SEB Commodities Research

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Virginia Wright
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1 SEB Commodities Research Bjarne Schieldrop Head of SEB Commodities Research Oil market Nov % shale oil vs 94% conventional oil 2018 still a bridging year Accelerating upside price risk 2019/2020

2 $65/b before Christmas, but 2018 is Bridge over troubled waters Increasing cyclical upside price risk 2019/2020 Deficit is artificial but real Brent 1mth at $65/b before Christmas 2018 is Bridge over troubled waters OPEC+ MUST hold back supply all through 2018 Substantial upside risk 2019, 2020, 2021 Brent 2020 at $55/b is a bargain Bearish 2025 onwards Oil is just energy 2

3 World and EM doing better and so are all commodities Emerging market equities versus broad Bloomberg commodities index SEB RESEARCH 3

+/- 30% YoY US shale oil boom 2011 - North Sea production growth 1975-1998 Iran revolution

4 Oil price is about available supply above ground Average crude price since 1970: $54/b (in 2014 USD) Average yearly US crude oil prices in USD/bl (2014 dollar) Normal yearly price variations: +/- 30% YoY US shale oil boom North Sea production growth Iran revolution Iran-Iraq war Iraq war Arab spring OPEC cartel and oil embargo:

5 Brent crude oil swinging between surplus and deficit Brent crude oil prices in USD/bl 5

inventories at 2862, down 121 m bl/d YoY in Dec.

6 OECD Inventories declining Down 70 mb YoY in Aug Extrapolating March to Aug draws + seasonality puts OECD inventories at 2862, down 121 m bl/d YoY in Dec. A deficit of about 0.6 mb/d implicit OECD commercial crude and product stocks 6

7 Inventories have been heading lower since mid-march Down 158 m bl since mid-march with a speedbump in June Implied deficit: 0.75 mb/d since mid-march in terms of inventory draws Crude and product inventories in weekly data (million barrels) SEB RESEARCH 7

8 US crude oil stocks are still very high but in decline US Crude oil stocks 8

because inventories in the US mid-continent are very high

9 Non-US mid-continent crude stocks drawing down fast The reason why overall US crude stocks are still fairly high is because inventories in the US mid-continent are very high and currently rising US Crude ex-mid-continent stocks in mblpd 9

10 US Distillate stocks below normal ahead of likely cold US winter due to La Nina US Distillate stocks 10

11 So global oil demand is growing steadily At about 1.2% YoY, but currently around 1.6% YoY Global oil demand (mb/d) and YoY growth (%) 11

12 OPEC has cut according to decisions in November 2016 SEB fcst call-on-opec 2018: 32.7 mb/d. IEA: 32.5 mb/d OPEC production in mb/d IEA s fcst for 2018 Call-on-OPEC: 32.5 mb/d 14/11/2017 SEB RESEARCH 12

increased thus limiting the overall effect of the cuts

13 OPEC has cut according to decisions in November 2016 Even though some OPEC members without caps have increased thus limiting the overall effect of the cuts by the others OPEC production in mb/d 14/11/2017 SEB RESEARCH 13

14 OPEC cutters and non-cutters. Total still down If cutters hadn t cut then OPEC s production would have been considerably higher in total. Thus cuts have been highly important. OPEC production in mb/d 14/11/2017 SEB RESEARCH 14

15 Saudi Arabia doing the heavy lifting as usual But production is not that low. Back to before volume over price mid-2014 Saudi Arabia crude oil production in kb/d 14/11/2017 SEB RESEARCH 15

16 Also Russia has cut back according to agreement One might however question the high reference point from Oct 2016 Russian oil production in kb/d 14/11/2017 SEB RESEARCH 16

17 Rebounding production in Libya and Nigeria have made cuts from the rest of OPEC much less effective Production in Libya and Nigeria (kb/d) 14/11/2017 SEB RESEARCH 17

18 Rebounding production in Libya Libya s NOC and CB are the once who have made it possible Production in Libya (kb/d) 14/11/2017 SEB RESEARCH 18

19 Iraqi oil production heading for 5 mb/d Will they be able to hold back production at 4.5 mbl/d? Production in Iraq (kb/d) 14/11/2017 SEB RESEARCH 19

20 Kurdistan independence vote 0.6 mb/d at risk Kurdistan exports 550 kb/d through the Kirkuk-Ceyhan pipeline through Turkey. Region holds 45 bn barrels of reserves Kurdistan vote of independence, Mon Iraq s prime minister Haider al-abadi: International flights to stop on Friday at 6pm if airports and borders not handed over to Iraqi authorities Iraqi parliament asks for military act Problem for biz & int aid (ISIS) No diffusion has eased situation Kurdish KRG has not asked for statehood, but that is the path Chance of war estimated Turkey could re-rout oil supply by Iran The Kirkuk-Ceyhan oil pipeline 20

21 Venezuela s production is ticking lower and lower As social/economic instability and lack of oil investments Venezuela oil production in kb/d 14/11/2017 SEB RESEARCH 21

22 Chinese oil production has tumbled As lower oil prices have led to lower investments and production Chinese oil production in kb/d 14/11/2017 SEB RESEARCH 22

crude oil curve plagued by rising Cushing inventories & contango

23 Crude forward curves flattening, shifting to backwardation The pronounced contango one year ago now increasingly gone The WTI crude oil curve plagued by rising Cushing inventories & contango Crude oil forward prices now and one year ago (USD/b) 14/11/2017 SEB RESEARCH 23

24 Brent to WTI forward 18mth price spread blowing out Lack of Cushing Oklahoma to Gulf coast transport capacity Brent to WTI 18mth price spread in USD/bl 24

25 US crude oil exports booming in response to higher Brent to WTI crude oil differential. So market is finding ways US crude oil exports in kbl/d 25

26 Backwardation the fingerprint of a tighter market Brent and WTI 1 mth to 18 mth time spreads in USD/bl 26

27 Positive Brent crude positive roll yield attracting more speculative money in a low yield world Brent crude front month marginal, annulized roll yield fully funded 27

28 Brent crude spec length close to record high More to come but does create correctional risk to the downside Brent crude net long speculative positions 28

29 The US shale oil production boom US crude to average 2017: 9.4 mb/d, 2018: 10.8 mb/d, 2019: 12.0 mb/d US crude oil production (million bl/d) 29

30 US crude oil production growth has halted on Harvey Likely to move back on track again since well completions are still rising US crude oil production level and marginal annualized growth in kbl/d 30

31 US shale oil production growth now growing as fast as it ever did even though 200 wells out of 1100 every month are not completed. I.e. potential to grow even stronger US shale oil production now growing as fast as it ever did 31

32 At face value it does look like US shale oil volume productivity growth has come to a halt as activity has ramped up. US shale oil volume drilling productivity new production / mth / rig 32

33 Drilling > Completions by 20% ytd Drilling < Completions by 20% will switch in 2018 to US shale oil drilling and completions and uncompleted wells 33

34 # Wells drilled per month per rig at steady level US shale oil wells drilled per rig / mth 34

35 New production per well was at least moving higher to March 2017 before going sideways. Not lower US shale oil new production per well first mth 35

36 US shale oil volume productivity has probably not gone down. Official productivity declining due to DUC build US shale oil volume drilling productivity new production / mth / rig 36

37 US crude and NGL production growing very strongly YoY to 2018 in response to strong rise in rigs and drilling productivity US crude and NGL production Change YoY (m bl/d) 37

38 Shale oil declines rapidly. New drilling needed all the time US crude to average 2017: 9.4 mb/d, 2018: 10.8 mb/d, 2019: 12.0 mb/d US crude oil production (million bl/d) 38

Upstream oil investment time-shift induced 4 yr surplus A

year cycle in upstream oil investments alone would have

39 Upstream oil investment time-shift induced 4 yr surplus A time-shift in part of supply from 5 year cycle to only 1 year cycle in upstream oil investments alone would have been enough to explain a production surplus lasting four years. Billion USD upstream oil investments Resulting new oil production in mb/d Source: SEB 14/11/2017 EQUITY RESEARCH 39

40 New capital for US oil and gas is drying up in 2017 Will investors continue to bankroll US shale oil producers which are running at negative cash flow? Time probably running out Capital to US oil and gas drying up in

41 The number of US oil rig count falling back US oil rig count 41

42 US shale oil rig count change to price pattern changing US oil rig count change and the WTI 18 mth crude oil price with 6wk lead 42

43 US oil rig count to price inflection point moving higher It used to be at $47/bl now it has moved above $50/b WTI 18 mth crude oil price with 6wk lead vs rig count chang wkly 43

44 44

45 45

46 US shale oil legacy loss rising strongly with higher prod. Making the sector more and more reactive. Ability to adjust down is huge Legacy loss - Loss in existing US shale oil production (bl/d) 46

47 Upstream oil and Gas capex fell sharply in 2015 & 2016 Between 35% and 45% from 2013 to Probably rising 5-10% Annual change SEB global upstream E&P spending ( E) Source: SEB E 47

48 A decline of some $270bn/yr since the peak in 2014 May rise by up to $50bn YoY in 2017 Upstream Oil and gas investments in billion USD per year (IEA). 2017: +10%? Source: SEB 48

49 If $300bn per year is needed to cover declines + growth then $60/b is needed to cover growth. Cut upstream oil investments by $60bn and there is zero growth in global production while consumption continues to rise Global oil demand growth and decline in existing production Demand growth: +1.3 mb/d per year Decline in existing production: Minus 5 mb/d per year OPEC decline: 3.4% pa Non-OPEC decline: 7.1% pa Global decline: 5.5% pa Total replacement need: ~ +6.3 mb/d per year 49

50 China Mexico Azerbajan Malaysia Egypt Vietnam Oman Indonesia Turkey Australia South Sudan India Argentina Colombia UK Norway USA Kazakhstan Russia Brazil Canada k bl/d Oil production declining 5-10% where not countered Where oil production is not countered by new production it typically declines some 5-10% pa. Legacy conventional oil investments from 2014 or before still countering overall declines Jan-Jun YoY change in production (m bl/d) Change in average production from January to June YoY (k bl/d) Source: SEB 14/11/2017 EQUITY RESEARCH 50

51 Still solid chunk of new offshore production in 2018 But market rapidly drying up in 2019 and onwards New offshore oil production (m bl/d) Brent crude oil price forecast (from Aug 2017): Market SEB 2018 $56.8/b $55/b 2019 $55.3/b $60/b 2020 $54.7/b Upside price risk 51

52 OECD Inventories (m bl) Supply/Demand balance (m bl/d) Global supply/demand balance Artificial tightness in 2017 and 2018 through managed supply and production cuts by OPEC+ before natural deficit kicks in in 2019 Global supply / demand balance (million bl/d) 3, , ,900 2, , ,600 2,500 2, E 2018E 2019E Supply/Demand-balance OECD inventories (year end, m bl)

53 Our offices Copenhagen Bernstorffsgade 50 P.O. Box 100 DK-1577 Copenhagen V Denmark Tel: Frankfurt Stephanstrasse DE Frankfurt am Main Germany Tel: Helsinki Unioninkatu 30 P.O. Box 630 FI Helsinki Finland Tel: Hong Kong 17/F Jardine House 1 Connaught Place Central, Hong Kong Island Hong Kong Tel: London One Carter Lane London EC4V 5AN United Kingdom Tel: New York 245 Park Avenue, 33rd floor New York NY USA Tel: Oslo Filipstad Brygge 1 P.O. Box 1363 Vika NO-0113 Oslo Norway Tel: Stockholm Kungsträdgårdsgatan 8 SE Stockholm Sweden Tel: Tallinn Tornimäe 2 Tallinn Estonia Tel: /11/2017 EQUITY RESEARCH 53

Energy Outlook. U.S. Energy Information Administration. For EnerCom Dallas February 22, 2018 Dallas, TX

Energy Outlook. U.S. Energy Information Administration. For EnerCom Dallas February 22, 2018 Dallas, TX Energy Outlook For EnerCom Dallas Dallas, TX Jeff Barron Industry Economist, U.S. Energy Information Administration U.S. Energy Information Administration Independent Statistics & Analysis www.eia.gov