GLOBAL OIL MARKET TRENDS

Our view is neutral in the short term (end of 2015) and bullish in the medium term (to 2020). We see insufficient oil demand growth to prevent further stockbuilding in Q3 & Q4 2015. Brent front month prices have stabilized since April, settling in a 60 to 68 USD range from a low of 46 USD/bbl. In the medium term, the cost of supply necessary to meet demand to balance the market is too high relative to where the futures marketis currently trading, making us bullish the back-end. Longer-dated prices (five years) have been more stable in this market downturn, trading above 75 USD vs. a low of 72 USD/bbl.

Brent timeline and latest forward curve: Prompt prices recovering, back-end more stable

Source: Bloomberg, Rystad Energy research and analysis

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Brent front month Forward curve

Credit crisis

QE1

China fiscal stimulus

Lehman collapse

Libya losses

EU crisis

Iran

Iran negotiations KSA supply surge Greece

Draghi “whatever it takes”

Libya losses

Weaker growth, strong supply growth (NAm shale, Libya etc.)

Saudi price cuts

OPEC meeting

US rig count starts to drop

ICE Brent crude, historical front month contract price and latest forward curve USD per bbl

Global recovery

“Arab spring”

Iraq supply risk fears

Iran tentative agreement

US rig count bottoming out

Global purchasing manager indices (PMIs) are monthly leading indicators for economic activity. Based on the latest readings, the uneven global economic recovery is set to continue in 2015.

• The US PMI (ISM) has come

down sharply from lofty levels, and signals a cooling from strong activity levels in H2 2014.

• The euro area PMI has continued to improve supported by QE in Europe.

• Continued soft readings in Chinese PMI adds pressure on policy makers to support growth.

• The Global Manufacturing PMI aggregate has trended lower and is signaling only mediocre growth in the global economy currently.

Global Purchasing Manager Indices (PMIs) The uneven economic recovery looks set to continue in 2015

Source: Bloomberg, ISM, Markit

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Note on PMIs: Monthly survey of purchasing managers. A level of 50 indicates unchanged overall conditions since last month. Below 50 indicates worse overall conditions, above 50 signals improving overall business conditions since last month.

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Global purchasing manager indices (PMIs) for the manufacturing sector % (index)

According to the latest estimates by the IEA and EIA, world oil demand in 2015 is expected to grow by around 1.2 mmbbld y/y. Global oil demand has tentatively recovered with cold temperatures starting in Q1 2015, an improving OECD economy, and with further support from lower oil prices. Growth momentum in demand is currently expected to ease over the coming quarters, with the downside stemming from structural headwinds to the global economy and weaker economic activity in large commodity exporting countries. Nevertheless, continued lower oil prices should stimulate demand further, providing some upside to the oil market. 2015 demand downside factors are Russia and prolonged recession in Russia, Brazil and southern Europe.

Global oil demand growth Tentative signs of a global demand growth recovery in 2015

Source: EIA Short-Term Energy Outlook May 2015, IEA OMR May 2015

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EIA STEOIEA OMR

Actual Estimates

World liquids demand growth y/y Million bbl/d

Forecast

EIA and IEA 2015: +1.1 MMbbld y/y

EIA 2014: +0.85 MMbbld y/y

IEA 2014: +0.66 MMbbld y/y

EIA 2016: +1.3 MMbbld y/y

Horizontal rig count in the «Big 3» plays (“the rigs that count”) US rig count by direction Number of rigs

US rig count and the “rigs that count” 50% drop in US horizontal rig count, with the same drop in the “Big 3” plays

Source: Baker Hughes and Rystad Energy research and analysis

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Crude oil inventories, Cushing Oklahoma (WTI delivery point) Million barrels

US Commercial crude inventories, total Million barrels

Oil inventory trends The current oversupply is primarily a US crude phenomenon (0.8m b/d into storage ytd)

Source: DOE/EIA

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1 3 5 7 9 1113151719212325272931333537394143454749515yr range 20152014 5yr avg.EIA storage capacity estimate

The chart reveals the trends for commercial crude inventories for all OECD countries combined. Crude inventories were higher than the 5 year average during the last 6 months of 2014, but still in the 5 year range. In April 2015 – the last month with available data – they rose to an alarming 1147 mmbbl – far above 5 year range. Note: OECD oil inventories are reported monthly to the IEA and are the most comprehensive and trustworthy source of data on global oil inventories, as non-OECD oil inventory data are scarce.

Oil inventory trends OECD commercial crude oil inventories continue to climb led by soaring US crude storage

Sources: IEA OMR May 2015 and Rystad Energy research and analysis

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OECD commercial crude oil inventories Million bbls

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The chart shows the convention of oil market balances, namely the “Call-on-OPEC crude + stock change”, ie. the production rate for OPEC crude to exactly balance supply and demand. According to Rystad Energy’s latest UCube supply forecast for 2015, the Call-on-OPEC is 29.2 MMbbld this year, assuming global demand growth of 1.1 MMbbld. OPEC crude production is currently estimated at around 31 MMbbld after averaging 30.5 MMbbld in Q1 2015. The quarterly profile in 2015, however, indicates that the “Call” rises above the collective output target of 30 MMbbld in Q4 of 2015.

Oil market balance in 2015 Call-on-OPEC rises towards OPEC’s collective output target in H2 2015

Source: Rystad Energy research and analysis, International Energy Agency OMR May 2015, UCube May 2015

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OPEC crude production

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Rystad Energy Call-on-OPEC crude 2015 avg.

OPEC liquids supply and call-on-OPEC* Million bbls/d

We are comfortable in the current oil futures price trading range. The market stabilized as data show: • Continued drop in US rig counts • Flattening of the US weekly oil

production estimate from EIA and first weekly stock draw of the year

• Record-high Chinese crude net imports in April

Short term direction for US shale production – especially the extent of deferred completions of drilled wells – is driving prompt prices. The US horizontal rig count appears to have bottomed out this cycle. Middle East tensions and strong refinery margins have helped support crude prices. The chart shows the relative development of WTI oil prices (monthly averages) from the local peak month: In 1985-86 oil prices fell 62% in 8 months. In 2008-09 oil prices fell 71% in 7 months. In this downturn, oil prices fell 55% in 7 months but now look stable.

Historical comparisons 1985, 2008 and 2014 Prompt oil price development & where we are now

Source: Bloomberg, Rystad Energy research and analysis

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WTI oil price development during three downturns Index, 100 = month of oil price peak

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May 2015

Months after oil price peak

The chart shows the relative development of total US rig count (monthly averages) from the local peak month for WTI oil prices. In 1985-86 US rig count peaked 1 month after oil prices and dropped 65% in 8 months. In 2008-09 US rig count peaked 2 month after oil prices and dropped 55% in 9 months. In this downturn, US rig count peaked 3 months after oil prices and has not yet bottomed.

Historical comparisons 1985, 2008 and 2014 US rig count bottoming out now

Source: Bloomberg

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US total rig count development during three downturns Index, 100 = month of oil price peak

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Months after oil price peak

The chart shows historical and forecasted (UCube base case) liquids production split by life cycle as of 2015. The producing fields are in decline going forward, but the decline would be even steeper if continuous infill drilling was not included. Sanctioned fields currently under development are expected to help increase global production towards 2018, but after that, decline is inevitable unless new fields are sanctioned.

Global oil supply to 2025 by life cycle If no new fields are sanctioned, liquids production will be in decline from 2018

Source: Rystad Energy UCube May 2015

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Global liquids production from 1990-2025 split by life cycle Million bbl/d

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Discoveries

Other liquids

Producing

Abandoned as of 2015

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History Forecast

Shale/tight liquids production in North America is expected to reach 11.2 MMbbl/d in 2020 and 12.1 MMbbl/d in 2025. The current base case implies a temporary slowdown in NAm shale liquids additions in 2016. In the following years higher oil prices in our base case scenario will increase drilling activity, and as a result, production again during 2016 and thereafter. Around 40% of North American shale/tight liquids output is NGLs and condensate from wet gas wells. The crude oil percentage of total output stays roughly constant towards 2020, while crude production increases year on year in 2014-2020E.

North America shale Temporary slowdown in NAS liquids supply growth in 2015-16 expected in base case

Source: Rystad Energy UCube May 2015

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Liquids production from North American shale plays split by liquids type, 2009-2020 Million bbl/d

Crude Oil

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NGL

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The chart the average breakeven even for US shale oil*. This historical numbers are based on actual well results and reported well costs. For 2015 the breakeven even is estimated based on a expected cost deflation of 15% and efficiency gains of 5% On average the breakeven price has gone down with 8% per year since 2011, with 2014 with the largest improvements. Going forward, it could be arguing that the efficiency will continue, with will reduce the breakeven even further. Three scenarios: • No efficiency gains until 2020 • 5% yearly efficiency gains until

2020 • 10% yearly efficiency gains until

2020

Average shale WTI breakeven price might fall below 50 $/bbl in 2015

*Based on horizontal wells in Bakken, Eagle Ford, Permian Midland, Delaware and Niobrara Source: NASWellData; Rystad Energy research and analyses

Average NA shale WTI breakeven price for different spud year USD/bbl

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?? Ask us!

Per Magnus Nysveen • Head of Analysis at Rystad Energy • Expert on upstream portfolio and transaction

advisory, experience with financial and fiscal regimes; unconventionals

Bjørnar Tonhaugen • VP oil and gas markets at Rystad Energy • Expert on oil market fundamentals • Previously senior commodities strategist

Nordea Markets Nadia Martin • Senior analyst at Rystad Energy • Expert on short-term oil and products

markets analysis and trading • Previously at Phibro and Morgan Stanley

Global Oil Market Trends Report (OMT) Description • Recent developments in supply & demand, oil prices and

forward curve with explanations • Views on oil price direction & forward curve development –

short and medium terms • Global cost of supply curves based on data collected at field

level • Forecasts of global supply, demand and supply-demand

balances at short and medium-term

Benefits • Macro analysis: Analyses the global demand and supply

picture; the impact of endogenous and exogenous influences

• Strategy: Develops individual market views in order to make the right decisions

• Benchmarking: Compares country and company research; analyses break-even prices

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Global Oil Market Expertise