BofA Global Research-Commodity Strategist Year Ahead 2023 Commodity Outlook-99278411

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Commodity Strategist
Year Ahead 2023: Commodity outlook
Our top five themes 21 November 2022
1. Supply constraints finely balanced against recession risks Commodities

2. Brent crude could hit $110/bbl, diesel exceed $200/bbl Global
3. NYMEX US nat gas prices should drop below $5/MMBtu
4. Copper could hit $12,000/t and gold could exceed $2,000/oz
5. Add commodities for inflation hedging, diversification, and positive roll returns
Inflation pressures should support commodity returns…

The ICE MLCX TR index was up 78% in the past 12 months and 32% YTD, helped by a
surge in global energy and agriculture prices. In contrast, base and precious metals
recorded negative performances of 6.7% and 5.4% respectively YTD. Our economics
team sees US inflation slowly falling over 2023, with the Fed hitting terminal in 1Q23
and remaining on hold until end of year. Global GDP growth should average 2.4%, with
recessionary backdrops in the US and Europe. While tighter monetary policy and a strong
View Transcript
US dollar have held down commodities this year, China reopening could reverse some of
these headwinds. Importantly, a long-term fixed asset investment cycle linked to the Global Commodity Research
BofA Europe (Madrid)
energy transition is underway and Russian commodity exports will continue to face
sanctions and friction, lending support to cyclical commodity prices. Net, upside price Francisco Blanch
Commodity & Deriv Strategist
potential in metals, steady energy prices, and backwardation point to modest positive BofA Europe (Madrid)
+34 91 514 3070
total commodity returns in 2023. Key downside risks, other than recession, include Fed francisco.blanch@bofa.com
rate hikes past 1Q23 for gold and further lockdowns in China for oil and metals. Michael Widmer
Commodity Strategist
…while metals should outperform energy and agriculture MLI (UK)
michael.widmer@bofa.com
Looking at individual commodities, crude and petroleum products like diesel and
Warren Russell, CFA
gasoline, coupled with selective metals like copper, should perform. Further disruptions Commodity Strategist
of Russian supplies present clear upside risk to both energy and metals prices. While we BofAS
warren.russell@bofa.com
project an average Brent price of $100/bbl in 2023, spot prices could rise to $110/bbl by
Andy Pham
2H23 as international travel picks up in Asia. We are also increasingly constructive on FICC Quant Strategist
transition metals like copper, as infrastructure and grid spending in China combines with BofAS
apham3@bofa.com
rising EV sales. We are also bullish on other transition precious metals like platinum and
Danica Averion
silver, but think gold has the most to gain among the precious metals on a Fed pivot. On Commodity Strategist
a weaker note, US nat gas prices should average $4.50/MMBtu as supplies continue to MLI (UK)
danica_ana.averion@bofa.com
grow at a fast pace. Also, we see a mean-reverting price scenario for agricultural Irina Shaorshadze
commodities as supply continues to respond to the high prices. FICC Quant Strategist
BofAS
Focus on commodity beta, carry, spread value, congestion irina.shaorshadze@bofa.com
Following the dismal performance of 60/40 and risk parity equity/bond portfolios this
year, commodities should attract investor flows in 2023 due to their diversification
benefits and their appeal as an inflation hedge. Lower index AUMs and positive roll
returns provide further support, with ICE MLCX TR roll returns delivering 6% this year, the
strongest in two decades. Yet curves will likely flatten, modestly reducing roll returns over
the next year. Spreads are historically elevated, providing mean reversion opportunities,
but positioning may be too early given limited capacity, inventories, and bottlenecks.
Trading ideas and investment strategies discussed herein may give rise to significant risk and are
not suitable for all investors. Investors should have experience in relevant markets and the financial
resources to absorb any losses arising from applying these ideas or strategies.
BofA Securities does and seeks to do business with issuers covered in its research
reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Refer to important disclosures on page 95 to 96. 12485492
Timestamp: 20 November 2022 09:07PM EST

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Contents
1. Macro overview 5
2. Energy outlook 14
2.1 Crude oil 14
2.2 Refined products 26
2.3 US natural gas 47
3. Industrial metals outlook 53
3.1 Aluminum 53
3.2 Copper 56
3.3 Nickel 59
3.4 Zinc 62
4. Precious metals 65
4.1 Gold 65
4.2 Silver 68
5. Agriculture outlook 71
5.1 Corn 77
5.2 Soybeans 79
5.3 Wheat 82
6. Portfolio strategy 84
6.1 Portfolio strategy outlook 84
6.2 Alpha strategy outlook 90
6.3 New friends in commodity trend Error!
Bookmark
not
defined.
6.4 Commodity carry and the Ukraine crisis Error!
Bookmark
not
defined.
6.5 Decarbonizing commodity portfolio Error!
Bookmark
not
defined.
Appendix – Commodity balance tables 92
2 Commodity Strategist | 21 November 2022
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Exhibit 1: Sector and individual commodity views
Sector views for 2023
Price view Roll yield view BofA view relative to benchmark
Energy Positive Positive Neutral
Brent crude oil Positive Positive Overweight
WTI crude oil Positive Positive Neutral
Natural gas Negative Negative Underweight
Gasoline (RBOB) Positive Positive Neutral
Gasoil Positive Positive Neutral
Livestock Positive Neutral Neutral
Live cattle Positive Neutral Neutral
Lean hogs Neutral Neutral Neutral
Grains & oilseeds Neutral Neutral Underweight
Corn Neutral Neutral Neutral
Wheat Neutral Neutral Neutral
Soybeans Negative Negative Underweight
Soybean meal Negative Negative Underweight
Soft commodities Positive Negative Underweight
Sugar Positive Negative Overweight
Coffee Neutral Neutral Neutral
Cotton Neutral Neutral Neutral
Base Metals Positive Positive Overweight
Aluminium Positive Positive Overweight
Copper Positive Positive Overweight
Nickel Neutral Positive Neutral
Zinc Neutral Positive Neutral
Precious metals Positive Negative Overweight
Gold Positive Negative Overweight
Silver Neutral Negative Underweight
Source: BofA Global Research
BofA GLOBAL RESEARCH
Exhibit 2: BofA Commodity Price Forecasts

(end-of-period forecasts)
units Dec-22F Mar-23F Jun-23F Sep-23F Dec-23F
WTI Crude Oil ($/bbl) 89 94 99 104 94
Brent Crude Oil ($/bbl) 95 100 105 110 100
US natural gas ($/MMBtu) 6.50 4.40 4.10 4.20 4.50
Source: BofA Global Research estimates
Exhibit 3: BofA Commodity Price Forecasts

(period averages)
units 4Q22F 2022F 1Q23F 2Q23F 3Q23F 4Q23F 2023F
WTI Crude Oil ($/bbl) 89.00 95.99 89.00 94.00 99.00 94.00 94.00
Brent Crude Oil ($/bbl) 95.00 100.65 95.00 100.00 105.00 100.00 100.00
US NY Harbor ULSD (HO) Cracks to Brent Crude Oil ($/bbl) 65.00 50.20 57.50 40.00 32.50 30.00 40.00
US RBOB Cracks to Brent Crude Oil ($/bbl) 16.00 25.97 21.00 28.00 21.00 14.00 21.00
NWE Low Sulphur Gasoil Cracks to Brent Crude Oil ($/bbl) 47.00 39.93 49.50 32.00 24.50 22.00 32.00
NWE Eurobob Cracks to Brent Crude Oil ($/bbl) 12.00 18.72 10.00 17.00 13.00 8.00 12.00
NWE 1% Residual Cracks to Brent Crude Oil ($/bbl) -10.00 -7.59 -7.50 -5.00 -5.00 -5.00 -5.63
NWE 0.5% Residual Cracks to Brent Crude Oil ($/bbl) 1.00 10.21 3.00 4.00 5.00 5.00 4.25
NWE 3.5% Residual Cracks to Brent Crude Oil ($/bbl) -32.00 -23.26 -24.00 -20.00 -20.00 -20.00 -21.00
US Natural Gas ($/MMBtu) 6.75 6.70 5.50 4.10 4.15 4.25 4.50
Thermal coal, Newcastle FOB ($/t) 375 356 300 300 300 300 300
Aluminium $/t 2,249 2,684 2,450 2,750 2,750 3,000 2,738
Copper $/t 7,848 8,778 7,500 8,000 9,000 10,000 8,625
Lead $/t 2,028 2,130 2,250 2,500 2,050 2,050 2,213
Nickel $/t 23,456 25,206 22,500 27,500 27,500 25,000 25,625
Zinc $/t 2,866 3,446 2,750 3,000 2,750 2,750 2,813
Gold $/oz 1710 1797 1750 1800 2000 2000 1888
Silver $/oz 21 22 22 22 25 25 23
Platinum $/oz 1,030 977 1,050 1,250 1,500 1,500 1,325
Palladium $/oz 2,000 2,126 2,000 1,750 2,000 1,710 1,865
Commodity Strategist | 21 November 2022 3
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Exhibit 4: BofA Commodity Research Themes and Outlook
Key takeaways
View
Macro outlook  Our economists see world GDP rising 3.5% in 2022 and expanding by an additional 2.4% in 2023.
WTI and Brent crude  We project Brent and WTI to average $100/bbl and $94/bbl in 2023, respectively.
oil  The global oil balance should stay tight in 2023, supported by rebounding Asia demand, slower non-OPEC growth, and OPEC+ mopping up excesses
 We forecast global demand growth to slow to 1.55mn b/d YoY in 2023 from 1.9mn b/d in 2022.
 Non-OPEC supply should grow roughly 1.8mn b/d YoY in 2022 and an additional 0.8mn b/d in 2023.
 We project total US crude and NGL supply to rise 1.1mn b/d and 1mn b/d in 2022 and 2023, respectively.
 OPEC crude oil supplies are set to rise 2.6mn b/d in 2022 and 260k b/d in 2023 as OPEC+ actively manages balances.
Atlantic Basin  Refined product markets face significant risk from a Russian fuel embargo, China's export quotas, and a looming recession.
oil products  The world was long refining capacity before the pandemic, but historical closures during 2020-21 created a deficit in 2022, and now, self-sanctioning and
product export restrictions have made existing refining capacity less capable of meeting demand.
 We forecast RBOB-Brent to average $21/bbl in 2023, and we see ULSD-Brent cracks averaging $40/bbl over the same period.
 Yield competition presents upside for VLSFO cracks versus the curve in 2023.
US natural gas  US gas supply and demand growth should hit 3.1Bcf/d and 1.1Bcf/d YoY in 2023, pushing stocks above 3.8Tcf by October.
 We forecast $4.50/mmbtu US gas on average in 2023, but prices may trade sub-$4 if macro or LNG/Mexico exports disappoint.
LNG  We see TTF & JKM upside as Europe and Asia compete for LNG cargoes next year.
 Longer term, global LNG supply growth should slow as regas capacity growth accelerates, keeping LNG markets tighter.
Thermal coal  Thermal coal prices surged to record highs as Russia, the world's 3rd largest coal exporter, invaded Ukraine.
 We expect Newcastle coal to average $356/t in 2022 and $300/t in 2023.
Aluminium  China has reaching its 45Mt capacity cap and smelters ex-China have closed capacity
 Rolling COVID lockdowns pushed China’s smelters to increase aluminium exports. As the economy re-opens, these shipments should subside.
 A stabilisation of growth in the US and Europe should help demand.
 We expect rising deficits going forward.
Copper  Demand in China has been patchy, but grid spending has completely offset weakness in housing. Demand may be more balanced in 2023, but it should hold
up
 Supply is disappointing, but additions are accelerate, pushing the market into surplus by 2023.
 Inventories are low, which is supportive, but could also increase volatility
 We expect a small surplus for 2023.
Lead  There are no immediate scrap and concentrates shortages, suggesting the market could flip back into surplus.
 China’s demand has slowed structurally, as the ebike market has matured.
Nickel  Nickel demand from electric vehicle producers should rise in the coming years, yet, more NPI being converted to nickel sulphate.
 Indonesian supply may prevent shortages near-term, but further out, more material is required.
 We expect a surplus for 2023, but deficits beyond.
Zinc  The project pipeline is not well filled with high quality operations
 Zinc may remain an underperformer, but immediate downside more limited, also because smelter closures in Europe have not been offset by supply
additions elsewhere.
Gold  Gold has been a trade on US rates. Rising inflation has been bearish through rising nominal rates.
 Physical demand has been strong and a Fed pivot may bring more buyers into the market.
 Gold to bottom out in 2023.
Silver  The silver market has rebalanced on production discipline and demand from new applications including solar panels.
 If more spending on solar panels come through, silver should rally.
Platinum/Palladium  Palladium is slowly moving into surplus, likely keeping prices capped.
 Supply problems in South Africa have reduced platinum supply. The hydrogen economy and substitution should push the metal up.
Agriculture (grains,  Low inventories and La Niña risk should be supportive for agriculture prices next year.
oilseeds,  We see more downside than upside for soybean prices on easing supply concerns.
livestock,sugar)  A safe passage deal for Ukraine exports soothed markets in 2H22 but the situation remains volatile and there is uncertainty around Ukraine's 2023 crops.
 Flat to falling energy prices should provide a cap on prices.
 We see tight balances continuing to support corn and wheat prices.
 We are bearish soybeans due to a potential record South American crop, but weather remains a key risk.
 We see upside for bean oil prices versus the curve on significant US renewable diesel capacity growth next year.
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1. Macro overview
Commodities surged in 2022 led by energy, but metals fell…
Commodities surged to start the year, led by energy and agriculture. The MLCX Energy
TR index returned 51% YTD while Brent crude oil has risen by 39% and NYH heating oil
is up by 95% during the same period. Still, much of the run up occurred in 1H22 and
commodity prices have retraced on account of macro headwinds (Exhibit 5) in recent
months. Meanwhile, industrial and precious metals faced one of their worst years on
record as interest rates rose (Exhibit 6). But in contrast to energy, base and precious
metals have both picked up in the past few weeks on China reopening and Fed pivot
expectations.
Exhibit 5: MLCX sector indices total returns rebased to Jan-22 Exhibit 6: Annual BCOM metals sector total returns
Commodities surged to start the year, led by energy, but have retraced on Meanwhile, industrial and precious metals faced one of their worst years on
account of macro headwinds, and metals have lagged record as interest rates rose
200 120%
175
80%
150
40%
125
100 0%
75 -40%
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22
Index Energy
Industrial metals Precious metals -80%
Softs Agriculture 1991 1995 1999 2003 2007 2011 2015 2019
Livestock Industrial metals Precious metals
Source: BofA Global Research Source: Bloomberg
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
… as an energy shock combined with a Chinese housing recession

Energy demand rose at the start of 2022 as the US and European economies started to
reopen internationally after the pandemic. More importantly, the collapse in Russian
energy supplies into Europe as a result of hostilities in Ukraine triggered a global race
for substitution (Exhibit 7). The shockwaves of the Russian oil, gas, and coal supply
shock were felt not just in Europe but across the world including Asia, Africa and Latin
America, as energy consumers faced skyrocketing gas, thermal coal and petroleum
product prices. Meanwhile, the Chinese real estate sector, responsible for almost a third
of the economy, fell into recession (Exhibit 8) and dragged down the industrial metals
complex.
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Exhibit 7: Total gas exports by country, 2021 Exhibit 8: Annual growth in Chinese property sales (% yoy for
The collapse in Russian energy supplies into Europe triggered a global cumulative year-to-date sales)
race for substitution Meanwhile, the Chinese real estate sector, responsible for almost a third of
the economy, fell into recession
300
Pipeline LNG 150%
Bcm
200 100%
50%
100
0%
0
Russia US Qatar Norway Australia Canada -50%
2001 2003 2005 2008 2010 2013 2015 2018 2020
Source: BP Statistical Review
BofA GLOBAL RESEARCH Source: China National Bureau of Statistics
In 2023, we expect slower GDP growth and sticky inflation but…

The macro picture in 2023 rhymes with 2022 and many of the crises that developed this
year will reverberate into the next, particularly if EU energy sanctions on Russia are
delivered as planned in the weeks ahead. For starters, more aggressive central bank
tightening combined with the European energy crisis have lowered global GDP growth
expectations (Exhibit 9). Thus, the demand growth base case for many commodities is
lower. Importantly, inflation stubbornly continues to run high across developed and
emerging economies (Exhibit 10), suggesting that interest rates are unlikely to come off
any time soon even if the Fed pauses the tightening cycle in 1Q23 as our economics
team expects.
Exhibit 9: World GDP forecast evolution Exhibit 10: G10 core inflation
More aggressive central bank tightening combined with the European … as inflation stubbornly continues to run high across developed and
energy crisis and a locked down China have lowered growth expectations emerging economies
5 8%
%, YoY Core inflation 2% target
4 6%
3
4%
2
2%
1
0 0%
2022 2023
f'casts (Jan) f'casts (Feb) f'casts (Mar) f'casts (Apr)
f'casts (May) f'casts (Jun) f'casts (Jul) f'casts (Aug)
f'casts (Sep) f'casts (Oct) f'cats (Nov)
Source: BofA Global Research estimates Source: Haver, BofA Global Research
… commodities may get support from a retracement in the USD…

Even then, weaker GDP may not necessarily translate into much lower commodity prices
for a host of reasons. For starters, the strength of the USD was a surmountable
headwind for commodity prices in 2022 (Exhibit 11) that dragged the sector down. Yet a
weaker US currency could now turn into a tailwind for raw materials prices if the DXY
bottoms on peak US interest rates (Exhibit 12). Our FX team is making the case that the
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EURUSD exchange rate will likely bottom as US rates peak in the next few months and
forecast this crucial currency cross at 1.10 by the end of 2023.
Exhibit 11: BCOM and DXY Exhibit 12: EURUSD and 10y nominal yield with BofA forecasts
The strength of the USD was a surmountable headwind for commodity … but it could now turn into a tailwind if the DXY bottoms on peak US
prices in 2022… interest rates
250 40 1.25 0.0
USD
1.20 1.0
appreciation
200 60 1.15
BofA forecast 2.0
1.10
150 80 3.0
1.05
1.00 4.0
100 100
0.95 5.0
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Sep-19
Sep-20
Sep-21
Sep-22
Sep-23
May-19
May-20
May-21
May-22
May-23
50 120
1980 1984 1989 1994 1999 2004 2009 2013 2018
Recession BCOM DXY (rhs, inverted) EURUSD 10y (rhs, inverted)
Source: Bloomberg Source: BofA Global Research estimates
… with the reopening of China’s economy offsets higher rates

To be clear, ample risks remain to the bearish USD view. The global monetary tightening
cycle has accelerated with terminal rates revised even higher, well above current policy
rates (Exhibit 13), and US inflation could fail to cool off from these exceptionally high
levels. A second leg higher in the Fed’s tightening cycle in 2H23 remains a key downside
risk to commodity prices, particularly gold. Yet we expect Chinese economic activity to
pick up firmly as Zero Covid policies are gradually eased (Exhibit 14), lending support to
the commodity complex. While China’s reopening is most bullish metals, we also expect
a substantial 5% pick up in domestic demand for oil, assuming mobility gradually
recovers.
Exhibit 13: OIS implied terminal and current central bank policy rates Exhibit 14: Latest COVID outbreaks and COVID curbs in key cities
The global monetary tightening cycle has accelerated with terminal rates …yet we expect Chinese economic activity to pick up firmly as Zero Covid
revised even higher, well above current policy rates… policies are gradually eased
6% Daily New Guangzhou Chongqing
October July Current rate
cases Shijiazhuang Nov 13, Haizhu
20 measures have been relaxed curbs
5% 6000 introduced slightly, but other
districts' curbs
enlonged
4% Nov 9, 2 other
4500 districts
significantly
tighened curbs
3% Nov 12,
significantly
Nov 9, significant
3000 tightened curbs in
tightened
mobility in central
2% central districts region
Nov 6, significant
1% 1500 Oct 24, Haizhu tighted curbs in
district tightened central districts Nov 13, relaxed
curbs COVID mass
testing
0% 0 requirement
RBNZ Fed BoE BoC RBA ECB 13-Oct 20-Oct 27-Oct 3-Nov 10-Nov
Source: Bloomberg, BofA Global Research. Implied terminal uses the 5th contract for Fed, BoE, Source: Wind, local government websites, news, BofA Global Research
RBA and 4th contract of ECB, BoC, and RBNZ. Data from Jul 27-Oct 18. BofA GLOBAL RESEARCH
Still industrial activity is rolling over on high energy costs…

A crucial concern for the commodity complex comes from the slowdown in global
manufacturing activity. Industry is starting to show cracks, especially on a forward
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looking basis as new orders have contracted pretty significantly in recent months
(Exhibit 15) on a combination of higher interest rates and soaring inflation. In addition,
exceptionally high energy prices globally and in Asia will likely continue to weigh on
economic activity over the near term (Exhibit 16), as soaring input costs erode margins
and reduce final end-user demand.
Exhibit 15: Manufacturing PMIs new orders Exhibit 16: Asia resid fuel oil prices and breakevens with coal and gas in
Global manufacturing activity is starting to show cracks, especially on a power generation
forward looking basis as new orders have contracted on a sustained basis Exceptionally high energy prices globally and in Asia will continue to weigh
on economic activity over the near term
70
270
$/bbl of
60 240
resid equiv.
210 in power
50 180 gen
40 150
contraction 120
30 90
20 60
2008 2009 2011 2012 2014 2015 2017 2018 2020 2021 30
Recession Global 0
US Eurozone 15 16 17 18 19 20 21 22 23
UK China 380cst fuel oil Singapore Newcastle coal breakeven
Japan Emerging markets US nat gas breakeven JKM nat gas breakeven
Source: Markit marine fuel (0.5%) Singapore
BofA GLOBAL RESEARCH Source: Bloomberg, BofA Global Research
… particularly in Europe, where energy scarcity will hit GDP and…

Throughout this year, we have emphasized in our research that the energy sector presented
huge macro risks to the global economic recovery. After all, energy and GDP remain
extremely intertwined with an R2 exceeding 80% and a beta of nearly 1 (Exhibit 17). This
means that any major loss of energy supplies quickly translates into a rapid change in GDP
growth expectations. Europe is perhaps the prime example, with economic growth
expectations deteriorating at the fastest rate of any major region during the past few
months (Exhibit 18). As a result, many European economies will fail to recover to their pre-
pandemic GDP levels until 2024 or 2025.
Exhibit 17: World GDP and energy demand growth (1966-2021) Exhibit 18: Bloomberg consensus forecasts for Eurozone GDP growth
Energy and GDP remain extremely intertwined, so any major loss of energy …quickly translates into rapid change in GDP growth expectations, as we have
supplies… seen in Europe
8% 4%
YoY energy
Hundreds
demand 3%
growth
4% 2%
1%
0%
y = 1.1253x - 0.0129 -1%
R² = 0.8165
-4% -2%
-3%
GDP growth
Mar-22 May-22 Jul-22 Sep-22
-8%
Series1 Series2
-0.04 0 0.04 0.08
2022 (relative to Feb 22) 2023 (relative to Feb 22)
Source: BP, Bloomberg Source: Bloomberg
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… weaken external balances, and fiscal support may balloon debt
The negative effects of rising energy prices are very visible on key macro figures for the
European continent. For example, trade balances have been on a downward trend since
2021 and are negative outside of Germany, which is barely hanging onto a slightly
positive, but much shrunken surplus (Exhibit 19). The government response to this
unfolding crisis has been, well, to spend more money. Over 700bn euros or 3.5% of GDP
in funding has been allocated to protect households and businesses from the energy
crisis, with Germany delivering a proper fiscal “bazooka”, but the bill could be even
higher with an exacerbation of the energy crisis (Exhibit 20).
Exhibit 19: Monthly nominal trade balances by country Exhibit 20: European government allocated funding from Sep 2021 –
Sep 2022 to shield households and businesses from the energy crisis
Trade balances have been on a downward trend since 2021 and are negative Over 700bn euros or 3.5% of GDP in funding has been allocated to protect
outside of Germany, which is hanging onto a slightly positive, but much households and businesses from the energy crisis, but the bill could be even
shrunken surplus higher with an exacerbation of the energy crisis
20 60 360 €bn
10%
Allocated funding % GDP (rhs)
40 300 8%
10 240
20 6%
180
0 0 4%
120
-20 60 2%
-10 0 0%
-40
Spain
Netherlands
Belgium
Denmark
Sweden
Greece
Italy
Norway
France
United Kingdom
Germany
Ireland
Austria
Poland
-20 -60
Mar-21 Jun-21 Sep-21 Feb-21 Mar-22 Jun-22
Germany France Italy
Spain UK EU (rhs)
Source: Statistical Office of European Communities, DGDDI (France), INS (Italy),Ministerio de Source: Bruegel, “National policies to shield consumers from rising energy prices,” 2022. German
Economia y Competitividad (Spain), ONS measures do not take into account overlap between 100bn and 200bn package announced late
BofA GLOBAL RESEARCH September.
Underinvestment will amplify supply constraints down the line…

Large-scale energy subsidies will partially shield consumers from the Russian shock, but
will also likely also result in more entrenched inflation. In fact, core inflation only fell by
100bps during the depths of the Great Recession, with additional downward price
pressures arriving 2 years after the start (Exhibit 21). Put differently, European core
inflation is likely to remain sticky. Another macroeconomic feature that should be a
cause of concern is the high likelihood that investment spending will decline by
significantly more than consumption during a recession. Also, we note that inflation
tends to remain positive even during recessions (Exhibit 22)
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Exhibit 21: US real GDP growth contributions and core CPI from during Exhibit 22: Average quarterly growth of real economic variables and
Great Recession inflation
Core inflation only fell by 100bps during the depths of the Great Recession, Investment spending declines by significantly more than consumption
with additional downward price pressures arriving 2 years after the start during recessions, while inflation remains positive even during recessions
10% 3.0% 10%
5% 2.5% 5%
2.0%
0% 0%
1.5%
-5% -5%
1.0%
-10% 0.5% -10%
-15% 0.0% -15%
Mar-08
Mar-09
Mar-10
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
Sep-10
Dec-10
Jun-08
Jun-09
Jun-10
Recession Normal
-20%
CPI Personal consumption
Investment Net exports
Government Real GDP growth
Source: BofA Global Research, BLS
Source: BLS, BofA Global Research
… and inflation will likely exacerbate the lack of capital challenge

The relationship between inflation, investment and consumption matters particularly at
this juncture, as inflation has been the byproduct of outsized demand meeting a historic
supply shortfall. Our analysis shows that investment spending beats out consumption
spending on impact on inflation. Although the magnitude is small (Exhibit 23), this result
suggests that even as the supply-side challenges that the market faces today resolve,
the impact on inflation will take time. Perhaps the silver lining here is that consecutive
large declines in investment spending can reduce core inflation by 175bps after 3 years
(Exhibit 24), potentially enabling central banks to ease policy rates more rapidly into
2024.
Exhibit 23: Cumulative impulse response of US core CPI to a 1-standard Exhibit 24: Cumulative impulse response of US core CPI to 3
deviation positive shock to investment consecutive quarterly (annualized) declines in US investment
Investment spending beats out consumption spending on impact on Consecutive large declines in investment spending can reduce core inflation
inflation, but the magnitude is small by 175bps after 3 years
1.8%
15% drop 10% drop 5% drop
0.0%
1.2%
-0.5%
0.6% -1.0%
quarters since shock -1.5%

0.0%
0 1 2 3 4 5 6 7 8 9 10 11 12
95% confidence interval Cumulative impulse -2.0% quarters since shock
Long-run 0 1 2 3 4 5 6 7 8 9 10 11 12
Source: BofA Global Research. Data quarterly from 1957Q1-2022Q2. VAR is run with quarterly Source: BofA Global Research. Data quarterly from 1957Q1-2022Q2. VAR is run with quarterly
changes in investment, unemployment, personal consumption expenditures, and core inflation. changes in investment, unemployment, personal consumption expenditures, and core inflation.
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Recessions could lead to weaker demand, but supply is uncertain
If the global economy does indeed go into recession led by a pullback in activity in the
US and Europe, commodity prices could drop. After all, commodity demand typically falls
during recessions and metals demand is significantly more volatile than energy (Exhibit
25). Yet China is 50% of the world’s metals demand and still has yet to fully reopen post
pandemic, likely lending support to commodity prices. Looking back in history, we note
that commodity prices surged during the 1973-1975 recession on account of tight
supply, but faltered during the Volcker disinflation (Exhibit 26). This time around, we
believe metals prices have already fallen significantly and the sector will outperform
energy in 1H23.
Exhibit 25: Change in oil and copper demand during US recessions Exhibit 26: Annual commodity price returns
Commodity demand falls during recessions and metals demand is Commodity prices surged during the 1973-1975 recession on account of
significantly more volatile than energy tight supply, but faltered during the Volcker disinflation
4% Year Corn Wheat Copper Aluminum Oil
Copper % change (rhs) Oil % change (rhs) 1970 8.3% -1.7% 21.4% 5.5% 0.0%
1971 0.0% 1.1% -10.9% 1.0% 24.4%
0% 1972 -4.1% 11.6% -1.6% -9.0% 10.7%
1973 75.0% 106.5% 16.3% -5.3% 32.7%
1974 34.7% 41.8% 30.2% 36.4% 252.0%
-4%
1975 -9.4% -13.1% -17.1% 16.7% -0.4%
1976 -6.0% -17.8% 8.3% 11.6% 11.0%
-8% 1977 -15.2% -22.3% -4.4% 15.5% 8.7%
1978 5.7% 16.4% -0.5% 3.5% 0.7%
1979 14.7% 27.9% 40.8% 11.9% 125.5%
-12% 1980 8.5% 10.7% 11.0% 16.8% 16.5%
1981 4.4% 2.9% -18.2% 9.5% -2.4%
-16% 1982 -16.4% -15.3% -13.0% 0.0% -8.2%
1983 24.4% 1.8% 6.8% 2.2% -10.4%
1974 1981 1990 2008 Average
1984 -0.1% -2.4% -14.2% 4.3% -2.6%
Source: IEA, BofA GLOBAL RESEARCH 1985 -17.4% 4.8% -1.8% 0.0% -4.2%
1986 -20.7% -7.7% -1.5% 13.7% -47.6%
1987 -14.9% -16.6% 29.5% -19.0% 27.8%
1988 41.2% 34.5% 46.0% 63.0% -19.0%
1989 4.3% 12.1% 9.5% -23.5% 22.1%
1990 -2.0% -22.4% -6.6% -16.0% 30.2%
… as stocks are low, capacity is tight and producers unresponsive

While recession could drag down cyclical commodity prices, we note that inventories are
very low across the board in energy, metals, and even agriculture. Also, metals premia
remain firm and most energy markets are still trading in backwardation. Looking at
energy stocks for instance, we note that total OECD commercial and government oil
stocks are at a record low level (Exhibit 27), providing limited cushion against the next
negative supply shock. Similarly, spare production capacity across OPEC+ is at a
minimum. Plus we note that the responsiveness of energy producers to prices changes
has dropped dramatically (Exhibit 28), with the price elasticity of oil supply falling by half
in the past couple of years.
CR
Exhibit 27: OECD total oil stocks Exhibit 28: Non-OPEC rig count and oil prices
Looking at energy stocks for instance, we note that total OECD commercial Similarly, we note that the responsiveness of energy producers to price
and government oil stocks are at a record low level changes has dropped dramatically
5 1000
Rigs
bn bbl
800
600
4.4
400
200
3.8 24 mo Brent (3mo avg, $/bbl)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0
40 60 80 100 120
10 year range 10 year avg 2021 2022 2010-2020 2021+
Source: IEA Source: Bloomberg, BofA Global Research
Geopolitics will play a key role as the US pushes for hegemony…

While interest rates, inflation, the US dollar and macro activity are all key determinants
of commodity prices, it is also worth remembering that geopolitics are currently playing
an outsized role in price formation, including an extraordinary rerouting of Russian
commodities away from Western markets. Tensions in the Taiwan Straits are another
major concern for commodity markets. The rise of China has entailed an enormous
increase in their absolute and relative energy demand (Exhibit 29), but now it is no
longer clear when or if the Chinese economy will surpass the US at market exchange
rates (Exhibit 30). The Biden administratio40n has increased the pressure on China by
limiting the export of certain technologies including advanced chips and China itself has
not opened up to certain western technologies such as mRNA Covid vaccines.
Exhibit 29: Primary energy consumption share by country Exhibit 30: US and China GDP at current prices
The rise of China has entailed a huge increase in their absolute and relative …but now it is no longer clear when or if the Chinese economy will surpass
energy demand… the US at market exchange rates
40% 30,000
of world US China
bn $
30%
20,000
20%
10%
10,000
0%
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
0
European Union China India
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
US Japan Russia
Source: BP Source: IMF, BofA Global Research
… as commodities are China’s Achilles heel and America’s edge

Commodities have been a collateral victim of this tug of war for global economic and
political hegemony. For instance, China has fully caught up with the US when it comes to
global commerce volumes (Exhibit 31), but in doing so it has become extremely
dependent on the supply of foreign raw materials from energy to metals and mined
commodities, as well as agricultural goods. In that regard, we expect the US to retain a
CR
key advantage over China when it comes to foreign energy and food dependence
(Exhibit 32). As Russian commodity supply flows into Europe dry up, American industry
will likely step up to the rescue, setting the stage for intense commodity market friction
ahead.
Exhibit 31: US and China share of global exports/imports of goods and Exhibit 32: Energy trade balance
services (current US$) The US retains a key advantage over China when it comes to foreign energy
Still, China has fully caught up with the US when it comes to global dependence
commerce
100
bn $
20% 50
of world 0
16% -50
-100
12% -150
-200
8% -250
-300
4%
-350
-400
0%
-450
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
96 98 00 02 04 06 08 10 12 14 16 18 20
China exports US exports US China
China imports US imports Source: CEIC, BofA Global Research
Source: World Bank BofA GLOBAL RESEARCH
CR
2. Energy outlook
2.1 Crude oil
Global oil demand growth is slowing down and…
Global oil demand growth this year has slowed down from the breakneck recovery rate
of 6.1mn b/d YoY in 2021 to a much more timid pace of just 1.9mn b/d in 2022 (Exhibit
33). It is important to note that we first forecast global oil demand to average 101mn
b/d in 2022 and now we see just 99.6mn b/d of consumption this year. The slowdown in
oil demand has come mostly on the back of weaker expectations of economic growth
across the US, Europe, and OECD Asia (Exhibit 34) and higher prices.
Exhibit 33: Global oil demand growth Exhibit 34: Global GDP forecasts
Global oil demand growth this year has slowed down from a breakneck …in line with weaker expectations of economic growth across the US,
recovery pace of 2021… Europe, and Asia
8000 8 2022 2023 2024
k b/d, YoY %
6
4000
4
0
2
-4000 0
-2
-8000
-12000
Source: IEA, BofA Global Research estimates Source: BofA Global Research estimates
…we now see a slower expansion this year, next…

Looking into 2023, we expect global oil demand growth to average just 1.55mn b/d,
below some other forecasters (Exhibit 35) like the IEA and OPEC. In part, our weaker
demand expansion figures stem from our BofA Research global economics GDP growth
projections of just 2.4% for next year. When breaking our oil demand growth figures
further, we note that petroleum consumption should be mostly driven by China and EMs
as OECD countries lag (Exhibit 82).
CR
Exhibit 35: Global oil demand growth comparisons (YoY) Exhibit 36: Global oil demand growth
Looking into 2023, we expect global oil demand growth to average Demand growth for petroleum will be mostly driven by China and EMs,
1.55mn b/d, below some other forecasters with OECD countries lagging
3000 15 BofAML fcst

k b/d, YoY 10 YoY, mn
b/d
5
2000 0
-5
-10
1000 -15
-20
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
1Q21
3Q21
1Q22
3Q22
1Q23F
3Q23F
0
2022 2023 OECD YoY non-OECD YoY Global Demand
BofA IEA EIA OPEC
Source: BofA, IEA, EIA, OPEC Source: IEA, BofA Global Research estimates
…just as oil prices face a strong dollar headwind

Demand growth for oil has also experienced a dramatic slowdown year-on-year in 3Q22
that should extend into 4Q22, partly a result of the spike in global energy prices
witnessed this year. Moreover, the dollar has posted an exceptional rally against a broad
range of currencies in 2022 due to the rapid pace of Fed interest rate hikes (Exhibit 37),
making petroleum fuels very expensive in local currency across most corners of the
world. A strong dollar has been a major headwind for global oil prices (Exhibit 38), even
if commodities and FX have partially decoupled.
Exhibit 37: YTD FX performance (vs USD)* Exhibit 38: Brent crude oil price and dollar indices
The dollar has posted an exceptional rally against a broad range of …resulting in a major headwind-turned-partial-decoupling for global
currencies this year… commodity prices
20% 135 95
2022 Worst 5 annual ytd ret $/bbl index
10% USD
115 appreciation
110
0%
95
-10%
75 125
-20%
55
-30% 140
Indonesia
New Zealand
Taiwan
China
Japan
Brazil
Singapore
Hungary
Sweden
Australia
Philippines
Colombia
Canada
Chile
Norway
Switzerland
Korea
United Kingdom
Thailand
Czech Republic
Mexico
Peru
India
South Africa
European Union
Poland
35 oil price
depreciation
15 155
2014 2015 2016 2017 2018 2019 2020 2021 2022
Brent crude oil price USD (DXY) (rhs, reverse axis)
*Note: Total return. Source: Bloomberg, BofA Global Research Source: Bloomberg
Rising rates may impact oil demand negatively but…

Rising interest rates have also been a headwind for global oil demand historically
(Exhibit 39), but there is of course a lag between tighter monetary policy and a
slowdown in economic activity that typically kicks in one year out. Our oil demand
growth projections embed weaker GDP driven by tighter policy rates. Still, there is not a
strong direct correlation between the UST yield curve and oil prices (Exhibit 40), even if
periods of yield curve inversion have typically been followed by recessions.
CR
Exhibit 39: Average oil demand growth in top quartile of 10yr Exhibit 40: Front-month rolling Brent crude oil prices and 2s10s US
Treasury yield changes YoY relative to mean (1965-2019) Treasury yield curve
Historically, higher interest rates have been a headwind for global oil …although there is not a strong correlation between the UST yield curve
demand with a lag… and oil prices
1.2% 3 1,000
% $/bbl (log
0.8% scale)
2
0.4% 100
0.0% 1
-0.4% 10
0
-0.8%
-1 1
-1.2% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
Contemporaneous 1yr lag 2yr lag
recessions 2s10s yield curve Brent prices (rhs)
Source: BP, Bloomberg, BofA Global Research Source: Bloomberg
…OPEC+ guidance and SPR refills may support oil

In short, global GDP growth and oil demand have been slowing down materially in recent
quarters and oil prices could fall if economic activity weakens further. Yet, it is also
important to remember that the US SPR has been drawing at a fast pace this year, and
the US government recently discussed refilling the SPR this year if WTI prices fall below
$80/bbl (Exhibit 41). Moreover, OPEC has never announced an oil production cut before
with Brent crude oil prices above $90/bbl (Exhibit 42).
Exhibit 41: US SPR inventory level Exhibit 42: OPEC quota/target changes and Brent crude oil prices
The SPR has been drawing at a fast pace this year, and the US OPEC+ has never cut production with Brent crude oil prices above
government recently discussed refilling it at $80/bbl WTI $90/bbl
900
mn bbl 3000 150
k b/d $/bbl
2000
120
600 1000
0 90
-1000
300 -2000 60
-3000
change in quota/target 30
-4000
0 Brent (rhs)
83 86 89 92 95 98 01 04 07 10 13 16 19 22 -5000 0
96 99 02 05 08 11 14 17 20
Source: Bloomberg
BofA GLOBAL RESEARCH Source: OPEC, Bloomberg, Various news agencies, BofA Global Research estimates
Thus, we believe $80/bbl is the new $60 for Brent…

Coupled with rising global inflation, what does US energy and OPEC+ policy mean for oil
prices going forward? In our view, it means that $80 is the new $60 for Brent. Long
dated Brent oil prices (m60) have fallen by $7/bbl in the past 2 months to the center of
our $60-$80/bbl long term crude oil band (Exhibit 43), partly to reflect recessionary
CR
risks. Yet, broad based inflation in the US and elsewhere will likely lift the floor on oil
prices (Exhibit 44), as signaled by OPEC and the US government in the past two weeks.
Exhibit 43: Long dated Brent prices Exhibit 44: Headline inflation across developed countries
Long dated Brent oil prices have fallen by $7/bbl in the past 2 months to Broad based inflation in the US and elsewhere will likely lift the floor on
the center of our band oil prices
100 12%
$/bbl
10%
8%
80
6%
4%
2%
60
0%
-2%
Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
40 Australia Canada Euro area
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Japan New Zealand Norway
MT forecast range Brent (60 mo.) UK US
Source: Bloomberg Source: Haver
…as spare capacity dwindles and investment lags

Higher inflation and rising interest rates are far from the only challenges facing the oil
market. Looking at the micro structure of the sector, we note that a lack of investment
in refining has led to major dislocations in petroleum product crack spreads (Exhibit 45)
that are impacting crude producers and fuel refiners (see Americans set to refill their
gas tanks). Specifically, refining sector woes have to do with skyrocketing natural gas
prices (a key input), sanctions on Russian energy (the second largest net oil exporter) and
a collapse in refining capacity during the pandemic (Exhibit 46).
Exhibit 45: NWE refined product cracks Exhibit 46: Global CDU capacity growth
A lack of investment in refining has led to major dislocations in Refining sector woes also stem from a collapse in refining capacity
petroleum product crack spreads during the pandemic
80 3
$/bbl mn b/d,
60 2 YoY
40
1
20
0
0
-1
-20
-40 -2
-60
Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Middle East China Japan
Other Asia Europe US
gasoline cracks heating oil cracks Other Total
Source: Bloomberg Source: Platts
Crucially, most of Asia has yet to reopen post-Covid…

One factor that could easily drive oil prices a lot higher over the coming months is the
reopening of Asia. In fact, Asian demand for international air travel has already been
picking up strongly in recent months (Exhibit 47), but still has a long way to catch up
relative to North America or Europe. The gap in mobility in Asia is broad based and not
only linked to the airline sector. In fact, heading into 2023, we project Asian oil demand
to account for 90% of global growth compared to just 5% in 2022 (Exhibit 48).
CR
Exhibit 47: International RPK: Actual passenger traffic growth Exhibit 48: Global oil demand growth
Asian demand for international air travel has been picking up strongly in Heading into 2023, we project Asian oil demand to drive global growth
recent months
120 8,000
k b/d YoY
90 4,000
60 0
30 -4,000
indexed to
100 in 2019 -8,000
0
Dec-19 May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22
Africa Asia Pacific -12,000
Europe Latin America 2020 2021 2022 2023
Middle East North America RoW RoW
Source: IATA, BofA Global Research Source: BofA Global Research estimates
…and China could stimulate growth in November…

Economic woes in Asia are not just limited to air travel. China, Asia’s largest economy by
a factor of 3, has been struggling for most of this year as a result of Covid-19 lockdowns
and an ailing real estate sector. For instance, daily subway rides across China’s major
cities is at the lowest point since February (Exhibit 49), a sign that mobility curbs are
still very broad. Moreover, Chinese investment in real estate, a key engine of the
economy, remains very depressed (Exhibit 50). Still, some help could be on the way and
our economists see a strong chance of reopening and stimulus ahead (see China – More
stimulus for unfinished projects, but property will remain a drag).
Exhibit 49: Daily subway rides of major cities, China Exhibit 50: Property transaction in 30 major cities, China
Daily subway rides across China’s major cities is at the lowest point since Chinese investment in real estate remains very depressed, but some help
May could be on the way
Index, Shanghai Guangzhou '000 sqm,

2019 2020 2021 2022
7dma Shijiazhuang Chongqing 7d avg
140 900
120
100
600
80
60
40 300
20
0 0
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Wind, Note: 100 represents benchmark (subway volume in Dec 2019); data as of Nov 13 Source: Wind, Note: Red dots indicate Lunar New Year (LNY) in each year; data as of Nov 14
…at a time oil inventories remain relatively low…

A meaningful acceleration in global oil demand will be hard to achieve given the limited
OPEC+ spare capacity and modest non-OPEC+ supply growth ahead. Moreover, total
petroleum stocks across industry and governments in the OECD remain at rock-bottom
levels (Exhibit 51) with volumes at just 3.96bn barrels, the lowest seasonal point since at
least 1986. Satellite data provided real time offers a slightly better reading, but not by a
large margin (Exhibit 52) and also points to a draw of 11mn barrels in the past 14 weeks.
CR
Exhibit 51: OECD total oil stocks Exhibit 52: Observed change in petroleum inventories
Total petroleum stocks across industry and governments in the OECD are Satellite data provided real time offers a slightly better reading, but not
at very low levels by a large margin
5 800
bn bbl 600
400
200
4.4 0
-200 mn bbl, vs.
Dec 2019
-400
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22
ARA products Singapore products
3.8 US products products in floating storage
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US (commercial+SPR), crude onshore ex. US, crude
floating storage, crude in-transit crude
10 year range 10 year avg 2021 2022
net change in observed, total
Source: IEA Source: Bloomberg, Kayrros, Clarkson, BofA Global Research
…and spare production capacity is at a minimum

With no oil in commercial or strategic storage and limited investment in the oil and gas
sector, the oil market has been increasingly relying on OPEC+ to add incremental barrels
this year. Yet few countries other than Iran in OPEC+ have any spare production capacity
to grow volumes from here (Exhibit 53), with Saudi Arabia and the UAE combined now
sitting on less than 1mn b/d of spare output. Historically, periods of very low spare
capacity have been associated with higher than average realized oil prices (Exhibit 54).
Exhibit 53: OPEC production and spare capacity Exhibit 54: Relative spare capacity (normalized) and price changes
Very few countries in OPEC+ have any spare production capacity to grow Periods of very low spare capacity are associated to higher than average
volumes from here realized oil prices
45 80% -10%
mn b/d YoY
1.31
30 40%
0.77 0%
0.00 0%
15
0.05 10%
0.04 0.32 -40%
0
-80% 20%
00 03 06 09 12 15 18 21
Price change (Brent 36 mo.)
production Spare capacity Iran spare relative spare capacity (rhs, reverse-axis)
Source: IEA, BofA Global Research Source: EIA, Bloomberg, BofA Global Research
Meanwhile, investment in oil & gas has picked up…

Limited spare capacity and very low stocks are not the only reasons to believe that $80
is the new $60 for Brent. Looking at global oil and gas capex, we note that investment
has picked up by $70bn this year to just over $400bn (Exhibit 55), a notable feat. Yet it
is also important to consider that the last year oil averaged more than $100/bbl in 2014,
oil & gas capex totaled $761bn. Put differently, the global rig count is now half as
sensitive to oil prices than it used to be (Exhibit 56), a fact that is true for OPEC, non-
OPEC and US shale producers.
CR
Exhibit 55: Global upstream capex Exhibit 56: Non-OPEC rig count and oil prices
Looking at global oil and gas capex, we note that investment has picked …although the global non-OPEC is now a lot less sensitive to prices than
up by $70bn this year… it used to be
800 1000
Rigs
700 $bn
800
600
500 600
400
300 400
200
200
100
24 mo Brent (3mo avg, $/bbl)
0 0
40 60 80 100 120
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2010-2020 2021+
Non-OPEC OPEC
Source: Woodmac Source: Bloomberg, BofA Global Research
…keeping non-OPEC growth at 0.8mn b/d in 2023

As a result of this lower sensitivity of production to oil prices, we expect non-OPEC
supply to increase just 1.8mn b/d YoY in 2022 and 0.8mn b/d YoY in 2023 (Exhibit 57).
The bulk of the growth in output likely will come once again from the US as well as
Canada, Norway, and Brazil (Exhibit 58). A factor that will drag net non-OPEC growth in
oil supply next year will be our expected decline in Russian oil supplies of 1mn b/d in
2023, a country that had historically contributed to modest increases in output.
Exhibit 57: Global oil supply growth Exhibit 58: Global oil supply growth in 2023 by country
We expect non-OPEC supply to rise just 1.8mn b/d YoY in 2022 and …with the bulk of the growth in output coming once again from the US
0.8mn b/d YoY in 2023… as well as Canada, Norway, and Brazil
4 1,500
mn b/d, k b/d YoY 2023
YoY 1,000
0 500
0
-4
-500
-1,000
-8
-1,500
1Q2008
1Q2009
1Q2010
1Q2011
1Q2012
1Q2013
1Q2014
1Q2015
1Q2016
1Q2017
1Q2018
1Q2019
1Q2020
1Q2021
1Q2022
1Q2023F
United Brazil Other Norway Canada Russia

States non-OPEC
US non-OPEC (ex. US) total non-OPEC
Source: IEA, BofA Global Research estimates Source: BofA Global Research estimates
Again, America likely will lead global oil supply growth…

The sensitivity of production to price around the world has declined. In America, we
estimate that US shale elasticity to price has dropped by more half, with the regression
beta falling from 14 to 5 since the beginning of the pandemic (Exhibit 59). Put
differently, prices need to work at least twice as hard to get the same output response
in the US shale patch. Even then, we project US crude oil production to exceed 12.5mn
b/d by the end of next year, driven mostly by growth in the Permian basin as other
regions lag materially (Exhibit 60).
CR
Exhibit 59: US oil rigs and front month WTI prices Exhibit 60: US oil production
In America, we estimate that US shale elasticity to price has dropped in Still, we project US crude oil production to exceed 12.5mn b/d by the end
half, meaning that prices now need to work twice as hard to stimulate of next year, driven mostly by growth in the Permian basin
production
15
1200 mn b/d
oil rig count (10 weeks forward)
1000
10
800
600
5
400
200
-
WTI $/bbl Jan-11 Dec-12 Nov-14 Oct-16 Sep-18 Aug-20 Jul-22
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 Other* Alaska GoM Permian
Pre-covid Post-covid
Source: EIA, BofA Global Research estimates
Source: Bloomberg, BofA Global Research BofA GLOBAL RESEARCH
…with other nations like Brazil or Canada following

America likely will not be alone in its pursuit of incremental oil supplies next year. We
expect Canadian volumes to come back and hit nearly 6mn b/d (Exhibit 61), posting
growth of 0.12mn b/d YoY in 2023. Similarly, we expect Brazilian liquids growth to
accelerate as well with new FPSOs starting up in the Buzios, Itapu, and Mero fields. Net,
we see Brazil as the second largest contributor to global oil supply growth with volumes
expanding by 0.11mn b/d in 2022 and 0.26mn b/d in 2023, moving well above pre-
pandemic highs (Exhibit 62).
Exhibit 61: Canada liquids production Exhibit 62: Brazil liquids production
We expect Canadian volumes to come back and hit nearly 6mn b/d, We see Brazil as the second largest contributor to global oil supply
posting growth of 0.12mn b/d YoY in 2023 growth with volumes expanding by 0.11mn b/d in 2022 and 0.26mn b/d
in 2023,
6000 800
k b/d 4000 600
k b/d
400
3000 300
4000 0
-400 2000 0
2000 -800
1000 -300
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22F
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22F
YoY growth (rhs) Canada

Source: IEA, BofA Global Research estimates
YoY growth (rhs) Brazil
BofA GLOBAL RESEARCH Source: IEA, BofA Global Research estimates
Net, we project a surplus of 0.1mn b/d next year…

While we admittedly see a number of factors that could swing prices up and down
$20/bbl over the course of the next few months (see OPEC+: standing still to move
forward), our supply/demand projections reflect a tight market environment (Exhibit 63).
Net, we see demand reaching 102.4mn b/d by 4Q23, well above pre-pandemic highs, as
long as supply availability allows. As such, our balance forecasts (Exhibit 64) reflect a
CR
modest surplus over the course of the next nine months that quickly turns into a deficit
in 2H23, which should encourage OPEC+ to raise quotas.
Exhibit 63: Global oil demand and supply Exhibit 64: Global oil market imbalance
Net, we see demand reaching 102.4mn b/d by 4Q23, well above pre- As such, our balances reflect a modest surplus over the course of the
pandemic highs, as long as supply availability allows next nine months that quickly turns into a deficit in 2H23
105 8,000
mn b/d k b/d
6,000
4,000
90
2,000
75 -2,000
-4,000
1Q20171Q20181Q20191Q20201Q20211Q20221Q2023
Global Supply Global Demand global imbalance Forecast
Source: IEA, BofA Global Research estimates Source: IEA, BofA Global Research estimates
…that OPEC+ will likely mop up with a modest cut

A small surplus over the next few months could elicit a modest OPEC+ curb in supply and
should be easy to accomplish. After all, most OPEC+ members are already producing well
below their agreed quota levels (Exhibit 65). Worryingly, the group is now 3.4mn b/d
short of their production targets, a clear sign that OPEC+ has limited ability to meet
rising demand volumes. Historically, Saudi Arabia adjusted output volumes in response
to oil price movements (Exhibit 66) but it is now limited in its ability ease tight markets,
producing 11mn b/d, one of the highest levels on record.
Exhibit 65: OPEC+ production vs. quota Exhibit 66: Brent crude oil price and Saudi production changes
Most OPEC+ members are already producing well below their quota …and Saudi Arabia has typically adjusted production volumes in response
levels… to price movements
80 4
1.5 $/bbl, YoY end-2016: Saudi cutsmn b/d,
output YoY
0.0 40 2
-1.5
0 0
-3.0
mn b/d
-4.5
-40 -2
May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22
Algeria Angola Congo Eq. Guinea
Gabon Iraq Kuwait Nigeria mid-2014: Saudi stops balancing the market
-80 -4
Saudi Arabia UAE Azerbaijan Bahrain
00 02 04 06 08 10 12 14 16 18 20 22
Brunei Kazakhstan Malaysia Mexico
Oman Russia Sudan SouthSudan Brent crude oil price, YoY Saudi production, YoY (rhs)
Total Source: Bloomberg
Source: IEA, BofA Global Research BofA GLOBAL RESEARCH
Moreover, we expect some gas-to-oil switching…

Limited spare capacity, low inventories, underinvestment, and Asia reopening are only
some of the challenges for the tight oil market in the year ahead. Given the exceptionally
high prices of global natural gas, we also expect substantial levels of gas and possibly
CR
even coal switching into oil in Europe (see Europe’s energy crunch gets louder) and
beyond (Exhibit 67) given the current price differentials across fuels. On our estimates,
switching into oil could range between 1 and 2mn b/d around the world (Exhibit 68), with
countries like Japan likely ramping up oil-fired generation.
Exhibit 67: Fuel prices Exhibit 68: Fuel oil fired power generation capacity and utilization
rates
Given the exceptionally high prices of global natural gas, we expect some In Asia, Japan holds the largest fuel oil power generation capacity, at
oil switching around 31GW
45 60.00 60%
$/mmbtu GW
30 40.00 40%
15 20.00 20%
0 - 0%
Indonesia
Pakistan
Brazil
China
Dom. Rep.
Japan
Saudi Arabia
Bangladesh
Philippines
Canada
Chile
Mexico
USA
Germany
Egypt
Capacity Utilization rate
Source: Bloomberg, BofA Global Research Source: BNEF
…to lend support to Brent oil at $100/bbl in 2023

Given all this uncertainty, where do we see prices next year for oil? Brent crude prices
have averaged about $101/bbl so far this year and we continue to project them at
$100/bbl next year (Exhibit 69), a figure that we first introduced on March 8th (see
NEWO). Furthermore, we expect Brent to hit $110/bbl around the height of next year’s
driving season. Also, we project average oil prices to be slightly lower in 1Q23 compared
to 2Q and 3Q23 and beyond (Exhibit 70).
Exhibit 69: Brent annual average price Exhibit 70: Brent crude oil price
Brent crude oil prices have averaged about $101/bbl so far this year and We project oil prices to be slightly lower in 1Q23 compared to 2Q and
we see them at $100 next year beyond
120 $120
$/bbl
average=$64/bbl
(2000-present)
80
$90
40
0 $60
2022 YTD
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Brent fwd Brent avg fcst

Source: Bloomberg Source: Bloomberg, BofA Global Research estimates
Still, a Russian oil price cap is a major upside risk…

Beyond the supply and demand dynamics described above, we would also note that the
upcoming Russian oil price cap is a major upside risk to prices in 2023. The discount on
Russian crude oil grades has narrowed as Brent prices fell in recent months (Exhibit 71),
even as Russian crude oil loadings have recovered to pre-Covid levels this year (Exhibit
CR
72). At present, we embed Russian total oil production levels of 10mn b/d in our
assumptions for 2023 compared to the 9.59mn b/d figure provided by the IEA. Any
meaningful downward deviation from these figures could turbocharge oil prices higher.
Exhibit 71: Crude oil differentials vs Brent Exhibit 72: Russian crude loadings
The discount on Russian crude oil grades has narrowed as Brent prices …even as Russian crude oil loadings have recovered to pre-Covid levels
fell in recent months… this year
5 4000
$/bbl k b/d
0
-5 3000
-10
-15
2000
-20
-25
-30 1000
-35
-40 0
Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-16 Jul-17 Jan-19 Jul-20 Jan-22
Urals-Brent WTI-Brent Dubai-Brent Urals ESPO
Source: Bloomberg Source: Bloomberg
…with other key risks coming from Iraq or Libya

We have previously estimated that every unexpected 1mn b/d swing in supply or demand
tends to impact Brent oil prices by $20 to $25/bbl. As such, a curtailment in Russian
production or further supply disruptions over the coming quarters (Exhibit 73) from
Libya, Nigeria, Iraq or others could quickly put the oil market on notice (Exhibit 74).
Russia presents the largest risk here, but a 1mn+ b/d supply shortfall could come from a
number of producers, particularly within the OPEC+ group.
Exhibit 73: Major oil supply disruptions (excluding disruptions due Exhibit 74: Libya and Nigeria oil supply
to OPEC policy changes)
We still see a risk of further supply disruptions over the coming …particularly from volatile nations like Libya, Iraq, or Nigeria
quarters…
3000 k b/d
8
mn b/d
Saudi Arabia, drone attack
6
Kuwait, Gulf War
post Arab spring
Nigeria
4
unrest 1500
Venezuela,
oil strikes Iraq,
2 Gulf War
Iraq, Gulf War
(and oil embargo)
0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 0
Iraq, civil war Libya, civil war Nig eria, oil theft 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Syria, civil war Saudi Arabia, dummy Nig eria, civil war
Venezuela, oil strikes Canada, Wildfires Venezuela, poltical turmoil
Nigeria Libya
Iran, US embargo (2018) Saudi Arabia, drone attack Russia, invasion Source: IEA
Source: IEA BofA GLOBAL RESEARCH
To the downside, a global recession is the key risk

Should production experience a severe shortfall, prices would have to rise accordingly as
demand would need to adjust lower in the current context of limited spare capacity and
inventories. Still, we would not downplay the risk a global recession could have on oil
demand. The ratio of energy consumption as a share of income is the highest on record
(Exhibit 75), an ominous sign. And even if sovereign credit spreads are still not at
CR
extremely stressed levels (Exhibit 76), the average global recession has led to an 640k
b/d annual demand contraction (see Mind the Russian energy gap).
Exhibit 75: Primary energy to nominal GDP ratio – World Exhibit 76: Global sovereign CDS 5Y spreads
The ratio of energy consumption as a share of income is the highest on …although sovereign credit spreads are still not at extremely stressed
record… levels
14%
% of GDP at 2022-2030 420
12% forward prices bps
360
10% 300
8% 240
180
6%
120
4% 60
2% 0
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22
0% Italy Germany Japan
65 70 75 80 85 90 95 00 05 10 15 20 25 30
Oil Gas Coal Nuclear Korea China Brazil
Source: BP, Bloomberg, BofA Global Research estimates
Mexico Indonesia South Africa
BofA GLOBAL RESEARCH Source: Bloomberg
CR
2.2 Refined products
We see winter diesel crack upside, while recession and China exports key risks
Low diesel stocks ahead of winter, particularly in PADD 1, and the risk of diesel supply
disruptions from Russia pre/post embargo could lead to explosive upside for diesel and
gasoil cracks in 4Q22/1Q23, even as the macro outlook remains gloomy (Exhibit 77) We
forecast ULSD-Brent will average $57.50/bbl in 1Q23 before falling to $30 by the end of
the year as the economy slows and capacity continues to ramp up. We are bullish
gasoline cracks versus the curve in 2023 and expect RBOB-Brent cracks to average
$21/bbl on recovering demand, especially in China and the US. We see upside risk for
HSFO-Brent cracks versus the forward curve and forecast they will average -$21/bbl in
2023 on lower medium and heavy sour OPEC+ supply, risk of reduced Urals and HSFO
output post embargo, and rising global upgrading capacity outside China next year
(Exhibit 78).
Exhibit 77: NYH refined product crack history, forecast, and Exhibit 78: NWE refined product crack history, forecast, and
forward curves forward curves
We see winter upside for NYH ULSD cracks and expect narrower RBOB- NWE EBOB cracks should outperform the curve on recovering driving
ULSD spreads as 2023 progresses activity, while HSFO should see support from sour crude oil supply
curtailments
80 80
70 $/bbl 60 $/bbl
60 40
50 20
40
0
30
20 -20
10 -40
0 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
-10 Gasoil-Brent EBOB-Brent
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 0.5%FO-Brent 3.5%FO-Brent
Gasoil-Brent forward EBOB-Brent forward
ULSD-Brent RBOB-Brent
0.5%FO-Brent forward 3.5%FO-Brent forward
ULSD-Brent forward RBOB-Brent forward Gasoil-Brent forecast EBOB-Brent forecast
ULSD-Brent forecast RBOB-Brent forecast 0.5%FO-Brent forecast 3.5%FO-Brent forecast
Source: Bloomberg, BofA Global Research estimates Source: Bloomberg, BofA Global Research estimates
Refined product cracks have weakened except for diesel, jet…

The refined product markets have been on a roller coaster ride this year, spiking in
March as Russia invaded the Ukraine and supply disruption fears rippled through the
market. From there, performance has dramatically diverged, with diesel and gasoil prices
holding up relatively well during 2H22, while nearly all other products faded (Exhibit 79).
Refined product cracks converged during the pandemic as consumers shifted spending
from services to goods and refinery run cuts reduced supplies of naphtha and fuel oil
and increased the refining industry’s ability flex yields. These dynamics have reversed in
recent quarters and refined product winners and losers have emerged. Gasoline and
middle distillates were the best performing cracks at mid-year, but gasoline has
dramatically weakened since then, with front month cracks dipping below $0/bbl at
times in Asia (Exhibit 80). Diesel and gasoil cracks have held firm as the world’s refining
capacity struggles to meet demand. Fuel oil and naphtha cracks, which were some of the
best performing during the pandemic, have been some of the worst performers in 2022.
CR
Exhibit 79: NWE crude oil and refined product prices Exhibit 80: Front month NWE refined product cracks
Refined product performance has dramatically diverged in 2H22 with Gasoline and middle distillates were the best performing cracks at mid-
diesel and gasoil prices holding up while nearly all other products year, but gasoline has significantly weakened since then
weakened
240 $80
$/bbl $/bbl
200 $60
$40
160
$20
120
$0
80
-$20
40 -$40
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22
Gasoil Jet fuel HSFO
VLSFO Brent Gasoline LSFO-Brent Jet fuel-Brent Naphtha-Brent
… as global oil demand continues to trend below pre-COVID levels…

After a fairly rapid recovery during 2020 and 2021, global oil demand has slowed
recently, trending about 1.5mn b/d below seasonal 2019 levels in 3Q22 or about 2.3mn
b/d below December 2019 levels, according to Woodmackenzie data (Exhibit 81). Jet fuel
remains the biggest laggard, with consumption trailing about 2mn b/d below 2019
levels, while LPG, naphtha, and fuel oil demand is above pre-COVID levels. From here, we
expect YoY demand growth to slow to zero during 4Q22 and 1Q23 before re-
accelerating in 2Q23 (Exhibit 82). In total, we see demand growth of 1.7mn b/d YoY next
year, driven primarily by Asian non-OECD countries. We see downside risk to this
estimate if China retains its strict zero-COVID protocols.
Exhibit 81: Global oil demand Exhibit 82: Global oil demand growth
After a rapid recovery during 2020-21, global oil demand has slowed We expect demand growth to slow to zero during 4Q22 and 1Q23 before
recently, trending about 1.5mn b/d below seasonal 2019 levels in 3Q22 re-accelerating in 2Q23
12 mn b/d vs 15
BofAML fcst
YoY,
6 seasonal 10
2019 levels mn b/d
5
0
0
-6
-5
-12 -10
-18 -15
-24 -20
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
1Q21
3Q21
1Q22F
3Q22F
1Q23F
3Q23F

LPG Naphtha Gasoline
Jet/Other Kerosene Diesel/Gasoil Fuel Oil
Other Products Total OECD YoY non-OECD YoY Global Demand
Source: Woodmac Source: IEA, BofA Global Research estimates
… and macro headwinds weigh on the growth outlook for 2023…

Headwinds continue to build for the global economy as central banks raise rates to
combat inflation and tight energy supplies constrain economic activity (see Oil demand
has a supply problem). Since the start of the year, GDP estimates for 2022 have been
mostly revised lower, while 2023 forecasts have been consistently cut (Exhibit 83). In our
latest forecast, global GDP growth is set to rise just 2.4% YoY next year. The reduction
CR
in GDP growth will have differing effects on consumption depending on the refined
product. Traditionally, middle distillates, especially jet fuel, are most heavily levered to
GDP (Exhibit 84), which could weigh on diesel and jet fuel cracks next year. That said, the
world is still in the reopening process, with Asia likely to add new long-haul flights as the
year progresses, providing some offset.
Exhibit 83: BofA global GDP growth forecasts Exhibit 84: Elasticity w.r.t. GDP in OECD & non-OECD economies
Since the start of the year, our economists have dramatically cut their Traditionally, middle distillates, especially jet fuel, are most heavily
global GDP estimates for 2022 and 2023 levered to GDP, which could weigh on diesel and jet fuel cracks next year
6 4
2022 2023 2024
%
3
4
2
2 1
0
0
jet***
other***
jet***
gasoline***
gasoline***
naphtha***
other*
naphtha
fuel oil**
diesel***
diesel***
fuel oil***
-2
Global Developed Markets Emerging Markets Non-OECD OECD
Source: BofA Global Research Source: IEA, IMF, Woodmackenzie, BP, BofA Global Research
… but oil products should see some support as the cheapest BTUs
Sluggish economic growth is typically negative for oil consumption, but the global
energy crisis makes the current environment more complicated. After all, the collapse in
Russian gas flows to Europe and soaring coal prices have made oil products competitive
on a BTU basis in the power stack and in industry (Exhibit 85). This is not just a near
term phenomenon (Exhibit 86). The forward curves for global gas and coal are elevated,
making oil appear more attractive next year too, which should lead to more oil demand,
all else equal, than would be the case in a traditional economic slowdown.
CR
Exhibit 85: Fuel prices in mmbtu Exhibit 86: Asia resid fuel oil prices and breakevens with coal and
gas in power generation
Collapsing Russian gas flows to Europe and soaring coal prices have The forward curves for global gas and coal are elevated, making oil appear
made oil products competitive on a BTU basis in the power stack and in more attractive next year too
industry
270
45 $/bbl of
$/mmbtu 240
resid equiv.
210 in power
180 gen
30
150
120
15 90
60
30
0 0
15 16 17 18 19 20 21 22 23
380cst fuel oil Singapore Newcastle coal breakeven
US nat gas breakeven JKM nat gas breakeven
marine fuel (0.5%) Singapore
Source: Bloomberg
Source: Bloomberg BofA GLOBAL RESEARCH
… and cracks may spike as EU’s embargo on Russian petroleum kicks in…
The petroleum markets face significant uncertainty around Europe’s embargoes on
Russian crude oil (December 5th) and refined products (February 5th) and the G7’s
planned energy price cap. In the aftermath of the war in Ukraine, some European buyers
self-sanctioned by cutting purchases of Russian petroleum, but flows remain elevated
today (Exhibit 87), which means that significant trade-flow changes are yet to come. The
market is already desperately short diesel, so any trade friction that leads to a reduction
in diesel supply could be met with panic buying.
… if significant trade friction emerges and a supply disruption occurs

We expect the embargo to shift more Russian product trade from short-haul European
destinations to long haul destinations like Brazil, India, and China (Exhibit 88), though the
outcome of Brazil’s recent election presents uncertainty around how aggressively the
country will pursue Russia’s barrels. Meanwhile, US diesel cargoes currently being sold
into South America, more than 800k b/d ytd, could be rerouted to Europe. Longer voyage
times for Russian cargoes, coupled with ship-to-ship transfers and other factors could
lead to stress on the clean and dirty tanker fleets. This, coupled with difficulty moving
barrels to the export market and demand for Russian cargoes should lead to some trade
friction, lost supply, and higher cracks. Depending on how energy supplies evolve this
winter, it is possible that Europe delays or cancels its embargo plans, which is a risk to
our view.
CR
Exhibit 87: OECD imports from Russia Exhibit 88: Russian refined product export trip times
In the aftermath of the war in Ukraine, some EU buyers self-sanctioned The embargo should shift more Russian product trade from short-haul
by cutting purchases of Russian petroleum, but flows remain elevated European destinations to long haul destinations like Brazil, India, and
today China
5000 90
Round trip
k b/d
75
60
45
2500
30
15
0
0
Crude oil Diesel Jet LPG
Gasoline Naphtha Kero Fuel oil Old routes New routes
Source: IEA Source: Sea-Distances.org, BofA Global Research estimates
Global refining capacity start-ups in 2022 are still ramping up…

During 2020-21, global refining capacity collapsed as small capacity additions in the
Middle East and China were offset by record refinery closures elsewhere (Exhibit 89). In
2022, capacity additions started to pick up again, driven primarily by new refinery starts
in China, including at Jieyang (400k b/d), Zhenhai (220k b/d), Lianyungang (320k b/d) and
Ningbo (120k b/d) and also the Middle East, where the Al-Zour refinery (615k b/d)
started its multi-phase ramp up (Exhibit 90). In 2023, growth is set to slow, with
capacity additions in Oman (Duqm, 230k b/d), US (Beaumont (250k b/d), and Nigeria,
where the long-awaited Dangote refinery (650k b/d) is tentatively set to start up before
year-end.
Exhibit 89: Global refining capacity additions (net) Exhibit 90: Global CDU capacity additions by quarter (gross)
During 2020-21, global refining capacity collapsed as Middle East and In 2023, Oman, Iraq, the US, and Nigeria will contribute to global refining
China additions were offset by record refinery closures elsewhere capacity growth
3 1200
mn b/d,
k b/d
2 YoY
1 800
0
-1 400
-2
0
Africa Other Asia Oceania

China Europe
FSU LatAm Africa Middle East China Latin America
Middle East US & Canada East Asia U.S. South Asia FSU
Source: Platts Source: Platts, BofA Global Research
… and more upgrading capacity helps, but China holds the cards here
During the pandemic, numerous low to medium complexity refineries closed, meaning
that upgrading capacity was less affected. However, refinery closures hit FCC capacity
harder than hydrocracking and coking capacity (Exhibit 91). In 2022, upgrading capacity
additions favored diesel too as more hydrocrackers and cokers start up in China (Exhibit
CR
92). However, the market did not feel the full impact of this increased capacity due to
China’s restrictive refined product export quotas. In 2023, hydrocracker units in India,
Iran, and Nigeria will help provide some relief to diesel market tightness.
Exhibit 91: Upgrading capacity growth (net) Exhibit 92: Global hydrocracker additions by quarter (gross)
During the pandemic, refinery closures hit FCC capacity harder than In 2023, hydrocracker units in India, Iran, and Nigeria will help provide
hydrocracking and coking capacity some relief to diesel market tightness
2 mn b/d, 400
YoY k b/d
300
1
200
100
0
0
-1 Africa China Middle East

2011Q1 2013Q1 2015Q1 2017Q1 2019Q1 2021Q1 2023Q1 South Asia FSU Latin America
Coking FCC Hydrcracking East Asia MED U.S.
Source: Platts Source: Platts
China’s product export program could help ease diesel tightness…

Over the past three years, China has added nearly 1.4mn b/d of refining capacity.
However, since 2019, China cut its refined product export quotas by about 20mn mt,
equivalent to about 400k b/d (annualized), in the name of decarbonization (Exhibit 93).
Reduced export quotas effectively negating any relief China’s increased refining capacity
may have had on global refined product markets. China’s government was particularly
slow to hand down export quotas, with just 13mn mt issued in the first batch, or about
55% lower YoY. China’s exports have been sluggish as a result, with shipments of
gasoline, diesel, and jet fuel totaling just 20mn mt ytd, or a 40% reduction YoY (Exhibit
94). A fourth batch, issued in September, granted companies an additional 15mn mt of
exports, which should allow for outsized export volumes into year-end if refiners are
willing to use the quotas.
CR
Exhibit 93: China gasoline, diesel, and jet fuel export quotas Exhibit 94: China exports of gasoline, diesel, and jet fuel
Since 2019, China cut its refined product export quotas by about 20mn China’s gasoline, diesel, and jet exports hit 20mn mt ytd, or a 40% cut
mt, equivalent to about 400k b/d annually YoY, but a 4th quota issuance in September will allow for higher exports
in 4Q22
60000
kmt 60 YTD exports Total exports
mn mt
40000
40
20000
20
0
2014* 2015 2016 2017 2018 2019 2020 2021 2022 0
Batch 1 Batch 2 Batch 3 Batch 4 Batch 5 2016 2017 2018 2019 2020 2021 2022
Source: Platts
… but its restrictive policy has only exacerbated shortages since 2021
Next year, China’s export quotas could make or break refined product markets. While the
global refining system is larger today than in 4Q19, thanks to China’s new capacity
additions, the country’s restrictive export policies have constrained fuel availability
globally. In fact, if China’s new capacity is excluded, global refining capacity remains
more than 1mn b/d below 4Q19 levels (Exhibit 95) and China’s 20mn mt export quota
cut in 2021 effectively reduces capacity even further. As global oil demand continues to
rise (Exhibit 96), China has the ability to keep product markets tight or provide
significant relief. A policy similar to 2022 would leave the market tight, especially for
diesel, while a looser policy that allows refiners to ramp up utilization rates could swamp
the market and weigh on refined product cracks.
Exhibit 95: Global refining capacity change since 4Q19 Exhibit 96: Global oil demand change since 4Q19
The global refining system is larger today than 4Q19 levels thanks to As global oil demand continues to rise, China has the ability to make or
China, but its restrictive export policies have constrained fuel availability break refined product markets through its product export quota program
globally
5
2 mn b/d,
0 Index 4Q19
1 mn b/d,
Index 4Q19 -5
0
-10
-1
-15
-2
-20
4Q2019
1Q2020
2Q2020
3Q2020
4Q2020
1Q2021
2Q2021
3Q2021
4Q2021
1Q2022
2Q2022
3Q2022F
4Q2022F
1Q2023F
2Q2023F
3Q2023F
4Q2023F
-3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
2023Q1
2023Q2
2023Q3
2023Q4
2024Q1
Demand growth Demand growth ex China

Total Total ex China Source: IEA, BofA Global Research
Source: Platts, BofA Global Research BofA GLOBAL RESEARCH
CR
Gasoline
After mid-year, gasoline cracks collapsed to pre-Ukraine war levels…
Global gasoline prices rallied significantly since the height of the pandemic, rising from a
trough of roughly $0.50/gal in 2Q20 to a peak of about $4/gal in 2Q22 in the US and
Europe (Exhibit 97). Gasoline cracks traded upwards of $50/bbl in the US, while cracks in
Singapore peaked at a more subdued height of about $40/bbl during the same period.
High fuel prices and broader inflation stress caused demand to buckle, driving gasoline
prices and cracks lower in 2H22. Now, front month NYH RBOB-Brent cracks are trading
near $14/bbl, while cracks in Singapore have dipped negative on multiple occasions
during September and October (Exhibit 98).
Exhibit 97: Regional gasoline prices Exhibit 98: Regional gasoline cracks
High fuel prices and broader inflation stress caused gasoline demand to Front month NYH RBOB-Brent cracks are trading near $14/bbl, while
buckle, driving prices and cracks lower in 2H22 cracks in Singapore have dipped negative
$5.00 60
$/bbl 50 $/bbl
$4.00
40
$3.00 30
$2.00 20
10
$1.00 0
$0.00 -10
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 -20
NWE eurobob Singapore mogas Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
NYH RBOB USGC gasoline Singapore gasoline-Brent NWE gasoline-Brent
… as soft gasoline consumption collided with deteriorating petchem demand

Gasoline prices and cracks typically weaken seasonally after the peak of driving season,
but the decline has been more precipitous this year. Slower driving activity growth is one
factor contributing to the weakness and a significant deterioration in petchem sector
demand for naphtha, also a key blending component for gasoline, is also playing a role.
Naphtha cracks have collapsed since the start of the year, dipping as low as -$30/bbl in
NWE (Exhibit 99). Meanwhile, high octane blending components like alkylate and
reformate have spiked in value relative to gasoline, supporting wider spreads between
regular and premium gasoline blends (Exhibit 100).
CR
Exhibit 99: NWE naphtha cracks Exhibit 100: USGC gasoline blending component spreads vs 87RON
gasoline
Weak petchem sector demand for naphtha, which is also a key gasoline High octane blending components like alkylate and reformate spiked
blending component, caused naphtha cracks to collapse this summer relative to gasoline, supporting wider regular-premium gasoline spreads
10 300
5 $/bbl c/gal
0 200
-5
-10 100
-15
-20 0
-25
-30 -100
-35
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -200
2017 2018 2019 Dec-12 Dec-14 Dec-16 Dec-18 Dec-20
2020 2021 2022 Alkylate Reformate Raffinate
Source: Bloomberg Source: Platts
Gasoline demand has struggled due to China’s zero-COVID policy…

The EIA’s US weekly report provides the most visible data point for gasoline demand,
and though data this year has been extremely noisy, it points to a slowdown in
consumption (Exhibit 101). The final monthly data, which show consumption through
August, suggest that US gasoline demand grew by 450k b/d YoY in 1Q22, partly due to
lockdowns in 2021. Since then, consumption has slowed, averaging nearly 200k b/d
lower YoY (-2%) during April-August. Meanwhile, China’s zero-COVID policy caused a
sharp slowdown in road congestion (Exhibit 102), and national statistics suggest that
China’s apparent demand has also contracted by nearly 500k b/d or -13% YoY from May
through September.
Exhibit 101: US gasoline demand (weekly implied data) Exhibit 102: Congestion delay index: 100-city average
US weekly gasoline demand has been extremely noisy but points to a China’s zero-COVID policy caused a sharp slowdown in road congestion,
slowdown in consumption this year which is consistent with the country’s decline in apparent gasoline
demand
13000
k b/d Index, 2019 2020 2021 2022
7d avg
1.8
10000
1.6
7000
1.4
4000 1.2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2017 2018 2019
2020 2021 2022 1.0
Source: Bloomberg
BofA GLOBAL RESEARCH Source: Wind Note: Red dots indicate Lunar New Year (LNY) in each year; data as of Oct 25
… high prices, soaring inflation, and negative real wage growth

Containing energy inflation has been a top priority for governments globally, but
inflation has broadened and is evident in food, housing, and other areas. Inflation across
major OECD economies has trended steadily higher since 2021 (Exhibit 103) and while
wages have also increased, they have not risen nearly enough to offset inflation (Exhibit
CR
104), leading to negative real wage growth. This dynamic should lead to worsening
household finances, causing some consumers to draw on savings and others to borrow
to continue to maintain living standards. In short, this dynamic is unsustainable over the
medium term and will likely hinder household consumption and gasoline demand could
suffer as a result.
Exhibit 103: Year-on-year headline inflation by country Exhibit 104: Year-on-year wage growth by country
Inflation across major OECD economies has trended steadily higher since … but wages have not kept pace, resulting in negative real wage growth
2021… across many economies
12% 12%
8% 8%
4% 4%
0% 0%
-4% -4%
-8% -8%
Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22
Australia Canada Euro area US Euro area UK
Japan New Zealand Norway Canada New Zealand Australia
UK US Norway Japan
Source: Bloomberg, Haver Source: Bloomberg, Haver
But gasoline production capacity growth is set to slow in 2023…

Refineries coming online over 2023 will be geared more towards diesel and
petrochemicals than gasoline as companies steer away from gasoline production due to
concerns over rising electric vehicle adoption (Exhibit 105). Less FCC capacity will enter
the market in 2023, especially during the first three quarters of the year (70k b/d),
though the ramp up of nearly 300k b/d of capacity that started operations in 2022
should help supply the market next year (Exhibit 106). In late 2023, Nigeria’s Dangote
refinery is expected to be commissioned, but this will likely start affecting markets in
2024.
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Exhibit 105: Global FCC capacity additions by quarter (gross) Exhibit 106: RBOB-Brent forward curve
Refineries coming online over 2023 will be geared more towards diesel RBOB cracks have weakened recently but should rebound in 2023 on
and will have lower FCC capacity recovering gasoline demand
300 42
k b/d 36 $/bbl
200 30
24
100 18
12
6
0 futures expiry
0
Nov-21 May-22 Nov-22 May-23 Nov-23 May-24 Nov-24
Nov-22 Nov-22 Jul-22
Africa East Asia China Middle East Mar-22 10/7/2021
Source: Platts Source: Bloomberg
… and RBOB-ULSD spreads encourage max diesel yields through 2024…

Refiners have been receiving strong signals nearly all year long to maximize diesel yields,
with front month RBOB-ULSD spreads trading as wide as -$1.77/gal recently, much
wider than the extreme weakness seen during 2008, when the market was facing similar
issues (Exhibit 107). Refiners have been ramping up production of middle distillates, with
yields reaching as high as 40% in May and remaining near those levels in recent months
(Exhibit 108).
Exhibit 107: RBOB-ULSD front month spreads Exhibit 108: Global refinery yields for middle and light distillates
Refiners have been receiving strong signals nearly all year long to … and have been ramping up production of middle distillates, with yields
maximize diesel yields… reaching as high as 40% in May
25 44% 54%
% of
0 cents/gal 43% 52%
refinery
-25 42% output
50%
-50 41%
-75 40% 48%
-100 39% 46%

-125 38%
44%
-150 37%
36% 42%
-175
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 35% 40%
2009-19 avg 2008 2022
Jet & diesel Gasoline & naphtha (rhs)
Source: Bloomberg Source: Woodmackenzie
… which could limit gasoline supply as inventories remain low

Refiners have struggled to meet gasoline demand in 2022, even as cracks soared and
consumption in some countries softened YoY, causing inventories, particularly in the
West, to trudge along at 5 year lows (Exhibit 109). While not as extreme as front month
RBOB-ULSD spreads, the forward curve incentivizes maximum diesel yields too, with
summer 2023 RBOB-ULSD spreads trading around -$0.45/gal. We think gasoline
demand growth should pick back up in 2023, especially as China re-opens. Rebounding
consumption, coupled with limited gasoline capacity growth and incentives to maximize
diesel, should support gasoline cracks in 2023 versus the forward curve. We see upside
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to gasoline cracks as a result and forecast RBOB-Brent to average $21/bbl next year
(Exhibit 110). Furthermore, we see room for RBOB-ULSD spreads to narrow as the year
progresses.
Exhibit 109: Gasoline inventories in US, ARA, and Singapore Exhibit 110: RBOB-Brent crack history, forecast, and forward curve
Gasoline inventories have trended near five year lows recently, even as We see upside to gasoline cracks as a result and forecast RBOB-Brent to
demand has faltered average $21/bbl next year
300 60
mn bbl 50 $/bbl
40
30
260
20
10
0
220 -10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
2017 2018 2019 RBOB-Brent RBOB-Brent forward
2020 2021 2022 RBOB-Brent forecast
Source: Bloomberg Source: Bloomberg, BofA Global Research estimates
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Diesel
Diesel has outperformed other fuels this year, particularly in NYH…
The middle distillate market has tightened dramatically in the past two years as global
manufacturing and trade remained strong and air travel began to pick up. Refiners have
struggled to keep up with diesel demand, causing prices in the US to spike above
$215/bbl this spring (Exhibit 111). Diesel has been the most resilient refined product in
2H22, even as leading indicators suggest the global economy is slowing. Diesel’s
outperformance versus crude oil pushed NYH diesel cracks up towards $70/bbl on
several occasions (Exhibit 112), and though cracks have come off in recent weeks, they
remain historically strong.
Exhibit 111: Global diesel and gasoil prices Exhibit 112: Global diesel and gasoil cracks
Refiners have struggled to keep up with diesel demand, causing diesel Diesel’s outperformance versus crude oil pushed NYH diesel cracks up
prices in the US to spike above $215/bbl this spring towards $70/bbl on several occasions
240 80
$/bbl 70 $/bbl
60
50
40
160
30
20
10
0
80 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 NYH ULSD - Brent NWE gasoil - Brent
NWE Singapore USGC NYH Sing. gasoil - Brent
… even as global industrial and manufacturing activity has slowed…

Global manufacturing PMIs roared higher in 2021 and early 2022, but activity has slowed
dramatically in recent months, particularly in Europe and China (Exhibit 113). Diesel
demand is heavily leveraged to manufacturing and industrial production (Exhibit 114), so
it is likely that further deterioration of conditions in these sectors will eventually give
way to weaker diesel consumption. In prior slowdowns like 2009 and 2016, global diesel
demand contracted at an average pace of 500k b/d YoY, while consumption actually
grew 300k b/d in 2012, though the pace of growth was much slower YoY.
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Exhibit 113: Global manufacturing PMIs Exhibit 114: Global diesel demand growth and IP growth
Global manufacturing PMIs roared higher in 2021 and early 2022, but Diesel demand is heavily leveraged to manufacturing and industrial
activity has slowed dramatically in recent months, particularly in Europe production
and China
6 20%
70
mn b/d 15%
index expansion
4
60 10%
2
5%
50 0 0%
-5%
-2
40 -10%
-4
-15%
30 -6 -20%
02 04 06 08 10 12 14 16 18 20 22 Jan-14 Apr-15 Jul-16 Oct-17 Jan-19 Apr-20 Jul-21
Global U.S. Japan
diesel demand growth (mn b/d) IP, YoY (rhs)
Germany Eurozone China
Source: Bloomberg , Woodmackenzie
… because refiners have struggled to produce enough fuel supply

Middle distillate inventories quickly expanded to multi-year highs in 2020, but the
trajectory of inventories has been mostly down since then. Indeed, inventories dropped
to new multi-year seasonal lows in 2022 across the US, ARA, and Singapore (Exhibit
115). This is a symptom of constrained refining capacity, which is unable to ramp up
more or shift yields further towards diesel. This tight inventory set up caused parabolic
moves higher in ULSD cracks in recent months (Exhibit 116).
Exhibit 115: Middle distillate inventories in US, ARA, and Singapore Exhibit 116: US distillate days of supply and NYH diesel cracks
Middle distillates have mostly fallen since 2020, with 2022 inventories The current tight inventory set up has led to exceptional moves in
making new multi-year lows across the US, ARA, and Singapore refined product cracks recently
270 80
mn bbl
$/bbl
240 60
210
40
180
20
150
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Day of inventory supply
0
2017 2018 2019
2020 2021 2022 25 30 35 40 45 50 55
The US Northeast and Europe are in a precarious spot this winter

Two regions that could face severe tightness this winter are the US Mid-
Atlantic/Northeast (PADD 1A and 1B) and Europe. In PADD 1, the Philadelphia Energy
Solutions refinery closure in 2019 and Canada’s Come-by-Chance refinery closure in
2020 left the US Atlantic coast with minimal local fuel suppliers, forcing the region to
pull in barrels from further afield. The region has struggled to attract sufficient diesel
barrels in the current environment and inventories have declined to the lowest level in at
least 30 years as a result (Exhibit 117). More recently, NYH ULSD-NWE gasoil (HOGO)
spreads have exploded above $1.00/gal at times and averaged about $0.50/gal over the
past month to pull more diesel from Europe and elsewhere to PADD 1 before winter
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heating season sets in. In the months ahead, Europe could potentially face its own diesel
crisis as the region enacts embargoes on Russian crude oil and refined products. Russia
is the largest supplier of gasoil to OECD Europe (Exhibit 118), and shipments have
remained elevated ahead of the embargo start dates. Pulling these cargos away from
Europe should force the region to compete with the US East Coast for other cargos,
causing HOGOs to compress from current levels and potentially driving cracks
significantly higher across the Atlantic Basin this winter.
Exhibit 117: US PADD 1A and 1B distillate inventories Exhibit 118: Top gasoil/diesel exports to OECD Europe
The Northeast has struggled to attract sufficient diesel barrels, so Europe may experience its own diesel crisis as the region enacts
inventories have declined to the lowest level in at least 30 years as a embargoes on Russian products, causing the region to compete with
result PADD 1 for barrels
75 18000
mn bbl kmt
60
12000
45
30
6000
15
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0
Russia Saudi India UAE USA Singapore
30 year range 2021 2022
30yr avg 2020 Arabia
Source: Bloomberg Source: IEA
We see near term diesel crack upside, downside in 2023 on macro weakness
The set up for diesel cracks remains constructive ahead of winter, with low inventories,
natural gas-to-diesel demand switching, and the Russian product embargo likely to stave
off the negative impacts of a macro slowdown and lead to sustained high NYH diesel
and NWE gasoil cracks. However, we expect the softening macro picture to start to
negatively affect diesel demand in 2023 and see downside risks to cracks versus
forward curves as the year progresses (Exhibit 120).
Exhibit 119: NYH ULSD – Brent forward curve Exhibit 120: NYH ULSD – Brent history, forecast, and forward curve
The set up for diesel cracks remains constructive ahead of winter, thanks …. however, we expect the softening macro picture to start to negatively
to low inventories, gas to diesel switching, and the Russian embargo… affect diesel demand and cracks as 2023 progresses
70 80
$/bbl
70 $/bbl
60
60
50
50
40
40
30 30
20 20
10 10
0 futures expiry 0
Apr-22 Oct-22 Apr-23 Oct-23 Apr-24 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
Nov-22 Sep-22 Jun-22 Feb-22 Jul-21 ULSD-Brent ULSD-Brent forward ULSD-Brent forecast
Jet fuel
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Jet fuel has outperformed most other products this year
The recovery in air travel over the past two years has allowed jet fuel to transition from
one of the worst performing fuels to one of the best, though its performance has
faltered recently, especially relative to diesel. Nonetheless, jet fuel prices are still 40-
50% higher since the start of the year (Exhibit 121). Jet fuel cracks exploded higher this
year, with performance exceeding diesel during the first half of the year. However, a
tight diesel market, macro concerns, and continued lockdowns in China have curbed
enthusiasm for jet fuel cracks since mid-year. As a result, jet fuel regrades (jet fuel –
diesel spread) have plummeted, with front month spreads trading as wide as -$39/mt in
October (Exhibit 122).
Exhibit 121: Regional jet fuel prices Exhibit 122: Jet fuel regrade forward curve
Jet fuel transitioned from one of the worst performing fuels during Jet fuel regrades have plummeted, with front month spreads trading as
2020-21 to one of the best in 2022, though its performance has faltered wide as -$39/mt in October on macro concerns and China’s zero-COVID
recently policy
240 150
$/bbl 125 $/mt
100
75
160 50
25
0
-25
futures expiry
-50
80 Nov-20 Jun-21 Jan-22 Aug-22 Mar-23 Oct-23 May-24
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22
NWE Singapore USGC NYH Nov-22 Oct-22 Jun-22 Mar-22 Dec-21
US passenger traffic hit pre-COVID levels, while other regions lagged…

Passenger travel has been on a slow and steady recovery path since 2Q20. The US is one
of the countries where air travel has improved the quickest, with the number of
passengers traveling through security checkpoints reaching pre-COVID levels at times
this year (Exhibit 123). More broadly, the number of flights globally has recovered to
around 80% of December 2019 levels (Exhibit 124), with OECD countries exceeding pre-
COVID levels, while non-OECD countries have recovered to about 60% of pre-COVID
levels, held back by China’s zero-COVID policy.
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Exhibit 123: TSA throughput Exhibit 124: Global air traffic, number of flights, rebased
The US is one of the countries where air travel has improved the The number of flights globally has recovered to around 80% of
quickest December 2019 levels, though OECD countries have reached pre-COVID
levels
3000 120
(000)
people, 7 100
day avg
2000 80
60
1000 40
20
index (Dec 2019=100)
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
2019 2020 2021 2022 world non-OECD OECD
Source: Bloomberrg Source: CEIC
... hampering jet fuel demand, which is 2mn b/d below 2019 levels
In 2019, global jet fuel demand averaged around 8mn b/d, and at the height of the
pandemic, consumption plunged by about 5mn b/d before starting its recovery (Exhibit
125). The rebound in demand was quickest in 2H20 and has since slowed due to rolling
lockdowns in 2021 and China’s continued zero-COVID policy in 2022. Today, jet fuel
demand is about 2mn b/d below pre-pandemic levels and should continue to recover into
2023, especially as China begins to loosen its pandemic policies. With re-opening
policies as a tailwind, jet fuel regrades could outperform, but we see downside for
middle distillate cracks versus the forward curve in 2023 as economic activity slows
(Exhibit 126).
Exhibit 125: Global jet fuel demand Exhibit 126: Implied jet fuel crack forward curve
Jet fuel demand is about 2mn b/d below pre-pandemic levels and should Even so, we see downside for middle distillate cracks versus the forward
continue to recover into 2023 curve as 2023 progresses and economic activity slows
2 mn b/d vs 54
seasonal 48 $/bbl
1
2019 levels 42
0
-1 36
-2 30
-3 24
-4 18
-5 12
-6 6
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22 -
Latam Asia NAM China Africa Mar-22 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25
ME Europe FSU Total Nov-22 Sep-22 Jun-22 Apr-22 Jan-22
Source: Woodmackenzie Source: Bloomberg
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Residual fuel oil
Fuel oil cracks have weakened significantly since mid-year…
Resilient global trade during the height of the pandemic, OPEC+ supply cuts, and
historically low refinery utilization rates, which allowed for more upgrading of residual
fuel, kept the fuel oil market tight and fuel oil cracks strong during 2020 and most of
2021 (Exhibit 127). However, all of these dynamics have reversed course over time. The
refining system is running near its limit, OPEC+ and other medium and heavy sour crude
oil supplies have recovered, and global trade growth is slowing. As a result, fuel oil
cracks have weakened dramatically (Exhibit 128), with HSFO cracks trading down to the
lows of 2019, when the market was preparing for IMO 2020. Even VLSFO cracks, which
rallied during 1H22, have collapsed recently on weaker upgrading margins and increased
competition as new sources of supply hit the market.
Exhibit 127: NWE Residual fuel – Brent cracks Exhibit 128: VLSFO cracks by region
Constrained refining capacity, high OPEC+ output, and slowing global VLSFO cracks, which rallied during 1H22, collapsed recently on weaker
trade have caused fuel oil cracks to crash recently upgrading margins and more competition from new sources of VLSFO
40 60
30 $/bbl $/bbl
45
20
10 30
0
-10 15
-20
0
-30
-40 -15
11 12 13 14 15 16 17 18 19 20 21 22 Mar-19 Oct-19 May-20 Dec-20 Jul-21 Feb-22 Sep-22
3.5% Rotterdam 1.0% Rotterdam 0.5% Rotterdam NWE 0.5% FO - Brent Sing. 0.5% FO
USGC 0.5% FO - Brent
… as refineries ramped up, OPEC+ added medium and heavy sours

Global refinery utilization rates plummeted in 2020 from around 80% to nearly 65%
(Exhibit 129) as lockdowns caused a historic collapse in oil demand. Lower utilization
rates created slack in upgrader units, allowing refiners to swing yields to a greater
degree than when plants are running near operation limits. This dynamic contributed to
tight fuel oil supply even as global trade held up, leading to fuel oil’s relative
outperformance. Utilization rates have been slowly rising since then, helped by
recovering product demand and refinery closures, which removed excess capacity from
the system. Now, utilization rates are trending near pre-COVID levels and recent
increases in OPEC+ medium and heavy sour production have pushed global fuel oil
supply to the highest level since 2018 (Exhibit 130).
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Exhibit 129: Global refinery utilization rates Exhibit 130: Global fuel oil supply
Lower utilization rates created slack in upgrader units, allowing refiners … but now that refineries are running near pre-COVID highs, yield
to swing yields away from fuel oil during the pandemic… flexibility has decreased and fuel oil output has increased to pre-COVID
levels again
85%
Utilization
10 mn b/d
80%
9
75%
8
70% 7
65% 6
5
60%
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
2013 2014 2015 2016 2017
Source: Woodmackenzie 2018 2019 2020 2021 2022
BofA GLOBAL RESEARCH Source: Woodmackenzie
Meanwhile, global trade growth has started to lose steam…

Global maritime trade is the key driver of fuel oil markets, so it is no surprise that the
surge in trade during 2020-21, as consumers shifted away from services and towards
goods, created a solid backdrop for fuel oil demand. However, trade growth has started
to slow more recently, as these pandemic trends reverse course and consumers grapple
with inflation. Trade has already started to slow (Exhibit 131), with exports from Taiwan
contracting 5.3% YoY in September, while shipments from South Korea and China
slowed to just 2.7% and 5.7% YoY, down from 13.8% and 13.3% during the January-
August timeframe. Global trade data through August shows growth of 5.2% (Exhibit
132), though messaging from the major shipping companies paints a dire picture for 4Q.
Exhibit 131: Asia export trade growth Exhibit 132: Global trade growth
Trade growth has started to slow recently, as pandemic consumption Global trade data through August shows growth of 5.2%, though
patterns reverse course and consumers grapple with high inflation messaging from the major shipping companies paints a dire picture for
4Q
80
35
3-month
60 %, YoY
MA, %, YoY
25
40
20 15
0 5
-20
-5
-40
-15
-60
2000 2003 2006 2009 2012 2015 2018 2021 -25
Korea China Taiwan 01 03 05 07 09 11 13 15 17 19 21
Source: Bloomberg
… and economic forecasts point to slower growth in 2023

Global trade growth tracks global economic growth closely (Exhibit 133), and fuel oil
demand growth correlates reasonably well with global trade growth (Exhibit 134). Thus
our expectation for weaker economic growth next year presents a headwind to fuel oil
demand as global trade will likely be challenged. Fortunately for fuel oil, weak demand
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for other products could lead to run cuts, especially in Asia, which can be a source of
support for fuel oil cracks as capacity to upgrade heavy residual fuel opens up.
Exhibit 133: Global trade growth and global GDP growth Exhibit 134: Fuel oil demand growth vs global trade growth
Global trade growth tracks global economic growth closely, and fuel oil …. which means slowing GDP growth could translate to weaker fuel oil
demand growth correlates reasonably well with global trade growth… demand growth next year
20% 0.2
% YoY fuel oil
demand,
10% 0.1 YoY
0% 0.0
-10% -0.1
-20% global trade, YoY

-0.2
2001 2004 2007 2010 2013 2016 2019 2022 -0.2 -0.1 0 0.1 0.2 0.3
YoY growth World
Source: IMF, Bloomberg Source: Bloomberg, Woodmackenzie
OPEC+ cuts, SPR curbs, Russia embargo bullish for HSFO cracks…
OPEC+’s historic 9.7mn b/d supply cut in April 2020 helped save the oil market from a
much longer recovery. GCC countries and Russia curtailed lower value medium and heavy
sour production first and restored it last as OPEC+ quotas ramped up throughout 2021-
22 (Exhibit 135). These cuts, along with increased refinery flexibility, narrowed light-
heavy spreads (Exhibit 136) and curtailed HSFO supply, causing HSFO cracks to
strengthen to multi-year highs, even though IMO 2020 regulations had just been
implemented. Now, HSFO cracks could see some upside on OPEC’s decision to cut
output into year-end.
Exhibit 135: OPEC+ cuts Exhibit 136: Saudi crude oil OSPs
GCC countries and Russia curtailed lower value medium and heavy sour OPEC+ cuts, along with increased refinery flexibility, narrowed light-
production first in 2020 and restored it last as quotas ramped up in heavy spreads and curtailed HSFO supply
2021-22
14
16
12 mn b/d $/bbl, vs
10 12 Oman/Dub.
8
6 8
4 4
2
0 0
-2
-4
Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22
-8
Algeria Angola Congo
Eq. Guinea Gabon Iraq -12
Jan-14 Jan-16 Jan-18 Jan-20 Jan-22
Kuwait Nigeria Saudi
UAE Russia Other non-OPEC Super light Extra light Light
GCC overcompliance Medium Heavy
Source: OPEC, BofA Global Research estimates Source: Bloomberg
… while we also see upside for VLSFO cracks on yield competition

We see upside risk for HSFO-Brent cracks versus the forward curve and forecast they
will average -$21/bbl in 2023 on lower medium and heavy sour OPEC+ supply, risk of
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reduced Urals output following Europe’s embargo of Russian petroleum, and rising global
upgrading capacity outside China next year (Exhibit 137). Meanwhile, the continued ramp
up of activity at the Al-Zour refinery and rising export quotas from China should add
VLSFO supply to the market. However, we still see some upside for VLSFO cracks on
rebounding gasoline cracks next year and forecast cracks to average more than $4/bbl
(Exhibit 138).
Exhibit 137: HSFO – Brent crack history, forecast, and forward Exhibit 138: VLSFO – Brent crack history, forecast, and forward
curve curve
We see upside risk for HSFO cracks versus the curve in 2023 on OPEC+ We see some upside for VLSFO on rebounding gasoline cracks, and
cuts, Russian embargoes, and new upgrading capacity forecast cracks to average nearly $4/bbl next year
0 30
$/bbl $/bbl
-10 20
-20 10
-30 0
-40 -10
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23
3.5%FO-Brent 3.5%FO-Brent forward 0.5%FO-Brent 0.5%FO-Brent forward
3.5%FO-Brent forecast 0.5%FO-Brent forecast
Source: Bloomberg, BofA Global Research estimates Source: Bloomberg, BofA Global Research estimates
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2.3 US natural gas
US gas prices have collapsed after two strong runs
Henry Hub natural gas has been exceptionally volatile this year, with front month prices
trading below $4/mmbtu at the start of the year before rallying above $9/mmtbu
(Exhibit 139) on two occasions in June and again in August as inventories trailed behind
seasonal norms (Exhibit 140). In September and October, front month prices collapsed
below $5/mmbtu as fundamentals started to soften. Later dated contracts have been
more subdued but have also made strong runs higher, with Cal 23 prices exceeding
$6/mmbtu. US balances have rapidly loosened as production picked up and demand
started to weaken into shoulder season, while mild early winter temperature forecasts
contributed to a precipitous price drop recently. In November, cooler weather forecasts
and expectations for the ramp up at Freeport LNG put a bid under prices and front
month prices remain around $6/mmbtu today.
Exhibit 139: US natural gas prices Exhibit 140: US natural gas storage
After twice trading above $9/mmbtu this year, front month natural gas …as inventories started to quickly grow on rising output, soft demand,
prices briefly plummeted below $5/mmbtu… and warm early winter weather forecasts
11 5,000 2016-20 range 5yr avg Current
$/MMBtu Prompt Cal 23 Cal 24
10 Bcf
9
8 3,500
7
6
5 2,000
4
3
2 500
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22Apr-22 Jul-22 Oct-22
Warm temps and high power burns kept gas tight

Weather helped keep US gas balances tight this year, with CDDs surging higher during
July (Exhibit 141) and leading to a large increase in gas power burns YoY (Exhibit 142).
Power burns remained exceptionally strong during summer, when CDDs spiked to the
high end of the five year range. In addition to warmer temperatures, tight thermal
generation related to coal plant retirements and coal deliverability issues also
contributed to higher gas burns this summer. More recently, power burns have fallen
towards five year lows on the back of moderating temperatures and have contributed to
looser gas balances.
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Exhibit 141: Population weighted CDDs Exhibit 142: US natural gas power generation consumption growth
Warmer than normal temperatures, alongside coal generation tightness… … supported exceptional gas power burns for most of the summer
120 6
5 year range 2022 5 year average Bcf/d, YoY
CDDs
4
90
2
60 0
-2
30
-4
0 -6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22
La Niña could hit Res/Com but weather looks ok so far

Weather models suggest a high probability for La Niña this winter, with weather likely to
shift into a more neutral pattern by spring 2023 (Exhibit 143). Traditionally, La Niña
winters have led to below average HDDs for most regions, with US average HDDs falling
about 4HDDs below normal on a monthly basis (Exhibit 144). Historical relationships
between HDDs and Res/Com and industrial demand are strong and suggest a 1HDD
decrease in monthly totals leading to a ~1.5Bcf decrease in demand. Thus, an average La
Niña event over the Nov-Mar timeframe could lead to a 30Bcf decrease in demand
during winter.
Exhibit 143: Probability of weather phenomenon Exhibit 144: La Niña winter deviation from average winter (Nov-
Mar, since 2003)
Models suggest a high probability of La Niña this winter, with weather La Niña winters have typically led to below average HDDs for most
likely to shift into a more neutral pattern by spring 2023 regions, with US average HDDs falling about 4HDDs below normal on a
monthly basis
100% Northeast, M. Atlantic

Midwest, E. N. Central
75% Midwest, W. N. Central
South, E. S. Central
50% South, W. S. Central
South, S. Atlantic
25% Northeast, New England
US total
0%
West, Mountain
Jun-Aug
May-Jul
Jan-Mar
Feb-Apr
Dec-Feb
Mar-May
Apr-Jun
Oct-Dec
Nov-Jan
West, Pacific
-8 -4 0 4
2022 2023 HDDs/month
La Niña Neutral El Niño Northeast Midwest South West
Source: IRI Columbia model, Oct 2022 Source: Bloomberg, BofA Global Research estimates
LNG and Mexico exports will be key to 2023 demand growth

LNG exports have underperformed year to date even as Calcasieu Pass ramped up earlier
than expected (Exhibit 145). The extended Freeport LNG outage kept feedgas demand
running about 2Bcf/d below normal since June, and though the official delayed restart
was set for mid-November, the new restart date is likely to be mid-December.
Uncertainty around dock logistics and the ability to run close to full capacity on one dock
may mean that Freeport doesn’t reach its newly approved FERC nameplate capacity of
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2.38Bcf/d until March or possibly later. The Freeport LNG restart will contribute to LNG
demand growth next year, while most other sources of US natural gas demand struggle
(Exhibit 146). Even Mexico exports are uncertain now that the country has been pulling
less gas across the border recently. In total, we see 1.1Bcf/d of US natural gas demand
growth next year, down from 4.9Bcf/d in 2021.
Exhibit 145: US LNG capacity and exports Exhibit 146: US natural gas demand growth YoY
LNG exports have underperformed year to date as the Freeport LNG We expect US natural gas demand growth to fall from 4.9Bcf/d in 2022
outage outweighed the faster than expected ramp up at Calcasieu Pass to 1.1Bcf/d in 2023 YoY, driven by higher LNG exports
24 6.0 2022 2023

Bcf/d Bcf/d
18 4.0
12
2.0
6
0.0
0
Jan-16 Jan-18 Jan-20 Jan-22 Jan-24 Jan-26
-2.0
Sabine Pass Cove Point Cameron
Freeport Corpus Christi Elba
Calcasieu Pass NFE Golden Pass
Driftwood Plaquemines Exports
Source: Bloomberg Source: EIA, Genscape, BofA Global Research estimates
Meanwhile, US gas production has perked up in recent months…

US rig counts have risen steadily since bottoming in mid-2020 (Exhibit 147), but activity
has started to flatten out recently as rig availability has dried up. In the Marcellus and
Haynesville, rigs are up 50% YoY, but these regions have seen limited rig additions since
May. Meanwhile, the pace of rig additions in associated gas plays has also slowed
dramatically with Permian weekly rig count peaking in July and declining slightly since
then. Now, the Permian rig count is just 30% higher YoY. Even as signs point to slowing
upstream activity, natural gas production has continued to climb higher (Exhibit 148),
driven primarily by Permian and Haynesville output, which helped lift US natural gas
production 4.5Bcf/d higher YoY.
CR
Exhibit 147: US land rig count by basin Exhibit 148: Cumulative change in US natural gas production since
January 2020
US drilling activity has risen steadily since bottoming in mid-2020 but US dry gas production is about 3.9Bcf/d above pre-COVID levels, thanks
has started to flatten out recently as rigs have become scarce to rising output in the Permian, Haynesville, and Appalachia
1800 10 Cumul.
rig count change,
5
Bcf/d
1200 0
-5
600 -10
-15
Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22
0
Jan-14 Jan-16 Jan-18 Jan-20 Jan-22 Anadarko Bakken Eagle Ford
Anadarko Appalachia Bakken Eagle Ford Haynesville Appalachian Niobrara
Haynesville Niobara Permian Other Permian Total
Source: Bloomberg Source: Genscape, EIA
…but we see headwinds to meaningful gas supply growth…

The recovery in oil and gas prices have encouraged producers to start to grow
production at a moderate pace, but supply chain and oil field service bottlenecks have
contributed to a material well cost inflation, dampening any interest in accelerating
production growth as gas and oil prices skyrocketed earlier this year. For one, average
rig dayrates have increased by nearly 50% yoy through 2Q22 (Exhibit 149) and have
increased further in 3Q. Meanwhile the cost per frac stage has increased by 30% over
the same period and materials like steel pipe have increased by over 300% since the
start of COVID. As input costs have climbed higher, producers in the Permian and
Haynesville have also felt pressure from logistical constraints, which depressed basis
pricing recently, a dynamic that could get worse as production continues to climb
(Exhibit 150).
Exhibit 149: Spot AC rig dayrates Exhibit 150: Haynesville gas basis price
Supply chain and oil field service bottlenecks have contributed to a Rising production in the Haynesville and the Permian is running into
material increase in the cost of wells and dampened E&P growth pipeline constraints and leading to weaker in-basin gas prices
ambitions
0.2
$40,000
$/MMBtu
dayrate 0.0
-0.2
$30,000
-0.4
-0.6
$20,000
-0.8
-1.0
$10,000
-1.2
-1.4
$0 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
1Q18
4Q18
3Q19
2Q20
1Q21
4Q21
NGPL TexOK
Source: Bloomberg
Source: Company Reports, BofA Global research BofA GLOBAL RESEARCH
…and expect US gas production to rise 3.1Bcf/d YoY in 2023…

US E&Ps have exhibited restraint over the last three years, a theme that is clearly visible
in post-COVID upstream activity trends, where producers have noticeably cut their
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drilling and completion activity at a given natural gas price (Exhibit 151 and Exhibit 152).
Under pressure from shareholders, cost inflation, and limited takeaway capacity,
producers have a handful of reasons to maintain discipline next year and keep to a low
single digit growth trajectory until there is line of sight for a meaningful increase in
demand. In our view, this is unlikely to arrive until 2025-26 when the next wave of LNG
capacity starts to ramp up.
Exhibit 151: US natural gas rigs versus prices Exhibit 152: Haynesville and Northeast well completions versus
US E&Ps have exhibited restraint over the last three years, materially prices
reducing drilling activity at a given gas price level versus pre-COVID Completion activity has followed a similar path, exhibiting a lower
elasticity to prices too
300
300
Gas rig count (10 weeks forward)
2014-20 2021 onward

250
completions
200
200
150
100
50 100
$/mmbtu
0
0 2 4 6 8 10 12mo HH (3mo MA, $/MMBtu)
Pre-covid Post-covid 0
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5
Source: Bloomberg
BofA GLOBAL RESEARCH Source: Bloomberg, EIA
…driven by the activity in the Haynesville and Permian basins

US natural gas production is set to rise by 3.2Bcf/d YoY in 2023 driven by growth in the
Haynesville (+1.2Bcf/d) and the Permian (+1.1Bcf/d), while other basins like the Eagle
Ford, Northeast, and Rockies deliver smaller growth (Exhibit 153). We forecast
production will reach 99.2Bcf/d in December 2022 and rise to 101Bcf/d by the end of
2023 (Exhibit 154). Along the way, production in the Permian and Haynesville will likely
run into logistical constraints, leading to weaker in basin pricing as producers compete
for limited available takeaway capacity.
CR
Exhibit 153: US gas production growth YoY by region Exhibit 154: US natural gas production
US natural gas production is set to rise by 3.2Bcf/d YoY in 2023 driven by We forecast production will reach 99.2Bcf/d in December 2022 and rise
growth in the Haynesville (+1.2Bcf/d) and the Permian (+1.1Bcf/d) to 101Bcf/d by the end of 2023
2 105
Bcf/d
Bcf/d 100
95
90
0
85
80
75
-2 70
65
60
2022 YoY 2023 YoY Jan-15 Jan-17 Jan-19 Jan-21 Jan-23
Source: EIA, Genscape, BofA Global Research estimates Source: EIA, Genscape, BofA Global Research estimates
Balances still tight this winter, loosening as 2023 progresses

Warm early winter weather forecasts, the rising risk of a warmer La Niña winter, and our
call for a US recession lead us to the view that US natural gas demand growth should
slow next year. We expect demand growth to fall from 4.9Bcf/d YoY in 2022 to just
1.1Bcf/d in 2023 as higher LNG and Mexico exports offsets lower consumption
elsewhere. Meanwhile, supply growth (production + imports) is also set to step down
next year, but to a lesser degree, rising by 3.2Bcf/d YoY in 2023 versus 3.8Bcf/d in 2022.
Mismatched supply and demand growth should loosen US balances as the year
progresses, with inventories reaching 1.5Tcf in March 2023 before rising above 3.8Tcf in
October (Exhibit 155). We expect looser balances will likely continue to weigh on prices
next year, which is why we maintain our 2023 Henry Hub price forecast of $4.50/mmbtu,
which is currently $0.85/mmbtu below the forward curve (Exhibit 156)
Exhibit 155: US natural gas inventories Exhibit 156: US nat gas: forecast vs forward
Mismatched supply and demand growth should loosen US balances in We maintain our 2023 Henry Hub price forecast of $4.50/mmbtu, which
2023, with inventories falling to 1.5Tcf in March before rising to 3.8Tcf in is currently $0.85/mmbtu below the forward curve
October
4,500
9
BCF $/MMBtu
4,000
3,500 6
3,000
2,500 3
2,000 5YR Avg

2022 0
1,500
2023
1,000
historical forward forecast
Source: EIA, BofA Global Research estimates Source: Bloomberg, BofA Global Research estimates
CR
3. Industrial metals outlook
3.1 Aluminum
Overview
Notwithstanding significant production losses in Europe and China, aluminium prices
have declined. While weak demand is a headwind, supply additions will in all likelihood
remain subdued. Along potential sanctions on Rusal, the aluminium market should
tighten quickly as consumption stabilises. As such, headwinds may subside and prices
pick up through 2023.
Exhibit 157: Aluminium supply and demand balance

The aluminium market should remain tight
'000 tonnes 2021 2022E 2023E 2024E 2025E
Global production 67765 68292 72337 73628 74714
YoY change 3.6% 0.8% 5.9% 1.8% 1.5%
Global consumption 68693 69219 71960 75558 79336
YoY change 7.6% 0.8% 4.0% 5.0% 5.0%
Balance -927 -927 377 -1930 -4622
Market inventories 9142 8215 8592 6662 2040
Weeks of world demand 6.9 6.2 6.2 4.6 1.3
LME Cash ($/t) 2474 2684 2738 3500 3668
LME Cash (c/lb) 112 122 124 159 166
Source: SNL, Woodmac, CRU, Bloomberg, company reports, IAI, BofA Global Research
Demand has declined faster as supply; smelters keep facing headwinds

After supply curtailments have dominated the aluminium news flow earlier in 2022, the
focus has increasingly shifted towards demand and inventories. Exhibit 158 picks up on
the latter, outlining that warehouses still store significant tonnages that can keep the
market well supplied. Exhibit 159 takes this a step further, showing that physical premia,
paid on top of LME quoted prices and an indicator of market tightness, have been falling
steadily in recent months.
Exhibit 158: Aluminium inventories Exhibit 159: Regional premia

Warehouses still store significant tonnages Physical premia have declined of late
14,000 kt 4000 900
US$/t
12,000 3500 US$/t
3000 800
10,000 Europe
2500 700
8,000 USA
2000 600
6,000 Japan
1500
4,000 500
1000
2,000 500 400
0 0 300
Jul-14 Sep-15Nov-16 Jan-18 Mar-19May-20 Jul-21 Sep-22
200
Unreported World ex-China Social/ unreported China 100
Non-SHFE China Japanese Ports 0
Producer Total Exchange Sep-18 May-19 Jan-20 Sep-20 May-21 Jan-22 Sep-22
Price (rhs)
Source: CRU, Bloomberg, BofA Global Research Source: CRU, Bloomberg, BofA Global Research
China’s aluminium exports have declined; smelter cut production

Meanwhile, the demand weakness was most visible in China’s aluminium exports, which
almost doubled in 2Q over the aggressive COVID lockdowns. Yet, as the economy has
opened up, those shipments have now fallen. This dynamic matters for 2023 because a
reacceleration of China’s economy will in all likelihood reduce the appetite of domestic
producers to ship tonnes to international markets. Of course, recent output curtailments
over tight electricity markets also highlight that the operating environment remains
CR
challenging for China’s smelters. This, and assuming that the government-imposed 45Mt
smelting cap holds, suggests that the Asian country is unlikely to flood the global market
with aluminium units.
Exhibit 160: China, aluminium export Exhibit 161: China, aluminium production
China’s aluminium exports have risen during the COVID lockdowns, but Aluminum production has fallen into 3Q22 over renewed smelter production
shipments have since subsided cuts
800 43000
'000 Kt, ann'd
700 tonnes 41000
39000
600 37000
500 35000
400 33000
31000
300 29000
200 27000
Prior 5 year range Prior 5 year average 25000
100
2021 2022 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
0 Prior 5 year range Average, past 5 years
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2021 2022
Source: Bloomberg, BofA Global Research Source: Bloomberg, BofA Global Research
Production ex-China also remains constrained

Europe’s metals producers under pressure on energy costs
Europe’s energy-intensive industries have been under pressure due to rising electricity
prices, a trend that is visible in a drop of aluminium and steel production. Operators have
been vocal about the need to take up emergency support measures.
Exhibit 162: Aluminium smelter closures in Europe, in Kt
There has been a steady flow of smelter closures
Country Company Smelter Capacity Closed Date
Netherlands Aldel Delfzijl 150 150 Jan-21
Slovakia Hydro Slovalco 170 136 Oct-21
Germany Trimet Hamburg 135 41 Oct-21
Germany Trimet Voerde 95 29 Oct-21
Montenegro Uniprom KAP 40 40 Dec-21
Spain Alcoa San Ciprian 250 250 Jan-22
France Alvance Dunkerque 290 11 Jan-22
Romania Alro Slatina 290 174 Jan-22
Germany Trimet Essen 165 83 Mar-22
Slovenia Kidricevo Talum 100 11 Aug-22
Norway Alcoa Lista 75 31 Aug-22
Slovakia Slovalco Ziar and Hronom 100 34 Sep-22
France Aluminium Dunkerque Industries France Dunkerke 290 64 Oct-22
Total 2150 1052
Source: Company websites, BofA Global Research
Indeed, on energy costs, the aluminium industry had asked for the creation of an
emergency EU fund that would offer relief/mitigate soaring energy prices impact. That
said, smelters had also asked for other measures, including windfall profit taxes on
power suppliers to support the aluminium industry. In addition, there has been a focus on
improved state aid, including updates to the temporary emergency state aid framework,
limited to EUR50M per undertaking at present. Finally, smelters have also taken an issue
with carbon costs, and expenses around indirect emissions.
The impact of the proposals depend on a confluence of factors, including the size of the
operations, spot operating costs at aluminium smelters could potentially fall to €3,000/t,
compared to around €11,000/t during summer. This may not lead to restarts, but it could
CR
potentially throw an additional lifeline during the current period of dislocations. Beyond
that, other measures worth noting include a Hydrogen Bank and a Critical Raw Materials
Fund. Overall, we don’t expect Europen smelters to resume full operations until the
energy crisis has been resolved sustainably. This, according to guidance from teh EU
may not happen until 2025/26.
Rusal also remains an overhang

Russian aluminium producer Rusal produced 3.8Mt annualised of aluminium in 1H22,
equivalent to around 6% of the global market. Looking at the company’s business, the
Europe and the US accounted for 37% and 9% of sales in the first half of the year.
Against this backdrop, aluminium recently rallied by 8% intra-day on suggestions that
the White House was considering sanctioning Russian aluminium through 1) an outright
ban, 2) increasing tariffs to punitive levels, or 3) sanctioning Rusal. There are various
ways to slice and dice aluminium trade data. Looking at imports of aluminium and
aluminium products (HTS code 76) by the US and also the EU, Russia is not the biggest
supplier, but the country still provides for marginal units.
Exhibit 163: US, aluminium imports Exhibit 164: EU, aluminium imports
US aluminium imports have risen, but those from Russia have been 10% of the aluminium units used by the EU have originated from Russia
comparatively low
10 14
Mt Mt
Millions
Millions
9
12
8 ex-Russia Russia ex-Russia Russia
7 10
6 8
5
4 6
3 4
2
2
1
0 0
2020 2021 2022 YTD ann.d 2020 2021 2022 YTD ann.d
Source: USITC, BofA Global Research Source: Eurostat, BofA Global Research
So what does that likely mean? If sanctions indeed materialized, it may be hard to place
Russian aluminium units in Western markets; at the same time, a re-direction of the
entire trade flows may also be somewhat difficult because e.g. China is self-sufficient.
So in the end, this may leave some of the Russian tonnages stranded, hence the rally on
LME. As a reminder, there is precedence to restricting Russian aluminium shipments
when the US sanctioned Oleg Deripaska, who then controlled Rusal, in 2018. Rusal then
said that “The company’s initial assessment is that it is highly likely that the impact may
be materially adverse to the business and prospects of the group”, with implications also
for the aluminium market, as prices rallied by almost 40%.
Granted, this time around, demand has faced immense headwinds, but then again,
smelters have curtailed production in the US, Europe and, more recently, also in China.
So losing additional units would in all likelihood support fundamentals.
CR
3.2 Copper
Overview
Exchange quoted copper prices have come under pressure, over righter US monetary
policy, the energy crisis in Europe and China’s COVID lockdowns/ weak housing market.
Yet, physical markets have been tight with premia remaining high and inventories low.
Supply is challenged and this is set to keep surpluses contained, while investment in
renewables should boost demand. As such, we expect copper to bottom out in 2023.
Exhibit 165: Copper supply and demand balance

Copper moving back into small, temporary surplus
'000 tonnes 2021 2022E 2023E 2024E 2025E
YoY change 4.8% 2.6% 7.3% 4.1% 0.8%
YoY change 3.7% 0.7% 4.7% 4.0% 4.0%
Balance -583 -136 507 562 -301
LME Cash ($/t) 9321 8778 8625 9875 10500
LME Cash (c/lb) 423 398 391 448 476
Source: SNL, Woodmac, CRU, Bloomberg, company reports, ICSG, BofA Global Research
Demand has held up

Headwinds to growth in the US, Europe and China
While copper has overall held up, prices have still fallen from the highs seen earlier in
2022. These declines have been heavily influenced by macro concerns: in the US, there is
apprehension that the Fed will push the economy into recession; in Europe, the energy
crisis has put enormous strain on corporates and consumers; meanwhile, in China,
various issues, including rolling COVID lockdowns that had such a pronounced impact on
activity earlier his year, have been a concern. Notwithstanding the macro headwinds,
physical markets have remained tight, highlighting the lack of spare copper units
available at present. Exhibit 166 picks up on this, outlining that average (US, China,
Europe) premia1 have risen sharply.
Exhibit 166: Average (US, Europe, China) premia and prices Exhibit 167: Regional (US, Europe, China) premia
LME prices have fallen, premia have rallied Premia have risen in all the key regions
12000 400 280
350 260 Premium,
10000 240 $/t
300 220
8000 200
250 180
160
6000 200 140
150 120
4000 100
100 80
2000 60
50 40
0 0 20 Europe USA China
0
Oct-10 Nov-12 Dec-14 Jan-17 Feb-19 Mar-21
Sep-18 May-19 Jan-20 Sep-20 May-21 Jan-22 Sep-22
Cash price, $/t (lhs) Average premium index (rhs)
Source: Bloomberg, CRU, BofA Global Research Source: Bloomberg, CRU, BofA Global Research
Exhibit 167 takes this a step further, showing quotations have rallied in all the key
consuming regions.
1 Physical premia have to be paid on top of the quoted LME price; they can include items such as
transportation cost and insurance. However, they are also an indicator for the tightness of regional markets
CR
Demand has so far been resilient
Sticking with the physical market, Exhibit 168 highlights that global copper demand has
been resilient, rising YoY YTD. Remarkably, the strength in offtake has been broad based,
with purchases ex-China running at record levels, as Exhibit 169 shows.
Exhibit 168: Global, refined copper demand Exhibit 169: World ex-China, copper demand
Consumption is up YoY YTD Copper demand has been very strong
14000
28000 '000 13500 '000
27000 tonnes 13000 tonnes
26000 annualised annualised
12500
25000
12000
24000
11500
23000
11000
22000
10500
21000
10000
20000
9500
19000
9000
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Prior 5 year range Prior 5 year average Prior 5 year range Prior 5 year average
2021 2022 2021 2022
Source: ICSG, BofA Global Research Source: ICSG, BofA Global Research
Demand should expand in 2023

Offtake to stabilize next year
Looking into 2023, macroeconomic headwinds will likely persist, so it is by no means
plain sailing for metals demand. At the same time, Exhibit 170 and Exhibit 171 suggest
that offtake should remain positive when modelled on global GDP growth (“global GDP”
and “regional GDP” model global metals demand on global GDP growth and separate
GDP growth rates of the US, Europe and China respectively; this approach is different
to that shown from Exhibit 169 onwards, which breaks down demand by sector).
Exhibit 170: Copper demand Exhibit 171: Copper, demand and industrial production, 2010-2019
Copper demand to stabilise Copper demand and industrial production have been positively correlated
20%
Actual Global GDP Regional GDP 12% Copper
15% demand,
8% YoY chge
10%
4%
5%
0%
0%
-4%
-5%
-8%
-10% -20% -10% 0% 10% 20% 30%
81838587899193959799010305070911131517192123 Industrial production, YoY chge
Source: Bloomberg, BofA Global Research
BofA GLOBAL RESEARCH Source: Bloomberg, BofA Global Research
Taking this a step further, Exhibit 170 highlighted that China’s grid spending has offset
weakness in the wider economy indeed, building out the electricity infrastructure has
completely offset weakness in the housing market. A key question going forward is
whether this a one-off or a structural trend? Exhibit 171 already confirmed that this
dynamic may prevail Exhibit 173. Approaching it from a different angle, Exhibit 168
outlines that global copper demand tended to correlate with industrial production
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growth. Yet, this relationship has broken down in the past 1.5 years, with industrial
production and copper demand growth virtually uncorrelated. In our view, this confirms
to some extent that green spending has already supported global copper demand and
physical markets. Exhibit 173 looks at this from a different angle, showing the demand
growth rates from sectors linked to Net Zero and Others; weighing the expansion rates
from these two segments, copper consumption could expand by 4.5% YoY total out to
2030. To put this number into context, potential demand growth has been 2.1% over the
past two decades.
Exhibit 172: Copper, demand and industrial production since 2020 Exhibit 173: Split of copper demand growth
Industrial production is a poor indicator for copper demand Spending on green technologies towards achieving Net Zero should
structurally raise copper demand growth in the coming years
12%
Copper 16%
YoY chge
demand,
8% YoY chge
12%
4%
8%
0%
4%
-4%
-6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6%
Industrial production, YoY chge 0%
Net Zero Others Total
Note: chart excludes COVID pandemic; Source: Bloomberg, BofA Global Research Source: Bloomberg, BofA Global Research
Sticking with the tightness on physical markets, inventories have been falling,
irrespective of unfolding macro headwinds. This is mirrored by Exhibit 174, which
outlines that total (reported and unreported) inventories are hovering around multi-year
lows.
Exhibit 174: Total copper inventories Exhibit 175: Copper, unexpected supply disruptions
Inventories have fallen to multi-year lows Disruptions have risen in 2022
0%
5 Inventories
, weeks of -2%
4 demand -4%
3 -6%
-8%
2
-10%
1 -12%
-14%
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -16%
Prior 5 year range Prior 5 year average -18%
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
2021 2022
Source: Bloomberg, CRU, BofA Global Research Source: Woodmac, company reports, BofA Global Research
Beyond support from the energy transition on the demand side, copper markets have
also remained tight because supply disruptions have become more pronounced. This has
been particularly visible in Chile and Peru, where low ore grades/ droughts and blockages
have contributed to capping production. Feedback from LME Week suggests these
output losses have reduced next year’s consensus market surplus from around 1Mt to
300Kt at present. In short: markets keep overestimating supply additions.
CR
3.3 Nickel
Overview
After a wild ride in 2022, nickel prices have to some extent stabilised of late. Looking
into 2023, China’s conversion capacity in Indonesia should deliver more nickel units to
EV manufacturers, likely keeping the global market well supplied. Yet, with EV sales
continuing to grow, the supply overhang will in all likelihood be short-lived. Indeed,
without further investment in nickel production, we expect shortages in refined material
to reappear in late-2023/ 2024. As such, prices should remain supported.
Exhibit 176: Nickel supply and demand balance

Differentiation between refined and non-refined essential
'000 tonnes 2021 2022E 2023E 2024E 2025E
YoY change 8.1% 15.6% 8.5% 8.1% 8.9%
YoY change 14.0% -0.2% 24.2% 13.9% 10.5%
Balance, incl. NPI oversupply 124 566 194 15 113
Balance, excl. NPI oversupply 4 117 52 -255 -236
LME price ($/t) 18455 25206 25625 25000 32500
LME price (c/lb) 837 1143 1162 1134 1474
Source: SNL, Woodmac, CRU, Bloomberg, company reports, INSG, BofA Global Research
Nickel’s wild ride

Nickel prices have been extremely volatile in recent months (Exhibit 177), heavily
influenced by a short squeeze on London Metals Exchange, which briefly took prices
above US$100,000/t (US$45.36/lb). Similarly, premia2 have also pushed higher,
predominantly in Europe and the US (Exhibit 178).
Exhibit 177: Nickel, prices and premia Exhibit 178: Nickel premia
Prices and premia have rallied sharply Premia are up especially in Europe and the US
40,000 600 3900
Cash price, $/t (lhs)
3600 Premium,
35,000 Average premium index (rhs) 500 3300 $/t
30,000 3000
400 2700
2400 Europe
25,000
300 2100 USA
20,000 1800
1500 China
200
15,000 1200
900
10,000 100 600
300
5,000 0 0
May-12 Nov-13 May-15 Nov-16 May-18 Nov-19 May-21 Apr-18 Dec-18 Aug-19 Apr-20 Dec-20 Aug-21 Apr-22
Source: CRU, Bloomberg, BofA Global Research Source: CRU, Bloomberg, BofA Global Research
While the run-up in prices and premia was driven by various factors (see Global Metals
Weekly: Fickle nickel 14 March 2022), ultimately, a lack of metal units meant that short
holders on LME could not close their positions. This is mirrored by Exhibit 179, which
outlines that reported and unreported inventories, measured in weeks of demand, are
hovering around multi-year lows. Meanwhile, Exhibit 180 highlights that the status quo
has been a long time coming after almost a decade of inventory declines (Exhibit 180).
2 Physical premia have to be paid on top of the quoted LME price; they can include items such as
transportation cost and insurance. However, they are also an indicator for the tightness of regional markets
CR
Exhibit 179: Nickel inventories, weeks of demand Exhibit 180: Nickel exchange and non-exchange inventories
Inventories are hovering around multi -year lows Stocks have drawn for years
18 Inventories 700 40,000
Inventories Price,
16 , weeks of 600 35,000
, '000t US$/t
14 demand 30,000
500
12 25,000
10 400
20,000
8 300
15,000
6 200 10,000
4 100 5,000
2
0 0
0 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Prior 5 year range Prior 5 year average LME SHFE Producer
2021 2022 Consumer Cash price
Source: CRU, INSG, BofA Global Research Source: CRU, INSG, Bloomberg, BofA Global Research
Supply is responding
Production in world ex-China has been pushing higher
While we acknowledge pockets of tightness, it is nonetheless worth noting that supply is
now reacting, with shortfalls nowhere near as pronounced as in recent quarters (Exhibit
181). Exhibit 182 takes this a step further, outlining that operators in China have been
reducing output at stages, while production has been expanding in World ex-China/
Indonesia.
Exhibit 181: Nickel supply, demand and balances Exhibit 182: Nickel, refined supply
Nickel shortfalls are less pronounced Supply has been increasing especially ex-China
300 100 150
'000 tonnes '000 tonnes YoY chge,
200 '000 tonnes
60
100
100
20
0 50
-20
-100
0
-200 -60
-300 -100 -50

1Q10 3Q11 1Q13 3Q14 1Q16 3Q17 1Q19 3Q20 1Q22 1Q10 3Q11 1Q13 3Q14 1Q16 3Q17 1Q19 3Q20 1Q22
World ex-China China Global (rhs) World ex-China China
Source: CRU, BofA Global Research Source: CRU, BofA Global Research
Keeping in mind the relentless production increases at China’s nickel pig iron3 producers
in recent years (Exhibit 183), this dynamic is somewhat unusual. In our view, it reinforces
that China’s focus has been shifting: Class 2, non-refined nickel pig iron was essential
when the country built its stainless steel industry in the past 20 years; now, investment
is channelled into Indonesia to increasingly produce higher quality nickel products that
can be used in EV batteries.
3 Nickel comes in different qualities. Class 1 nickel is refined nickel traded on LME. Class 2 nickel includes
lower grade ferronickel, but also nickel pig iron , the latter a low grade alloy that has been invented in China
as a cheaper alternative to pure nickel and used in the production of stainless steel. Nickel is produced from
sulphide and laterite ores. Sulphide ores are typically fire-refined in smelters; laterite ores are often high-
pressure acid leached (HPAL) to produce a high purity nickel, but can also be processed in rotary kiln electric
furnaces to produce NPI or in smelters to produce ferro-nickel
CR
Exhibit 183: China, nickel pig iron production Exhibit 184: China, ferronickel and refined imports
After relentless increases, NPI productions is now falling China has complemented falling domestic supply with higher imports
700 260
'000 240 '000
600 tonnes, 220 tonnes Ferronickel
annualised 200
500 180 Refined nickel
160
400 140
120
300 100
80
200 60
40
100 20
0
0 -20
Nov-04 Jun-07 Jan-10 Aug-12 Mar-15 Oct-17 May-20 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Source: CRU, SMM, BofA Global Research Source: Bloomberg, BofA Global Research
China’s producers are shifting further downstream

To that point, nickel intermediate capacity additions in Indonesia have been accelerating.
Of course, much of that material is a feedstock for nickel-containing EV battery
cathodes. Indeed, between now and 2023, a series of facilities will be increasing activity,
as market participants are seeking to prevent raw material bottlenecks that may slow
the EV Industry. In addition, Indonesia’s government keeps also incentivising operators
to shift further downstream. Having tackled nickel ore exports, authorities are now
discussing the possibility of levying an export tax on products below a nickel threshold
content of 50-70% (this would imply a dis-incentive to shipments of nickel pig iron).
Exhibit 185 puts output increases of intermediate products into context, highlighting
that operators in Indonesia are boosting conversion capacity quicker than nickel demand
in China is increasing. As such, the nickel market may be oversupplied in 2023. Yet,
supply needs to rise further to prevent sustained shortfalls beyond 2024.
Exhibit 185: Intermediate nickel production in Indonesia V. nickel requirements in China
Nickel intermediate supplies from Indonesia are sufficient in 2023, but fall short again beyond 2024
1,800
'000 tonnes
1,600
1,400
Indonesia, conversion capacity
1,200
1,000 China, nickel requirements
800
600
400
200
0
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Woodmac, BofA Global Research
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3.4 Zinc
Overview
Zinc has faced headwinds, but prices have been supported by persistent issues. Indeed,
Europe has lost around 1Mt of supply over the energy crisis. Unused concentrates have
not been picked up by smelters in the rest of the world, so global output has been
contracting. Steel production cuts will likely weigh on consumption, but investment in
the renewable infrastructure and EVs should double potential demand growth to around
2% going forward. As such, fundamentals will likely remain supported near-term.
Exhibit 186: Zinc supply and demand balance

Production disruptions have kept the market tight
'000 tonnes 2021 2022E 2023E 2024E 2025E
YoY change 1.8% -6.3% 3.7% 8.2% 5.0%
YoY change 6.2% -1.1% 1.5% 2.1% 2.1%
Balance 416 -337 -39 816 1265
LME Cash ($/t) 3003 3446 2813 2500 2250
LME Cash (c/lb) 136 156 128 113 102
Source: SNL, Woodmac, CRU, Bloomberg, company reports, ILZSG, BofA Global Research
Zinc market has remained tight

Premia have trended up, while prices have declined
Many commodity prices have fallen sharply as concerns over the health of the global
economy have intensified. Zinc has not been immune to those headwinds, as Exhibit 187
shows. Notwithstanding, the metal has been relatively resilient and it is still trading
8.5% higher than at the beginning of last year. Some of that support has come through
the physical market, where premia4 remain at extremely high levels in Europe and the US
(Exhibit 187). This highlights ongoing concerns over production losses, and a view that
not a lot of spare zinc units are available at present.
Exhibit 188: Reported inventories
Exhibit 187: LME zinc prices and average (US, China, Europe) premia
LME have declined, while premia have been resilient Inventories are close to multi-year lows
5000 550 Inventories

500 , weeks of
4500 6
demand
4000 450 5
400
3500 4
350
3000 3
300
2500 2
250
2000 200 1
1500 150 0
1000 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Oct-12 Apr-14 Oct-15 Apr-17 Oct-18 Apr-20 Oct-21 Prior 5 year range Prior 5 year average
Cash price, $/t (lhs) Average premium index (rhs) 2021 2022
Source: Bloomberg, CRU, BofA Global Research
Source: Bloomberg, CRU, BofA Global Research
Of course, the lack of surpluses is also mirrored in inventories, which track close to
multi-year lows (Exhibit 188).
4 Phys i cal premia have to be paid on top of the quoted LME pri ce; they ca n i nclude i tems s uch as
tra ns portation cost and insurance. However, they a re also an indicator for the tightness of
regi onal markets.
CR
Supply side has been the concern
Europe’s smelters remain under pressure
Taking a closer look into supply issues, smelters in Europe have been heavily exposed to
the energy crisis. This has been reflected in a recent release by industry organisation
Eurometaux5, which highlighted that “40 CEOs in the metals sector united in warning EU
leaders of the existential threat to their future from skyrocketing electricity and gas
prices. 50% of the EU’s aluminium and zinc capacity has been forced offline in the last
twelve months […]. New curtailments or closures are being announced on a weekly basis.
Once a plant is closed, it very often stays a permanent situation, as reopening requires
considerable time, costs, and the right competitive conditions”. Beyond curtailing
operations during peak power prices, Glencore and Nyrstar have idled production at the
130Kt Portovesme and 280Kt Budel sites in Italy and the Netherlands respectively. The
sites account for around 3.5% of global production between them, so these closures are
meaningful.
China’s smelters have remained cautious

Production cutbacks at smelters in Europe had raised expectations that some of the
mine supply no longer needed would be made available on concentrates markets
globally, with smelters ex-Europe boosting output. Indeed, we estimate a surplus in
global mine supply of around 700Kt this year. Exhibit 189 shows that treatment charges6
have recovered, highlighting that smelters have regained negotiation power against the
miners.
Exhibit 189: Zinc, treatment charges Exhibit 190: China, refined zinc production
Treatment charges suggest that there is no shortage in mine supply Well supplied concentrates markets have not prompted refined output
increases
400
$/t 650
350 Kt
600
300
550
250
200 500
150 450
100 400
50 350
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Prior 5 year range Prior 5 year average
Source: Bloomberg, Woodmac, BofA Global Research
2021 2022
BofA GLOBAL RESEARCH Source: Bloomberg, CRU, BofA Global Research
Linked to that, China’s zinc concentrate imports have risen over summer. Yet, refined
supply has been much more contained, with production actually down YoY YTD (Exhibit
190). While operational issues are not quite as pronounced as those at the European
peers, this suggests that the operating environment has not been much easier for
China’s smelters either.
5 https ://eurometaux.eu/media/saeo2z2x/20220914-eurometaux-press-release-eu-energy-crisis-
s upport-package.pdf
6 Mi nes send zinc concentrates to s melters. Smelters receive a treatment charge (TC) from the
mi ners for their s ervices, while miners retain the zinc price l ess the treatment charge. TCs a re an
i mportant i ndicator for constraints: when they fa ll, concentrates availability i s insufficient. Hence,
there a re two zinc market balances: one for concentrates, the other for refined metal.
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Energy transition to support zinc demand
Against the backdrop of a global economic slowdown, the focus has increasingly shifted
on the extent to which a shift towards the energy transition could be an offset going
forward.
Exhibit 191: Zinc in green technologies
Green technologies require zinc as corrosion protection
Application Zinc usage Units
Offshore wind 400 kg/MWh
Onshore wind 40 kg/MWh
PV 2400 kg/MWh
Electric vehicles 15 per vehicle
Source: IZA, BofA Global Research
As a reminder, the energy transition effectively means an electrification of the global

economy through investing in electricity generation, storage and ultimately
consumption. Zinc coatings are important in technologies required for renewable energy
production7, including in the following applications:
• Offshore wind power generation requires a zinc coating to survive extreme
environmental conditions and continue to provide green energy. Indeed, an offshore
wind turbine with a capacity of 1MW generally contains around 0.4tonnes of zinc.
• Onshore wind power generators are less vulnerable to corrosion and therefore
require less zinc – about 40 kg for a 1MW capacity turbine.
• Solar panel fixtures are coated with zinc to prevent rust. For a solar panel park
with a capacity of 1MW, around 2.4 tonnes of zinc are used.
• Finally, while there is a lot of discussion of whether aluminium or zinc will win market
share in EVs, the IZA highlights that EVs can contain around 15kg of zinc per vehicle.
Picking up on these numbers, Exhibit 192 shows the assumptions over renewables
installations from IEA’s Net Zero 2050 scenario. Exhibit 193 takes this a step further,
noting that renewables could add around 1330Kt annually on average out to 2050,
suggesting that zinc fundamentals will remain supported.
Exhibit 192: Installed renewables capacity under the IEA Net Zero Exhibit 193: zinc demand from solar and wind
scenario
Power generation capacity is set to increase steadily Consumption will likely remain supported over the energy crisis
Power generation capacity 2020 2030 2050 Zinc demand, tonnes 2020 2030 2050
Total installed capacity (GW) 10,000 16,885 30,227 From solar 3,480,000 16,480,000 42,560,000
Renewables From Wind
Installed capacity (GW) 2,900 10,300 26,600 Onshore 55100 109867 283733
Share in total generation 29% 61% 88% Offshore 29,000 274,667 709,333
Total solar PV 1,450 6,867 17,733 Total, cumulative 3,564,100 16,864,533 43,553,067
Total wind 1,450 3,433 8,867 Zinc demand annually, tonnes 1,330,043 1,334,427
Other 7,100 6,585 3,627 Source: IEA, IZA, BofA Global Research
Source: IEA, BofA Global Research BofA GLOBAL RESEARCH
7 SDG zinc sector roadmap
CR
4. Precious metals
4.1 Gold
Overview
Central bank purchases have been solid, but lack of investor interest means that gold has
been under pressure in recent months. Of course, weak non-commercial purchases have
been driven by a stronger USD and rising real rates. As such, current headwinds are
unlikely to abate until the Fed turns less hawkish. Notwithstanding, a pivot away from
the aggressive rate hikes through 2023 should bring new buyers back into the market.
Investors interest in gold has been low

With relatively limited commercial uses, gold has always been driven by investor
demand. This is also mirrored by Exhibit 194, which highlights that 2020 was a
remarkable year in implied investment (this includes bar hoarding, physically backed
ETFs, OTC net-investment and official sector purchases), which then fed through into a
27% YoY increase of prices. Yet, offtake dropped sharply in 2021, prompting a relatively
abrupt halt to the upside. Indeed, quotations then gained a meagre 1.6% YoY.
Exhibit 194: Gold, implied investment demand Exhibit 195: Central bank gold purchases
After stellar inflows in 2020, investors have purchased fewer ounces Gold purchases from central banks have picked up again
4,000 400
tonnes tonnes
3,000
300
2,000
200
1,000
0 100
-1,000 0
-2,000
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 -100
Russia World ex-Russia
Bar hoarding ETFs
OTC net-investment Official sector purchases -200
Source: World Gold Council, BofA Global Research
1Q16 4Q16 3Q17 2Q18 1Q19 4Q19 3Q20 2Q21 1Q22
Central banks are adding gold to reserves

How have we fared YTD? Exhibit 195 picks up on central bank purchases, outlining a
pick-up in offtake. Remarkably, purchases have been relatively broad based, with
monetary authorities in Turkey, Egypt, Iraq, India and Ireland all adding to their holdings.
The latest survey by the World Gold Council suggests that this dynamic is unlikely to
change, with 25% of central banks expecting to increase their exposure to the precious
metals further, compared to 21% last year. By motives, lack of default risk, long-term
store of value and performance during a time of crisis all are “highly relevant”, according
to 43%, 41% and 39% of respondents respectively. Taken together, these numbers
confirm that central banks remain conservative in an increasingly uncertain geopolitical
environment. Yet, while purchases from monetary authorities are supportive, their ca.
20% share in total implied investment is usually not sufficient to drive rallies alone.
Outflows from ETFs

Against this backdrop, investors in physically-backed ETFs have been liquidating
positions of late, partially because the macro economic environment has not incentivised
holding on to the yellow metal (more on this below). This also contributed to a
comparatively low aggregate demand from central banks and ETFs (Exhibit 196).
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Exhibit 197 takes this a step further, comparing YTD changes in assets under
management at central banks and ETFs with total implied investment (bar hoarding and
OTC investment are more difficult to observe real-time). The data suggests that non-
commercial interest has been running at around half the level seen in the 2020 bull
market.
Exhibit 196: Aggregate ETF inflows and central bank purchases Exhibit 197: Investor demand, visible and total
Non-commercial demand has been lacklustre CB and ETF demand suggests that total investment has remained
comparatively low
600 QoQ
1,500 3,200
tonnes tonnes tonnes 3,000
1,200
400 2,800
900
600 2,600
200 2,400
300
2,200
0 2,000
0 -300 1,800
-600 1,600
-200 -900 1,400
10 12 14 16 18 20 22 YTD
Physically backed ETFs Central banks Total ann'd
-400
1Q16 4Q16 3Q17 2Q18 1Q19 4Q19 3Q20 2Q21 1Q22 AUMs, central banks and ETFs, YoY chge (lhs)
Implied investment (rhs)
BofA GLOBAL RESEARCH Source: World Gold Council, BofA Global Research
Further liquidations in investor positions could take gold lower still

Pulling it all together, Exhibit 198 shows how supply and demand has been shaping up in
the past 5 years. While it is possible to model gold fundamentals on physical flows, our
approach in analysing the precious metal is slightly different to that of other
commodities, partially because some line items are price-sensitive. Acknowledging this,
we usually model mine supply, scrap supply as well as jewellery demand outright and
then ask how much investor demand is required to support gold prices at different
levels:
• Mine supply tends to be stable, with operators usually not reacting to prices
• Scrap supply is to some extent driven by economic distress, although prices also
matter. In a rally, more recycled material comes to the market.
• Jewellery demand is linked to both GDP per capita levels, but also gold prices.
Usually, jewellery demand falls when gold gets more expensive as buyers in
emerging markets normally buy on a budget and jewellery is linked to spot gold
prices.
• Implied investment demand, i.e. bar hoarding, physically backed ETFs, OTC net-
investment and official sector purchases, is the item balancing the market.
CR
Exhibit 198: Gold, supply and demand Exhibit 199: Gold, investment demand require for different price levels
Demand fell last year If investor interest fell further gold could decline to $1,500/oz
2017 2018 2019 2020 2021
SUPPLY 3,500
Mine production 3,573 3,655 3,595 3,476 3,582 tonnes
Old scrap 1,112 1,132 1,276 1,293 1,136 3,000
Net producer hedging 6
Total supply 4,685 4,787 4,877 4,769 4,718
2,500
DEMAND
Jewellery 2,257 2,290 2,152 1,324 2,229 2,000
Other 333 335 326 303 330
Total fabrication 2,590 2,625 2,478 1,627 2,560 1,500
Bar hoarding 1,044 1,090 867 896 1,180 Forecast
ETFs 266 83 408 873 -173
Net producer de-hedging 26 12 0 39 23
1,000
OTC net-investment 382 321 519 1,078 675 17 18 19 20 21 22 23
Official sector purchases 379 656 605 255 454
at $1500/oz at $2000/oz at $2500/oz
Total demand 4,685 4,787 4,877 4,769 4,718
Source: World Gold Council, BofA Global Research Source: World Gold Council, BofA Global Research
Exhibit 199 is a forward looking analysis, highlighting that annualised gold purchases
YTD place the gold market squarely into the $1,500/oz and $2,000/oz range; for
reference, prices have averaged $1,804/oz YTD. Encouragingly, for gold to fall to the
lower end of the range, recent investor liquidations, and outflows from ETFs would have
to accelerate, which is not our base case, because we expect a bottoming out in USD
and less upside to 10-year rates.
Ultimately, rates and USD matter

Picking up on the last two points, investor flows are ultimately driven by 10-year real
rates and USD (Exhibit 200 and Exhibit 201). Hence, aggressive tightening by the Fed
has been a major headwind to the yellow metal. While the US central bank will in all
likelihood keep tightening monetary policy, the pace of rate hikes should start to slow.
This pivot will likely bring new investors into the market. As such, with physical demand
already strong in some pockets, we believe gold prices should rally into 2H23.
Exhibit 200: Gold and real rates Exhibit 201: Gold and EURUSD
Rising real rates usually push gold prices down The stronger USD has been a meaningful headwind
-2 2,500 2,200 1.5

Percent US$/oz US$/oz
-1 2,000 1.4
2,000
0 1,800 1.3
1 1,500
1,600 1.2
2 1,000 1,400 1.1
3 1,200 1.0
US, 10 year real yield (lhs) 500
4
Gold (rhs) 1,000 0.9
5 0 2012 2014 2016 2018 2020 2022
1999 2002 2005 2008 2011 2014 2017 2020 Gold (lhs) EURUSD (rhs)
Source: Bloomberg, BofA Global Research Source: Bloomberg, BofA Global Research
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4.2 Silver
Overview
Silver has been under pressure on subdued industrial demand and lack of investor
interest. While upside may be limited near-term, mine supply is constrained, so a
rebound of commercial purchases is set to ultimately push prices higher. Offtake should
also be supported by rising demand from solar panel and electric vehicle manufacturers,
as the global community focuses on tackling climate change.
Exhibit 202: Silver supply and demand balance

The silver market has been better supplied this year on ETF outflows
tonnes 2021 2022E 2023E 2024E 2025E
Global production 31,017 32,046 32,877 32,752 32,113
YoY change 4.6% 3.3% 2.6% -0.4% -2.0%
YoY change -8.0% -13.0% 14.4% 2.2% 0.6%
Balance -3,630 1,917 -1,595 -2,468 -3,303
Spot ($/oz) 27.30 21.73 23.40 25.75 23.50
Source: Silver Institute, company reports, BofA Global Research
Mine supply growth is tailing off

While prices have been under pressure, they have remained above the lows seen in
recent years. Exhibit 203 picks up on this, showing that silver production remains below
peak supply seen in 2017 and is unlikely to return to the levels then. Of course, lack of
output growth has been influenced by the low silver quotations in the past decade,
which pushed miners to cut capex.
Exhibit 203: Silver mine production Exhibit 204: Silver demand from PV
Output is unlikely to return to the levels seen a few years ago Consumption is set to increase gradually
5000
900 350 tonnes
Moz Moz 4500
850 300 4000
800 3500
250
750 3000
200 2500
700
2000
650 150
1500
600 100 1000
2005 2008 2011 2014 2017 2020 2023 500
Modelled Silver Institute
S/D Model (lhs) 0
Top-13 producer covered by BofA Equity Research (rhs) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Source: Silver Institute, company reports, BofA Global Research Source: Silver Institute, company reports, BNEF, BofA Global Research
Industrial demand set to increase

Silver demand from solar panels set to increase
Shifting focus, silver demand had been challenged for a while, as the photography
industry digitalised. Yet, demand headwinds from that sector have been gradually tailing
off, and silver usage in solar panels is set to increase further (Exhibit 204). Importantly,
out to 2025, new PV (photovoltaic) installations in GW will likely outpace any savings
from learning effects that might reduce silver loadings in panels (Exhibit 205).
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Exhibit 205: New PV installations and learning effects Exhibit 206: Breakdown of market share by technology
Until 2025, new PV installations will likely outpace silver demand Crystalline silicon PVs are the mainstay of the market
40% New PV CIGS a-Si

installation Installations > silver CdTe
2% 0%
YoY reductions in PV 3%
30%
20%
Installations < silver
reductions in PV
10%
+2025
c-Si
0% 95%
0% 10% 20% 30% 40%
Learning effect, YoY
Source: Silver Institute, company reports, BNEF, BofA Global Research Source: Carrara S., Alves Dias P., Plazzotta B. and Pavel C., Raw materials demand for wind and solar
BofA GLOBAL RESEARCH PV technologies in the transition towards a decarbonised energy system, EUR 30095 EN,
Publication Office of the European Union, Luxembourg, 2020
How have costs evolved?

Revisiting photovoltaic, there are different technologies for solar panels. This is
reflected in Exhibit 206, which outlines that crystalline silicon (c-Si) panels remain the
mainstay with a market share of 95%, followed by thin-film technologies including
Cadmium Tellurium (CdTe), copper indium gallium diselinide (CIGS) and amorphous
silicon (a-Si).
Using metal content estimates and spot prices, Exhibit 207 shows the cost breakdown
of crystalline solar panels, also highlighting the sensitivity to raw material prices. The
data outlines that silicon has made an increasing contribution to costs. Meanwhile,
importantly for silver, the precious metal has a comparatively small share in overall
expenses, reducing the need to accelerate any thrifting/ learning effects.
Exhibit 207: c-Si panels, cost evolution
Raw material costs have risen
600
$/KWh
500
400
300
200
100
0
Aluminium Concrete Copper Glass Plastic Steel Silver Silicon
Source: Carrara S., Alves Dias P., Plazzotta B. and Pavel C., Raw materials demand for wind and solar PV technologies in the transition towards a
decarbonised energy system, EUR 30095 EN, Publication Office of the European Union, Luxembourg, 2020, ISBN 978-92-76-16225-4,
doi:10.2760/160859, JRC119941; Bloomberg, BofA Global Research
China remains key to polysilicon production

Incidentally, and sticking with silicon, Exhibit 208 shows the breakdown of polysilicon
production by country. The data highlights that China accounts for 87% of installed
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capacity, so the Western world remains dependent on the Asian nation. Hence, the
discussion around raw material availability and supply safety is not surprising.
Exhibit 208: Production capacity of polysilicon Exhibit 209: Polysilicon capacity, market share by country
China is the mainstay of the polysilicon market China accounts for 87% of polysilicon capacity
Operator Country Capacity Others
East Hope China 75,000
Yongxiang/Tongwei China 170,000
2%
GCL FBR China 40,000 Malaysia
DAQO China 120,000 4% Germany
GCL Siemens (Xinjiang) China 60,000 7%
Asia Silicon China 30,000
Xinte (Xinjiang) China 90,000
Xinte (Inner Mongolia) China 30,000
Other Chinese companies China 61,200
GCL Siemens (Xuzhou factory) China 35,000
OCIMSB Malaysia 30,000
Wacker (solar grade) Germany 60,000 China
Others U.S., Norway 17,000
87%
Source: BNEF
Source: BNEF, BofA Global Research

Silver demand from the car industry is set to increase going forward
Beyond solar, the auto industry is another sector that will likely boost silver usage in the
coming years as more EVs are being put on the road. Exhibit 210 picks up on this,
showing average silver loadings per vehicle and outlining that EVs contain almost twice
as much silver as cars with a combustion engine. Exhibit 211 overlays with expected EV
production volumes, outlining our expectations that silver usage will continue to expand
in the coming years.
Exhibit 210: Average silver usage in cars Exhibit 211: Silver demand from car manufacturers
EVs tend to be more silver intensive Silver usage in vehicles is set to increase steadily in the coming years
60 4,500
grams tonnes
4,000
3,500
40 3,000
2,500
2,000
20 1,500
1,000
Modelled Silver Instsitute
500
0 0
EV HEV ICE 15 16 17 18 19 20 21 22E 23E 24E 25E 26E
Source: Silver Institute, BofA Global Research Source: Silver Institute, BofA Global Research
A stabilisation of industrial demand should boost investor interest

Investors usually look at silver both through a macro, but also a micro lens: On the macro
side, a Fed pivot and stabilisation of USD should make the precious metal more
attractive; meanwhile, on the micro side, a stabilisation of industrial offtake may help. As
such, we see scope that outflows from silver backed ETFs may slow, after assets under
management had fallen by 13% YoY YTD.
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5. Agriculture outlook
Grain and oilseed prices spiked this year as war in Ukraine…
The agriculture markets have been on mostly an upward trend since 2019, save for the
peak pessimism that hit prices in 2H20. Coming off a strong year in 2021, grains and
oilseeds rallied even further this year as war in Ukraine stoked fears of a global food
shortage. At the highs, corn and wheat prices more than doubled from end-2019 levels
and though prices have come off recently, they remain >50% above pre-Covid levels
(Exhibit 212). The oilseeds markets also strengthened in response to potential
disruptions, with the EU rapeseed market outperforming CBOT soybeans, partly due the
war’s impact on European markets and due to the collapse in the Euro currency (Exhibit
213). Rapeseed prices have fallen more than 40% from the highs, but soybean and
sunflower seed prices have held up much better, with the latter trading just 8% below
the highs of March 2022.
Exhibit 212: Global grain prices Exhibit 213: Global oilseed prices
Corn and wheat prices have come off from the highs recently, but remain The oilseeds markets also strengthened in response to potential disruptions,
>50% above pre-Covid levels with the EU rapeseed market outperforming CBOT soybeans
$12 450 € 2000 14,000

$/bu euro/mt 400 € 1800 12,000
$10 1600
350 € 1400 10,000
$8 300 € 1200 8,000
1000
250 € 800 6,000
$6
200 € 600 4,000
$4 150 € 400
200 2,000
100 € 0 0
$2
50 €
2000
2001
2003
2005
2007
2009
2011
2012
2014
2016
2018
2020
2022
$0 0€ SAFEX sunflower seed (ZAR/mt, rhs))
2000 2003 2005 2008 2011 2014 2017 2020 CBOT soybeans (c/bu)
CBOT corn CBOT wheat Euronext wheat (rhs) Euronext rapeseed (euro/mt)
…stoked trade-flow fears and caused actual disruptions

At the height of the crisis, the market was considering whether to write off future
exports of Ukrainian corn, wheat, and sunflower meal and oil, which would have left a
sizeable hole in global agriculture balances. After all, Ukraine exported nearly 30mn mt of
corn and more than 20mn mt of wheat pre-pandemic (Exhibit 214). These volumes
accounted for more than 16% of global corn exports and about 11% of global wheat
exports. Ukraine’s export volumes did collapse in the early stages of the war, with wheat
exports practically hitting 0mn mt in May before a ‘safe passage’ agreement was
reached, allowing some Ukrainian volumes to move through the Black Sea (Exhibit 215).
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Exhibit 214: Russia and Ukraine agriculture exports (2019/20) Exhibit 215: Ukraine wheat exports
Ukraine exported nearly 30mn mt of corn and more than 20mn mt of wheat Ukraine’s wheat exports collapsed in the early stages of the war before a
pre-pandemic ‘safe passage’ agreement was reached
60 90% 4.5
mn mt mn mt
40 60%
3
20 30%
1.5
0 0%
0
Russia Ukraine % of global exports 2019 2020 2021 2022
Source: USDA Source: UN Comtrade
These dynamics caused global food prices to spike before mid-year…

Since 2000, the world has experienced three major rallies in agriculture markets (Exhibit
216). The first major bull market peaked ahead of the Global Financial Crisis as investors
piled into commodities to diversify their portfolios, only to see demand for commodities
collapse as a perfect storm of negative economic shocks rippled through the global
economy. The second bull market arrived shortly thereafter in 2010 as drought hit crops
in major producing countries, high energy prices lifted agriculture input costs, countries
like Russia imposed export bans, biofuel sector demand surged, and demand growth in
China and India stayed robust. The third bull market, which started in 2020 was also
caused by a confluence of factors, including drought and trade flow disruptions resulting
from the war in Ukraine. In the most recent run up, FAO food and food oil indices spiked
to 200% and 400% of 2000 levels. Animal protein markets experienced smaller boom-
bust cycles and instead rose more steadily throughout the last two decades, with the
FAO meat price index hitting a new record high this year (Exhibit 217).
Exhibit 216: FAO food and food oil indices Exhibit 217: CME cattle and hog prices and the FAO meat price index
Since 2000, the world has experienced three major rallies in agriculture In contrast, animal protein markets rose more steadily over the last two
markets decades, with the FAO meat price index hitting a new record high this year
600% 180 140

cumulative c/lb index
120
% change
400% 100
120
80
200%
60
60
40
0%
20
-200% 0 0
2000 2002 2005 2007 2010 2012 2015 2018 2020 Jan-00 May-03 Sep-06 Jan-10 May-13 Sep-16 Jan-20
CME live cattle CME lean hogs
FAO food oils index (rhs) FAO world food index (rhs) FAO meat price index (rhs)
…but a safe passage deal was reached, and markets have cooled since
The Ukraine war created significant volatility in the grain and oilseed markets due to
uncertainty around the country’s ability to export grain in storage and from future
CR
harvests. In the worst-case scenario, markets were nearly writing off future Ukrainian
shipments through the Black Sea in April, which led to panic buying from consumers and
attracted speculators into the markets. On July 22, the warring countries reached a deal
that would allow some grain to move through the Black Sea. Exports started to pick up
in the ensuing months, alleviating some concern over food shortages (Exhibit 218). As a
result, the USDA is now calling for a more modest reduction in Ukrainian corn and wheat
export volumes (Exhibit 219).
Exhibit 218: Ukraine corn exports Exhibit 219: Ukraine exports estimates, 2021/22
Ukraine corn exports started to pick up after the trade agreement, alleviating As a result, the USDA is now calling for a more modest reduction in Ukrainian
some concern over food shortages corn and wheat export volumes
6 45
Jan Nov
mn mt mn mt
4 30
2 15
0
0
corn wheat
2019 2020 2021 2022
Source: UN Comtrade Source: WASDE
A third year of La Niña conditions remains a risk to crops in 2023…

Every year, the outlook for agriculture markets depends to a large degree on
temperatures and precipitation. Weather forecasters are calling for La Niña again this
winter (Exhibit 143), which may lead to a continuation of drought conditions across the
southern US, Argentina (Exhibit 221) while delivering excess precipitation across
Northern Brazil, Australia, and elsewhere. If realized, these patterns may contribute to a
repeat of poor crop conditions seen during 2022.
CR
Exhibit 220: Probability of weather phenomenon Exhibit 221: La Nina effects
Weather forecasters are calling for La Niña again this winter… … which may lead to a continuation of drought conditions across the
southern US and Argentina
100%
75%
50%
25%
0%
Jun-Aug
May-Jul
Jan-Mar
Feb-Apr
Dec-Feb
Mar-May
Apr-Jun
Oct-Dec
Nov-Jan
2022 2023
La Niña Neutral El Niño
Source: IRI Columbia model, Oct 2022
Source: NOAA
…and the impact of fertilizer shortages on yields may grow

The global energy shock and bans on Russian and Belarusian fertilizer have contributed
to a shortage of fertilizer globally and a spike in fertilizer prices (Exhibit 222). In Europe
and elsewhere, prohibitively expensive energy costs drove fertilizer producers to cut
output or shutter operations completely, leaving the region more dependent on imports
to help meet demand. In emerging market economies, some farmers have foregone
fertilizer applications entirely due to procurement challenges and astronomical prices.
Given the timing of the global fertilizer crisis, we do not yet believe this has been fully
felt by the market. Furthermore, the fact that less transparent countries are likely most
affected by the shortage, the market may not have a good grasp on the impact on global
food supply for some time. Historically, fertilizer application, along with other factors,
has helped boost global crop yields (Exhibit 223), so a reduction in usage is likely to
affect crops in the future. Lower than expected crop yields in emerging economies may
force those countries to import more grain from abroad, which remains a key upside risk
to our outlook.
CR
Exhibit 222: USGC fertilizer prices Exhibit 223: World cereal yields and fertilizer applications
The global energy shock and bans on Russian and Belarusian fertilizer have Historically, fertilizer application, along with other factors, has helped boost
contributed to a shortage of fertilizer globally and led to a spike in prices global crop yields
1600 4.5
cereal
$/ton
yields
1200 mt/ha
4.0
800 3.5
400
3.0
0 NPK (mt per hectare of agricultural land)

Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 2.5
MAP Potash Granular Ammonia UAN 0.025 0.03 0.035 0.04 0.045
Source: Bloomberg Note: Cereal yields calculated as production/area harvested. Source: UN FAO, BofA Global Research
BofA GLOBAL RESEARCH estimate
Meanwhile, low river levels could still hurt US exports

Drought conditions in the US have hurt crops like wheat, and they also affected farmers
in other ways. Low rainfall contributed to a big drop in Mississippi River water levels
(Exhibit 224), which curtailed barge traffic moving grain to the export market during
harvest. This caused grain and oilseeds inventories to back up at river elevators and
forced merchants to find alternative storage options (like ground storage) to handle the
unmovable bushels. River levels have started to rise recently, but now the export window
has narrowed and could result in lower US prices in the future as merchants seek to ship
more grain and oilseed abroad over a shorter time horizon. On the contrary, storing
crops in sub-optimal conditions may also lead to damaged grain which could reduce the
quality and size of the crop in the end. Another issue with a low river level is that it
increases the risk that the river freezes during winter, which can also cut off access to
the Gulf Coast export market, causing merchants to seek other alternative transportation
options, like rail. Unfortunately, rail lines are already struggling to move record amounts
of agriculture products and other commodities today (Exhibit 225). Furthermore, the risk
of a rail strike in December (see Transport Tracker) could leave the sector with even
fewer options to move commodities. Any transportation related issue will likely lead to
wider spreads between inland-coastal US grain prices.
CR
Exhibit 224: Mississippi river streamflow Exhibit 225: US agriculture rail carloads
Low rainfall has contributed to a big drop in Mississippi River water levels… …while rail lines are already struggling to move record amounts of agriculture
products
750000 100000 rail

ft3/s carloads,
600000 90000 4wk avg
450000
80000
300000
70000
150000
60000
0 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 10yr range 2021 2022 10yr avg
2021 2022
Source: USGS Source: Bloomberg
Grain spec positioning off the highs but still elevated

The grain markets saw a significant amount of speculative interest since the start of the
pandemic, with managed money positioning in corn hitting multi-year (possibly record)
high levels in 2020, while soybeans also experienced a significant uptick (Exhibit 226). A
continuation of bullish dynamics has kept managed money net length high in both
commodities this year, and though interest has waned somewhat recently, positioning is
still high from a historical perspective. The potential disruption of Ukrainian corn and
wheat supplies spurred investment into Ag ETFs too (Exhibit 227), with WEAT (ETF)
shares outstanding rising nearly 5x at the height of the panic. ETF positioning has also
faded recently but remains elevated versus recent history.
Exhibit 226: CBOT corn and wheat managed money net length Exhibit 227: Shares outstanding
The grain markets saw a significant amount of speculative interest since the …and the potential disruption of Ukrainian corn and wheat supplies spurred
start of the pandemic… investment into Ag ETFs too
600 80 16
(000)
mn shares
contracts
400 oustanding
60 12
200
40 8
0
-200 20 4
-400
Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22 0 0
Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22
corn soybean
Wheat (lhs) Corn Soybeans
CR
5.1 Corn
Corn prices neared record levels in mid-2022 and softened since
The global corn market experienced several shocks since 2019, leading to two large
price spikes (Exhibit 228). The first coincided with a recovery in ethanol demand and a
surge in corn exports to China during 2021. In 2022, exports remained strong, but corn
prices received an extra bump from war in the Ukraine and concerns around the corn
crop during the US planting season. Corn weakened into mid-year on news of the safe
passage deal and that global corn crop was coming in healthier than originally
anticipated. Since late July, corn prices have rebounded across the curve, but they remain
below the peak of April 29th (Exhibit 229). From here, tight balances should help support
corn prices near current forward curve levels.
Exhibit 228: Corn front month prices Exhibit 229: Corn forward curve
The global corn market has experienced several shocks since the pandemic, Since late July, corn prices have rebounded across the curve, but they remain
leading to two large price spikes below the peak in late April
10 9.0
$/bu $/bu
8.0
8
7.0
6.0
6
5.0
4.0
4 futures expiry
3.0
Jul-20 Apr-21 Jan-22 Oct-22 Jul-23 Apr-24 Jan-25 Oct-25
2 latest (16-11-22) 22/07/2022 29/04/2022
11 12 13 14 15 16 17 18 19 20 21 22 15/11/2021 29/04/2020
…on improved Black Sea flows, better than expect crops elsewhere
The war in Ukraine lead to significant uncertainty around the country’s corn export
program, with the most extreme scenarios pointing to a complete collapse in Ukraine’s
waterborne export volumes. Since then, the safe passage deal allowed volumes to
recover somewhat, and now, the USDA is assuming that Ukraine’s exports contracted by
about 6.5mn mt over the 2021/22 crop year (Exhibit 230). In turn, expectations for
exports from Brazil, Canada, and the US have all increased more than 1mn mt. Higher
exports have led to sustained low carryout in the US corn balance sheet and supported
corn prices in the process (Exhibit 231).
CR
Exhibit 230: Change in exports expectations from Jan to Nov in Exhibit 231: US corn ending stocks
2021/22 Higher exports and domestic demand have led to sustained low carryout in
Estimates for Ukraine’s exports fell about 6.5mn mt over the 2021/22 crop the US corn balance sheet and supported corn prices in the process
year, while estimates for Brazil, Canada, and the US exports have increased
80 120
2 USDA f'cast
mn mt
mn mt
60 90
0
40 60
-2
20 30
-4
0 0
-6
-8 Ending Stocks Ending Stocks (days of consumption) (rhs)

Brazil Canada USA Ukraine Other World
Source: USDA
Source: USDA BofA GLOBAL RESEARCH
Corn balances look tight next year which should support prices
Surprisingly, while soaring corn prices would suggest a market in deficit, 2021/22 turned
out to be a surplus year, with carryout estimated to be 308mn mt, up 15mn mt or 5%
YoY. In 2022/23, the market is expected to be fairly balanced, with smaller crops in the
US, the EU, and Ukraine being partially offset by higher output in Argentina and Brazil
and leading to global corn production of 1,168mn mt, a decrease of nearly 50mn mt or
4% YoY (Exhibit 232). Meanwhile, demand is expected to contract by 15mn mt, leaving
just 7mn mt lower carryout in 2022/23 (Exhibit 233). We see the continued tight market
as supportive for corn prices around current levels but see export volumes from Ukraine
and the global fertilizer shortage as risks to prices.
Exhibit 232: World corn production and consumption Exhibit 233: World corn ending stocks
In 2022/23, the corn market is expected to be fairly balanced, with global We see the continued tight market as supportive for corn prices around
production decreasing by 4% YoY current levels
1,400 90 450 days of forward consumption

180
mn mt USDA f'cast mn mt USDA f'cast
150
1,200
50 300 120
1,000 90
10
800 150 60
30
600 -30
0 0
Domestic Consumption Production Ending Stocks Ending Stocks (days of consumption) (rhs)
Source: USDA Source: USDA
CR
5.2 Soybeans
Soybean prices hit new highs in 2022, but balances have softened…
The grain markets were most affected by , but the oilseed complex was not immune to
the shock. After all, Ukraine was a significant exporter of sunflower oil and meal, and
disruptions of those flows has tightened the broader oilseeds market. Front month
soybean prices rallied to record high levels in April of $17.84/bu before dropping below
$14/bu in October (Exhibit 234). Interestingly, while front month prices are far off the
highs, the soybean forward curve has performed relatively well since bottoming in July,
with the curve pricing less than $1/bu below levels seen during the height of market
panic in April (Exhibit 235).
Exhibit 234: US soybean front month prices Exhibit 235: Soybean forward curve
Front month soybean prices rallied to record high levels in April of $17.84/bu The soybean forward curve has performed relatively well since bottoming in
before dropping below $14/bu in October July, with the entire curve pricing less than $1/bu below the peak
20 18.0
$/bu $/bu
16.5
17
15.0
14 13.5
12.0
11 10.5
9.0
8 7.5 futures expiry
May-21 Dec-21 Jul-22 Feb-23 Sep-23 Apr-24 Nov-24
5 latest (16-11-22) 22/07/2022 29/04/2022
11 12 13 14 15 16 17 18 19 20 21 22 15/11/2021 29/04/2020
…on expectations for a record Brazilian bean crop this year

Global soybean balances benefitted from a smaller South American crop in 2021/22,
which dropped nearly 20mn mt due to drought-stricken crops in Brazil and Argentina
(Exhibit 236), while consumption there continued to rise, tightening the region’s
balances. The US crop increased around 7mn mt, but the world was still shorter
soybeans. This year, South America could see a record crop, with the USDA forecasting
Brazil will hit 152mn mt, an increase of 25% YoY, though La Nina remains a risk to
yields. This year, Brazil and Argentina are likely to see their export volumes surge, while
US soybean exports fall on expanded domestic crushing (Exhibit 237).
CR
Exhibit 236: Latin America soybean production and consumption Exhibit 237: World's largest soybean exporters by volume
Global soybean balances benefitted from a smaller South American crop in This year, Brazil and Argentina are likely to see their export volumes surge,
2021/22, which dropped nearly 20mn mt due to drought-stricken crops while soybean exports fall on expanded domestic crushing
240 USDA f'cast

120 120
mn mt mn mt
180 90 90
60
120 60
30
60 30
0
0 0
Total Consumption Production

supply-demand (rhs) 2021/22 2022/23
We see downside to the soybeans in 2023 if weather holds up

A record South American crop should help lengthen the global soybean balances, with
global supply expected to rise 35mn mt or nearly 10% YoY (Exhibit 238). Meanwhile, a
more subdued demand growth figure should help tip the market into a surplus of nearly
7.5mn mt, raising the global carryout to 102mn mt (Exhibit 239). Looser balances are
likely to pressure soybean prices next year, though we acknowledge that weather
remains a key upside risk, especially if we see a repeat of poor crop conditions in South
America.
Exhibit 238: World soybean production and consumption Exhibit 239: World soybean ending stocks
A record South American crop should help lengthen the global soybean A more subdued demand growth figure should help tip the market into a
balances, with global supply expected to rise 35mn mt or nearly 10% YoY surplus of nearly 7.5mn mt, raising the global carryout to 102mn mt
410 30 150 160

USDA f'cast mn mt days of forward consumption
380 mn mt
20 USDA f'cast
350 120
10 100
320
0 80
290
-10
260 50
-20 40
230
200 -30
0 0
Total Dom. Cons. Production Stocks (million mt) Stocks (days of consumption, rhs)
Strong bean oil prices pushed crush margins to record heights this year
US soybean crush margins skyrocketed to new record highs of more than $3.40/bu
recently as soybean oil consumption in the US renewable fuel industry increased and
meal demand remained strong (Exhibit 240). Crush margins have come off nearly a dollar
since then but remain historically high. In fact, the soybean crush margin forward curve
remains above $1.50/bu through the remainder of 2023 (Exhibit 241), which is higher
than nearly every year over the past two decades.
CR
Exhibit 240: Soybean cost, revenues and crush Exhibit 241: Soybean crush forward curve
US soybean crush margins skyrocketed to new record highs of more than Crush margins have come off nearly a dollar since then but remain
$3.40/bu, driven by strong soybean oil prices historically high
$20 $4 4.0 $/bu

$/bu 3.5
$10 $3 3.0
2.5
$0 $2
2.0
1.5
-$10 $1
1.0
0.5 futures expiry
-$20 $0
2005 2007 2009 2011 2013 2015 2017 2019 2021 Dec-21 May-22 Oct-22 Mar-23 Aug-23 Jan-24
Meal revenue Oil revenue latest (16-11-22) 31/10/2022 22/07/2022
Soybean cost Crush (rhs) 29/04/2022 15/11/2021
Source: Bloomberg, BofA Global Research Source: Bloomberg
We are bullish soybean oil on RD capacity starts but RFS a risk

The ramp up of US renewable diesel capacity has been a primary driver behind record
soybean oil prices and crush margins this year. Interestingly, several projects originally
slated for startup this year were pushed back into 2023 and should make next year an
even bigger year for renewable diesel capacity expansions (Exhibit 242). We think this
will support elevated crush margins and should push bean oil prices to new record highs.
Furthermore, we think oil could exceed 50% of crush revenue this year (Exhibit 243).
Over the coming years, as more soybean crush plant capacity comes online, we see a
natural home for incremental bean oil supply in the biofuel market but think the
additional soybean meal volumes will require lower prices to clear in the export market
or facilitate the reshoring of more animal protein production in the US.
Exhibit 242: US biomass based diesel production capacity Exhibit 243: Oil's % of soybean board crush revenue (meal+oil)
Several projects originally slated for startup this year were delayed to 2023 We think soybean oil prices could reach new record high levels and oil
and should make next year an even bigger year for renewable diesel capacity could exceed 50% of crush revenue at times next year
4000 55%
mn gal/yr oil/meal
50% ratio
3000
2000 45%
40%
1000
35%
0
TBD
2022
2023
2024
2025
2026
RD & SAF
Biodiesel
30%
25%
Existing Planned/proposed 00 03 06 09 12 15 18 21
Source: Platts, BofA Global Research Source: Bloomberg
CR
5.3 Wheat
After rising to unthinkable levels this spring…
Global wheat prices experienced explosive upside during the early stages of the Ukraine
war, with prices trading up more than 75% from sub $8/bu in February to over $14/bu in
early March (Exhibit 244). The market was focused on potential Ukraine supply losses
and on the possibility that Russian supplies could be curtailed too. After all, Russia
imposed wheat export restrictions late in 2021 to help combat domestic food inflation.
Additional upside pressure for wheat came from drought in major crop producing
regions like the US, Canada, and Europe. These factors combined to lift the forward
curve for wheat substantially higher during 1H22. Prices have come down significantly
since then as it became clear that some volumes would continue to flow from Ukraine,
with back-end prices back below $9/bu (Exhibit 245).
Exhibit 244: Soft red winter wheat front month prices Exhibit 245: Soft red winter wheat forward curve
Wheat prices traded up more than 75% from sub $8/bu in February to over After peaking in March, the wheat forward curve collapsed as peak panic
$14/bu in early March faded and it became clear that some Ukraine exports would continue to flow
16 11.0 $/bu
$/bu
14 10.0
12 9.0
8.0
10
7.0
8 6.0
6 5.0
futures expiry
4 4.0
Jul-20 Jul-21 Jul-22 Jul-23 Jul-24 Jul-25
2 latest (16-11-22) 22/07/2022 29/04/2022
11 12 13 14 15 16 17 18 19 20 21 22 15/11/2021 29/04/2020
…wheat prices fell back to earth on rebounding supply, exports…

The direst wheat supply estimates assumed a complete write-off of Ukrainian wheat
exports, but volumes have continued to flow, albeit at reduced rates and more recent
estimates reflect a less devastating situation. Since January, Ukraine wheat export
estimates were cut by 5mn mt for 2021/22, but other countries like India, Argentina, and
Australia have helped provide an offset. As a result, global trade estimates have fallen
less than 2mn mt for last year (Exhibit 246). A less gloomy export outlook has helped
deflate the risk premium built into wheat prices during the first half of the year and also
pulled wheat down relative to corn (Exhibit 247).
CR
Exhibit 246: Change in exports expectations from Jan to Nov in Exhibit 247: Wheat to corn ratio
2021/22 The collapse in wheat prices brought wheat to corn ratios back in line with
Since January, Ukraine wheat export estimates were cut by 5mn mt for historical normal levels
2021/22, but export estimates for India, Argentina, and Australia increased
1.8
4 Wheat/cor
mn mt
n
1.6
2
1.4
0
1.2
-2
1.0
-4 Wheat to corn ratio
0.8 2010-22 avg

-6
India Argentina Australia Ukraine Other World Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22
Source: Bloomberg
Source: USDA BofA GLOBAL RESEARCH
…but a persistent deficit in 2023 should keep wheat supported

The most extreme scenarios for tightness in the wheat market are off the table for now,
but the balances still look tight. In fact, the USDA is projecting another deficit year for
wheat during 2022/23 thanks to a 12.5mn mt reduction in Ukraine’s wheat supply and
stronger demand globally (Exhibit 248). As a result of this shortfall, wheat carryout is
likely to decline for the third consecutive year, leaving the market with 30mn mt less
Inventory (-10%) at 2022/23 end versus 2020 ending inventories (Exhibit 249).
Continued deficit in the wheat market should support prices in 2023 and upside risk
remains if weather leads to sub-optimal harvests and/or conflict in Ukraine leads to a
smaller crop or lower exports than expectations (about 19mn mt).
Exhibit 248: World wheat production and consumption Exhibit 249: World wheat ending stocks
The USDA is projecting another deficit year for wheat during 2022/23 thanks Continued deficit in the wheat market should support prices in 2023
to a 12.5mn mt cut to Ukraine’s wheat supply and stronger demand globally
850 60 400 days of forward consumption 200

mn mt USDA f'cast mn mt
40 170
USDA f'cast
300 140
20
700 110
200
0 80
100 50
-20
20
550 -40
0 -10
total consumption production supply-demand

Ending Stocks Ending Stocks (days of consumption)
CR
6. Portfolio strategy
6.1 Portfolio strategy outlook
Another strong year for commodities despite dismal cross-asset performance
The past year marked a sharp upheaval for markets as persistently high inflation
buttressed by commodity price shocks, strong demand, and blistering hot labor markets
led to an abrupt pivot by central bankers towards rapid tightening. Indeed as monetary
policy accommodation has been quickly reversed and liquidity drained from the system,
markets, the specter and realization of higher nominal rates and sustained price
pressures continues to take a toll on risk assets and fixed income alike, deflating the
COVID boom in financial assets, while destroying fixed income allocations as rates
increase at a historic pace. Despite the dismal cross-asset landscape, two asset classes
were able to perform – the dollar and commodities (Exhibit 250). A unique environment
has emerged, given that a strong dollar is typically a headwind for commodity prices, but
supply shocks stemming from the Russia-Ukraine war and droughts across Europe and
North America supported commodity prices, leading to another blockbuster year for the
asset class (Exhibit 251). Moving forward however, despite commodities proving their
worth as the preeminent inflation hedge over the past two years, a disinflationary
environment with high real rates and slow growth may dampen further upside if supply
cannot adequately reduce to offset the impending demand contraction around the
corner. Still, supply conditions remain exceptionally tight and China has inched closer to
re-opening with less stringent tourist quarantine measures, suggesting support for the
complex over the near term (see China Watch: COVID policy watch series #1: Politburo
signals key changes in policy tone).
Over the coming year we would expect the energy complex to remain supported over the
first half as risks of price spikes amidst historic low inventories remain. But as the
impacts of monetary tightening make their way into the real economy, broader macro
weakness will weigh on risk assets including commodities, dragging them lower from
historically high levels as demand falters and supply is unable to sufficiently offset.
China remains a wildcard as potential for re-opening could help boost demand,
supporting the metals and broader commodity complex. Indeed, this would be bullish for
the industrial metals which have been battered by China lockdowns, and we would
expect metals to outperform energy and agriculture. Precious metals depend crucially on
the path of real rates, with a Fed pivot pointing to stronger gold. Lastly for agriculture
the outlook points towards support for corn and wheat due to a continuation of tight
balances stemming from fertilizer shortages and weather risk, while soybeans are
expected lower.
CR
Exhibit 250: Year-to-date cross asset returns Exhibit 251: Annual commodity index returns
Despite a dismal year for cross-asset returns, commodities and the dollar Commodities had another blockbuster year, continuing the gains from 2021
have been the only positive returning asset classes
50% BCOM GSCI
20% ann.
10% 25%
0%
-10% 0%
-20%
-30% -25%
-50%
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
Equities Fixed income Commodities FX
Source: Bloomberg
Commodities had a hot start, but macro has weighed since the summer
Commodity markets were already on a tear coming into 2022 as short supply coming
from under-production and investment from COVID and the past decade met surging
demand fueled by the monsoon of global fiscal stimulus and coordinated monetary
accommodation. This was further amplified by the emergence of the Russia-Ukraine war
in March that exacerbated already tight supply conditions and led to price spikes across
all commodity markets, especially energy, grains, and metals (Exhibit 252). Despite the
continuation of tight supply and inventories across commodities and resilient demand
throughout the year, commodities have since retraced from their spring peaks as
markets anticipated a slowdown in economic conditions stemming from the global
disinflation campaign that has lifted global rates at a historic pace. Looking across
sectors, we note that while energy has been the star performer attributed to the
immediate implications of lost Russian supply of crude oil and natural gas (see
Commodity Strategist: NEWO: New Energy World Order), the metals complex has
suffered, especially the industrial metals (Exhibit 253).
CR
Exhibit 252: MLCX year-to-date total returns Exhibit 253: Year-to-date MLCX average returns, volatility, and
Commodities had a hot start to the year and the Russia-Ukraine war information ratios
supported prices, but macro weakness has weighed Energy is the outperformer this year, while the metals have been hit the
hardest
200
2 4%
175
1.5 3%
150 1 2%
125 0.5 1%
100 0 0%
-0.5 -1%
75
Jan-22 Mar-22 May-22 Jul-22 Sep-22 -1 -2%
Index Energy
Industrial metals Precious metals
Softs Agriculture
Livestock
Info ratio Avg. ret Vol
BofA GLOBAL RESEARCH Source: BofA Global Research
Industrial metals have been hit the hardest as slower growth is on the horizon
Investing in commodities at the beginning of the year would have been a positive, but
the retracement in prices in the latter half of the year may have left those late to the
party underwater. Even energy, the best performing commodity year-to-date, has seen a
max drawdown of 27% this year, but the most pain has been felt by the industrial metals
at -37%, driven by growth concerns from monetary tightening, the European energy
crisis, and weak property/construction sectors and Zero Covid policy in China (see Global
Metals Weekly: Strong premia, weak prices) (Exhibit 254). On a vol-adjusted basis, both
industrial and precious metals have seen the largest max drawdowns relative to
volatility, indicating pain felt across the metals complex, with the former declining due
to growth, and the latter faltering due to the sharp rise in real rates. Indeed comparing
correlations of commodity sector returns to changes in 2y nominal Treasury yields, we
find that precious metals have been the most exposed (Exhibit 255).
Exhibit 254: Year-to-date max drawdown and drawdown to vol ratio Exhibit 255: Correlation to US 2y treasury yields
Industrial and precious metals exhibit the largest drawdown to volatility Correlations to rates are low across commodity sectors, but precious metals
ratios relative to other commodity sectors are extremely exposed year-to-date
0% 0 0.2 Full YTD
0.1
-10%
-0.6 0
-20% -0.1
-1.2 -0.2
-30%
-0.3
-40% -1.8 -0.4
Max drawdown Drawdown to vol ratio

Source: BofA Global Research, Bloomberg Source: BofA Global Research, Bloomberg
CR
Lower index AUMs and positive roll returns suggests a call option that pays
Despite the sharp rise in commodity prices since 2021, index money in commodity
indices on a price-adjusted basis has continued to fall, indicative of tempered demand
for exposure to the asset class in light of growth concerns (Exhibit 256). Further
outflows were seen even as commodity prices retraced, reinforcing the bearish
commodity narrative, but all of this together suggests that index investors may
potentially be under-allocated to the asset class. If growth concerns are less dire than
expected and/or supply further tightens in force, upside from commodity allocations
could be attractive, especially given that roll returns are currently positive at 6% (Exhibit
257). As such, allocation to commodities can be likened to being paid to own a call
option. However moving forward, we would expect curves to flatten and roll returns to
compress but stay positive. Downside risks of course remain salient given the ominous
growth outlook, but even if commodity prices remain flat, the pervasive curve
backwardation across the complex provides positive carry.
Exhibit 256: Nominal and price-adjusted commodity index AUMs Exhibit 257: Annual BCOM total and roll returns
Commodity index AUMs have been falling on both nominal and real Commodity index roll returns are the highest since 2000 as curves remain
measures steeply backwardated, providing positive carry
40%
400 Roll return Total return
350
300 20%
250
200 0%
150
100 -20%
50
0 -40%
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
investment value (bn $) price adjusted (100 on 1-jan-07)
Source: BofA Global Research, Bloomberg Source: BofA Global Research, Bloomberg
Commodities have provided best inflation return asymmetry cross-asset…

We have long argued for commodities as the preeminent inflation hedge and strong
commodity performance over the past two years further supports this notion (see
Quantamental Insights: How to position for rising inflation). In a recent publication we
compared asset class returns during high inflation periods going back to 1969, capturing
the Great Inflation of the 1970’s and 1980’s (see Quantamental Insights: Disinflation is a
marathon, not a sprint). We found that even going back to the Great Inflation,
commodities were the dominant asset class, exhibiting the most positive inflation return
asymmetry relative to fixed income and equities (Exhibit 258). This is consistent with
our findings that commodities have also provided the best inflation return asymmetry
cross-asset over the past 20 years, beating out equities and the dollar (Exhibit 259).
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Exhibit 258: Inflation return asymmetry for US headline CPI (year- Exhibit 259: Cross-asset inflation return asymmetry
over-year) Commodities are the only asset class outside of TIPS that provide positive
Commodities provide the best inflation return asymmetry relative to equities convexity in response to both elevated realized inflation and expectations
and bonds once we account for the Great Inflation
2
CPI 10y breakeven
1
BCOM
0
-1
5y UST
-2
-3
10y UST -4
SPX
-4 -2 0 2 4
Source: BofA Global Research. Inflation convexity is measured as difference in average monthly
Source: BofA Global Research, Bloomberg. Data from Jan 1962 – Oct 2022. returns in top 10%-tile and bottom 90%-tile of monthly CPI changes or 10y breakeven levels,
BofA GLOBAL RESEARCH scaled by standard deviation of monthly returns.
… with energy leading the way, but lower growth provides a headwind
We highlighted the outperformance of energy over the past year that has coincided with
higher inflation, but this has been largely unsurprising given the dominance of energy
commodities as inflation hedges relative to the wider commodity complex historically
(see Quantamental Insights: Energizing inflation hedging with commodities) (Exhibit
260). Energy supply remains historically tight, leaving a slightly flat-bullish outlook for
the commodity over the first half of next year, but this relies crucially upon the path of
consumption and how soon and large the demand contraction is when it arrives.
Commodity demand tends to fall during recessions and we note that during the Volcker
disinflation, commodity prices faltered as demand was hammered by a combination of
sustained high rates and low economy growth that was further amplified by oversupply
(Exhibit 261). While the demand picture has risk of looking more akin to the 1980s, the
supply picture is precisely the opposite as energy balances remain tight. As such, the
depth, length, and timing of the economic slowdown from the disinflation campaign in
relation to the ability of supply to cut and offset any weakness will be crucial.
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Exhibit 260: Cross-commodity average returns in top 10%-tile of Exhibit 261: Cumulative cross-asset returns indexed to Oct 1979
inflation prints and return asymmetry Equities and commodities underperformed during the depths of the Volcker
Energy commodities do best when realized inflation is high, but metals such disinflation, but bonds exhibited positive total returns
as aluminum and copper help with inflation expectations
75%
1.8 190
50%
1.2 160
25% 0.6
130
0% 0
100
-25% -0.6
Coffee
Diesel
Sugar
Brent
Natural gas
Gold
Zinc
Aluminum
Live cattle
Lean hogs
Soybean meal
Copper
Gasoil
Kansas wheat
Cocoa
Soybean
Cotton
Wheat
Corn
WTI
Gasoline
Soybean oil
Silver
Nickel
70
Oct-79 Jun-80 Feb-81 Oct-81 Jun-82 Feb-83 Oct-83
Recession SPX 5y UST
10y UST BCOM
Avg. ret Avg. ret (be) Convexity Convexity (be)
Source: BofA Global Research, Bloomberg
Source: BofA Global Research. Inflation convexity is measured as difference in average monthly BofA GLOBAL RESEARCH
returns in top 10%-tile and bottom 90%-tile of monthly CPI changes or 10y breakeven levels,
scaled by standard deviation of monthly returns.
Commodities generally do not fare well during recessions…

Commodities are a cyclical asset class and unsurprisingly, they perform poorly during
recessions as risk assets sell off and global demand compresses (Exhibit 262). While
2022 may not have yet brought global recession, risk assets have been battered and it is
surprising that commodities have still held onto the bulk of their gains despite recent
weakness on account of macro. Moving forward however with recession on the baseline
forecast (see US Economic Weekly: Slower pace, higher peak), we examine commodity
sector drawdowns during US recessions to see which sector is the most battered by
weak growth. Here we find that energy consistently exhibits the largest drawdowns, an
ominous characteristic given the impending macro environment (Exhibit 263).
Exhibit 262: MLCX information ratios during US recessions Exhibit 263: Max MLCX sector drawdowns during US recessions
Commodities have exhibited negative information ratios during the past 3 Energy usually exhibits the largest drawdown during US recessions
recessions, but the 1990-1991 recession was a boon for energy and livestock
1990- 2007- 0%
1991 2001 2009 2020 Average
Agriculture -1.22 -0.87 -0.47 -3.17 -1.43
Softs -0.99 -1.03 0.34 -3.03 -1.18
Index 0.97 -1.33 -0.46 -3.54 -1.09 -30%
Industrial
-0.29 -0.92 -0.53 -2.16 -0.98
metals
Energy 1.13 -1.13 -0.37 -3.08 -0.86 -60%
Livestock 2.31 -0.04 -1.59 -2.52 -0.46
Precious
-0.07 0.24 0.40 0.73 0.33
metals
Source: BofA Global Research -90%
BofA GLOBAL RESEARCH 1990-7-1 2001-3-1 12-1-2007 2020-2-1 Average
Energy Index Softs
Industrial metals Agriculture Livestock
Precious metals
… but have provided the best risk-adjusted returns under rising real rates…
While recession probabilities are high, one thing for certain has been the rise in real
rates. The Fed has pushed real US rates positive across the curve on the disinflation
campaign that requires a cooler labor market and slowing of economic activity. We have
already seen some impacts in the housing and financial markets, but with inflation still
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high and policy rates remaining well below still unknown terminal rates, real rates are at
the risk of rising even further. We update our analysis on cross-asset returns when real
10y rates are rising (current yield above moving averages), again finding that
commodities and oil in particular have provided the highest monthly returns relative to
other asset classes (see Quantamental Insights: A guide to rising real rates) (Exhibit
264). Interestingly the size of the year-to-date move is in line with the historical
annualized averages for WTI and commodities, which are similar across the full and split
samples. In contrast, copper has had a dismal year, bucking the trend of the red metal
performing when rates are rising. Furthermore the relative dominance and consistency
of oil and commodities when real rates are rising cross-asset is apparent when looking
at risk-adjusted returns, demonstrating that the out-sized average positive moves are
not solely the by-product of higher asset class volatility (Exhibit 265). As such, an
environment of rising rates may be fertile ground for commodity exposure, but must be
weighed against the contractionary effects of tighter financial conditions and the
accompanying slower real economic activity.
Exhibit 264: Average annualized cross-asset monthly returns Exhibit 265: Average 1-month cross-asset information ratios
conditional on rising real rates conditional on rising real rates
A broad commodity index or oil have provided the most consistent average … and year-to-date performance has surprisingly aligned well with history
monthly returns when rates are rising…
40% 4
20% 2
0% 0
-20% -2
-40% -4
Rising real rates Rising real rates (1981-2001) Rising real rates Rising real rates (1981-2001)
Rising real rates (2002-2022) YTD Rising real rates (2002-2022) YTD
Source: BofA Global Research. Rising real rates reflect months in which the current month’s real Source: BofA Global Research. Rising real rates reflect months in which the current month’s real
rate is higher than the 1, 3, 6, 12, and 24-month moving averages. The underlying real rate is the rate is higher than the 1, 3, 6, 12, and 24-month moving averages. The underlying real rate is the
10y real yield computed by differencing the 10y nominal US treasury yield with the University of 10y real yield computed by differencing the 10y nominal US treasury yield with the University of
Michigan’s inflation expectations over the next 10 years survey. Michigan’s inflation expectations over the next 10 years survey.
Curve backwardation remains elevated but will flatten into recession

Curves went into historic backwardation with the emergence of the Russia-Ukraine war
(Quantamental Insights: Befriend the inflation trend). Indeed looking at the average 1-
year backwardation across 24 commodities, curves steepened to their most inverted
levels since 1999 in March before retracing from these historic levels since (Exhibit
270). Despite the retracement, the average level of backwardation is still the highest
since 2004, reflecting the continued tightness in commodity markets despite the soft
demand picture. At the commodity level, we note that the steepest curves remain in the
energy sector, led by refined products such as heating oil and gasoil as historically
limited capacity, low inventories, and resilient demand remain (Exhibit 271). Moving into
2023, we would expect tightness and backwardation to remain, albeit as growth begins
to slow, curves should flatten further, but remain backwardated in the energy sector
unless a more precipitous demand contraction emerges and supply is not cut
accordingly.
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Exhibit 266:Average of 1-year commodity curve backwardation Exhibit 267:Curve backwardation (1-year tenor) across commodities
The average 1-year curve backwardation across commodities is still at The energy sector has the steepest curve backwardation, led by refined
historically high levels even after retracing from March highs products such as heating oil and diesel
Source: BofA Global Research. Curve backwardation is (front month – 1yr contract) / front month. Source: BofA Global Research
Cross-commodity spreads are historically stretched…

In addition to curve extremities, we have also seen cross-commodity spreads reach
historic extremes. Indeed energy spreads such as cracks are at eye-watering levels
compared to the past 5 years or even since 2000, but livestock and agricultural spreads
too are stretched, a testament to acute tightness across different levels of the
commodity supply chain (see exhibit below ). Only a third of the spreads are between the
25th and 75th percentiles historically, with the vast majority stretched too high or low,
indicative of significant dislocation that has persisted. While mean reversion has not yet
emerged across cross-commodity spreads, 2023 may be an apt time to position for
reversion as demand collapses, removing some of the acute tightness and normalizing
cross-commodity price relationships. That being said, it may still be too early given
continuation of limited capacity, inventories, and bottlenecks.
Exhibit 268:Commodity spread percentiles relative to past 5-years and since 1999
Cross-commodity spreads are historically stretched levels whether looking over the past 5 years,

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Appendix – Commodity balance tables
Exhibit 269:BofA global oil supply forecast (in thousand b/d)
Quarterly forecast
2021 1Q2022F 2Q2022F 3Q2022F 4Q2022F 2022F 1Q2023F 2Q2023F 3Q2023F 4Q2023F 2023F
OECD Americas 24,380 24,990 25,380 26,080 26,480 25,730 26,530 26,720 26,830 27,080 26,790
United States 16,820 17,250 17,800 18,220 18,560 17,960 18,640 18,970 18,970 19,100 18,920
-Crude 11,250 11,470 11,700 11,910 12,290 11,840 12,370 12,470 12,490 12,580 12,480
-NGL 5,420 5,610 5,910 6,110 6,060 5,930 6,070 6,280 6,270 6,290 6,230
Canada 5,590 5,730 5,580 5,850 5,900 5,760 5,900 5,750 5,880 5,980 5,880
Mexico 1,950 2,000 1,990 2,000 2,010 2,000 1,980 1,990 1,980 1,990 1,980
OECD Asia Oceania 510 490 510 420 470 470 470 460 460 450 460
Australia 440 420 450 360 400 400 400 400 390 390 390
OECD Europe 3,380 3,310 3,020 3,090 3,390 3,200 3,440 3,250 3,350 3,540 3,400
Norway 2,040 1,970 1,740 1,920 2,100 1,930 2,150 2,000 2,100 2,250 2,130
United Kingdom 890 920 860 750 850 840 850 810 810 850 830
Non-OECD Europe 110 110 110 100 110 110 110 100 100 100 100
Former Soviet Union 13,770 14,400 13,430 13,660 13,690 13,800 12,990 12,890 12,890 12,990 12,940
Russia 10,870 11,380 10,700 11,070 10,750 10,970 10,000 10,000 10,000 10,000 10,000
Azerbaijan 700 700 670 660 650 670 650 650 650 650 650
Kazakhstan 1,850 1,980 1,760 1,630 1,950 1,830 2,000 1,900 1,900 2,000 1,950
Non-OPEC Africa 1,330 1,300 1,300 1,310 1,290 1,300 1,280 1,270 1,260 1,250 1,260
Egypt 590 590 610 600 590 600 590 580 580 570 580
Sudan 210 200 200 210 200 200 190 190 190 190 190
Non-OPEC Asia 6,910 7,000 6,950 6,790 6,830 6,890 6,920 6,940 6,930 6,880 6,920
India 730 720 710 700 690 710 700 690 690 680 690
Malaysia 570 570 560 540 560 560 570 560 560 560 560
China 4,060 4,230 4,230 4,120 4,130 4,180 4,230 4,260 4,260 4,230 4,250
Non-OPEC Latin America* 5,300 5,430 5,480 5,740 5,760 5,600 5,830 5,910 5,960 6,020 5,930
Argentina 640 690 700 720 720 710 730 730 740 740 730
Brazil 3,000 3,090 3,000 3,160 3,200 3,110 3,280 3,350 3,400 3,450 3,370
Colombia 740 750 760 760 740 750 740 740 740 740 740
Non-OPEC Middle East 3,080 3,150 3,210 3,250 3,250 3,220 3,240 3,240 3,250 3,250 3,250
Oman 979 1,044 1,065 1,098 1,103 1,078 1,108 1,113 1,118 1,123 1,116
Qatar 1,822 1,822 1,850 1,848 1,850 1,842 1,850 1,850 1,850 1,850 1,850
Processing Gains 2,250 2,280 2,290 2,320 2,350 2,310 2,300 2,340 2,340 2,360 2,340
Global Biofuels 2,750 2,440 3,010 3,280 2,900 2,910 2,520 3,090 3,360 2,980 2,990
Non-OPEC** (incl. processing gains) 63,780 64,900 64,690 66,050 66,510 65,540 65,630 66,220 66,730 66,900 66,370
OPEC crude 26,420 28,540 28,740 29,540 29,300 29,030 29,030 29,010 29,560 29,560 29,290
Saudi Arabia crude 9,150 10,200 10,490 10,930 10,630 10,560 10,500 10,500 10,700 10,700 10,600
Kuwait 2,410 2,610 2,670 2,800 2,730 2,700 2,700 2,700 2,750 2,750 2,730
UAE 2,760 3,090 3,290 3,410 3,220 3,250 3,100 3,100 3,400 3,400 3,250
Iraq crude 4,030 4,290 4,450 4,540 4,500 4,440 4,450 4,450 4,450 4,450 4,450
Iran crude 2,420 2,550 2,470 2,520 2,550 2,520 2,550 2,550 2,550 2,550 2,550
Libya crude 1,150 1,080 770 960 1,100 980 1,100 1,100 1,100 1,100 1,100
Nigeria crude 1,310 1,300 1,150 1,010 1,100 1,140 1,150 1,150 1,150 1,150 1,150
Venezuela crude 610 720 740 660 700 710 750 750 750 750 750
other OPEC crude 2,580 2,700 2,720 2,720 2,760 2,720 2,730 2,710 2,710 2,710 2,710
Total OPEC NGLs + Non-conventional 5,120 5,270 5,350 5,380 5,400 5,350 5,400 5,400 5,400 5,400 5,400
Total OPEC 31,540 33,810 34,090 34,920 34,700 34,380 34,430 34,410 34,960 34,960 34,690
Total World Supply 95,320 98,720 98,780 100,970 101,210 99,920 100,060 100,620 101,680 101,860 101,060
Source: IEA, EIA, BofA Global Research estimates
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Exhibit 270:BofA global oil demand forecast (in thousand b/d)
Quarterly forecast
2021 1Q2022F 2Q2022F 3Q2022F 4Q2022F 2022F 1Q2023F 2Q2023F 3Q2023F 4Q2023F 2023F
TOTAL OECD Demand 44,830 45,780 45,400 46,610 46,750 46,140 45,540 45,620 46,830 46,760 46,190
OECD Americas Demand 24,320 24,780 25,010 25,290 25,030 25,030 24,620 25,040 25,500 25,120 25,070
United States 20,030 20,380 20,410 20,500 20,460 20,440 20,210 20,310 20,760 20,500 20,450
Canada 2,280 2,250 2,230 2,490 2,390 2,340 2,290 2,360 2,420 2,430 2,370
Mexico 1,650 1,760 1,990 1,930 1,770 1,860 1,740 1,980 1,950 1,790 1,860
Chile 370 390 380 370 410 390 390 390 370 410 390
OECD Europe Demand 13,120 13,150 13,410 14,070 13,780 13,600 13,130 13,250 13,970 13,670 13,510
OECD Pacific Demand 7,380 7,850 6,980 7,250 7,940 7,500 7,790 7,320 7,360 7,970 7,610
TOTAL NON-OECD Demand 52,820 53,640 53,050 53,350 53,710 53,440 54,070 54,810 55,210 55,660 54,940
China 15,420 15,400 14,230 14,550 15,160 14,830 15,250 15,390 15,520 15,950 15,530
India 4,770 5,250 5,140 4,920 5,240 5,140 5,510 5,440 5,120 5,540 5,400
Other Asia (ex. China & India) 8,610 8,870 8,860 8,470 9,050 8,810 9,090 8,890 8,930 9,580 9,130
Middle East 8,480 8,520 9,170 9,500 8,690 8,970 8,720 9,450 9,620 8,830 9,150
Latin America 5,930 5,910 6,070 6,110 5,990 6,020 5,930 6,100 6,180 6,060 6,070
FSU 4,850 4,710 4,720 5,020 4,610 4,760 4,570 4,640 4,980 4,660 4,710
Africa 3,990 4,210 4,100 4,000 4,180 4,120 4,240 4,140 4,050 4,230 4,170
Non-OECD Europe 770 770 760 790 800 780 760 760 800 810 780
TOTAL Demand 97,650 99,430 98,450 99,960 100,460 99,570 99,610 100,430 102,040 102,420 101,120
Market imbalance (supply - demand) -2,330 -710 330 1,010 750 350 450 190 -360 -560 -60
Source: IEA, EIA, BofA Global Research estimates
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Exhibit 271:US natural gas supply/demand balance
Monthly, yearly, and seasonal average figures (Bcf/d)
Dry Canadian LNG Total Mexican LNG Plant Pipe Total Ending
Month production imports imports Supply Res/Com Industrial Power exports exports fuel loss Vehicle Demand storage
Nov-20 91.1 4.2 0.1 95.5 24.3 22.4 25.7 5.5 10.3 5.0 2.7 0.1 96.0 3,902
Dec-20 91.2 5.7 0.2 97.1 40.3 24.1 28.5 5.3 10.8 5.0 3.4 0.1 117.5 3,313
Jan-21 92.1 6.2 0.2 98.5 44.8 24.4 28.1 5.6 10.9 5.0 3.6 0.1 122.6 2,608
Feb-21 85.2 6.7 0.2 92.1 48.9 23.6 28.0 4.9 8.3 4.7 3.8 0.1 122.4 1,834
Mar-21 92.8 4.7 0.0 97.6 29.9 21.5 24.2 5.9 11.5 5.1 2.9 0.1 101.2 1,778
Apr-21 93.7 4.5 0.0 98.1 19.5 21.4 25.1 6.1 11.3 5.1 2.6 0.1 91.4 1,952
May-21 93.6 4.3 0.1 98.0 12.9 20.2 26.3 6.2 11.2 5.2 2.3 0.1 84.3 2,365
Jun-21 93.3 4.6 0.0 98.0 9.1 20.3 36.1 6.6 10.0 5.1 2.6 0.1 89.9 2,558
Jul-21 94.1 5.1 0.1 99.3 8.2 20.5 39.8 6.4 10.7 5.2 2.7 0.1 93.5 2,726
Aug-21 94.5 4.8 0.0 99.3 8.0 20.6 40.6 6.2 10.6 5.2 2.7 0.1 94.1 2,888
Sep-21 94.3 4.9 0.0 99.2 8.9 20.3 33.1 6.0 10.4 5.2 2.5 0.1 86.6 3,276
Oct-21 95.9 5.3 0.0 101.2 12.4 20.9 30.4 6.0 10.6 5.3 2.6 0.1 88.3 3,635
Nov-21 96.8 5.2 0.1 102.0 27.1 23.1 29.3 5.5 11.2 5.4 3.2 0.1 105.1 3,505
Dec-21 97.0 4.6 0.1 101.6 34.4 23.6 28.5 5.4 12.2 5.4 3.5 0.1 113.2 3,185
Jan-22 94.3 6.7 0.2 101.2 48.7 25.0 31.5 5.6 12.5 5.2 4.3 0.1 133.1 2,193
Feb-22 93.6 6.4 0.2 100.1 44.9 24.5 29.1 5.5 12.4 5.2 4.0 0.1 125.8 1,541
Mar-22 94.5 4.9 0.1 99.5 31.4 22.9 25.3 5.5 12.9 5.3 3.3 0.1 106.6 1,381
Apr-22 95.6 5.5 0.0 101.1 22.2 22.1 25.1 5.9 12.1 5.3 2.8 0.1 95.7 1,591
May-22 96.8 4.9 0.0 101.7 12.3 20.5 29.9 6.0 12.5 5.4 2.6 0.1 89.3 1,979
Jun-22 97.5 5.3 0.0 102.8 9.0 20.7 38.7 6.0 11.0 5.4 2.8 0.1 93.8 2,300
Jul-22 97.4 6.0 0.1 103.5 8.3 20.0 45.1 6.1 10.7 5.5 3.0 0.1 98.7 2,478
Aug-22 97.7 5.1 0.1 102.9 7.8 20.3 44.4 5.8 10.9 5.5 3.0 0.1 97.8 2,680
Sep-22 98.8 5.9 0.1 104.7 8.7 21.0 35.6 5.7 11.5 5.4 2.6 0.1 90.7 3,106
Oct-22 98.5 5.5 0.1 104.1 14.1 21.8 29.2 5.5 11.2 5.4 2.6 0.1 89.9 3,535
Nov-22 98.5 4.9 0.1 103.5 27.5 24.0 30.5 5.4 11.9 5.4 3.2 0.1 108.1 3,522
Dec-22 99.2 6.2 0.3 105.7 41.1 24.4 29.6 5.7 12.3 5.4 3.7 0.1 122.3 3,006
Jan-23 99.4 5.9 0.4 105.6 45.1 24.5 32.3 6.0 12.8 5.4 3.9 0.1 130.2 2,245
Feb-23 99.7 5.6 0.2 105.5 43.7 24.0 31.9 6.1 13.4 5.4 3.8 0.1 128.5 1,601
Mar-23 99.8 6.3 0.1 106.2 32.0 22.2 27.0 6.1 13.8 5.4 3.2 0.1 109.9 1,485
Apr-23 99.9 6.2 0.1 106.1 21.5 21.3 24.8 6.3 13.5 5.4 2.7 0.1 95.7 1,798
May-23 99.9 5.0 0.0 104.9 12.4 20.5 28.4 6.7 13.0 5.4 2.4 0.1 89.0 2,292
Jun-23 99.9 5.2 0.1 105.2 8.9 20.8 36.5 7.1 12.9 5.4 2.6 0.1 94.3 2,618
Jul-23 99.9 5.3 0.1 105.3 8.1 20.4 42.3 7.1 12.8 5.4 2.8 0.1 99.1 2,811
Aug-23 99.9 5.6 0.1 105.6 7.5 20.4 41.7 7.2 12.9 5.4 2.8 0.1 98.1 3,042
Sep-23 100.3 5.3 0.0 105.7 8.7 20.9 35.1 6.9 12.9 5.5 2.6 0.1 92.7 3,431
Oct-23 100.6 5.2 0.1 105.8 13.7 21.6 29.2 6.7 13.1 5.5 2.6 0.1 92.4 3,848
Nov-23 100.8 4.7 0.1 105.6 27.4 23.6 27.8 6.3 14.1 5.5 3.1 0.1 108.1 3,775
Dec-23 101.0 6.0 0.3 107.2 41.9 24.3 30.4 6.2 14.2 5.5 3.7 0.1 126.5 3,178
Jan-24 100.9 5.7 0.3 106.9 45.7 25.1 32.4 6.4 14.2 5.5 4.0 0.1 133.5 2,354
Feb-24 101.0 5.4 0.2 106.5 43.8 24.1 32.2 6.4 14.4 5.5 3.9 0.1 130.2 1,667
Mar-24 100.9 6.1 0.1 107.1 32.5 22.5 26.8 6.6 14.4 5.5 3.2 0.1 111.6 1,525
Summer (April - October)

Summer 20 88.9 4.0 0.1 93.0 11.6 20.3 33.8 5.5 5.7 4.8 2.4 0.1 84.2 3,897
Summer 21 94.2 4.8 0.0 99.0 11.3 20.6 33.0 6.2 10.7 5.2 2.6 0.1 89.7 3,635
Summer 22 97.5 5.5 0.0 103.0 11.8 20.9 35.4 5.9 11.4 5.4 2.8 0.1 93.7 3,535
Summer 23 100.0 5.4 0.1 105.5 11.6 20.8 34.0 6.9 13.0 5.4 2.6 0.1 94.5 3,848
Winter (November - March)
Winter 19-20 95.1 4.6 0.2 99.9 36.4 23.6 29.3 5.2 8.4 5.2 3.2 0.1 111.4 2,006
Winter 20-21 90.5 5.5 0.1 96.2 37.6 23.2 26.9 5.5 10.4 4.9 3.3 0.1 111.9 1,778
Winter 21-22 95.2 5.6 0.1 100.9 37.3 23.8 28.7 5.5 12.3 5.3 3.7 0.1 116.7 1,381
Winter 22-23 99.3 5.8 0.2 105.3 37.9 23.8 30.3 5.9 12.8 5.4 3.6 0.1 119.8 1,485
Annual
Cal 2020 90.7 4.4 0.1 95.2 21.4 21.5 31.7 5.4 7.3 4.9 2.7 0.1 95.1 3,313
Cal 2021 93.6 5.1 0.1 98.7 22.0 21.7 30.8 5.9 10.7 5.2 2.9 0.1 99.4 3,185
Cal 2022 96.9 5.6 0.1 102.6 23.0 22.3 32.8 5.7 11.8 5.4 3.2 0.1 104.3 3,006
Cal 2023 100.1 5.5 0.1 105.7 22.6 22.0 32.3 6.6 13.3 5.4 3.0 0.1 105.4 3,178
Source: EIA, Genscape, BofA Global Research estimates
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BofA Global Research-Commodity Strategist Year Ahead 2023 Commodity Outlook-99278411

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Our top five themes 21 November 2022

1. Supply constraints finely balanced against recession risks Commodities

Inflation pressures should support commodity returns…

Timestamp: 20 November 2022 09:07PM EST

2 Commodity Strategist | 21 November 2022

Exhibit 2: BofA Commodity Price Forecasts

Exhibit 3: BofA Commodity Price Forecasts

Commodity Strategist | 21 November 2022 3

4 Commodity Strategist | 21 November 2022

… as an energy shock combined with a Chinese housing recession

Commodity Strategist | 21 November 2022 5

In 2023, we expect slower GDP growth and sticky inflation but…

… commodities may get support from a retracement in the USD…

6 Commodity Strategist | 21 November 2022

… with the reopening of China’s economy offsets higher rates

Still industrial activity is rolling over on high energy costs…

Commodity Strategist | 21 November 2022 7

… particularly in Europe, where energy scarcity will hit GDP and…

8 Commodity Strategist | 21 November 2022

Underinvestment will amplify supply constraints down the line…

Commodity Strategist | 21 November 2022 9

… and inflation will likely exacerbate the lack of capital challenge

quarters since shock -1.5%

10 Commodity Strategist | 21 November 2022

… as stocks are low, capacity is tight and producers unresponsive

Commodity Strategist | 21 November 2022 11

Geopolitics will play a key role as the US pushes for hegemony…

… as commodities are China’s Achilles heel and America’s edge

12 Commodity Strategist | 21 November 2022

Commodity Strategist | 21 November 2022 13

…we now see a slower expansion this year, next…

14 Commodity Strategist | 21 November 2022

3000 15 BofAML fcst

…just as oil prices face a strong dollar headwind

Rising rates may impact oil demand negatively but…

Commodity Strategist | 21 November 2022 15

…OPEC+ guidance and SPR refills may support oil

Thus, we believe $80/bbl is the new $60 for Brent…

16 Commodity Strategist | 21 November 2022

…as spare capacity dwindles and investment lags

Crucially, most of Asia has yet to reopen post-Covid…

Commodity Strategist | 21 November 2022 17

…and China could stimulate growth in November…

Index, Shanghai Guangzhou '000 sqm,

…at a time oil inventories remain relatively low…

18 Commodity Strategist | 21 November 2022

…and spare production capacity is at a minimum

Meanwhile, investment in oil & gas has picked up…

Commodity Strategist | 21 November 2022 19

…keeping non-OPEC growth at 0.8mn b/d in 2023

United Brazil Other Norway Canada Russia

Again, America likely will lead global oil supply growth…

20 Commodity Strategist | 21 November 2022

…with other nations like Brazil or Canada following

YoY growth (rhs) Canada

Net, we project a surplus of 0.1mn b/d next year…

Commodity Strategist | 21 November 2022 21

…that OPEC+ will likely mop up with a modest cut

Moreover, we expect some gas-to-oil switching…

22 Commodity Strategist | 21 November 2022

…to lend support to Brent oil at $100/bbl in 2023

Brent fwd Brent avg fcst

Still, a Russian oil price cap is a major upside risk…