Commodities & Energy Sector

Highlights Venezuela’s oil production likely fell ~ 500k b/d last week in the wake of nationwide power outages, reducing total output to ~ 500k b/d. However, neither OPEC 2.0 nor U.S. President Donald Trump drew much attention to it. During an industry gathering in Houston last week, an administration official conceded events in Venezuela could affect whether U.S. waivers on its Iranian oil-export sanctions are extended beyond May 4, but that was pretty much it.1 This is consistent with the thesis we laid out last month, which reflects our view OPEC 2.0 is evolving a more flexible production strategy that allows it to adjust production quickly in response to exogenous events over which it has little control; chiefly, U.S. foreign, trade and monetary policy.2 This will result in higher prices, satisfying the sometimes-conflicting goals of OPEC 2.0’s leadership – i.e., KSA’s budgetary need for prices closer to $80/bbl, and Russian producers’ need to increase revenue through higher volumes. Given this backdrop, our updated balances and price forecasts remain largely unchanged, with minor adjustments to the overall supply side and no change on the demand side. We continue to expect Brent to average $75/bbl this year. For 2020, we continue to expect Brent to average $80/bbl – higher U.S. shale output will be offset by delays in building out deepwater export facilities in the U.S. Gulf for most of the year. We expect WTI to trade $7 and $5/bbl lower in 2019 and 2020, respectively. The balance of price risk remains to the upside, as policy risk – i.e., a miscalculation on all sides – is elevated. Highlights Energy: Overweight. We are closing our 2020 long WTI vs. short Brent position at tonight’s close, given delays in the buildout of deepwater-harbor capacity in the U.S. Gulf caused by additional environmental assessments. This likely will push the spread out to $5/bbl+, vs. our target of $3.25/bbl. Base Metals: Neutral. Copper got another endorsement from Fitch Solutions, which is predicting LME prices will average $6,900 and $7,100/MT this year and next, on the back of lower inventories and improving supply-demand fundamentals. We remain long copper, which is up 2.7% since we recommended it on March 7. Precious Metals: Neutral. Our colleagues at BCA Research’s Global Investment Strategy expect the USD to weaken in 2H19, which, all else equal, will support gold and precious metals.3 Our long gold portfolio hedge is up 6.3% since inception on May 4, 2017. Agriculture: Underweight. Grain markets likely will trade sideways ahead of the USDA’s Prospective Plantings survey of farmer intentions next Friday.   Feature The sudden loss of Venezuelan output – and exports – was barely noticed in price action over the past week.  U.S. foreign and trade policy will continue to keep oil supply and demand uncertainty elevated, particularly as sanctions against Venezuela play out against the backdrop of a collapsing infrastructure. Last week’s nationwide power outage likely caused crude oil production to drop 500k b/d from ~ 1mm b/d previously.4 The sudden loss of Venezuelan output – and exports – was barely noticed in price action over the past week. Global inventories remain swollen (Chart 1), and OPEC 2.0’s spare capacity is increasing as it cuts production (Chart 2). This allows Venezuelan production losses to be covered with little or no disruption to supply or demand, and little or no increase in the level of agita in oil markets. Chart of the WeekOECD Inventories Still High, But Continue to Drain OECD Inventories Still High, But Continue to Drain OECD Inventories Still High, But Continue to Drain Chart 2 That cushion allows the U.S. to continue to prosecute its sanctions strategy against Venezuela and Iran. But it does not give the U.S. carte blanche to pursue regime change in both countries at the same time. As we noted in our New Political Economy of Oil report last month, OPEC 2.0 possibly could cover the loss of 500k b/d of Venezuelan exports and maybe up to 1.5mm b/d of Iranian exports.5 We continue to expect waivers on the Iran sanctions to be extended, although Trump administration officials remain guarded in terms of providing markets any forward guidance. However, it would tighten the heavy-sour market even more than it is now.6 And, full-on sanctions campaigns conducted simultaneously on Venezuela and Iran following the expiration of U.S. waivers on export sanctions against the latter would leave spare capacity dangerously thin, and push the risk premium in oil prices up sharply, given the volumes Iran already is supplying (Chart 3, Table 1). Chart 3 Table 1Iran Exports By Country 2018 (‘000 b/d) OPEC 2.0: Oil's Price Fulcrum OPEC 2.0: Oil's Price Fulcrum We continue to expect waivers on the Iran sanctions to be extended, although Trump administration officials remain guarded in terms of providing markets any forward guidance. The most that’s been offered came last week in Houston at an industry convention, where Brian Hook, special representative for Iran at the U.S. State Department, indicated the U.S. administration is aware of the supply-side pressure associated with its campaigns against Venezuela and Iran. However, he offered nothing definitive one way or another, so markets will continue to assign a non-zero probability that waivers will not be extended.7 Oil Supply Expectations Remain Stable For our part, we believe waivers on the U.S. Iranian export sanctions will be extended out of necessity. While more than 2mm b/d of Venezuelan and Iranian production can be offset by increased OPEC 2.0 spare capacity – now running ~ 2.1mm b/d based on U.S. EIA estimates – it is not sufficient to cover any additional losses due to unplanned outage of the sort seen in May 2016, when 1mm b/d of Canadian oil production was lost to wildfires. These are real risks, not abstractions meant to illustrate a point.8 For 2H19, our base case now assumes OPEC 2.0’s production rises by ~ 0.5mm b/d vs. 1H19 production of 44.5mm b/d. This will smooth out the loss of Venezuelan output as it falls to 500k b/d by the end of this year, vs. the 650k b/d we expected last month. We also expect Iranian production to remain close to the 3mm b/d it will average in 1H19, likely increasing as global storage levels fall and waivers are exercised (much like a call option). News reports suggest KSA continues to advocate the extension of production cuts by OPEC 2.0 to year end. However, if the coalition’s goal is to keep Brent prices close to $75/bbl this year, and closer to $80/bbl next year – the assumptions we’re working with – OPEC 2.0 likely will have to raise production by 0.5mm b/d in 2H19 and 0.72mm b/d next year. Maintaining production cuts into 2H19 risks sending prices significantly higher, in our estimation. Globally, the big driver of growth on the supply side continues to be U.S. shales, which we now expect to increase 1.2mm b/d in 2019 and 0.9mm b/d next year, a small increase of ~ 60k b/d versus our estimates last month.9 While it is true the Permian bottleneck will be cleared by the end of this year – adding some 2mm b/d of new takeaway capacity – export capacity will remain challenged by new delays to the build-out of deepwater-harbor capacity in the U.S. Gulf well into 2020, following requests of Carlyle Group and Trafigura AG to provide additional information in environmental filings to regulators before work begins.10 This will push the Permian bottleneck from the basin to the U.S. Gulf refining market. On the back of this development, we are closing our 2020 long WTI vs. short Brent recommendation at tonight’s close, given these delays likely push the deep-water expansion in the Gulf to 4Q20 or later. Oil Demand Also Remains Stable Oil demand will continue to be supported by the easing of monetary policy in DM and EM economies to offset a slowdown in global growth. In addition, we expect China’s credit cycle to bottom in 1Q19, which will be supportive of oil demand there and in EMs generally (Chart 4). We continue to expect the Sino – U.S. trade war to be resolved in 1H19, as both presidents Trump and Xi need to get a deal done to satisfy domestic audiences – i.e., U.S. elections next year and the upcoming 100th anniversary of the Chinese Communist Party in 2021, respectively. Chart 4EM Growth Will Lift In 2H19 EM Growth Will Lift In 2H19 EM Growth Will Lift In 2H19 During the second half of this year, we expect a more significant pick-up in China’s credit cycle, which will set the stage for a year-end rally in commodities generally – oil and base metals in particular. We also expect global demand to get a lift from a weaker USD beginning in 2H19 and extending to the end of 2020.11 We expect demand growth of 1.5mm b/d this year and 1.6mm b/d next year, slightly more than the EIA and IEA. We expect EM to account for 53.7mm b/d of growth this year and 55mm b/d next year. Total global demand will average 101.8mm b/d and 103.4mm b/d in 2019 and 2020. U.S. policy is keeping the supply- and demand-side uncertainty elevated, but OPEC 2.0’s hand has been strengthened by the fact that it is, more than ever, the fulcrum of the oil market. OPEC 2.0’s Balancing Strategy U.S. policy is keeping the supply- and demand-side uncertainty elevated, but OPEC 2.0’s hand has been strengthened by the fact that it is, more than ever, the fulcrum of the oil market: It can balance shortfalls out of spare capacity – boosted some by its production cuts – and it can reduce unintended inventory accumulation via its demonstrated ability to cut output rapidly. Our 2019 and 2020 Brent price forecasts remain at $75 and $80/bbl (Chart 5). Delays in building out U.S. Gulf deepwater-harbor capacity next year will keep exports constrained. This will back production up behind the pipe in the Permian Basin next year, and keep inventories fuller than they otherwise would be. And it means Brent markets will remain tighter than we previously expected in 2020, as WTI won’t be exported in the volumes needed to tighten the Brent - WTI spread as much as we previously expected. For 2019, we expect WTI to trade $7/bbl under Brent, and $5/bbl under in 2020 (vs. our earlier expectation of $3.25/bbl), on the back of these delays. This compels us to liquidate our long WTI vs. Brent recommendation in 2020 at tonight’s close. Chart 5OPEC 2.0 Output Hike Needed To Keep Market Balanced in 2H19 OPEC 2.0 Output Hike Needed To Keep Market Balanced in 2H19 OPEC 2.0 Output Hike Needed To Keep Market Balanced in 2H19 OPEC 2.0’s position as the fulcrum effectively means it can balance the market to achieve its price goals (Chart 6, Table 2). This does not drive our forecast, but it does line up with what we would expect an economically rational agent to do. Chart 6Our Ensemble Forecasts Remain Fairly Stable Our Ensemble Forecasts Remain Fairly Stable Our Ensemble Forecasts Remain Fairly Stable Table 2BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) OPEC 2.0: Oil's Price Fulcrum OPEC 2.0: Oil's Price Fulcrum We believe OPEC 2.0 is succeeding in evolving a strategy that allows it sufficient flexibility to respond to exogenous forces affecting oil prices, which are, for the most part, out of its control. Bottom Line: Policy uncertainty is elevated, but we believe OPEC 2.0 is succeeding in evolving a strategy that allows it sufficient flexibility to respond to exogenous forces affecting oil prices, which are, for the most part, out of its control – i.e., U.S. foreign, trade and monetary policy.12 As such, we believe it will adjust output to achieve price targets, which, despite the sometimes-public disagreements between KSA and Russia, are closer to our forecast levels of $75 and $80/bbl for Brent this year and next than not.     Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger, Senior Analyst Commodity & Energy Strategy HugoB@bcaresearch.com       Footnotes 1      OPEC 2.0 is the name we coined for the OPEC/non-OPEC producer coalition led by the Kingdom of Saudi Arabia (KSA) and Russia.  U.S. waivers were granted by the Trump administration just before the sanctions against Iranian oil exports went into effect November 4; these waivers expire May 4, 2019. 2      Please see “The New Political Economy of Oil,” published by BCA Research’s Commodity & Energy Strategy February 21, 2019.  It is available at ces.bcaresearch.com. 3      Please see “What’s Next For The Dollar,” published by BCA Research’s Global Investment Strategy published March 15, 2019.  It is available at gis.bcaresearch.com. 4     In its March 2019 Oil Market Report, the IEA notes, “The electricity crisis in Venezuela has paralysed most of the country for significant periods of time. Although there are signs that the situation is improving, the degradation of the power system is such that we cannot be sure if the fixes are durable. Until recently, Venezuela’s oil production had stabilised at around 1.2 mb/d. During the past week, industry operations were seriously disrupted and ongoing losses on a significant scale could present a challenge to the market.”  We await better data to assess the full extent of the production lost in Venezuela. 5      Please see “The New Political Economy of Oil,” published by BCA Research’s Commodity & Energy Strategy February 21, 2019.  It is available at ces.bcaresearch.com. 6      Please see “Oil Price Diffs: Global Convergence,” published by BCA Research’s Commodity & Energy Strategy March 7, 2019.  It is available at ces.bcaresearch.com. 7      Please see “CERAWeek: US waivers for Iran oil imports may hinge on Venezuela sanctions impact: State official,” published by S&P Global Platts March 13, 2019. 8      We treat these waivers as quasi call options on Iranian crude oil in our analysis.  As inventories draw, importers holding waivers can be expected to exercise their option and lift more crude from Iran without running afoul of U.S. sanctions. 9      We approximate our shale production based on the big 5 basins (Anadarko, Bakken, Permian, Eagle Ford and Niobrara). 10     Please see “US Suspends Review On Trafigura Oil-Port Project” published by Hart Energy March 18, 2019.  See also “Exclusive: Environmental review could delay Carlyle deepwater oil export project up to 18 months,” published by reuters.com March 14, 2019. 11     See footnote 3 above. 12     A perfect example of this can be seen OPEC 2.0’s decision to move its ministerial meeting to June: A decision from the U.S. on whether to extend waivers on the Iranian sanctions will come May 4, right around the time OPEC 2.0 member states are deciding on export schedules.  If waivers are extended, member states can maintain production discipline or add volumes to the market as needed; if sanctions are re-imposed in full, they can increase production as needed. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2019 Summary of Closed Trades Image

Light My Fire Light My Fire Overweight Last summer we took refiners down to a below benchmark allocation as all of the good news was perfectly reflected in soaring relative share prices (top panel), at a time when cracks were forming. Today, refiners paint a near exact opposite picture compared with last July. Relative share prices are no longer rising by 50%/annum. Instead, momentum has collapsed and is now contracting (middle panel). Accordingly, we were compelled to book gains of 21% yesterday and boost exposure all the way to overweight. Sell-side analyst exuberance has turned into outright pessimism: refiners’ profits are expected to trail the broad market in the coming year. By comparison, last summer they were penciled in to beat the market by 30 percentage points (bottom panel). Refiners’ riches move in tandem with crack spreads. When refining margins widen, profits excel and vice versa. Now that refining margins are in a slingshot recovery, refining ills will turn into fortunes (bottom panel). Bottom Line: Yesterday we lifted the S&P oil & gas refining & marketing index to overweight all the way from a below benchmark allocation, crystalizing 21% in relative profits since last summer’s inception. Please see Monday’s Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5OILR – PSX, MPC, VLO, HFC.  

Highlights Portfolio Strategy As growth becomes scarce, investors flock to sectors that are slated to outgrow the broad market and shy away from the ones that are forecast to trail the SPX’s growth rate. This week we rank sectors and subsectors by EPS growth in our universe of coverage, and identify sweet and trouble spots. Fired up crack spreads, firming refining industry operating metrics, reaccelerating exports along with washed out technicals and compelling valuations, all signal that the time is ripe to buy into refining weakness. The cable industry’s demand headwinds are reflected in depressed relative valuations at a time when industry pricing power is trying to stage a comeback and a drifting lower greenback may also provide positive profit offsets. Stick with a benchmark allocation. Recent Changes Boost the S&P Oil & Gas Refining & Marketing index to overweight all the way from underweight today, locking in relative profits of 21%. Table 1 Awaiting Validation Awaiting Validation Feature Equities broke out last week and surpassed the upper band of their recent trading range, despite economic data releases that continued to surprise to the downside. Two weeks ago, we cautioned investors not to put cash to work as a tactical indigestion period loomed, with the SPX facing stiff resistance near the 2,800 level. In addition, we posited that most of the good news related to the U.S./China trade spat front was reflected in the S&P 500’s V-shaped recovery (top panel, Chart 1). In relative terms, the bottom panel of Chart 1 confirms that the easy money has already been made on the assumption of a positive resolution to the U.S./China trade dispute. Chart 1Trade Deal Priced In Trade Deal Priced In Trade Deal Priced In Going forward, the earnings juggernaut will have to remain in place in order for stocks to vault to fresh all-time highs, likely in the back half of the year. The Trump administration’s massive fiscal stimulus artificially fueled profit growth last year both by lowering the corporate tax rate and by encouraging overseas cash repatriation. The latter boosted share buybacks to an all-time record. Despite 24% EPS growth and $1tn in equity retirement, the SPX ended 2018 6% lower. Why? It became clear that EPS growth was headed lower. In order to gauge trend EPS growth we opt to use EBITDA, a cash flow proxy measure that strips out the direct impact of last year’s fiscal easing. Chart 2 clearly shows that trend growth took a step down following the positive base effects of the GFC-induced collapse and averaged close to 5%/annum from 2012 to 2014. Subsequently, the late-2015/early-2016 manufacturing recession sunk EBITDA into contraction, but the euphoria surrounding the newly elected President pushed trend EBITDA growth to near 10%/annum for two full years in 2017 and 2018. Chart 2Return To 5% Growth? Return To 5% Growth? Return To 5% Growth? Since the late-2018 peak, 12-month forward EBITDA growth continues to drift lower and is now hovering just shy of 3%. Our sense is that 5% organic profit growth is consistent with nominal GDP printing 4%-4.5% at this stage of the business cycle, signaling that a return to the 2012-2014 growth backdrop is likely later in the year. As a reminder, positive profit growth in calendar 2019 remains one of the three pillars underpinning stocks that we have highlighted since the beginning of this year. Stocks have come full circle recovering all of last December’s losses, but in order to make fresh all-time highs, profits will have to deliver. We deem that an earnings validation phase is transpiring and there are early signs that profit growth will trough sometime in the first half of the year. Not only has EBITDA breadth put in a bottom (Chart 2), but also economically hypersensitive indicators suggest that forward EBITDA growth will soon tick higher. Namely, the ISM manufacturing new orders component has perked up on a year-over-year basis. The trough in lumber futures momentum corroborates this message, as does the tick higher in the U.S. boom/bust indicator (Chart 3). Chart 3Growth Green-shoots Growth Green-shoots Growth Green-shoots Given the current macro backdrop and awaiting the profit validation, when growth becomes scarce investors flock to sectors that are outgrowing the broad market and shy away from ones that trail the SPX’s growth rate. Typically, in recessionary times that would equate to investors bidding up defensive sectors that command stable cash flow businesses and avoiding highly cyclical industries. But, BCA does not expect a recession in the coming year. Thus, in order to identify high growth sectors that should outperform during the current soft patch and growth laggards that should underperform, we compiled a table with the GICS1 sectors and all the subsectors we cover. First, we rank the GICS1 sectors and then within each sector we rank the subsectors, both times by absolute 12-month forward EPS growth using I/B/E/S/ data (see second columns, Table 2). We aim to reproduce this table once a quarter. Table 2Identifying S&P 500 Sector EPS Growth Leaders And Laggards Awaiting Validation Awaiting Validation The third columns in Table 2 show the sector growth rate relative to the SPX. The final columns in Table 2 highlight the trend in relative growth. In more detail, they compare the current relative growth rate to that of three months ago: a positive sign indicates an upgrade in analysts’ relative estimates and a negative sign a downgrade in analysts’ relative estimates. Industrials and financials (we are overweight both) are leading the pack outpacing the broad market by 410bps and 350bps, respectively, and enjoy a rising profit trend. On the flip side, energy (overweight) and real estate (underweight) trail the broad market by 490bps and 1480bps, respectively, and showcase a deteriorating EPS trend. With regard to energy, we first identified that analysts are really punishing this sector in the January 22 Weekly Report and the sector’s 2019 EPS contribution was and remains negative.1 Our overweight call will be offside if oil prices suffer a new setback, but our Commodity & Energy strategy service remains bullish on oil, implying relative EPS outperformance in 2019. Year-to-date, energy has bested the SPX by 170bps. This week, we make an energy sector subsurface tweak, and also update a communication services subgroup. Light My Fire Last summer we took refiners down to a below benchmark allocation as all of the good news was perfectly reflected in soaring relative share prices (top panel, Chart 4), at a time when cracks were forming. Now we are compelled to book gains of 21% and boost exposure all the way to overweight. Chart 4Crack Spreads Are On Fire Crack Spreads Are On Fire Crack Spreads Are On Fire Today, refiners paint a near exact opposite picture compared with last July. Relative share prices are no longer rising by 50%/annum. Instead, momentum has collapsed and is now contracting (middle panel, Chart 4). Sell-side analyst exuberance has turned into outright pessimism: refiners’ profits are expected to trail the broad market in the coming year. By comparison, last summer they were penciled in to beat the market by 30 percentage points (bottom panel, Chart 4). Granted M&A activity had also added fuel to the fire, but now all the hot air has come out of the refining industry, and then some. Refiners’ riches move in tandem with crack spreads. When refining margins widen, profits excel and vice versa. Now that refining margins are in a slingshot recovery, refining ills will turn into fortunes (bottom panel, Chart 4). Importantly, wide Brent-WTI spreads underpin crack spreads. Moreover, the crude oil versus refined product inventory backdrop currently reinforces a widening in refining margins. In absolute terms, gasoline stockpiles are being worked off (gasoline inventories shown inverted, bottom panel, Chart 5) and grinding higher demand for refined petroleum products (top panel, Chart 5) will further tighten the industry’s inventory outlook. Chart 5Healthy Supply/Demand Backdrop Healthy Supply/Demand Backdrop Healthy Supply/Demand Backdrop One way domestic refiners are taking advantage of the still wide Brent-WTI differential is via the export markets. Net refined products exports are running at over 3mn barrels/day (bottom panel, Chart 6), and the softening greenback since November will further boost profits with a slight lag as U.S. refining exports will grab an even larger slice of the global pie (U.S. dollar shown inverted and advanced, middle panel, Chart 6). Chart 6U.S. Dollar Softness Is A Boon To Refining Profits U.S. Dollar Softness Is A Boon To Refining Profits U.S. Dollar Softness Is A Boon To Refining Profits On the valuation front, both the relative forward P/E and P/S have undershot their respective historical means and EPS breadth is as bad as it gets, offering investors an excellent entry point in the pure-play oil & gas refining industry (Chart 7). Chart 7Extreme Analyst Pessimism Reigns Extreme Analyst Pessimism Reigns Extreme Analyst Pessimism Reigns In sum, fired up crack spreads, firming refining industry operating metrics, reaccelerating exports along with washed out technicals and compelling valuations, all signal that the time is ripe to buy into refining weakness. Bottom Line: Lift the S&P oil & gas refining & marketing index to overweight all the way from a below benchmark allocation, crystalizing 21% in relative profits since last summer’s inception. The ticker symbols for the stocks in this index are: BLBG: S5OILR – PSX, MPC, VLO, HFC. Cable’s Down But Not Out Cable & satellite stocks had been in an uninterrupted run from the depths of the Great Recession until the peak in relative share prices in August 2017. Since then, cord cutting news and the proliferation of on demand streaming services have wreaked havoc on the industry and cable stocks have trailed the market by over 33% from peak to the most recent trough (top panel, Chart 8). Chart 8Cable Signals Are… Cable Signals Are… Cable Signals Are… This deteriorating demand backdrop more than offset the industry’s reaction function, which has been intra and inter-industry M&A. Now that the M&A dust has settled, what is next in store for the industry? We reckon that leading profit indicators are a mixed bag and we continue to recommend a benchmark allocation in this niche communications services subgroup. The top panel of Chart 8 shows that relative outlays on cable are on a slippery slope, and will continue to weigh heavily on relative share prices for the coming quarters. Nevertheless, the ISM services survey ticked higher recently and is on the cusp of making fresh recovery highs, unlike its sibling the ISM manufacturing survey. This is encouraging news for cable executives and suggests that demand for cable services may not be as moribund as the PCE release is projecting (second panel, Chart 9). Chart 9..A Mixed… ..A Mixed… ..A Mixed… While the cable demand backdrop is unclear, industry pricing power has managed to exit deflation. Cable selling prices have been positive for the better part of the past decade, but starting in late-2017 they collapsed by roughly 600bps relative to overall inflation. True, this deflationary impulse dented profit margins, but currently the industry’s selling prices – and to a much lesser extent profit margins – are in a V-shaped recovery mostly courtesy of base effects (middle & bottom panels, Chart 8). Absent a sustained hook up in cable demand, selling price inflation will prove fleeting and the recent margin expansion phase will also lose steam. Meanwhile, cable stocks and the U.S. dollar enjoy a positive correlation as most of the constituents’ earnings are derived domestically (Chart 10). The recent U.S. dollar softness will, at the margin, weigh on relative profits and thus relative share prices, especially if the Fed stays pat and refrains from raising rates for the rest of the year as the bond market currently expects. Chart 10…Bag …Bag …Bag Finally, earnings breadth continues to fall, but relative valuations are still well below the historical mean (third & bottom panels, Chart 9). Netting it all out, cable’s demand headwinds are well reflected in depressed relative valuations at a time when industry pricing power is trying to stage a comeback and a drifting lower greenback may both provide positive profit offsets. Bottom Line: Remain on the sidelines in the S&P cable & satellite index. The ticker symbols for the stocks in this index are: BLBG: S5CBST – CMCSA, CHTR, DISH.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Footnotes 1      Please see BCA U.S. Equity Strategy Weekly Report, “Dissecting 2019 Earnings” dated January 22, 2019, available at uses.bcaresearch.com. Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps

We continue to expect copper prices to increase in the near term, as China’s credit cycle bottoms and DM central banks soften their monetary-policy stance. Fiscal and monetary stimulus in China also will be supportive of base metals prices going forward. The evolution of the Sino - U.S. trade negotiations remains a risk to our view, given how important the outcome of these talks will be for investors’ expectations and sentiment. Markets appear to be discounting a positive outcome. Anything that scuppers these talks – or results in a no-deal outcome – will be a negative for base metals, copper in particular. Our tactical long copper position is up by 1.2% since we initiated it last week. Highlights Energy: Overweight. Russian oil companies are expected to keep production lower until July, when the current OPEC 2.0 production-cutting agreement now in place expires. We expect the deal will be extended to year-end.1 Separately, the risk of a complete shutdown in Venezuela’s oil industry rose significantly, as a power failure in most of the country all but eliminated potable water supplies and significantly reduced oil exports. Base Metals/Bulks: Neutral. High-grade iron-ore prices got a boost this week as Vale was ordered to temporarily suspend exports from its primary port at Guaiba Island terminal in Rio de Janeiro state, according to Metal Bulletin’s Fastmarkets.2 The price-reporting agency’s 62% Fe Iron Ore Index rose $1.46/MT at $85.25/MT Tuesday. Precious Metals: Neutral. Spot gold is back above $1,300/oz, on the back of monetary policy easing among important central banks. This also is supporting base metals globally (see below). Ags/Softs: Underweight. Grain markets continue to drift sideways, awaiting definitive news re Sino - U.S. trade talks, specifically when presidents Xi and Trump will meet to finalize a deal (see below). Separately, wheat and corn inventories are expected to rise on the back of higher supplies and lower exports, the USDA forecast in its latest world supply-demand estimates. Feature Recent data releases confirm our view that global growth will remain weak in 1Q19 and early 2Q19. This will continue to put downward pressure on cyclical commodities – chiefly base metals and oil (Chart of the Week). Chart of the WeekGlobal Growth Slows In 1Q19 Global Growth Slows In 1Q19 Global Growth Slows In 1Q19 The persistence of the slowdown provoked major central banks to adopt a dovish stance in the short-term. This is easily seen in the recent actions by the U.S. Fed, the European Central Bank (ECB), the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA), all of which have communicated a pause in their rate normalization policies.3 At the moment, the frail global growth is partly balanced by expectations of a positive outcome re the ongoing Sino - U.S. trade negotiations (Chart 2). In the coming months, we expect the effect of accommodative DM monetary policy combined with an expansion in China’s credit (more on this below) and fiscal stimulus – i.e., tax cuts announced earlier this month amounting to almost $300 billion (~ 2 trillion RMB) meant to support policymakers’ GDP growth targets – will go a long way toward reversing the earlier contraction. The effect of these policy decisions will be apparent in 2H19. Chart 2China Growth To Hook Higher China Growth To Hook Higher China Growth To Hook Higher China’s Credit Cycle Bottomed In December 2018 The evolution of China’s credit cycle remains a central pillar to our view commodity demand growth in 2H19 will surpass consensus expectations. The massive growth reported in China’s January credit statistics revived investors’ expectations that China’s banks will re-open the credit valves as they did in 2016.4 In our view, this number does signal a bottom in China’s credit cycle, and implies Chinese – and indirectly EM – growth will bottom sometime this year. However, we still are not expecting a complete blowout credit expansion this year. We continue to believe Chinese policymakers will focus on stabilizing credit in 1H19 with moderate increases in supply, and start increasing stimulus in 2H19 or 2020 in order to maximize its effect later in 2020 ahead of the 100th anniversary of the founding of the Chinese Communist Party (CCP) in 2021. The soft February credit number released this week supports this argument.5 China’s Credit Cycle Matters For Base Metals Demand The relationship between China’s credit cycles and base metal prices endures and remains robust. We measure China’s aggregate credit using bank and non-bank claims on non-financial enterprises, households, local and central governments, and non-bank financial institutions. This corresponds to adding outstanding central and local government bonds to China’s Total Social Financing (TSF).6 The annual change in aggregate credit – or its impulses – do not perfectly capture the cycles in global base metal demand. These variables provide interesting signals about the direction and magnitude of movements in credit, however, they do not track base metals’ price cycles accurately and consistently (Chart 3). Chart 3Metals Price Cycles Don't Track Changed In China's Credit Metals Price Cycles Don't Track Changed In China's Credit Metals Price Cycles Don't Track Changed In China's Credit To decompose this variable into its trend and cycle, we use a proxy of the credit cycle constructed using the Hodrick-Prescott and Hamilton filters, and the standardized 12-month credit impulse (Chart 4).7 Chart 4China's Credit Cycle Proxy China's Credit Cycle Proxy China's Credit Cycle Proxy We find that our credit cycle proxy Granger causes base metal prices, import volume and industrial activity (Table 1).8 On average, it leads these variables by 4-6 months (Chart 5). Hence, we believe our credit cycle proxy provides valuable information about future commodity demand in China. Table 1China Credit Cycle Correlations Bottoming Of China's Credit Cycle Bullish For Copper Over Near Term Bottoming Of China's Credit Cycle Bullish For Copper Over Near Term Chart 5 In fact, when regressing copper prices and the LMEX against it, we found that 60% and 58% of the variation in copper prices and the LMEX, can be explained by the linear relationship with our China credit cycle proxy, respectively (Chart 6). Chart 6China's Credit Cycle and Metals Prices China's Credit Cycle and Metals Prices China's Credit Cycle and Metals Prices Given the leading property of China’s credit cycles with respect to industrial activity and metal prices, we included this new proxy in our Global Industrial Activity (GIA) index.9 This improves the correlation of our index with copper prices (Chart 7). Chart 7Credit Cycle Improves BCA's GIA Credit Cycle Improves BCA's GIA Credit Cycle Improves BCA's GIA Currently, our models suggest copper prices should increase in the coming months as China’s credit cycle bottoms and DM central banks soften their monetary policy stance. The evolution of the China-U.S. trade negotiations remains a risk to our view as the outcome will weigh on investors’ expectations and sentiment. China’s Vs. DMs’ Credit Cycles Between 2009 and 2014, China’s credit cycle lagged the U.S. and EU’s broad money cycles (Chart 8). This counter-cyclicality is partly explained by its elevated level of exports to the U.S. and of hard goods to Europe. When the global economic cycle works in China’s favor – i.e., when the Fed and ECB are accommodative or fiscal stimulus is deployed in either or both regions – China’s exports rise as U.S. and EU aggregate demand increases. This typically reduces the need for endogenous fiscal or monetary stimulus within China. Chart 8China's Credit Cycle Lags U.S., EU Money Cycles China's Credit Cycle Lags U.S., EU Money Cycles China's Credit Cycle Lags U.S., EU Money Cycles On the other hand, when the global economic cycle contracts and fiscal and monetary policy ex China becomes a headwind, Chinese policymakers typically need to deploy fiscal and monetary policy to keep growth going, or at least avoid a contraction in their economy. Between 2016 and 2017, DM and China credit cycles aligned and increased simultaneously. Taking into account the 4-to-6-month lag between the time credit supply is increased and commodity demand rises, this created bullish conditions for metals and oil from 2H16 to 1H18, pushing copper prices up by 60%. In 2018, both regions’ cycles rolled over. Base metals markets currently are experiencing the consequences of this contraction in credit availability and tightening of financial conditions generally. Going forward, we expect China will step in to raise domestic demand and offset the impact of the decline in credit availability elsewhere, which is affecting demand for its exports in the short-term. In the medium-term, the U.S. and EU, along with India, do not appear to be inclined to absorb Chinese exports to the extent they did in the past, which means the pivot to domestically generated growth through consumer- and services-led demand is the most viable alternative Chinese policymakers have to keep growth on target. Bottom Line: The dovish turn of major DM central banks combined with a bottoming of China’s credit cycle will support cyclical commodities at the margin in the coming months. During the second half of this year, we expect a more significant pick up in China’s credit, setting the stage for a year-end rally in base metal prices. As a consequence, the impact of China’s credit growth on base metals demand could diminish compared to previous stimulus targeting industrial demand.   Hugo Bélanger, Senior Analyst Commodity & Energy Strategy HugoB@bcaresearch.com Robert P. Ryan, Chief Commodity & Energy Strategist rryan@bcaresearch.com   Footnotes 1      Please see “Russia’s oil companies ready to cut output until July: TASS,” published by reuters.com March 12, 2019. 2      Please see Fastmarkets MB’s Daily Steel, March 12, 2019. 3      Please see “Pervasive Uncertainty, Persuasive Central Banks,” published by BCA Research’s Global Fixed Income Strategy March 12, 2019. It is available at gfis.bcaresearch.com. 4      Please see “China Macro And Market Review,” published by BCA Research’s China Investment Strategy March 13, 2019. It is available at cis.bcaresearch.com. 5      See footnote 4 above. 6      For more details please see “EM: A Sustainable Rally Or A False Start?” published by BCA Research’s Emerging Market Strategy March 7, 2019. It is available at ems.bcaresearch.com. 7      Hamilton notes the HP filter can be problematic. In general, we agree with critics of the filter (i.e. it results in spurious dynamics that are unrelated with the true data-generating process, it has an end-point bias which affects its real-time properties, and it is highly dependent on the parameter selection). However, there are some arguments in support of using the HP filter to proxy the credit cycle. First, as long as there are no clear theoretical foundation for an accurate measurement of the credit cycle, empirical validation should remain the number one criteria by which one selects its proxy. Second, credit cycles vary in duration and this weakens the ability to construct a reliable proxy. The usual parameter used with the HP filter favors short-term cycles (i.e. ~ 2 years) while the Hamilton filter focuses on medium-term cycles (i.e. ~ 5 years). Therefore, both can convey useful information. Third, China’s aggregate credit variable in level has a quasi-linear trend and is roughly approximated by a trend-stationary process with breaks in the trend and constant. Such a process should converge in limit when decomposed using the HP filter. Please see James D. Hamilton (2018), “Why You Should Never Use the Hodrick-Prescott Filter,” The Review of Economics and Statistics, vol 100(5), pages 831-843. and Phillips, Peter C. B. and Jin, Sainan (2015), “Business Cycles, Trend Elimination, and the HP filter,” Cowles Foundation Discussion Paper No. 2005. 8      Granger causality refers to a statistical technique developed by Clive Granger, the 2003 Nobel Laureate in Economics, which is used to determine whether one variable can be said to have caused (or predicted) another variable, given the past performance of each. Using standard econometric techniques, Granger showed one variable can be shown to have “caused” another, and that two-way causality also can be demonstrated (i.e., a feedback loop between the variables can exist based on the historical performance of each). 9      Please see “Oil, Copper Demand Worries Are Overdone,” published by BCA Research’s Commodity & Energy Strategy February 14, 2019. It is available at ces.bcaresearch.com. Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2019 Summary of Trades Image ​​​​​​​

A Modest Gold Portfolio Hedge Still Makes Sense A Modest Gold Portfolio Hedge Still Makes Sense Overweight Within our broad-based U.S. equity sector and subsector coverage, we continue to recommend a modest gold-related hedge via being overweight the global gold mining index (given that the S&P gold index only comprises a single stock) versus the MSCI All-Country World Index, expressed through the long GDX:US/short ACWI:US exchange traded funds. Globally there is a slowdown that has infected a number of economies and BCA’s calculated Global ZEW economic sentiment index has lit a fire under gold mining stocks (Global ZEW shown inverted, second panel). The longer the global soft-patch lasts, the longer Central Banks will remain on the sidelines or even ease monetary policy in order to rekindle growth. Moreover, the global policy uncertainty index is perking up given the ongoing U.S./China trade tussle (top panel), recent news of a no deal between the U.S. and North Korea and looming Brexit deadline. All of this underpins global gold stocks. Tack on the recent fear that gripped markets, and skyrocketing equity risk premia, and the ingredients are in place for additional gains in the relative share price ratio (bottom panel). Bottom Line: Stay overweight the global gold miners index (long GDX:US/short ACWI:US); please see Monday’s Weekly Report for more details.

Highlights Price differentials between global light-sweet crude oil benchmarks Brent and WTI will narrow over the next three years, as U.S. light-sweet crude oil exports expand and North Sea production growth remains challenged. U.S. product exports also will expand, as investments by Gulf Coast refiners allow them to take in more of the domestic light-sweet crude output. Growing volumes of WTI being exported to Europe are being priced relative to Brent. Over time, we expect the marginal light-sweet crude barrel for the global oil market – and the benchmark of refiners’ primary cost – will be directly linked to WTI – Houston pricing. Given this expectation of increased U.S. exports, we are initiating a long WTI vs. short Brent swap position at tonight’s close in 2020. The 2020 swap settled Tuesday at $6.6/bbl; we project it will average $3.25/bbl. In the heavy-sour markets, differentials – most prominently the Brent – Dubai spread – will remain tight, owing to OPEC 2.0 production cuts, lost Venezuelan and Iranian exports, due to U.S. sanctions, and ongoing difficulties getting Canadian heavy crude to refining markets. Energy: Overweight. OPEC 2.0 likely will decide to extend production cuts to year-end in June, as opposed to May, as was expected earlier.1 This will allow the Cartel to respond to whatever the U.S. decides on May 4 re extending waivers on Iranian export sanctions, and to export losses from U.S. sanctions on Venezuela’s state oil company. Base Metals/Bulks: Neutral. Chinese Premier Li Keqiang announced tax cuts amounting to almost $300 billion (~ 2 trillion RMB), as policymakers attempt to hit a GDP growth target of 6.0 to 6.5% this year. We are getting tactically long spot copper at tonight’s close, expecting this fiscal stimulus to boost prices over $3.00/lb in the next 3 – 6 months. Feature In a little more than two years from now, Exxon will add 1mm b/d of pipeline take-away capacity to the Permian Basin. The new pipe is in addition to the 2mm b/d of takeaway capacity currently being added to the basin, which is expected to be fully operational by the end of this year. Current production in the Permian is close to 4mm b/d, so the combined incremental new pipe will provide considerable room for production growth into the 2020s. Exxon’s pipeline expansion – undertaken with Plains All American and Lotus Midstream – was announced in January, just before the company proceeded with its final investment decision (FID) to expand the capacity of its Beaumont, TX, refinery by 250k b/d to 616k b/d. The new capacity is expected to come online in 2022, and will make Beaumont the largest refinery in the U.S. The refinery expansion will take in light-sweet crude from the Permian, where Exxon plans to triple production to 600k b/d by 2025.2 These announcements are not one-offs: Permian production, and shale-oil output generally, is booming. In the Permian, oil output rose just over 800k b/d last year, according to the U.S. EIA (Chart of the Week, panel 1). Overall U.S. shale output in the Big 5 basins – Anadarko, Bakken, Eagle Ford, Niobrara and Permian – rose close to 1.5mm b/d in 2018.3 Output growth in the Permian will remain super-charged on the back of the pipeline buildout, and the capex being poured into it as the Majors and large E&P companies industrialize production there, not unlike a manufacturing process. We expect the Permian to lead the development of shale-oil production, driving total crude and liquids growth in the U.S., which last year grew by 2.2mm b/d to reach 19mm b/d by December (Chart of the Week, panel 2). Chart of the WeekBrent Physical Liquidity Continues To Fall Brent Physical Liquidity Continues to Fall Brent Physical Liquidity Continues to Fall Continued investments in state-of-the-art refinery expansions in the U.S. Gulf are expected to continue as well, given the production growth we expect for the Permian, and the pipeline expansions that will take that output to the Houston refining market. Chevron, for example, is expected to close on an acquisition from Brazilian state oil company Petrobras for the 110k b/d Pasadena Refining System, also in the Houston Ship Channel. The company will feed this unit with light-sweet crude from the Permian, which it told analysts this week it expects to grow to 600k b/d by end-2020 and 900k b/d by 2023.4 At present, the U.S. Gulf Coast refining infrastructure cannot absorb all of the light-sweet crude that will be produced in the Permian and the other major basins in coming years. The export markets – particularly the Atlantic Basin, which is home to the physical Brent market – will be absorbing more and more of U.S. light-sweet production in coming years as North Sea production stagnates relative to the U.S. shales (Chart of the Week, panel 3). Output in the U.K. North Sea was at its lowest level since 1973 in 2017, following the price collapse of 2014 – 2017 instigated by the OPEC market-share war launched in 2014. UK output was flattish last year, while Norwegian production was down slightly more than 6% in 2018, bringing it to just under 1.5mm b/d. Drilling activity is picking up this year, along with M&A activity as private equity firms step in to buy properties being sold by the U.S. Majors. As can be seen in the Chart of the Week, production is expected to begin picking up at the end of this year, but base effects from the low levels of late exaggerate the gains in percentage terms. U.S. Crude Exports Set To Soar The North Sea Brent market is arguably the most important crude oil market in the world. It is the underlying physical market for the world’s benchmark crude oil – Brent Blend – against which up to two-thirds of the world’s crude oil prices are indexed.5 Production of the five constituent streams comprising the Brent index – the Brent, Forties, Oseberg, Ekofisk and Troll crudes – has been falling year on year, and one of the streams (Forties) is regularly being exported to Asian refining markets. This has prompted the main price-reporting agencies to consider adding to the constituents of the Brent index, and changing the type of pricing it records.6 At the same time, increasing volumes of WTI light-sweet crude are making their way into the Brent North Sea physical market.7 These export volumes will increase, supported by the buildout of pipeline takeaway and deep-water harbor capacity in the U.S. Gulf, which, when done, will expand the capacity of Gulf ports to accommodate very large crude carriers (VLCCs).8 On the back of these rising exports to the European market, Argus Media, one of the price-reporting agencies, this year began publishing U.S. waterborne pricing assessments as differentials to the ICE Brent futures. According to Argus, slightly over a quarter of the 2.6mm b/d of crude exports out of the U.S. last November went to Europe to compete with North Sea grades like Brent and Forties, two of the Brent index constituents. For the week ended February 22, 2019, the four-week average of crude oil exports from the U.S. was close to 3.1mm b/d, a record for average exports. According to S&P Global Platts, “There have been 48 VLCCs booked for loading out of the USGC so far in 2019 – about five times the amount booked in the first two months of 2018 and a drastic difference to the two VLCCs that were booked during the same period in 2017.”9 Most of the growth in U.S. exports is coming from the shale-oil production boom, which is swelling the volume of light-sweet barrels in the Gulf. While increasing volumes of WTI are making their way into European wet markets, it is too early to call WTI delivered to the Houston refining market (WTI – Houston) a benchmark; it’s more of a reference price for now. All the same, the necessary and sufficient conditions are falling into place for WTI – Houston to become a global benchmark: It has consistent quality; diversity of buyers (refiners and trading companies), sellers (producers and traders), and speculators to provide hedging liquidity to physical-market participants; and, in due course, will have reliable shipping facilities, including ports capable of handling VLCCs and smaller vessels. This last condition is the critical limiting factor at present.10 We expect that, by the early 2020s, the necessary and sufficient conditions will be in place to allow WTI – Houston to become a global benchmark. By that time, we project the U.S. will be exporting in excess of 10mm b/d of crude and liquids, and refined products, with crude exports alone exceeding 5mm b/d by then. Currently, the U.S. exports slightly more than 8mm b/d of crude oil and products (Chart 2). The six largest importers of U.S. crudes are found in the Atlantic and Pacific basins (Charts 3A & 3B). Chart 2U.S. Will Expand Its Lead As Largest Crude and Products Exporter U.S. Will Expand Its Lead As Largest Crude and Products Exporter U.S. Will Expand Its Lead As Largest Crude and Products Exporter Chart 3AU.S. Exports To Atlantic ... U.S. Exports To Atlantic ... U.S. Exports To Atlantic ... Chart 3B... And Pacific Growing ... And Pacific Growing ... And Pacific Growing Bottom Line: We expect the Brent vs. WTI crude oil differential to narrow next year, as U.S. light-sweet crude oil exports expand and North Sea production stagnates. On the back of this, we are opening a long WTI vs. short Brent position in 2020. We expect this differential to average $3.25/bbl next year versus current market levels of $6.6/bbl. Canadian WCS Differentials Could Relapse The Western Canadian Select (WCS) differential to WTI YTD contracted to a discount of $10.50/bbl from an average discount of $26.3/bbl in 2018, as the Alberta government’s production curtailment took effect (Chart 4).11 This is allowing Alberta’s excess inventories to start declining, which was one of the primary motivations of the government’s action. Chart 4Government-mandated Production Cuts Reverse Inventory Builds in Alberta Government-mandated Production Cuts Reverse Inventory Builds in Alberta Government-mandated Production Cuts Reverse Inventory Builds in Alberta Not all the news out of Canada is good for producers, however. An unexpected delay in Enbridge’s Line 3 replacement and expansion puts future Canadian production growth in jeopardy. This will complicate the Alberta government’s plan to stabilize the sound discount to WTI, which is necessary to maintain investors’ confidence in the sector. In our previous analysis of the Canadian oil sector, we assumed the Line 3 replacement project would be completed in the fourth quarter of this year. This is now pushed back by at least 6 months, likely into 2H20.12 The replacement was expected to restore Line 3’s original takeaway capacity of 760k b/d from 390k b/d, and was a crucial input in our Canadian oil output forecasts. The reduction of the production curtailment to ~ 95k b/d in 2H19 previously announced by the Alberta government will not be sufficient to maintain the WCS transportation discount below $15/bbl (Chart 5). Thus, the government most likely will extend part of the ~ 325k b/d mandatory cuts into 2H19. A rollback of the curtailment policy to 95k b/d ahead of the Line 3 replacement would push the differential back above the crude-by-rail range – i.e., a $15-to-$22/bbl discount over the quality discount for heavy sour crude vs. the light-sweet. Chart 5 We expect a combination of production decreases and increased crude-by-rail transport, which will have to go to record levels, could help alleviate the negative pressure on the WCS-WTI discount (Chart 6). For instance, maintaining a 225k-barrel-per-day production curtailment from April to December 2019, combined with an increase in crude-by-rail transport to ~ 460k b/d by year-end would be enough to maintain the discount in our estimated crude-by-rail range (Chart 7).13 Chart 6 Chart 7 Heavy Crude Differentials Will Remain Tight The prolongation of Canadian crude bottlenecks will contribute to keeping heavy-sour vs. light-sweet price differentials tight. Altogether, our expectation of high compliance to the output cuts agreed by OPEC 2.0 countries, which primarily export heavy-sour crudes; larger-than-expected Venezuelan output declines in heavy-sour output; and continued takeaway capacity constraints in Canada will keep the price differentials between light-sweet and heavy-sour crudes tight. This can be seen in the Brent – Dubai spread, which at times, favors the heavy-sour crude streams (Chart 8). Chart 8Heavy-Sour Crude Differentials Tighten As Supply Contracts Heavy-Sour Crude Differentials Tighten As Supply Contracts Heavy-Sour Crude Differentials Tighten As Supply Contracts Bottom Line: The WCS differential vs. WTI is at risk of weakening once again, following the unexpected delay in Enbridge’s Line 3 replacement and expansion. The Alberta government will have to get more deeply involved to keep unconstrained production from hammering the differential once again.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Hugo Bélanger, Senior Analyst Commodity & Energy Strategy HugoB@bcaresearch.com   Footnotes 1 Please see “OPEC likely to defer output policy decision until June – sources,” published by uk.reuters.com, March 4, 2019. 2 Please see “Permian Majors Expand Downstream Processing,” published by Morningstar Commodities Research, February 11, 2019. 3 These data were sourced from the EIA’s Drilling Productivity Report for February 2019. 4 See fn 2 above. See also “Chevron, Exxon take turns wooing investors with shale boasts,” published by reuters.com March 5, 2019. 5 This estimate comes from ICE Brent Crude Oil, published by The Intercontinental Exchange (ICE), which runs the Brent futures market. 6 Please see “Viewpoint: North Sea benchmark changes looming” which was published by Argus Media on December 27, 2018. 7 Please see “US waterborne crude trade shifts toward Brent basis” published by Argus Media on February 15, 2019. 8 See, e.g., Carlyle Group’s recently announced involvement in such a venture. Carlyle expects its deep-water buildout to be done in late 2020. 9 Please see “In the LOOP: Record US crude exports boost VLCC tanker demand, rates,” published by S&P Global Platts on March 5, 2019. 10 Please see Liz Bossley’s article “There Can (Not) Be Only One,” beginning on p. 15 of the May 2018 issue of the Oxford Energy Forum – Oil Benchmarks – Issue 113, for a discussion of different oil-price benchmarks. 11 We discuss Canada’s take-away dilemma in our November 29, 2018, publication entitled “The Third Man At OPEC 2.0’s Meeting.” It is available at ces.bcaresearch.com. 12 Please see “Enbridge’s Line 3 pipeline replacement likely won’t be in service until second half of 2020,” published by The Globe and Mail on March 3, 2019. 13 The government intends to increase the production ceiling by 100k b/d by April 2019, this makes the mandatory cuts at 225k b/d from 325k b/d in January 2019. https://www.alberta.ca/protecting-value-resources.asp Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in Summary of Trades Closed in Oil Price Diffs: Global Convergence Oil Price Diffs: Global Convergence