oil strategy：the macro push vs the fundamental pull
Capital Markets October12,2022 MichaelTran OilStrategy:TheMacroPushvsTheFundamentalPullGiotalEnergyStrategitandDigital Irtellipenc RESEARCH GY MajorThemesforQ4&GlobalOilPriceScenarioAnalysis Macromadness,policyparalysis,lightliquidityandtumultuoustrendlines,1H'22fundamentallyfocused,Q3'22waspolicydriven.Theremainingquarteroftheyearpromisestobeacocktailofboth,andmore.Inthispiece,weoutlineseveralpricepathsfortheoilmarketandthenecessarydriversofeachoftheframeworks.Also,weunpackfivemajor was (212)265-4020 michsel.tran@rbcem.com HelimaCroft HeadofGlobalCommodityStrategyand (212)618-7798 helima.croft@rbccm.com themesincluding:theDxYvsOilrelationship,exploringdemandandinventoryscenariosduringhistoricalperiodsofupheaval,weunpacktherippleeffectofaUsrefinedproduct ChristopherLouney exportbanandwealsotracetheeffectsofdisruptionstoRussiansupplyandimplicationsfor (212|437-1925 christopher.louncy@rbccm.com waterbornebenchmarkasbeingasymmetricallypositionedtocapturerelativeupside.BrianLeisen STRA D Senior.Associste MacroDrivenMadness(212)437-9956 Letusbeclear,Wehavebeenandcontinuetobestructurallybullishtheoilmarketframework overthecourseoftheforwardlooking,multi-yearcycle,butwefinditprudenttoexerciseAllsonEnck cautionovertheimmediatetermgiventherecentruninpricesandtherising,unquantifiable(646)618-6547 uncertaintyinthemacromarket.FewideaswouldleadustoalterourlongheldviewthatweAllson.enck:@prbccm.com JohnSoughan Assocet inflationandimplicationsforthedollar,tothelackofmarketliquidityandinvestorappetiteto deployrisk,Wedescribeouroilviewasonethatissimilartoahockeystickthepotentialfor (212)428-5491 lohn.soughan@rbccm.com atroughoverthenearterm,followedbystructuralstrengthafterthemarketnavigatestherecession-relatedchoppiness. Wecontinuetoholdtheviewthattheglobaloilmarketremainsinamulti-yeartighteningcycle, believethatthegreatercycleremainsintact.Thatsaid,oilmarketfundamentalshavetakenabackseattothebroadermacrolandscapeandthepolicydrivenmarket.Q3'22wasastark fundamentalsacrossmostassetclasses,andviceversafortailwinds.Nailinganoilpriceisan exerciseinfutility.TheBrent2023forwardstripcurrentlytradesat$83.75/bbl.Weoutlinethreepricepathsfortheoilmarket: LOBAL BlueSkyRiskOnScenario(40%):Russialosesmaterialphysicalvolumesofoutputandsupply tightnessunderpinsthefundamentalframework,overshadowingrecessionaryfears.Truedemandremainsunencumberedbyrampantinflationandriskappetitefrombothcommodity tradersandmacroinvestorslooktodeployriskfromanunencumberedstructuralbullishstandpoint.BrentPriceTrgjectoryformid-2023:$115-120/bb/range. WeakMacroBackdropvsConstructiveOilFundamentalPush-PullScenario(45%):Russialosesbarrelslaterthisyear,globalsupplytightens,butconcernscenteringonoildemandgiventheweakeningglobaleconomicbackdropmakesfreshriskdeploymentahighhurdle.AdditionalpolicyleversfromtheBidenadministrationaredifficulttoquantifyandremainadeterrentfor riskdeployment.VolumestradedinspotWTIcontractshasbeenclockinginatamere58%ofnormallevelsgiventhatmarketparticipantsloathetradingapolicydrivenmarket,andassuch, riskappetiteremainslow.Thisresultsinlowerliquidityandvolatilepricing.Policycross-currents DeepRecessionScenario(15%):It'saweakdemandstory.Macrodriversrangingfromstickier AllvaluesinUsDunleisotherwiseroted thanexpectedinflationwreakinghavoconconsumerdemandtoChina'sreluctancetopivotPricedagofgriortrecingtey'snartetdese, fromconsumptionhinderingCOVIDpolices,toaFedover-reachbymovingfastandbreaking things.Suchmacrothreatsarerealizedandleadtoarecessionlikebackdropwherecorrelations betweenriskassetclassesmovesharplytogetherasinvestorsseeksafehavens.BrentPriceForRequiredConflicts Trajectoryformid-2023:low$60/bblronge.Disclosures,seepage12. Copital Markets Figure1-BrentOilPriceScenarios,PeriodAverages BrentPriceScenarios($S/bbl) OilStrategy:TheMacroPushvsTheFundamentalPull 20222023 Q1Q2Q3 $97.90$111.98 $97.70 $89.25$99.21 $88.00 $89.75 $95.00$106.25 $94.75 $97.90$111.98 $97.70 $69.50$94.27 $65.25 $62.50 $62.50 $69.75 $65.00 $88.50 $85.48 $87.47 $84.68 BlueSkyRiskOn(40%)$97.90$111.98$97.70 MacrovsOilFundamentalPush-Pull(45%) DeepRecession(15%)BrentForwardCurve 22AvgQ1Q2Q323Avg $97.75$101.33$104.50$112.75$124.00$142.75$121.00 OilBenchmarks:NotAllEqual-BrentRemainsWidetoWTI Upsidepositioning,longer-datedcontractsandastomachforvolatility.Thosearethreekeyingredientsforriskdeploymentintoday'schoppyenvironment.However,notallbenchmarksarecreatedequal.ThespotWTl-Brentspreadiscurrentlytradingnear-S6.50/bblandwe exposuregearedtowardBrentonarelativebasisforavarietyofreasons. Forstarters,OPEC+hasclearlyenteredatighteningcycle.Assuch,takingbarrelsoutoftheMiddleEastandNorthAfricanmarketleavesadditionalregionsthroughoutEuropeandothers lookingelsewhereforwaterbornebarrels.Second,inthesameveinasmentionedabove,BrentshouldgarneranasyrmmetricamountoftheupsideifRussianbarrelsroll,whetherbyattrition orbydeliberateweaponizationofenergybyPutinasaretaliatoryeffortfollowingWesternirmplementationofpricecaps.Tangentialtobothaforementionedpointsisthird,wepreferto minimizeriskawayf
