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A Return To Higher Oil Prices: It’s Complicated

Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics CFA Society Buffalo Buffalo, New York April 26, 2016

Labyrinth Consulting Services, Inc. artberman.com 2

A Return To Higher Oil Prices: It’s Complicated

• Oil prices collapsed beginning in June 2014 because of market over-supply.
• This was a classic bubble: easy credit + high oil prices after the 2008 Financial Collapse lead to
• ver-investment and over-production.
• We are in the third oil-price rally since prices collapsed—prices are 63% higher than in January:

$44 vs. $27 per barrel.

• This rally is similar to the previous two but may end differently because of growing concern

about supply from under-investment (the reverse side of a bubble).

• The failure of an OPEC production-freeze may signal Saudi Arabia’s expectation for higher oil

prices in the near- to medium term.

• The weak global economy may not be able to sustain much higher oil prices.
• Everyone’s break-even price including OPEC’s is higher than current prices.
• Because of a profoundly changed economy and associated monetary policies, we have crossed

a boundary and a return to higher oil prices is complicated.

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Energy Is The Economy: The Context for The Oil-Price Collapse

• People think that the economy runs on money but it runs on

energy –Nate Hagens.

• Today, oil and gas prices & the economy must be viewed

through the debt lens.

• The end of cheap oil and natural gas in the early 2000s led to

financial dislocations and ultimately, the Financial Collapse of 2008.

• Because of resource scarcity, oil prices increased from a

baseline of $33/barrel in the 1990s to an average price of $99/barrel from late 2010 until September 2014.

• Before the Financial Collapse, E&P companies had almost

unlimited access to joint-venture capital and bank credit.

• Post-collapse monetary policy focused on forcing

consumption and investment: zero interest & further expansion of credit.

• This resulted in more capital to oil companies in the form of

bonds and share offerings as investors reached for yield in a low-interest rate world.

• It is impossible to understand and critically evaluate the shale

gas or tight oil without this context.

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Global Oil Output and Over-Production: How We Got Here

• Global crude oil production reached a plateau of ~ 72.5 mmbpd from 2003-2009.
• Depletion of old fields as new discoveries took longer to bring on production meant no production

growth.

• Higher oil prices provided incentive to produce more expensive, unconventional oil: tight oil

(shale), oil sands and deep-water oil.

• 7.1 mmbpd increase from 2009-2015 lead to production surplus by February 2014 that peaked in

May 2015.

• The over-supply caused oil prices to collapse beginning in mid-2014.
• Low-interest rates and currency devaluation after the Financial Collapse of 2008-2008 enabled
• ver-investment and over-production: cheap money and high oil prices.
• Main contributors to over-production: U.S. + Canada, Iraq, Brazil and Russia.

0.5 1 1.5 2 2.5 3 3.5 4 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Millions of Barrels of Crude Oil Per Day

Incremental Crude Oil Production Since Janaury 2014

U.S. + Canada Iraq Brazil Russia Saudi Arabia Iran

U.S. + Canada Iraq Russia Saudi Arabia Brazil

Production from these countrieswas 2.8 mmbpd more in Feb 2016 than in Jan 2014. 1.2 mmbpd was from the U.S. & 1.1 mmbpd from

• Iraq. Russia added 0.33 mmbpd.

Iran production increased 0.15 mmbpd from December 2015.

Source: EIA and Labyrinth Consulting Services, Inc.

Iran

60,000 62,000 64,000 66,000 68,000 70,000 72,000 74,000 76,000 78,000 80,000 82,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Thousands of Barrels Per Day

World Crude Oil & Condensate Production

Source: EIA & Labyrinth Consulting Services, Inc.

2003-2009 Production Plateau ~72.5 mmbpd 2010-2015 ~7.1 mmbpd increase

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Global Market Balance and Tight Oil Over-Production

• Current global oil market is over-supplied by ~1.45 million barrels of liquids per day.
• The market is moving slowly toward balance.
• Production surplus increased to > 3 mmbpd by May 2015 & has declined since then.
• Supply has flattened but consumption has fallen.
• The origins of over-supply of oil and low oil prices are found, ironically, in increased scarcity
• f petroleum resources.
• Scarcer resources led to higher prices that permitted production of unconventional oil.
• Over-investment because of high prices and easy credit led to over-production, over-supply

and lower oil prices.

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The End of Cheap Oil

• Oil prices have only been more than $90/barrel (March 2016 dollars) 3 times: after the oil

shocks of the 1970s and early 1980s, before the 2008 Financial Collapse, and 2010-2014.

• For the last 15 years of the 20th century, oil prices averaged $33/barrel and were partly

responsible for economic prosperity in the United States (Reagan-Bush-Clinton era).

• Low percent of GDP spent on energy.
• During the Asian Financial crisis in 1998, oil prices reached lowest level since 1950 ($16.49/

barrel).

• Cheap oil ended in the early 21st century—flat production & increased demand from

developing world especially China.

• Longest period (44 months) of high oil prices after the Financial Collapse.

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The Collapse of World Oil Prices

• Market balance expressed by relative supply surplus or deficit (supply minus demand).
• Period of supply deficit before the Financial Collapse contributed to high oil prices.
• A supply surplus because of low demand after the Financial Collapse (2008-2009).
• Period of supply deficit most of 2011-2014 because of supply interruptions in the Middle East.
• Growing supply surplus beginning in 1st quarter of 2014 caused collapse of oil prices.
• The surplus reached a maximum in the 2nd quarter of 2015 (2.2 mmbpd) and has generally

improved since then with falling production but remains more than 1.5 mmbpd.

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The Collapse of World Oil Prices

• The oil industry experienced downturns during previous periods of low oil prices.
• Capex generally follows oil price (but not in 1998-99).
• Significantly lower levels of investment in oil exploration and production as companies cut

budgets and staff.

• The magnitude of cuts and decreased investment are much greater in this downturn: debt

makes a difference.

• Three phases to this downturn marked by changes in rig count responding to price cycles.
• Reduced drilling and completion, and development projects have hurt the oil-field services

industry in addition to oil companies.

• Over-shoot will inevitably lead to higher oil prices.

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• Large reduction in E&P investment in 2015 and probably even greater in 2016.
• Deferred investments in 2015 equivalent to 20 billion barrels of reserves.
• Global E&P estimated capex for 2016 is 44% (-$412 billion) of 2014.
• A substantial supply deficit will result in the not-too-distant future.
• A price spike seems unavoidable.

The Big Picture On Oil Prices: Under-Investment

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The Big Picture On Oil Prices: E&P Debt

• Oil companies have relied on debt during good

and bad times since the Financial Collapse.

• Secondary share offerings in U.S. E&P

companies are already higher YTD 2016 than in 2015.

• Pioneer $1.4 billion, Devon $1.3 billion.
• Investors are looking for the bottom.
• ~$140 billion in junk bond debt coming due over

next 7 years.

• Huge bank exposure to energy debt.
• But companies are spending more than they

earn from operations.

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The Big Picture On Oil Prices: Monetary Policy

• Interest rates have been almost zero since the 2008 Financial Collapse.
• 8 years of zero-interest rate policy have distorted investments and the

economy.

• Investors seek yield because traditional investments have almost none.
• U.S. E&P companies became an attractive investment because of high yield and

relatively low risk.

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The Big Picture On Oil Prices: Monetary Policy

82 83 84 85 86 87 88 89 90 91 92 93 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 4-Jan-16 11-Jan-16 18-Jan-16 25-Jan-16 1-Feb-16 8-Feb-16 15-Feb-16 22-Feb-16 29-Feb-16 7-Mar-16 14-Mar-16 21-Mar-16 28-Mar-16 4-Apr-16 11-Apr-16 18-Apr-16 Wall Street Journal Dollar Index NYMEX WTI Price ($/Barrel)

NYMEX WTI Price & WSJ Dollar Index

WTI NYMEX Price WSJ Dollar Index

$26!Price!Double B

• ttom

$36!Price!Double B

• ttom

WTI!(L HS ) Dollar Index!(R HS )

Source: EIA, Wall Street Journal & Labyrinth Consulting Services, Inc.

L

• ng dollar!futures!

bets!sold!on!doubts! about!F ed!rate!hikes Declining!dollar! value

• A negative correlation between the value of the U.S. dollar and world oil prices: a

globally connected economy in which countries compete for investment based on interest rates and currency valuation.

• Oil transactions are denominated in U.S. dollars as the world reserve currency.
• Higher U.S. interest rates favor investments in the U.S. economy over commodities like
• il. When the dollar is strong, oil prices are generally lower and vice versa.
• The correlation between oil price and the dollar is especially strong since 2015 and

partly explains price cycles.

• The latest price rally began after the Federal Reserve Bank indicated that further

interest rate increases in 2016 were unlikely.

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Price Cycle Trends and Price Volatility

• Oil prices have increased from $26 to $44 per barrel during the current January–April price rally.
• This is based partly on hope for an OPEC-plus-Russia production freeze.
• There were two major price cycles in 2015: March-August ($44-$60-$38 per barrel) and August-January ($38-

$49-$27 per barrel).

• The first was based on plunging U.S. rig counts and withdrawals from storage.
• The second was based on good economic news about China and U.S. storage withdrawals.
• Both of these cycles lasted approximately 150 days (5 months).
• Oil-price volatility was generally high at the beginnings and ends of the cycles and generally low during their

peaks.

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The Present Price Cycle

• Prices increased from $26.55 to $33.62 in late January and then dropped to $26.21 on February 11.
• This “double-bottom” pattern probably tested the low-price threshold for the greater oil-price collapse that began in

June 2014.

• Prices increased to $41.45 on March 22 over a period of 40 days, then fell to $35.70 over the next 12 days before

peaking at $41.97 on April 13.

• The $35.70 low probably tested a threshold.
• Prices are now fluctuating between $42 and $44/barrel.
• Volatility patterns generally are consistent with earlier cycles but it is too early to say how these are developing.
• The total duration of this cycle is 96 days so far.

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U.S. Production Decline

• March production fell to 9.04 million barrels per day, 90,000 barrels per day less than in February.
• 660,000 barrels per day less than peak production in April 2015.
• EIA forecasts that production will drop another 920,000 barrels per day by September 2016 for a

total decline of 1.58 million barrels per day compared to April 2015.

• The rate of decline has increased from ~60,000 bpd/month to ~80-90,0000 bpd/month.

9.69 9.12 9.04 8.11

$0 $20 $40 $60 $80 $100 $120 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17

WTI Price ($/Barrel) Millions of Barrels of Crude Oil Per Day

U.S. Crude Oil Production

Crude Oil Production WTI Price

660!kbpd!decline!s ince!April!2015 (90 kbpd!s ince!F ebruary) Oil!Production (L HS ) WTI!Price!(R HS )

Source: EIA April 2016 STEO & Labyrinth Consulting Services, Inc.

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Inventories Remain An Obstacle To Price Recovery

• U.S. stocks are near record high levels of 539 million barrels: 78 million barrels more

than at this time in 2015 and 138 million barrels more than the 5-year average.

• OECD stocks are also at record levels of 3.13 billion barrels of liquids.
• That is 359 million barrels more than the 5-year average but 54% of those volumes are

U.S. stocks.

2.4 2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 January February March April May June July August September October November December Billions of Barrels of Liquids

OECD Liquids Inventories

2015 2014 2013 2012 2011 2016

2016!Inventory 359!mmb!above the!5-year!average 192!mmb!(54%)!is !US A 2015 2014 2012 2013 2011

Source: EIA & Labyrinth Consulting Services, Inc.

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Comparative Inventories At Cushing Are Falling

• Comparative inventory is determined by comparing current stocks with a moving

average of stocks over the past 5 years.

• The two previous price cycles in 2015 were both characterized by falling comparative
• inventories. When C.I. patterns reversed, prices fell.
• The current price cycle shows strong C.I. decrease at Cushing.
• Front-to-back futures spreads typically fall with decreasing inventories because short-

dated contracts gain value compared to longer-dated contracts.

• The past two cycles ended because producers increased drilling and production at

higher prices.

$0 $10 $20 $30 $40 $50 $60 $70 5 10 15 20 25 30 26-Dec-14 9-Jan-15 23-Jan-15 6-Feb-15 20-Feb-15 6-Mar-15 20-Mar-15 3-Apr-15 17-Apr-15 1-May-15 15-May-15 29-May-15 12-Jun-15 26-Jun-15 10-Jul-15 24-Jul-15 7-Aug-15 21-Aug-15 4-Sep-15 18-Sep-15 2-Oct-15 16-Oct-15 30-Oct-15 13-Nov-15 27-Nov-15 11-Dec-15 25-Dec-15 8-Jan-16 22-Jan-16 5-Feb-16 19-Feb-16 4-Mar-16 18-Mar-16 1-Apr-16 15-Apr-16 WTI PRrice & Futures-Spot Price Spread x 4 (Dollars Per Barrel) Cushing Comparative Inventory (Millions of Barrels of Crude Oil)

Cushing Comparative Invntory & Futures-SpotPrice Spread

Futures Spread Comparative Inventory WTI

Dec-J une!2016!F utures !Price!S pread!(R HS ) C

• mparative!Inventory!(L

HS ) WTI!(R HS )

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82 83 84 85 86 87 88 89 90 91 92 93 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 4-Jan-16 11-Jan-16 18-Jan-16 25-Jan-16 1-Feb-16 8-Feb-16 15-Feb-16 22-Feb-16 29-Feb-16 7-Mar-16 14-Mar-16 21-Mar-16 28-Mar-16 4-Apr-16 11-Apr-16 18-Apr-16 Wall Street Journal Dollar Index NYMEX WTI Price ($/Barrel)

NYMEX WTI Price & WSJ Dollar Index

WTI NYMEX Price WSJ Dollar Index

$26!Price!Double B

• ttom

$36!Price!Double B

• ttom

WTI!(L HS ) Dollar Index!(R HS )

Source: EIA, Wall Street Journal & Labyrinth Consulting Services, Inc.

L

• ng dollar!futures!

bets!sold!on!doubts! about!F ed!rate!hikes Declining!dollar! value

150 160 170 180 190 200 210 220 230 $0 $10 $20 $30 $40 $50 $60 $70 Jan-15 Jan-15 Jan-15 Feb-15 Feb-15 Mar-15 Mar-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 Jul-15 Jul-15 Aug-15 Aug-15 Sep-15 Sep-15 Oct-15 Oct-15 Nov-15 Nov-15 Dec-15 Dec-15 Jan-16 Jan-16 Jan-16 Feb-16 Feb-16 Mar-16 Mar-16 Apr-16 Gulf Coast Minus Cushing Stocks (Millions of Barrels of Crude Oil) WTI Price ($/Barrel)

Gulf Coast (PADD 3) Minus Cushing Inventories and WTI Price

WTI!Price!(L HS ) G ulf C

• as

t!Minus !C us hing! S tocks !(R HS )

Oil!moving!out!of!C ushing!and!into! Gulf!C

• ast storage

Source: EIA & Labyrinth Consulting Services, Inc.

The Current Price Rally and Movement of Stocks Out of Cushing

• Overall U.S. crude oil stocks are increasing but inventories are falling at Cushing.
• Gulf Coast inventories increase as Cushing stocks are transferred. This also correlates

with price cycles in 2015 and 2016.

• Cushing represents only 12% of total stocks but is the pricing point for WTI prices and is

the bottleneck for all Canadian imports and Bakken production.

• It is also the largest casino in the world: 3 billions barrels of oil futures contracts are

traded every week on WTI—3 times Brent, the international benchmark crude oil.

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3.03 1.20 0.89 0.53 0.51 0.34 0.24 0.11 0.10 0.5 1 1.5 2 2.5 3 3.5 Canada Saudi Arabia Venezuela Mexico Colombia Iraq Nigeria Kuwait Angola Millions of Barrels of Crude Oil Per Day

U.S. Imports of Crude Oil

Source: EIA & Labyrinth Consulting Services, Inc.

U.S. imports 7.3 mmbpd 6.94 mmbpd (95%) from 9 countries

Canada (44%), Saudi Arabia (17%), Venezuela (13%), Mexico (8%), Columbia (7%), Iraq (5%), Nigeria (3%), Kuwait (2%) and Angola (1%) 80% of Canadian production goes to the U.S.

Why Imports From Canada Matter

• 44% of U.S. imported crude oil is from Canada: 3 million barrels per day.
• The rest comes from Saudi Arabia (17%--1.2 mmbpd), Venezuela (13%--0.9 mmbpd),

Mexico (8%--0.5 mmbpd), Colombia (7%--0.5 mmbpd), Iraq (5%--0.3 mmbpd), Nigeria (3%--0.25 mmbpd), Kuwait (2% 0.1 mmbpd) and Angola (1%--0.1 mmbpd).

• U.S. imports from Canada have increased 1.25 mmbpd since 2011.
• 80% of all Canadian oil production is exported to the U.S.

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Inventory Growth Includes Imported Oil

• U.S. inventory includes imported oil bought on arbitrage.
• As U.S. production declined after peaking in April 2015, net crude oil imports
• increased. U.S. inventories increased at the same time.
• There is a reasonable correlation between decreased Brent-WTI spreads and increased

imports.

• Today’s world economy is a casino.

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Crude Oil Inventories, Oil Consumption and WTI Prices: 2016 Price Rally

• In the current price rally, consumption has increased following record low prices from December

2015 through February 2016.

• Very high stock levels may be rolling over.
• Consistent production decline of ~70,000 barrels per month since September 2015.
• 90,000 barrel per day decline in March is largest monthly drop so far.
• During 2015 price rally, $15 per barrel (41%) price increase killed consumption.
• In current rally, peak price was almost $17 above baseline with greater percent increase (63%)

than 2015.

9.69 9.12 9.04 8.11

$0 $20 $40 $60 $80 $100 $120 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17

WTI Price ($/Barrel) Millions of Barrels of Crude Oil Per Day

U.S. Crude Oil Production

Crude Oil Production WTI Price

660!kbpd!decline!s ince!April!2015 (90 kbpd!s ince!F ebruary) Oil!Production (L HS ) WTI!Price!(R HS )

Source: EIA April 2016 STEO & Labyrinth Consulting Services, Inc.

6 6.5 7 7.5 8 8.5 9 $0 $10 $20 $30 $40 $50 $60 $70 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Consumption (mmbpd/2.5) & Crude Oil Stocks (mmbo/60) WTI Price ($/Barrel)

U.S. Liquids Consumption, Crude Oil Stocks & WTI Price

WTI Price Consumption Inventory

WTI!Price (L HS ) C

• ns

umption!(R HS ) S tocks !(R HS )

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IA&!L abyrinth!C

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Mar-Aug!2015! Price!C ycle Aug-J an!Price! C ycle J an-Apr!Price! C ycle

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The Long-Term Perspective On Oil Prices

• Average oil price 1950-Present: $45 per barrel.
• Modal oil price: $25 per barrel.
• Present price: $44 per barrel.
• 1986-1999: $33 per barrel.
• The end of cheap oil in the 21st century led to financial dislocations and

ultimately, the Financial Collapse of 2008.

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Increased Driving Will Not Greatly Increase U.S. Oil Consumption

• Lower oil prices have lead to greater gasoline

consumption.

• Product supplied has increased 9% (745 mbpd)

since Jan 2009.

• Vehicle miles traveled have increased 6% (0.16

trillion miles per month).

• Gasoline sales have declined 8% (-640 mbpd).
• Gasoline exports have increased 264% (+419

mbpd) and storage has increased (+27 mmb).

• Greater gasoline consumption will not greatly

increase U.S. oil consumption.

2,400,000 2,500,000 2,600,000 2,700,000 2,800,000 2,900,000 3,000,000 3,100,000 3,200,000 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 Jan-2000 Jun-2000 Nov-2000 Apr-2001 Sep-2001 Feb-2002 Jul-2002 Dec-2002 May-2003 Oct-2003 Mar-2004 Aug-2004 Jan-2005 Jun-2005 Nov-2005 Apr-2006 Sep-2006 Feb-2007 Jul-2007 Dec-2007 May-2008 Oct-2008 Mar-2009 Aug-2009 Jan-2010 Jun-2010 Nov-2010 Apr-2011 Sep-2011 Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013 Mar-2014 Aug-2014 Jan-2015 Jun-2015 Nov-2015 Vehicle Miles Traveled (Millons of Miles) Total Wholesale & Retail Gasoline Sales (Thousands of Barrels Per Day)

Total U.S. Gasoline Sales & Vehicle Miles Traveled

Vehicle Miles Traveled Gasoline Sales 12 per. Mov. Avg. (Gasoline Sales)

Total Gasoline Sales (LHS) Vehicle Miles Traveled (RHS) 12-month average

Americans are driving 6% more (0.16 trillion miles/month)than in 2009 but using 8% less gasoline (-0.64 mmbpd)

Source: EIA, U.S. Federal Reserve Bank & Labyrinth Consulting Services, Inc. *March & April 2016 Gasoline Sales estimated from weekly Product Supplied data; no VMT data for those months. 50000 100000 150000 200000 250000 300000 350000 6000 6500 7000 7500 8000 8500 9000 9500 10000 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Gasoline Exports (Thousands of Barrels 12 MMA) Gasoline Product Supplied & Total Sales (Thousands of Barrels Per Day 12 MMA)

Gasoline Product Supplied, Total Sale & Exports

Gasoline Product Supplied Total Gasoline Sales Exports 12 per. Mov. Avg. (Gasoline Product Supplied) 12 per. Mov. Avg. (Total Gasoline Sales) 12 per. Mov. Avg. (Exports)

Total Sales (LHS) Product Supplied (LHS) Gasoline Stocks (RHS) Exports (RHS) Gasoline exports have increased 264% (419 mbd) since 2009 Product supplied has increased 9% (745 mbd) since 2009 Sales have decreased 8% (623 mbd) since 2009

180,000 190,000 200,000 210,000 220,000 230,000 240,000 250,000 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Gasoline Stocks (Thousands of Barrels)

Gasoline Stocks

Gasoline Stocks 24 per. Mov. Avg. (Gasoline Stocks)

Stocks 24-month average Gasoline Stocks have increased 13% (27 mmb) since 2009

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A Perspective On Break-Even Prices

• There has been a lot talk about low- and high-cost producers since the oil-price collapse of

2014.

• IMF published fiscal break-even prices for OPEC in 2015.
• We have determined break-even prices for the core tight oil plays in the U.S.
• Everyone needs prices higher than today’s to break even.
• Realistically, $70 per barrel is the minimum for the most lower-cost producers.
• Most OPEC members need more than $80 to break even.
• U.S. tight oil plays look pretty good in this company!

$137 $119 $115 $110 $97 $95 $89 $89 $86 $71 $70 $69 $67 $65 $49

$0 $20 $40 $60 $80 $100 $120 $140 $160

Yemen Iran Algeria Bahrain Libya Oman Qatar Average Saudi Arabia Permian Core UAE Iraq Eagle Ford Core Bakken Core Kuwait

Fiscal Break-Even Price (Dollars Per Barrel)

IMF Projected 2016 Fiscal Break-Even & U.S. Tight Oil Prices

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A Return to Higher Oil Prices Is Complicated

• The current price cycle may represent the beginning of an oil-price recovery.
• Comparative inventories are falling at Cushing and stocks now include imported oil.
• Chart patterns suggest that a bottom may have been established at $26-$27 per barrel.
• A more recent threshold may have been tested at $36 per barrel. The fact that the Doha failure did not affect

prices much is notable.

• Earlier price cycles in 2015 ended badly. Higher prices resulted in increased drilling and completion.
• Also, demand may have been range-bound because of a weak global economy.
• What may be different is concern about medium-term supply because of under-investment.
• There has been more progress toward market balance now but the global surplus is still 1.5 mmbpd.
• The likely path forward will be more price cycles but this time, with higher rather than lower ending prices.
• What is a reasonable price recovery level? History suggests $45 per barrel but everyone needs more now to

break even.

• A weak global economy and weak oil demand are the biggest risks.