Commodities & Energy Sector

Highlights Asian and European natural gas prices will remain well bid as the Northern Hemisphere winter approaches. An upgraded probability of a second La Niña event this winter will keep gas buyers scouring markets for supplies (Chart of the Week). The IEA is pressing Russia to make more gas available to European consumers going into winter. While Russia is meeting contractual commitments, it is also trying to rebuild its inventories. Gas from the now-complete Nord Stream 2 pipeline might not flow at all this year. High natgas prices will incentivize electric generators to switch to coal and oil. This will push the level and costs of CO2 emissions permits higher, including coal and oil prices. Supply pressures in fossil-fuel energy markets are spilling into other commodity markets, raising the cost of producing and shipping commodities and manufactures. Consumers – i.e., voters – experiencing these effects might be disinclined to support and fund the energy transition to a low-carbon economy. We were stopped out of our long Henry Hub natural gas call spread in 1Q22 – long $5.00/MMBtu calls vs short $5.50/MMBtu calls in Jan-Feb-Mar 2022 – and our long PICK ETF positions with returns of 4.58% and -10.61%. We will be getting long these positions again at tonight's close. Feature European natural gas inventories remain below their five-year average, which, in the event of another colder-than-normal winter in the Northern Hemisphere, will leave these markets ill-equipped to handle a back-to-back season of high prices and limited supply (Chart 2).1 The probability of a second La Niña event this winter was increased to 70-80% by the US Climate Prediction Center earlier this week.2 This raises the odds of another colder-than-average winter. As a result, markets will remain focused on inventories and flowing natgas supplies from the US, in the form of Liquified Natural Gas (LNG) cargoes, and Russian pipeline shipments to Europe as winter approaches. Chart of the WeekSurging Natural Gas Prices Intensify Competition For Supplies Natgas Markets Continue To Tighten Natgas Markets Continue To Tighten Chart 2Natgas Storage Remains Tight Natgas Markets Continue To Tighten Natgas Markets Continue To Tighten US LNG supplies are being contested by Asian buyers, where gas storage facilities are sparse, and European buyers looking for gas to inject into storage as they prepare for winter. US LNG suppliers also are finding ready bids in Brazil, where droughts are reducing hydropower availability. In the first six months of this year, US natgas exports averaged 9.5 bcf/d, a y/y increase of more than 40%. Although Russia's Nord Stream 2 pipeline has been completed, it still must be certified to carry natgas into Germany. This process could take months to finish, unless there is an exemption granted by EU officials. Like the US and Europe, Russia is in the process of rebuilding its natgas inventories, following a colder-than-normal La Niña winter last year.3 Earlier this week, the IEA called on Russia to increase natgas exports to Europe as winter approaches. The risk remains no gas will flow through Nord Stream 2 this year.4 Expect Higher Coal, Oil Consumption As other sources of energy become constrained – particularly UK wind power in the North Sea, where supplies went from 25% of UK power in 2020 to 7% in 2021 – natgas and coal-fired generation have to make up for the shortfall.5 Electricity producers are turning more towards coal as they face rising natural gas prices.6 Increasing coal-fired electric generation produces more CO2 and raises the cost of emission permits, particularly in the EU's Emissions Trading System (ETS), which is the largest such market in the world (Chart 3). Prices of December 2021 ETS permits, which represent the cost of CO2 emissions in the EU, hit an all-time high of €62.75/MT earlier this month and were trading just above €60.00/MT as we went to press. Chart 3Higher CO2 Emissions Follow Lower Renewables Output Higher CO2 Emissions Follow Lower Renewables Output Higher CO2 Emissions Follow Lower Renewables Output Going into winter, the likelihood of higher ETS permit prices increases if renewables output remains constrained and natgas inventories are pulled lower to meet space-heating needs in the EU. This will increase the price of power in the EU, where consumers are being particularly hard hit by higher prices (Chart 4). The European think tank Bruegel notes that even though natgas provides about 20% of Europe's electricity supply, it now is setting power prices on the margin.7 Chart 4EU Power Price Surge Is Inflationary Natgas Markets Continue To Tighten Natgas Markets Continue To Tighten Elevated natgas prices are inflationary, according to Bruegel: "On an annual basis, a doubling of wholesale electricity prices from about €50/megawatt hour to €100/MWh would imply that EU consumers pay up to €150 billion (€50/MWh*3bn MWh) more for their electricity. … Drastic increases in energy spending will shrink the disposable income of the poorest households with their high propensity to consume." This is true in other regions and states, as well. Is the Natgas Price Surge Transitory? The odds of higher natgas and CO2 permit prices increase as the likelihood of a colder-than-normal winter increases. Even a normal winter likely would tax Europe's gas supplies, given the level of inventories, and the need for Russia to replenish its stocks. However, at present, even with the odds of a second La Niña event this winter increasing, this is a probable event, not a certainty. The global natgas market is evolving along lines similar to the crude oil market. Fungible cargoes can be traded and moved to the market with the highest netback realization, after accounting for transportation. High prices now will incentivize higher production and a stronger inventory-injection season next year. That said, prices could stay elevated relative to historical levels as this is occurring. Europe is embarked on a planned phase-out of coal- and nuclear-powered electricity generation over the next couple of years, which highlights the risks associated with the energy transition to a low-carbon future. China also is attempting to phase out coal-fired generation in favor of natgas turbines, and also is pursuing a buildout of renewables and nuclear power. Given the extreme weather dependence on prices for power generated from whatever source, renewables will remain risky bets for modern economies as primary energy sources in the early stages of the energy transition. When the loss of wind, for example, must be made up with natgas generation and that market is tight owing to its own fundamental supply-demand imbalance, volatile price excursions to high levels could be required to destroy enough demand to provide heat in a cold winter. This would reduce support for renewables if it became too-frequent an event. This past summer and coming winter illustrate the risk of too-rapid a phase out of fossil-fueled power generation and space-heating fuels (i.e., gas and coal). Frequent volatile energy-price excursions, which put firms and households at risk of price spikes over an extended period of time, are, for many households, material events. We have little doubt the commodity-market effects will be dealt with in the most efficient manner. As the old commodity-market saw goes, "High prices are the best cure for high prices, and vice versa." All the same, the political effects of another very cold winter and high energy prices are not solely the result of economic forces. Inflation concerns aside, consumers – i.e., voters – may be disinclined to support a renewable-energy buildout if the hits to their wallets and lifestyles become higher than they have been led to expect. Investment Implications The price spike in natgas is highly likely to be a transitory event. Another surge in natgas prices likely would be inflationary while supplies are rebuilding – so, transitory.  Practically, this could stoke dissatisfaction among consumers, and add a political element to the transition to a low-carbon energy future. This would complicate capex decision-making for incumbent energy suppliers – i.e., the fossil-fuels industries – and for the metals suppliers, which will be relied upon to provide the literal building blocks for the renewables buildout.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish US crude oil inventories fell 3.5mm barrels in the week ended 17 September 2021, according to the US EIA. Product inventories built slightly, led by a 3.5mm-build in gasoline stocks, which was offset by a 2.6mm barrel draw in distillates (e.g., diesel fuel). Cumulative average daily crude oil production in the US was down 7% y/y, and stood at 10.9mm b/d. Cumulative average daily refined-product demand – what the EIA terms "Product Supplied" – was estimated at 19.92mm b/d, up almost 10% y/y. Brent prices recovered from an earlier sell-off this week and were supported by the latest inventory data (Chart 5). Base Metals: Bullish Iron ore prices have fallen -55.68% since hitting an all-time high of $230.58/MT in May 12, 2021 (Chart 6). This is due to sharply reduced steel output in China, as authorities push output lower to meet policy-mandated production goals and to conserve power. Even with the cuts in steel production, overall steel output in the first seven months of the year was up 8% on a y/y basis, or 48mm MT, according to S&P Global Platts. Supply constraints likely will be exacerbated as the upcoming Olympic Games hosted by China in early February approach. Authorities will want blue skies to showcase these events. Iron ore prices will remain closer to our earlier forecast of $90-$110/MT than not over this period.8 Precious Metals: Bullish The Federal Open Market Committee is set to publish the results of its meeting on Wednesday. In its last meeting in June, more hawkish than expected forecasts for interest rate hikes caused gold prices to drop and the yellow metal has been trading significantly lower since then. Our US Bond Strategy colleagues expect an announcement on asset purchase tapering in end-2021, and interest rate increases to begin by end-2022.9 Rate hikes are contingent on the Fed’s maximum employment criterion being reached, as expected and actual inflation are above the Fed criteria. Tapering asset purchases and increases in interest rates will be bearish for gold prices. Chart 5 BRENT PRICES BEING VOLATILE BRENT PRICES BEING VOLATILE Chart 6 BENCHMARK IRON ORE 62% FE, CFR CHINA (TSI)RECOVERING BENCHMARK IRON ORE 62% FE, CFR CHINA (TSI)RECOVERING       Footnotes 1     Equinor, the Norwegian state-owned energy-supplier, estimates European natgas inventories will be 70-75% of their five-year average this winter.  Please see IR Gas Market Update, September 16, 2021. 2     Please see "ENSO: Recent Evolution, Current Status and Predictions," published by the US Climate Prediction Center 20 September 2021.  Earlier this month, the Center gave 70% odds to a second La Niña event in the Northern Hemisphere this winter.  Please see our report from September 9, 2021 entitled NatGas: Winter Is Coming for additional background. 3    Please see IEA calls on Russia to send more gas to Europe before winter published by theguardian.com, and Big Bounce: Russian gas amid market tightness.  Both were published on September 21, 2021. 4    Please see Nord Stream Two Construction Completed, but Gas Flows Unlikely in 2021 published 14 September 2021 by Jamestown.org. 5    Please see The U.K. went all in on wind power. Here’s what happens when it stops blowing, published by fortune.com on 16 September 2021.  Argus Media this week reported wind-power output fell 56% y/y in September 2021 to just over 2.5 TWh. 6    Please see UK power firms stop taking new customers amid escalating crisis, published by Aljazeera; Please see UK fires up coal power plant as gas prices soar, published by BBC. 7     Please see Is Europe’s gas and electricity price surge a one-off?, published by Bruegel 13 September 2021. 8    Please see China's Recovery Paces Iron Ore, Steel, which we published on November 5, 2020. 9    Please see 2022 Will Be All About Inflation and Talking About Tapering, published on September 22, 2021 and on August 10, 2021 respectively.     Investment Views and Themes Recommendations Strategic Recommendations Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Highlights The odds of a stronger recovery in EM oil demand next year are rising, as vaccines using mRNA technology are manufactured locally and become widely available.1 This will reduce local lock-down risks in economies relying on less efficacious COVID-19 vaccines – or lacking them altogether – thereby increasing mobility, economic activity and oil demand. Our global crude oil balances estimates are little changed to the end of 2023, which leaves our price expectations mostly unchanged: 4Q21 Brent prices are expected to average $70.50/bbl, while 2022 and 2023 prices average $75 and $80/bbl, respectively (Chart of the Week). The balance of risks to the crude oil market remain to the upside in our estimation. In addition to a higher likelihood of better-than-expected EM demand growth, we expect OPEC 2.0 production discipline to hold, and for the price-taking cohort outside the coalition to continue prioritizing investors' interests. We remain long commodity index exposure – S&P GSCI and COMT – and, at tonight's close, will be getting long the DFA Dimensional Emerging Core Equity Market ETF (DFAE) on the back of increasing local mRNA vaccine production in EM economies. Feature As local production of COVID-19 vaccines employing mRNA technology spreads throughout EM economies, the odds of a stronger-than-expected recovery in oil demand next year will increase. The buildout of production and distribution facilities for this technology is progressing quickly in Asia – e.g., Chinese mRNA tech joint ventures are expected to be in production mode in 4Q21 – Latin America, Africa, and the Middle East.2 Accelerated availability of more efficacious vaccines globally will address the "fault lines" identified by the IMF in its July 2021 update. In that report, the Fund notes a major downside risk to its global GDP growth expectation of 6% this year remains slower-than-expected vaccine rollouts to emerging and developing economies.3 The other major risk identified by the Fund is too-rapid a winddown of policy support in DM economies, which would lead to tighter financial conditions globally. Our global demand expectation is driven by GDP estimates from the IMF and World Bank. The implication of that assumption is the powerful recovery in DM oil demand seen this year will slow while EM demand picks up next year (Chart 2). We proxy DM oil demand with OECD oil consumption and EM demand with non-OECD consumption. We continue to expect overall oil demand to recover by just over 5.0mm b/d this year and 4.4mm b/d next year (Table 1). Chart of the WeekOil Forecasts Hold Steady Oil Forecasts Hold Steady Oil Forecasts Hold Steady Chart 2Higher EM Oil Demand Expected in 2022 Higher EM Oil Demand Expected in 2022 Higher EM Oil Demand Expected in 2022 Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23 Upside Price Risk Rises For Crude Upside Price Risk Rises For Crude Global Oil Supply To Remain Steady Hurricane Ida will have removed ~ 30mm barrels of US offshore oil output by the time losses are fully tallied, based on IEA estimates. Even so, in line with the US EIA, we expect offshore US oil production will recover from the damage caused by the storm in 4Q21 and be back at ~ 1.7mm b/d on average over the quarter. This will allow oil prices to ease slightly from current elevated levels over the balance of the year. Inland, US shale-oil output remains on track to average ~ 9.06mm b/d this year, 9.55mmb/d in 2022 and 9.85mmb/d in 2023, in our modeling (Chart 3). We expect production in the Lower 48 states of the US to remain mostly steady going forward. Production from finishing drilled-but-uncompleted (DUCs) shale-oil wells is the lowest it's been since 2013.  Output from these wells will remain relatively low for the rest of the year. This supply was developed during the COVID-19 pandemic, as it was cheaper to bring on than new drilling. For 2022 and 2023 overall, our model points to a slow build-up in US shale-oil output as drilling increases. Going into 2022, we expect continued production discipline from OPEC 2.0, and for the coalition to continue to manage output in line with actual demand it sees from its customers. The 400k b/d being returned monthly to the market over August 2021 to mid-2022 will accommodate demand increases. However, it will be monitored closely in the event demand fails to materialize, as has been OPEC 2.0's wont over the course of the pandemic. Chart 3US Shale-Oil Output Mostly Stable US Shale-Oil Output Mostly Stable US Shale-Oil Output Mostly Stable Oil Markets To Remain Balanced We see markets remaining balanced to the end of 2023, with OPEC 2.0 maintaining its production-management strategy – keeping the level of supply just below the level of demand – and the price-taking cohort led by US shale-oil producers remaining focused on maintaining margins so as to provide competitive returns to investors. On the demand side, EM growth will pick up as DM growth slows. Given our fundamental view, global crude oil balances estimates are little changed to the end of 2023 (Chart 4). This allows inventories to continue to draw this year and next, then to slowly rebuild as production increases toward the end of 2023 (Chart 5). Falling inventories will keep the Brent forward curve backwardated – i.e., prompt-delivery oil will trade higher than deferred-delivery oil. Chart 4Markets Remain Balanced... Markets Remain Balanced... Markets Remain Balanced... Chart 5...And Oil Inventory Continues To Draw ...And Oil Inventory Continues To Draw ...And Oil Inventory Continues To Draw The backwardated forward curve means OPEC 2.0 producers will continue to realize higher delivered prices on their crude oil than the marginal shale-oil producer, which hedges its production 1-2 years forward to stabilize revenue. This is the primary benefit to the member states in the producer coalition: a backwardated curve pricing closer to marginal cost limits the amount of revenue available to shale-oil producers, and thus restrains output to that which is profitable at the margin. Investment Implications Our supply-demand outlook keeps our price expectations mostly unchanged from last month's forecast. We expect 4Q21 Brent prices to average $70.50/bbl, while 2022 and 2023 prices average $75 and $80/bbl, respectively, as can be seen in the Chart of the Week. WTI prices will continue to trade $2-$4/bbl below Brent over this interval. With fundamentals continuing to support a backwardated forward curve in Brent and WTI, we continue to favor long commodity-index exposure, which benefits from this structure.4 Therefore, we remain long the S&P GSCI and the COMT ETF, which is an optimized version of the GSCI that concentrates on positioning in backwardated futures contracts. The upside risk to oil prices resulting from increasing local production of mRNA vaccines in EM economies that had relied on less efficacious vaccines undoubtedly will increase mobility and raise oil demand, if, as appears likely, the impact of this localization is realized in the near term. This also could boost commodity demand generally, if it allows trade and GDP growth to accelerate in EM economies, which supports our long commodity-index view. The rollout of mRNA technology into EM economies also suggests EM GDP growth could increase at the margin with locally produced mRNA vaccines becoming more available. This would redound to the benefit of trade and economic activity generally.5 It also could help unsnarl the movement of goods globally. The wider implications of a successful expansion of locally produced mRNA vaccines leads us to recommend EM equity exposure on a tactical basis. At tonight's close, we will be getting long the DFA Dimensional Emerging Core Equity Market ETF (DFAE). As this is tactical, we will use a tight stop (10%) for this recommendation.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish Natural gas demand is surging globally. Record-breaking heat waves in the US are driving demand for gas-fired generation required to meet space-cooling demand. In addition, in the June-August period, the US saw record LNG exports. Europe and Asia are competing for the fuel as both prepare for winter. Brazil also has been a strong bid for LNG, as drought there has reduced hydropower supplies. In Europe, natural gas inventories were drawn hard this past winter as LNG supplies were bid away to Asia to meet space-heating demand. This is keeping Europe well bid now as winter approaches (Chart 6). The US Climate Prediction Center last week gave 70-80% odds of a second La Niña for the Northern Hemisphere winter. Should it materialize, it could again drive cold artic air into their markets, as it did last winter, and push natgas demand higher. Our recommendation to get long 1Q22 $5.00/MMBtu calls vs short 1Q22 $5.50/MMBtu calls last week was up 17% as of Tuesday's close. We remain long. Base Metals: Bullish The slide in iron ore prices from its ~ $230/MT peak earlier this year can be attributed to weak Chinese demand, and the possibility of its persistence through the winter and into next year (Chart 7). The world’s largest steel-producing nation is aiming to limit steel output to no higher than 2020 levels, in a bid to reduce industrial pollution. According to mining.com, provincial governments have directly asked local steel mills to curb output. Regulation in this sector in China will continue to reduce prices of iron ore, a key raw material in steel production. Precious Metals: Bullish The lower-than-expected reading on the US core CPI earlier this week weighed on the USD, and propelled gold prices above the $1,800/oz mark. While markets expected lower consumer prices for August to diminish the Fed’s resolve to taper asset purchases by year-end, we do not think the lower month-on-month CPI number will delay tapering. The timing of the Fed's initial rate hike – expected by markets to occur after the tapering of the central bank's asset-purchase program – will depend on the US labor force reaching "maximum employment." According to BCA Research's US Bond Strategy, this criterion will be met in late-2022 or early-2023. Low-interest rates, coupled with persistent inflation until then, will be bullish for gold prices. Chart 6 Upside Price Risk Rises For Crude Upside Price Risk Rises For Crude Chart 7 CHINA IMPORTED IRON ORE GOING DOWN CHINA IMPORTED IRON ORE GOING DOWN   Footnotes 1     Please see Everest to bring Canadian biotech's potential Covid shots to China, other markets published on September 13, 2021 by indiatimes.com. 2     Examples of this include Brazil's Eurofarma to make Pfizer COVID-19 shots for Latin America, published by reuters.com; Biovac Institute to be first African company to produce mRNA vaccines, published be devex.com; and mRNA Vaccines Mark a New Era in Medicine, posted by supertrends.com. The latter report also discusses the application of mRNA technology to other diseases like malaria. 3    Please see Fault Lines Widen in the Global Recovery published 27 July 2021 by the Fund. 4    Backwardation is the source of roll yield for long-index exposure.  This is due to the design of these index products, which buy forward then – in backwardated markets – roll out of futures contract as they approach physical delivery at a higher level and re-establish their exposure in a deferred contract. 5    The lower realized efficacy of Sinopharm and Sinovac COVID-19 vaccines and high reinfection rates in economies using these vaccines are one of the key risks to our overall bullish commodity view.  Please see Assessing Risks To Our Commodity Views, which we published on July 8, 2021. 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 2021 Summary of Closed Trades

Highlights Since June, 6 structured recommendations achieved their profit targets: short building and construction (XLB) versus healthcare (XLV); long USD/CAD; long USD/HUF; long Nike versus L’Oréal; short corn versus wheat; and short marine transport versus market. Additionally, short AMC Entertainment expired in profit, while short Australian versus Canadian 30-year bonds expired flat. Within the open trades, 3 are in profit. Against this, 2 structured recommendations hit their stop-losses: short Austria versus Chile; and short lead versus platinum. Additionally, short France versus Japan expired in loss. Within the open trades, 6 are in loss. This results in a ‘win ratio’ at a very pleasing 59 percent. Even more commendably, the 9 unstructured recommendations have all anticipated reversals or exhaustions – most notably for the ZAR, BRL, and stocks versus bonds. Feature Chart of the WeekFractal Fragility Correctly Signalled The Exhaustion Of Stocks Versus Bonds Fractal Fragility Correctly Signalled The Exhaustion Of Stocks Versus Bonds Fractal Fragility Correctly Signalled The Exhaustion Of Stocks Versus Bonds A major advance in our understanding of financial markets is that the Efficient Market Hypothesis (EMH) is only partly true. The market is efficient only when a wide spectrum of investment horizons is setting the price, signified by the market having a rich fractal structure. The market is efficient only when a wide spectrum of investment horizons is setting the price, signified by the market having a rich fractal structure. The eponymous Fractal Market Hypothesis (FMH) teaches us that when the fractal structure becomes extremely fragile, the information and interpretation of longer-term investors is missing from the recent price setting. Meaning that the market has become inefficient. When the longer-term investors do re-enter the price setting process, the question is: will they endorse the most recent trend as a justification of a change in the fundamentals. In which case, the trend will continue. Or will they reject it as an unjustified deviation from a fundamental anchor. In which case, the trend will reverse. In most cases, it is the latter: a rejection and a reversal. As most investors are unaware of the FMH, it gives a competitive advantage to the few investors that use it to signal a potential countertrend reversal. On this basis, we have used it – and continue to use it – to identify countertrend investment opportunities with truly excellent results. Fractal Trade Update This a brief review and update of the 29 short-term trades that we have recommended since our last update on 3rd June 2021, including recommendations that were open on that date. The 29 recommendations have comprised 20 structured trades – which include profit-targets, symmetrical stop-losses, and expiry dates – plus a further 9 recommendations without structured exit points. In summary, 6 structured recommendations achieved their profit targets: short building and construction (XLB) versus healthcare (XLV); long USD/CAD; long USD/HUF; long Nike versus L’Oréal; short corn versus wheat; and short marine transport versus market. Additionally, short AMC Entertainment expired in profit, while short Australian versus Canadian 30-year bonds expired flat. Within the open trades, 3 are in profit. Against this, 2 structured recommendations hit their stop-losses: short Austria versus Chile; and short lead versus platinum. Additionally, short France versus Japan expired in loss. Within the open trades, 6 are in loss. This results in a ‘win ratio’ at a very pleasing 59 percent – counting a win as achieving the profit target, a loss as hitting the (symmetrical) stop-loss, and pro-rata for partial wins and losses. Even more commendably, the 9 unstructured recommendations have all anticipated reversals or exhaustions. The sections below review the structured and unstructured recommendations in chronological order. The 20 Structured Trades 1.  6th May: Short Building and Construction (PKB) vs. Healthcare (XLV) Achieved its profit target of 15 percent. 2.  6th May: Short MSCI France vs. Japan Expired after three months in partial loss but went on to become very profitable – implying that a longer holding period was required (Chart I-2). Chart I-2Short France Versus Japan Became Very Profitable Short France Versus Japan Became Very Profitable Short France Versus Japan Became Very Profitable 3.  13th May: Long USD/CAD Achieved its profit target of 3.7 percent and went on to reach a high-water mark of 5.7 percent. 4.  20th May: Long 10-year T-bond vs. TIPS Open, in profit, having reached a high-water mark of 2.7 percent (versus a 3.6 percent target). 5.  3rd June: Short MSCI Austria vs. Chile Hit its stop-loss of 7 percent, albeit after previously reaching a high-water mark of 5.3 percent – implying that the profit target needed to be tighter. 6.  10th June: Short AMC Entertainment Expired at a 4 percent profit, having reached a high-water mark of 65.3 percent (versus a 100 percent target) (Chart I-3). Chart I-3Fractal Analysis Works Very Well For Meme Stocks Fractal Analysis Works Very Well For Meme Stocks Fractal Analysis Works Very Well For Meme Stocks 7.  10th June: Long USD/HUF Achieved its 3 percent profit target, before continuing to a high-water mark of 7.6 percent (Chart I-4). Chart I-4HUF/USD Corrected By 7.6 Percent HUF/USD Corrected By 7.6 Percent HUF/USD Corrected By 7.6 Percent 8.  17th June: Long Nike vs. L’Oréal Achieved its 9 percent profit target, before continuing to a high-water mark of 31.3 percent (Chart I-5). Chart I-5L’Oréal Underperformed Nike By 31 Percent L'Oreal Underperformed Nike By 31 Percent L'Oreal Underperformed Nike By 31 Percent 9.  24th June: Short Corn vs. Wheat  Achieved its 12 percent profit target, before continuing to a high-water mark of 38.7 percent (Chart I-6). Chart I-6Corn Underperformed Wheat By 39 Percent Corn Underperformed Wheat By 39 Percent Corn Underperformed Wheat By 39 Percent 10.  1st July: Short US REITs vs. Utilities  Open, in profit, having reached a high-water mark of 3 percent (versus a 5 percent target). 11.  8th July: Short Marine Transport vs. Market Achieved its profit target of 16.5 percent. 12.  15th July: Short Lead vs. Platinum Hit its stop loss of 6.4 percent. 13.  15th July: Short Australia vs. Canada 30-year T-Bonds Expired flat. 14.  5th August: Short Tin vs. Platinum Open, in loss, albeit having reached a high-water mark of 9.3 percent (versus a 16.5 percent target). 15.  12th August: Long MSCI Hong Kong vs. MSCI World Open, in loss. 16.  12th August: Long New Zealand vs. Netherlands Open, in loss. 17.  19th August: Short India vs. China Open, in loss (Chart I-7). Chart I-7The Outperformance Of India Versus China Is Fractally Fragile The Outperformance Of India Versus China Is Fractally Fragile The Outperformance Of India Versus China Is Fractally Fragile 18.  26th August: Short Sugar vs. Soybeans Open, in loss. 19.  2nd September: Short Aluminum vs. Gold Open, in loss (Chart I-8). Chart I-8The Outperformance Of Base Metals Versus Precious Metals Is Fractally Fragile The Outperformance Of Base Metals Versus Precious Metals Is Fractally Fragile The Outperformance Of Base Metals Versus Precious Metals Is Fractally Fragile 20.  9th September: Short US Medical Equipment vs. Healthcare Services Open, in profit. The 9 Unstructured Trades 1.  10th June: Short ZAR/USD ZAR/USD subsequently corrected by 12 percent. 2.  24th June: Short Copper Copper’s rally subsequently exhausted. 3.  1st July: Short MSCI ACWI vs. 30-year T-bond The rally in stocks versus bonds has subsequently exhausted (Chart of the Week). 4.  8th July: Short BRL/COP BRL/COP subsequently corrected by 4 percent. 5.  8th July: Short Saudi Tadawul All-Share vs. FTSE Malaysia All Share KLCI The rally in Saudi Arabian equities versus Malaysian equities subsequently exhausted. 6.  12th August: Long NOK/GBP        NOK/GBP has subsequently rallied by 3 percent. 7.  26th August: Short Hungary vs. EM Hungary’s outperformance is losing steam. 8.  26th August: Short USD/PLN USD/PLN subsequently corrected by 3 percent. 9.  2nd September: Short Trade Weighted US Dollar Index The dollar rally is meeting near-term resistance.   Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Mohamed El Shennawy Research Associate Fractal Trading System Fractal Trades 6-Month Recommendations Structural Recommendations Closed Fractal Trades Closed Trades Asset Performance Equity Market Performance   Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields ##br##- Euro Area Indicators To Watch - Bond Yields - Euro Area Indicators To Watch - Bond Yields - Euro Area Chart II-2Indicators To Watch - Bond Yields ##br##- Europe Ex Euro Area Indicators To Watch - Bond Yields - Europe Ex Euro Area Indicators To Watch - Bond Yields - Europe Ex Euro Area Chart II-3Indicators To Watch - Bond Yields ##br##- Asia Indicators To Watch - Bond Yields - Asia Indicators To Watch - Bond Yields - Asia Chart II-4Indicators To Watch - Bond Yields ##br##- Other Developed Indicators To Watch - Bond Yields - Other Developed Indicators To Watch - Bond Yields - Other Developed   Indicators To Watch - Interest Rate Expectations Chart II-5Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations  

Highlights Canada has been a G10 leader in innoculating its population. This should allow economic activity to resume, boosting the CAD/USD. A cresting in COVID-19 infections should permit the Bank of Canada to reintroduce a hawkish bias in upcoming policy meetings. While the CAD/USD is likely to strengthen, it will underperform at the crosses. Feature The Canadian dollar has been rather resilient amid broad US dollar strength this year. While the DXY is up 2.8%, the loonie has still managed to outperform marginally. This is a remarkable feat, given that the Canadian dollar is very much a procyclical currency, and is usually held hostage by broad movements in the trade-weighted dollar. The vaccination campaign in Canada has been very successful, pinning the country as a leader in the G10. This has partly helped curtail the number of new infections from the Delta variant of COVID-19, allowing the economy to reopen faster than its peers (Chart I-1). This is important because there has been a very clear correlation between currency markets and vaccination rates. In general, the countries with higher vaccination rates (UK, Canada, US) have seen better currency performance than countries with the worst vaccination rates (Australia, Japan, Chart I-2). Chart I-1Vaccinations Have Worked For Canada Vaccinations Have Worked For Canada Vaccinations Have Worked For Canada Chart I-2CAD/USD An Outperformer This Year An Update On The Canadian Dollar An Update On The Canadian Dollar In our October 20, 2020 report, we suggested the loonie will hit 82 cents, a level around which it peaked this year. Going forward, the key question is whether Canada’s vaccination success will allow the loonie to eventually overtake these highs. The outlook hinges on two critical calls: What happens to natural resource prices, specifically crude oil; and the Bank of Canada’s (BoC) monetary policy stance relative to the Federal Reserve. Our bias is that a cresting in COVID-19 infections should allow the BoC to reintroduce a hawkish bias in upcoming policy meetings, while oil prices should stay well bid over a cyclical horizon. This will allow the loonie to strengthen in a 12-18 month timeframe. This said, we also expect the loonie to underperform other commodity currencies. Improving Domestic Conditions The latest GDP report out of Canada was surprisingly weak, but by most measures, this represents a temporary blip. Canada is adding jobs at the fastest pace in decades, an average of 102 thousand per month this year. This is leading to the quickest recovery in the unemployment rate on record (Chart I-3). A total of 18.9 million Canadians are currently employed, a smidgen away from the February 2020 high of 19.1 million. At the current pace of job additions, employment should overtake pre-pandemic levels during the next couple of job reports. There remains a sizeable deficit of jobs in service-producing industries (Chart I-4). This suggests that as mobility trends improve, job gains should accrue. The majority of job losses since the pandemic have been in the accommodation, food services, wholesale trade, and retail trade sectors. Chart I-3Canadians Are Quickly Getting Back ##br##To Work Canadians Are Quickly Getting Back To Work Canadians Are Quickly Getting Back To Work Chart I-4Pent Up Recovery In Services Jobs Still Ahead of Us An Update On The Canadian Dollar An Update On The Canadian Dollar Strong employment growth has spurred an improvement in consumer demand. Consumer confidence is rebounding in Canada. Retail sales are robust, having handily overtaken pre-pandemic levels. Mortgage credit has also rebounded amidst low interest rates (Chart I-5).   Chart I-5Lower Rates Are Boosting Household Borrowing Lower Rates Are Boosting Household Borrowing Lower Rates Are Boosting Household Borrowing It is therefore no surprise that inflationary pressures have begun to surface in the Canadian economy. In the latest Business Outlook Survey, capacity pressures were at a decade high. Firms reported that shortages in skilled and specialized labor will persist. There are obviously fewer workers with the skills needed in a post-COVID-19 world, but government support schemes have also eaten up labor supply in traditionally fluid labor demand/supply sectors such as hospitality. Meanwhile, supply bottlenecks have also led to production constraints. This is beginning to show up in the key inflation prints to which the BoC pays attention (Chart I-6). Both the trimmed-mean and median CPI are well above the midpoint of the central bank’s 1%-3% target. While the BoC maintains that some upward pressure on inflation is due to temporary factors, the Canadian unemployment rate is declining faster than that in the US, giving scope for the BoC to normalize policy before the Fed, and putting upward pressure on the CAD (Chart I-7). Asset purchases have already been cut in half from C$4 billion to C$2 billion a week. Chart I-6CPI Is Above Midpoint Of The BoC Target Range CPI Is Above Midpoint Of The BoC Target Range CPI Is Above Midpoint Of The BoC Target Range Chart I-7Canada Versus US ##br##Employment Canada Versus US Employment Canada Versus US Employment Meanwhile, house prices are rising quite strongly. The rise in prices has been very broad based, making housing unaffordable for most Canadians (Chart I-8). Residential investment represents almost 9% of Canadian GDP, a significant chunk of aggregate demand (Chart I-9). This suggests that if left unchecked, a housing market bust will deal a severe blow to the Canadian economy. Chart I-8Surging Home Prices A Headache For The BoC Surging Home Prices A Headache For The BoC Surging Home Prices A Headache For The BoC Chart I-9Canadian GDP Is Highly Exposed To Residential Housing Canadian GDP Is Highly Exposed To Residential Housing Canadian GDP Is Highly Exposed To Residential Housing In a nutshell, despite the BoC standing aside this week, the path of least resistance for Canada is towards tighter monetary policy. This dovetails with the recommendation from our Global Fixed Income Strategy colleagues, who recommend an underweight position in Canadian bonds. Elections And Fiscal Policy A snap federal election will be held in Canada on September 20. Prime Minister Justin Trudeau’s bet is that an astute handling of the pandemic, combined with massive fiscal stimulus, gives him a legitimate shot at a majority government. During his Throne Speech last year, he vowed to do “whatever it takes” to support people and businesses throughout the crisis. The rationale is to deliver on this promise going into 2022. The Conservatives have taken a slight lead over the Liberals in the opinion polls, even though a similar state of affairs did not secure them a victory back in the 2019 election (Chart I-10). In general, the Liberals are pushing for more fiscal spending, but are also focused on issues that Canadians care about, such as housing and climate change. The Conservatives, on the other hand, are focused on balancing the budget, which could jeopardize the nascent economic recovery that Canada currently enjoys. Historically, minority governments tend to be positive for the Canadian dollar, while majority governments generally nudge the loonie lower post-election (Chart I-11). In the current context, a Liberal minority will allow fiscal policy to stay easy, giving room for the BoC to curtail accommodative monetary conditions. Tighter monetary policy and easy fiscal policy tend to be positive for a currency in a Mundell-Fleming framework. Meanwhile, a Conservative minority might dial back a little on fiscal stimulus, but not by much due to political gridlock. Chart I-10Polling Ahead Of The ##br##Election An Update On The Canadian Dollar An Update On The Canadian Dollar Chart I-11Historically, The Market Likes A Minority Government Historically, The Market Likes A Minority Government Historically, The Market Likes A Minority Government In a nutshell, a Liberal minority is likely to be positive for the loonie. Should the Trudeau government win a majority, then fiscal policy might become much more profligate, which will boost inflation expectations in Canada and depress real rates. This will be negative for the loonie, unless the BoC aggressively tightens monetary policy. The Canadian Dollar And Crude Oil The above synopsis highlights that a key driver of the Canadian dollar is the BoC’s monetary policy stance, particularly vis-à-vis the Fed. The other critical variable is what happens to natural resource prices, specifically crude oil. The loonie has a strong correlation with the price of oil, chiefly the Western Canadian Select (WCS) blend (Chart I-12). Chart I-12The Loonie Tracks WCS Oil Prices The Loonie Tracks WCS Oil Prices The Loonie Tracks WCS Oil Prices Going forward, the path for oil prices will be highly dependent on the interplay between demand and supply, especially given the various waves of COVID-19. Oil demand tends to follow the ebbs and flows of the business cycle, with over 60% of global petroleum consumed by the transportation sector. A population under lockdown is negative for crude. Nonetheless, our commodity strategists expect oil prices to average $73 per barrel next year, around today’s levels for Brent, as supply dynamics adjust to the current paradigm. With the WCS blend trading at a discount to this price, there is room for upside surprises due to the following reasons: Investment in the Canadian oil sands has dropped tremendously, while the environmental efficiency (emissions per barrel) has been improving (Chart I-13). This has narrowed the spread between WCS and Brent, something that is likely to persist. Canadian producers have gained market share in the heavy crude oil market, on the back of a drop in Venezuelan production. Production cuts in Alberta have also helped mitigate the oversupply of heavy crude. Canadian oil exports remain near record highs, even though the US is rapidly becoming energy independent (Chart I-14). A lot of refining capacity in the US has been fine-tuned to handle the cheaper, heavier blend from Canada. Finally, pipeline capacity remains a major hurdle in Canada but it is slated to ease. The Trans Mountain Expansion project (590K additional barrels), connecting Alberta to the Westridge Marine Terminal and Chevron refinery in Burnaby, is slated to be competed by the end of 2022. Both the Liberals and the Conservatives support the project. This could narrow the discount between WCS and WTI crude oil. Chart I-13Will A Cleaner Oil Sector See A Bottom In Investments? An Update On The Canadian Dollar An Update On The Canadian Dollar Chart I-14The Energy Independent US Still Likes Canadian Oil The Energy Independent US Still Likes Canadian Oil The Energy Independent US Still Likes Canadian Oil Netting it all out, we expect crude oil prices to stay firm, in line with our colleagues at the Commodity and Energy Strategy team, and the Canadian discount not to widen by much. This should provide modest upside for the Canadian dollar, which has lagged the improvement in terms of trade (Chart I-15). It is remarkable that long-term portfolio flows into Canadian assets have started picking up, a sign of bargain hunting by international investors (Chart I-16). This should provide a modest tailwind to the Canadian dollar over the next 9-to-12 months. Chart I-15The Loonie Is Undervalued Based On Terms Of Trade The Loonie Is Undervalued Based On Terms Of Trade The Loonie Is Undervalued Based On Terms Of Trade Chart I-16Will The Rising Capital Inflow Provide A Support For The Loonie? Will The Rising Capital Inflow Provide A Support For The Loonie? Will The Rising Capital Inflow Provide A Support For The Loonie? Investment Implications We expect the CAD/USD to break above the recent 82-cent high, towards 85 and eventually 90 cents. The key catalysts are both favorable interest rates versus the US and a gradual recovery in WCS oil prices as global economic activity picks up. According to our fundamental models, the CAD is still very undervalued (Chart I-17). Chart I-17The Loonie Is Undervalued By 19% According To Our Model The Loonie Is Undervalued By 19% According To Our Model The Loonie Is Undervalued By 19% According To Our Model Chart I-18The NOK Will Lead The CAD ##br##For Now The NOK Will Lead The CAD For Now The NOK Will Lead The CAD For Now Relative to other commodity currencies, the CAD should lag the AUD as the green energy revolution exhibits staying power, which will benefit metals more than oil over the longer term. In the shorter term, Canadian crude is likely to remain trapped in the oil sands for now, while North Sea crude will face fewer transportation bottlenecks. This suggests that the path of least resistance for the CAD/NOK is down (Chart I-18). Rising oil prices are a terms-of-trade boost for oil exporters, but lead to demand destruction for oil importers. In general, a strategy for playing oil upside is to be long a basket of energy producers versus energy consumers. This suggests that the CAD has upside against the euro, the Indian rupee, and the Turkish lira. But given that the latter currencies are oversold, we will wait for a better buying opportunity.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The US Climate Prediction Center gives ~ 70% odds another La Niña will form in the August – October interval and will continue through winter 2021-22. This will be a second-year La Niña if it forms, and will raise the odds of a repeat of last winter's cold weather in the Northern Hemisphere.1 Europe's natural-gas inventory build ahead of the coming winter remains erratic, particularly as Russian flows via Ukraine to the EU have been reduced this year. Russia's Nord Stream 2 could be online by November, but inventories will still be low. China, Japan, South Korea and India  – the four top LNG consumers in Asia  – took in 155 Bcf of the fuel in June. A colder-than-normal winter would boost demand. Higher prices are likely in Europe and Asia (Chart of the Week). US storage levels will be lower going into winter, as power generation demand remains stout, and the lingering effects from Hurricane Ida reduce supplies available for inventory injections. Despite spot prices trading ~ $1.30/MMBtu above last winter's highs – currently ~ $4.60/MMBtu – we are going long 1Q22 NYMEX $5.00/MMBtu natgas calls vs short NYMEX $5.50/MMBtu natgas calls expecting even higher prices. Feature Last winter's La Niña was a doozy. It brought extreme cold to Asia, North America and Europe, which pulled natural gas storage levels sharply lower and drove prices sharply higher as the Chart of the Week shows. Natgas storage in the US and Europe will be tight going into this winter (Chart 2). Europe's La Niña lingered a while into Spring, keeping temps low and space-heating demand high, which delayed the start of re-building inventory for the coming winter.  In the US, cold temps in the Midwest hampered production, boosted demand and caused inventory to draw hard. Chart of the WeekA Return Of La Niña Could Boost Global Natgas Prices A Return Of La Niña Could Boost Global Natgas Prices A Return Of La Niña Could Boost Global Natgas Prices Chart 2Europe, US Gas Stocks Will Be Tight This Winter NatGas: Winter Is Coming NatGas: Winter Is Coming Summer in the US also produced strong natgas demand, particularly out West, as power generators eschewed coal in favor of gas to meet stronger air-conditioning demand. This is partly due to the closing of coal-fired units, leaving more of the load to be picked up by gas-fired generation (Chart 3). The EIA estimates natgas consumption in July was up ~ 4 Bcf/d to just under 76 Bcf/d. Hurricane Ida took ~ 1 bcf/d of demand out of the market, which was less than the ~ 2 Bcf/d hit to US Gulf supply resulting from the storm.  As a result, prices were pushed higher at the margin. Chart 3Generators Prefer Gas To Coal NatGas: Winter Is Coming NatGas: Winter Is Coming US natgas exports (pipeline and LNG) also were strong, at 18.2 Bcf/d in July (Chart 4). We expect US LNG exports, in particular, to resume growth as the world recovers from the COVID-19 pandemic (Chart 5). This strong demand and exports, coupled with slightly lower supply from the Lower 48 states – estimated at ~ 98 Bcf/d by the EIA for July (Chart 6) – pushed prices up by 18% from June to July, "the largest month-on-month percentage change for June to July since 2012, when the price increased 20.3%" according to the EIA. Chart 4US Natgas Exports Remain Strong US Natgas Exports Remain Strong US Natgas Exports Remain Strong Chart 5US LNG Exports Will Resume Growth NatGas: Winter Is Coming NatGas: Winter Is Coming Chart 6US Lower 48 Natgas Production Recovering US Lower 48 Natgas Production Recovering US Lower 48 Natgas Production Recovering Elsewhere in the Americas, Brazil has been a strong bid for US LNG – accounting for 32.3 Bcf of demand in  June – as hydroelectric generation flags due to the prolonged drought in the country. In Asia, demand for LNG remains strong, with the four top consumers – China, Japan, South Korea, and India – taking in 155 Bcf in June, according to the EIA. Gas Infrastructure Ex-US Remains Challenged A combination of extreme cold weather in Northeast Asia, and a lack of gas storage infrastructure in Asia generally, along with shipping constraints and supply issues at LNG export facilities, led to the Asian natural gas price spike in mid-January.2 Very cold weather in Northeast Asia, drove up LNG demand during the winter months. In China, LNG imports for the month of January rose by ~ 53% y-o-y (Chart 7).3 The increase in imports from Asia coincided with issues at major export plants in Australia, Norway and Qatar during that period. Chart 7China's US LNG Exports Surged Last Winter, And Remain Stout Over The Summer NatGas: Winter Is Coming NatGas: Winter Is Coming Substantially higher JKM (Japan-Korea Marker) prices incentivized US exporters to divert LNG cargoes from Europe to Asia last winter. The longer roundtrip times to deliver LNG from the US to Asia – instead of Europe – resulted in a reduction of shipping capacity, which ended up compounding market tightness in Europe. Europe dealt with the switch by drawing ~ 18 bcm more from their storage vs. the previous year, across the November to January period. Countries in Asia - most notably Japan – however, do not have robust natural gas storage facilities, further contributing to price volatility, especially in extreme weather events. These storage constraints remain in place going into the coming winter. In addition, there is a high probability the global weather pattern responsible for the cold spells around the globe that triggered price spikes in key markets globally – i.e., a second La Niña event – will return. A Second-Year La Niña  Event The price spikes and logistical challenges of last winter were the result of atmospheric circulation anomalies that were bolstered by a La Niña event that began in mid-2020.4 The La Niña is characterized by colder sea-surface temperatures that develops over the Pacific equator, which displaces atmospheric and wind circulation and leads to colder temperatures in the Northern Hemisphere (Map 1). Map 1La Niña Raises The Odds Of Colder Temps NatGas: Winter Is Coming NatGas: Winter Is Coming The IEA notes last winter started off without any exceptional deviations from an average early winter, but as the new year opened "natural gas markets experienced severe supply-demand tensions in the opening weeks of 2021, with extremely cold temperature episodes sending spot prices to record levels."5 In its most recent ENSO update, the US Climate Prediction Center raised the odds of another La Niña event for this winter to 70% this month. If similar conditions to those of the 2020-21 winter emerge, US and European inventories could be stretched even thinner than last year, as space-heating demand competes with industrial and commercial demand resulting from the economic recovery. Global Natgas Supplies Will Stay Tight JKM prices and TTF (Dutch Title Transfer Facility) prices are likely to remain elevated going into winter, as seen in the Chart of the Week. Fundamentals have kept markets tight so far. Uncertain Russian supply to Europe will raise the price of the European gas index (TTF). This, along with strong Asian demand, particularly from China, will keep JKM prices high (Chart 8). The global economic recovery is the main short-term driver of higher natgas demand, with China leading the way. For the longer-term, natural gas is considered as the ideal transition fuel to green energy, as it emits less carbon than other fossil fuels. For this reason, demand is expected to grow by 3.4% per annum until 2035, and reach peak consumption later than other fossil fuels, according to McKinsey.6 Chart 8BCAs Brent Forecast Points To Higher JKM Prices BCAs Brent Forecast Points To Higher JKM Prices BCAs Brent Forecast Points To Higher JKM Prices Spillovers from the European natural gas market impact Asian markets, as was demonstrated last winter. Russian supply to Europe – where inventories are at their lowest level in a decade – has dropped over the last few months. This could either be the result of Russia's attempts to support its case for finishing Nord Stream 2 and getting it running as soon as possible, or because it is physically unable to supply natural gas.7 A fire at a condensate plant in Siberia at the beginning of August supports the latter conjecture. The reduced supply from Russia, comes at a time when EU carbon permit prices have been consistently breaking records, making the cost of natural gas competitive compared to more heavy carbon emitting fossil fuels – e.g., coal and oil – despite record breaking prices. With Europe beginning the winter season with significantly lower stock levels vs. previous years, TTF prices will remain volatile. This, and strong demand from China, will support JKM prices. Investment Implications Natural gas prices are elevated, with spot NYMEX futures trading ~ $1.30/MMBtu above last winter's highs – currently ~ $4.60/MMBtu. Our analysis indicates prices are justifiably high, and could – with the slightest unexpected news – move sharply higher. Because natgas is, at the end of the day, a weather market, we favor low-cost/low-risk exposures. In the current market, we recommend going long 1Q22 NYMEX $5.00/MMBtu natgas calls vs short NYMEX $5.50/MMBtu natgas calls expecting even higher prices. This is the trade we recommended on 8 April 2021, at a lower level, which was stopped out on 12 August 2021 with a gain of 188%.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish Earlier this week, Saudi Aramco lowered its official selling price (OSP) by more than was expected – lowering its premium to the regional benchmark to $1.30/bbl from $1.70/bbl – in what media reports based on interviews with oil traders suggest is an attempt to win back customers electing not to take volumes under long-term contracts. This is a marginal adjustment by Aramco, but still significant, as it shows the company will continue to defend its market share. Pricing to Northwest Europe and the US markets is unchanged. Aramco's majority shareholder, the Kingdom of Saudi Arabia (KSA), is the putative leader of OPEC 2.0 (aka, OPEC+) along with Russia. The producer coalition is in the process of returning 400k b/d to the market every month until it has restored the 5.8mm b/d of production it took off the market to support prices during the COVID-19 pandemic. We expect Brent crude oil prices to average $70/bbl in 2H21, $73/bbl in 2022 and $80/bbl in 2023. Base Metals: Bullish Political uncertainty in Guinea caused aluminum prices to rise to more than a 10-year high this week (Chart 9). A coup in the world’s second largest exporter of bauxite – the main ore source for aluminum – began on Sunday, rattling aluminum markets. While iron ore prices rebounded primarily on the record value of Chinese imports in August, the coup in Guinea – which has the highest level of iron ore reserves – could have also raised questions about supply certainty. This will contribute to iron-ore price volatility. However, we do not believe the coup will impact the supply of commodities as much as markets are factoring, as coup leaders in commodity-exporting countries typically want to keep their source of income intact and functioning. Precious Metals: Bullish Gold settled at a one-month high last Friday, when the US Bureau of Labor Statistics released the August jobs report. The rise in payrolls data was well below analysts’ estimates, and was the lowest gain in seven months. The yellow metal rose on this news as the weak employment data eased fears about Fed tapering, and refocused markets on COVID-19 and the delta variant. Since then, however, the yellow metal has not been able to consolidate gains. After falling to a more than one-month low on Friday, the US dollar rose on Tuesday, weighing on gold prices (Chart 10). Chart 9 Aluminum Prices Recovering Aluminum Prices Recovering Chart 10 Weaker USD Supports Gold Weaker USD Supports Gold       Footnotes 1      Please see the US Climate Prediction Center's ENSO: Recent Evolution, Current Status and Predictions report published on September 6, 2021. 2     Please see Asia LNG Price Spike: Perfect Storm or Structural Failure? Published by Oxford Institute for Energy Studies. 3     Since China LNG import data were reported as a combined January and February value in 2020, we halved the combined value to get the January 2020 amount. 4     Please see The 2020/21 Extremely Cold Winter in China Influenced by the Synergistic Effect of La Niña and Warm Arctic by Zheng, F., and Coauthors (2021), published in Advances in Atmospheric Sciences. 5     Please see the IEA's Gas Market Report, Q2-2021 published in April 2021. 6     Please see Global gas outlook to 2050 | McKinsey on February 26, 2021. 7     Please see ICIS Analyst View: Gazprom’s inability to supply or unwillingness to deliver? published on August 13, 2021.   Investment Views and Themes Recommendations Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades