flood of stimulus including China's own reflation efforts should help to restore investors’ risk appetite and lift the prices of risk assets. Although Chinese stocks have passively outperformed global stocks this year, the strong rebound in the SPX in recent weeks has made Chinese stocks slightly less overbought in relative terms (Chart 11). Chart 10A Tough Combination For The RMB Chart 11Chinese Stocks: Slightly Less Overbought In Past Weeks We expect China’s corporate profit growth to outpace global earnings growth this year, even as other economies re-open and start to recover. This warrants an overweight stance on Chinese stocks after near-term risks and market gyrations subside.   Jing Sima China Strategist jings@bcaresearch.com     Footnotes 1Please see Commodity & Energy Strategy Weekly Report "USD Strength Restrains Commodity Recovery," dated April 23, 2020, available at ces.bcaresearch.com 2The floor for retail fuel prices is set at $40 a barrel to limit losses at China’s state-owned oil companies, which generally have average production costs in the range of $40-$50 per barrel. http://english.www.gov.cn/news/top_news/2016/01/13/content_281475271410529.htm 3Based on daily data from MySteel. 4Based on weekly data from China Passenger Car Association. 5Please see China Investment Strategy Weekly Report "Three Questions Following The Coronacrisis," dated April 23, 2020, available at cis.bcaresearch.com Cyclical Investment Stance Equity Sector Recommendations

Highlights Real Yield Curve: Last week’s negative oil print could signal the peak in deflationary sentiment for this cycle. It’s a good time for bond investors to enter real yield curve steepeners. Buy a short-maturity real yield (1-year or 2-year) and sell a long-maturity real yield (10-year or 30-year). High-Yield: High-yield bond spreads are much too tight relative to the VIX and ratings migration. This is justified for Ba-rated issuers that can tap the Fed’s emergency programs. However, B-rated and below spreads look vulnerable. Investors should overweight Ba-rated junk bonds and underweight the B-rated and below credit tiers. Bank Bonds: US bond investors should overweight subordinate bank bonds within an allocation to investment grade corporate credit. Subordinate bank bonds are Baa-rated and thus offer reasonably high spreads. But unlike other Baa-rated bonds, banks should avoid ratings downgrades during this cycle. Feature Oil was the big mover in financial markets last week, with the WTI price dropping briefly into negative territory on the day before expiry of the May futures contract.1  Bond markets didn’t react much to the negative oil price (Chart 1), but this doesn’t mean that the energy market is unimportant for yields. On the contrary, the oil price often sends important signals about the near-term outlook for inflation, a key input for bond investors. Chart 1Negative Oil Didn't Shock The Bond Market A Bond Market Trade Inspired By Negative Oil The Fisher Equation is the formula that relates nominal yields, real yields and inflation expectations. In its simplest form the Fisher equation is: Nominal Yield = Real Yield + Inflation Expectations When applying this equation to the act of bond yield forecasting we find it helpful to note that both the nominal yield and inflation expectations have specific valuation anchors. The Federal Reserve sets the valuation anchor for nominal yields because it controls the overnight nominal interest rate. If you enter a long position in a nominal Treasury security and hold to maturity you will make money versus a position in cash if the average overnight nominal interest rate turns out to be lower than the nominal bond yield at the time of purchase. The oil price often sends important signals about the near-term outlook for inflation, a key input for bond investors. Similarly, inflation expectations are anchored by the actual inflation rate. If you enter a long position in inflation protection and hold to maturity you will make money if actual inflation turns out to be higher than the rate that was embedded in bond prices at the time of purchase.2 Turning to real yields, we see why the Fisher Equation is important. Real yields have no obvious valuation anchor. This means that the best forecasting technique is often to: (1)   Use our known valuation anchors (the fed funds rate and inflation) to forecast the nominal yield and inflation expectations. (2)  Use the Fisher Equation to back-out a fair value for real yields. With all that said, let’s apply this framework to today’s bond market in light of last week’s dramatic oil price moves. Inflation Compensation The cost of inflation protection tracks the oil price, more so at the front end of the curve than at the long end. This makes sense given that recent oil price trends tell us a fair amount about the outlook for inflation over the next year but very little about the outlook for inflation over the next 10 or 30 years. The inflation market didn’t react much to oil’s dip into negative territory last week, but this year’s broader drop in the WTI price from above $50 to below $20 had a big impact on TIPS breakeven inflation rates and CPI swap rates, particularly at short maturities (Chart 2). In fact, consistent with expectations for a very low oil price, the bond market is now pricing-in deflation over the next two years. Chart 2Bond Market Priced For Deflation Nominal Yields The Fed’s zero interest rate policy is having a profound effect on nominal bond yield volatility. Because the consensus investor expectation is that the Fed will keep rates pinned near zero for a long time, almost irrespective of economic outcomes, even a significant market event like a plunge in the oil price will do very little to move nominal bond yields. During the last zero-lower-bound period, nominal bond yield volatility fell across the entire yield curve but fell much more at the short end of the curve than at the long end (Chart 3). The same phenomenon will re-occur during the current zero-lower-bound episode. Chart 3The Zero Lower Bound Crushes Nominal Bond Yield Volatility Real Yields Using the Fisher Equation, we can deduce how real yields must move given changes in inflation expectations and nominal bond yields. With the Fed ensuring that short-maturity nominal yields remain stable, the recent decline in oil and inflation expectations caused short-dated real yields to jump (Chart 4). Long-maturity real yields remain low because (a) the shock to inflation expectations was smaller at the long-end of the curve and (b) the Fed’s forward rate guidance doesn’t suppress nominal bond yield volatility as much for long maturities. Chart 4There's Value In Short-Maturity Real Yields Investment Implications If we assume that last week’s -$37.60 WTI print will mark the cyclical trough in oil prices, US bond investors can profit by implementing real yield curve steepeners.3  Short-dated real yields will fall as oil and short-dated inflation expectations recover and nominal yields remain stable. In this scenario, real yields are more likely to rise at the long-end of the curve, given the greater volatility in long-dated nominal yields and the fact that long-maturity inflation expectations are not as depressed. Looking at the 2008 episode as a comparable, we see that the cost of inflation protection bottomed around the same time as the trough in oil, and about 7 months before the trough in 12-month headline CPI (Chart 5). After that trough, with the Fed keeping short-dated nominal rates pinned near zero, the inflation compensation curve flattened and the real yield curve steepened. Chart 5Initiate Real Yield Curve Steepeners Bottom Line: Last week’s negative oil print could signal the peak in deflationary sentiment for this cycle. It’s a good time for bond investors to enter real yield curve steepeners. Buy a short-maturity real yield (1-year or 2-year) and sell a long-maturity real yield (10-year or 30-year). Poor Junk Bond Valuations Illustrated In recent reports we have been advising investors to own spread products that offer attractive spreads and that benefit from Fed support.4 This includes investment grade corporate bonds and Ba-rated high-yield bonds, but not junk bonds rated B or below. In past reports we also showed that B-rated and below junk spreads don’t adequately compensate investors for likely default losses. But this week, we want to quickly illustrate that junk spreads are trading too tight even compared to other common coincident indicators. Specifically, we zero in on the VIX and ratings migration. In 2008, the cost of inflation protection bottomed around the same time as the trough in oil, and about 7 months before the trough in 12-month headline CPI. Charts 6A, 7A and 8A show the historical relationship between the VIX and Ba, B and Caa junk spreads. In all three cases, spreads are well below levels that have been historically consistent with the current reading from the VIX. Charts 6B, 7B and 8B show the historical relationship between the monthly Moody’s rating downgrade/upgrade ratio and Ba, B and Caa spreads. These charts tell a similar story. In fact, March saw nearly 12 times as many ratings downgrades as upgrades, the third highest monthly ratio since 1986. With more downgrades coming in the months ahead, it is apparent that junk spreads are stretched. Chart 6ABa Spreads & VIX Chart 6BBa Spreads & Ratings Chart 7AB Spreads & VIX Chart 7BB Spreads & Ratings Chart 8ACaa Spreads & VIX Chart 8BCaa Spreads & Ratings Relatively tight spreads are probably justified in the Ba space where firms will benefit from the Federal Reserve’s Main Street Lending facilities.5 However, B-rated and below securities have mostly been left out in the cold. We see high odds of spread widening for those credit tiers.  Bottom Line: High-yield bond spreads are much too tight relative to the VIX and ratings migration. This is justified for Ba-rated issuers that can tap the Fed’s emergency programs. However, B-rated and below spreads look vulnerable. Investors should overweight Ba-rated junk bonds and underweight the B-rated and below credit tiers. Subordinate Bank Debt Is A Good Bet The Fed’s decision to exclude bank bonds from its primary and secondary market corporate bond purchases complicates our investment strategy. We want to focus on sectors that offer attractive spreads and that benefit from Fed support, but should we carve out an exception for bank bonds? Bank Bonds Are A Defensive Sector First, we note that banks are a defensive corporate bond sector. This is due to bank debt’s relatively high credit rating and low duration. Notice that banks outperformed the rest of the corporate index when spreads widened in March, but have lagged the index by 131 bps since spreads peaked on March 23 (Chart 9). Bank equities don’t exhibit the same behavior and have in fact steadily underperformed the S&P 500 since the start of the year (Chart 9, bottom 2 panels). Chart 9Bank Bonds Are Defensive... However, if we consider senior and subordinate bank debt separately, a different picture emerges (Chart 10). Senior bank bonds behave defensively, as described above, but the lower-rated/higher duration subordinate bank bond index is more cyclical. It has outperformed the corporate benchmark by 316 bps since March 23 (Chart 10, bottom panel). Chart 10...Except Subordinate Debt The Value In Bank Bonds Despite being a defensive sector, senior bank bonds offer attractive risk-adjusted value. The average spread of the senior bank index is 18 bps above the spread offered by the equivalently-rated (A) corporate bond benchmark. Further, the senior bank index has lower average duration than the A-rated benchmark, making the sector very attractive on a per-unit-of-duration basis (Chart 11A). Chart 11ASenior Bank Bond Valuation Chart 11BSubordinate Bank Bond Valuation ​​​​​​​Turning to subordinate bank bonds, risk-adjusted value looks only fair compared to other equivalently-rated (Baa) corporate bonds (Chart 11B). However, in absolute terms the subordinate bank index offers a spread of 246 bps, compared to a spread of 178 bps on the senior bank index. Downgrade Risk Is Minimal We think investors should overweight subordinate bank bonds for two reasons. First, we think the Fed’s aggressive policy response means that investment grade corporate bond spreads, in general, have already peaked. We would expect defensive senior bank bonds to underperform in this environment of spread tightening, even though they offer attractive risk-adjusted value. Subordinate bank bonds should outperform the index in this environment, even if other Baa-rated sectors offer better value. Second, other Baa-rated corporate bond sectors offer elevated spreads because downgrade risk remains high. The Fed’s facilities will prevent default for investment grade firms, but many Baa-rated issuers will end up taking on a lot of debt to avoid bankruptcy and will get downgraded. We think banks are insulated from this downgrade risk. Even in the Fed's "Severely Adverse Scenario", three of banks' four main capital ratios remain above pre-GFC levels. Chart 12 shows the four main capital ratios calculated for US banks, and the dashed line shows the minimum value the Fed estimates that those ratios will hit under the “Severely Adverse Scenario” from the 2019 Stress Test. Three of the four ratios would remain above pre-crisis levels, and the Tier 1 Leverage Ratio would be only a touch lower. Chart 12Banks Have Huge Capital Buffers Further, our US Investment Strategy service observes that the large banks had sufficient earnings in the first quarter to significantly ramp up loan loss provisions without taking any capital hit at all.6 Our US Investment Strategy team believes that, as long as the shutdown doesn’t last more than six months, the big banks will have sufficient earnings power to absorb loan losses this year, without having to mark down their capital ratios, which in any case are extremely high. Bottom Line: US bond investors should overweight subordinate bank bonds within an allocation to investment grade corporate credit. Subordinate bank bonds are Baa-rated and thus offer reasonably high spreads. But unlike other Baa-rated bonds, banks should avoid ratings downgrades during this cycle. In short, subordinate bank debt looks like a reasonably safe way to capture high-beta exposure to the investment grade corporate bond market.   Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 For a more detailed explanation of the WTI price’s shocking move please see Commodity & Energy Strategy Special Alert, “WTI In Free Fall”, dated April 20, 2020, available at ces.bcaresearch.com 2 An example of a long position in inflation protection would be buying the 5-year TIPS and shorting the equivalent-maturity nominal Treasury security. 3 Our Commodity & Energy Strategy service’s view is that the WTI oil price will average ~$60 to $65 in 2021. For further details please see Commodity & Energy Strategy Weekly Report, “US Storage Tightens, Pushing WTI Lower”, dated April 16, 2020, available at ces.bcaresearch.com 4 Please see US Bond Strategy Weekly Report, “Is The Bottom Already In?”, dated April 21, 2020, available at usbs.bcaresearch.com 5 For more details on the Fed’s different emergency facilities please see US Investment Strategy / US Bond Strategy Special Report, “Alphabet Soup: A Summary Of The Fed’s Anti-Virus Measures”, dated April 14, 2020, available at usbs.bcaresearch.com 6 Please see US Investment Strategy Weekly Report, “The Big Bank Beige Book, April 2020”, dated April 20, 2020, available at usis.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification