Oil Markets: Where next?

Christof Rühl,

Global Head of Research

Singapore

September 2016

1

Content

Oil and the economy: Recap

Why did lower oil prices not support economic growth?

OPEC vs. US – two sides to supply

Will demand growth balance the market?

2

“Secular Stagnation“ ?

3

Source: The World Bank

-2

0

2

4

6

8

10

1970 1980 1990 2000 2010

US UK

Japan Italy

France Germany

10-year moving average in percent

Real GDP growth

Yield

Source: Datastream

-2%

0%

2%

4%

6%

8%

1983 '87 '91 '95 '99 '03 '07 '11 2015

US

Germany

Japan

Real return on 10-year

Government bonds

-8

-6

-4

-2

0

2

4

6

8

10

12

14

20

30

40

50

60

70

80

90

100

110

120

130

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

12M – Dated Brent (rhs)

Dated Brent

0

20

40

60

80

100

120

140

Jan-00 Jun-05 Nov-10 Apr-16

Dated Brent

Weekly oil price

$/bbl $/bbl $/bbl

Contango

Backwardation

Daily oil price and term structure

Crude oil prices

4

Source: Bloomberg Source: Bloomberg

Source: Bloomberg

3

4

5

6

7

8

9

China Emerging World

Apr-13 Apr-16

0

2

4

6

8

10

12

2000 2004 2008 2012 2016

BOJ ECB FED

Central bank assets and global growth projections

Trillion US dollars

5

Central bank assets Revisions to 5-year GDP growth forecast

Percent

Source: IMF WEO

-1.1pp

-2.4pp

-0.7pp

20

30

40

50

60

70

80

90

100

110

120

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

Dated Brent

Where is the “shot in the arm”?

Revisions to 2016 GDP growth projections

GDP growth

Source: IMF

6

Oil price decline

Source: Bloomberg

July 2014

US dollars per barrel

0%

1%

2%

3%

4%

5%

World US Advancedeconomies

Emergingeconomies

Jan-15 Jul-15 Jan-16 Jul-16

Content

Oil and the economy: Recap

Why did lower oil prices not support economic growth?

OPEC vs. US – two sides to supply

Will demand growth balance the market?

7

(1) US Dollar is appreciating

Source: Bloomberg

Real trade weighted US Dollar index…

• Relatively strong US growth and

productivity gains

• The end of QE in the US

… rises for good reasons

15% real appreciation since July

2014 (20% since July 2011):

Index, Jan 1990 = 100

85

90

95

100

105

110

115

120

125

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

8

(2) Households are deleveraging

Household debt as a share of GDP

Change in household

debt since peak:

- 7 percentage points

- 19 percentage points

40

50

60

70

80

90

100

1Q 99 1Q 01 1Q 03 1Q 05 1Q 07 1Q 09 1Q 11 1Q 13 1Q 15

US

Euro area

1Q 2008 = 97.9%

4Q 2009 = 63.6%

9

(3) Structural change: Importers are becoming producers

Share of local consumption produced ‘at home’

Decline in imports

since 1995:

- 470 Kb/d

- 2,710 Kb/d

10

Source: BP Statistical Review of World Energy

30%

40%

50%

60%

70%

80%

90%

1990 1994 1998 2002 2006 2010 2014

US Brazil

(4) The long decline of oil intensity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1965 1973 1981 1989 1997 2005 2013

OECD

Non-OECD

World

Barrels of oil per $1,000 of GDP

- 42%

- 48%

- 58%

Decline

since 1979:

1979

Source: BP Statistical Review of World Energy

11

Content

Oil and the economy: Recap

Why did lower oil prices not support economic growth?

OPEC vs. US – two sides to supply

Will demand growth balance the market?

12

20

30

40

50

60

70

80

90

100

110

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16

Total US crude production US onshore crude production WTI price (rhs)

The resilience of US shale production

13

Million barrels per day

Source: EIA

Dollars per barrel

0

20

40

60

80

100

120

Eagle Ford Bakken Permian(Delaware)

Permian (Midland) Niobrara

2012 2013 2014 2015 2016

US shale break-even crude price

US dollars per barrel

Source: Rystad Energy

14

Average 2016

WTI price so far:

$41 per barrel

US E&P: Operating cash flow does not cover capex

Million $

15

(50,000)

(40,000)

(30,000)

(20,000)

(10,000)

–

10,000

20,000

30,000

40,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Operating CF

Capex

Free Cash Flow

8%

9%

10%

11%

12%

13%

14%

15%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Russia

Saudi Arabia

US

Global liquids production and market share

Market share

40%

41%

42%

43%

44%

45%

46%

47%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Market share

Selected countries (crude and NGLs) OPEC (crude & NGLs)

16

Source: IEA Source: IEA

November 2014 November 2014

6%

7%

8%

9%

10%

11%

12%

13%

14%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Iran Iraq

Crude oil market share within OPEC

Market share within OPEC

26%

27%

28%

29%

30%

31%

32%

33%

34%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Market share within OPEC

Iran and Iraq Saudi Arabia

17

Source: IEA Source: IEA

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

Iran Iraq

UAE KSA

Venezuela Nigeria

Net change

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

Canada

US

Mexico

Net change

Source: IEA

Cumulative supply growth since 2Q 2014

Key OPEC producers

Thousand barrels per day (kb/d)

North American producers

18

Source: IEA

Thousand barrels per day (kb/d)

OECD inventories at historic highs

19

Million barrels of crude oil and oil products

Source: EIA

2,550

2,650

2,750

2,850

2,950

3,050

3,150

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov

2010-14 Range

2010-14 Average

2015

2016

Content

Oil and the economy: Recap

Why did lower oil prices not support economic growth?

OPEC vs. US – two sides to supply

Will demand growth balance the market?

20

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

Average2011-14

2015 1H 2016

Europe

US

Demand growth above long-term average

European and US demand growth

Million barrels per day (Mb/d)

Source: IEA

OECD and Non-OECD demand growth

-0.5

0.0

0.5

1.0

1.5

2.0

Average2011-14

2015 1H 2016

OECD

Non-OECD

Million barrels per day (Mb/d)

Source: IEA

1.1 Mb/d

1.6 Mb/d

21

1.5 Mb/d

Global growth

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016

North America Other FSU OPEC Global demand growth

Source: IEA

Global supply and demand

Thousand barrels per day (kb/d)

22

~400

kb/d

Incremental global supply and demand growth since 2Q 2014

Before Algiers: Where we stand

23

‘Freeze’ production?

YES NO

Decision implemented? Decision implemented?

YES NO YES NO

• Oil price supported

• Global market shares:

- OPEC down

- US up

• Market shares within

OPEC constant (Iran

up in case of a side

agreement)

• Oil price under pressure

• Global market shares

stabilizing

• Market share within OPEC:

- those who cheat are up

• Oil price under pressure

• Global market shares:

- OPEC up

- US down

• Market shares within

OPEC determined by

capacity

• Oil price supported

• Global market shares:

- OPEC down/

- US up

• Market share within OPEC:

- those who blink are down

Broken promises or OPEC ‘blinking’ – same same

OPEC blinks Broken promises

Conclusion

Oversupply (incl. inventories) to last for medium term

Price ceiling restricts room for intervention (“freeze”)

Meaningful intervention unlikely

Effect of Capex cuts will support prices – eventually

24