The Oil Price Collapse of 2018: More Than a Correction Shreveport - - PowerPoint PPT Presentation

Slide 1 Labyrinth Consulting Services, Inc. artberman.com

The Oil Price Collapse of 2018: More Than a Correction

Shreveport Geological Society March 19, 2019 Art Berman Labyrinth Consulting Services, Inc.

Slide 2 Labyrinth Consulting Services, Inc. artberman.com

Oil prices collapsed in early October but Have Recovered to High-$50 Range

• WTI has recovered 39% of the price decline from the 2018 oil-price collapse.
• $59.09 vs. $42.53 bottom in late December.
• Price collapse was signal to shale companies to stop over-producing.
• The message will be repeated until action results.
• WTI has been above the 100-day average since March 1.
• Price is -$7.75 less than 200-month average vs. +$10.58 above on October 3.

Slide 3 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory and Oil Price

• Oil prices are relatively high when Comparative Inventory (C.I.) is negative (deficit) & prices

are relatively low when C.I. is positive (surplus).

• Many observers and analysts believe that current oil prices are “too low.”
• The last time C.I. was at current ~9 mmb level, WTI was $65.72/barrel vs $56.35/barrel today.
• That price was ~$3 over-valued and current price ~$4 under-valued.
• Today’s WTI front-month price of $59.37 is correctly valued.
• Why isn’t this generally understood?

9

239 212

8 9

• 36

$72.36 $67.18 $53.34 $65.72 $61.28 $75.34 $45.26 $56.35

• 80
• 30

20 70 120 170 220 270 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 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 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

Crude + Refined Product Comparative Invneory (mmb) WTI Price ($/barrel) Source: EIA & Labyrinth Consulting Services, Inc.

Oil Over-Supply Positive C.I. WTI Spot Price (LHS)

April 2015 Nov 2014 mid-cycle price $72 Feb 2017

Oil Under-Supply Negative C.I.

OPEC+ Output Cut

Current front-month WTI price of $59.37 is correctly valued Last time comparative inventory (C.I.) was at current +9 mmb level, WTI was $65.72 That price was over-valued based on C.I. yield curve

Mar 2018 mid-cycle price $61 Last time CI was at current level, WTI was $65.72

EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI

Slide 4 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory-Price Yield Curve

• Inventory is part of supply. Demand is consumption, net imports & movements into & out of

inventory.

• A cross-plot of C.I. vs price results in a yield curve.
• The comparative inventory yield curve uses C.I. instead of maturity & oil price instead of yield.
• The concept is identical.
• The yield curve crosses the y-axis at the 5-year average.
• That is the “mid-cycle” price, the market-clearing price of the marginal barrel needed to maintain

supply.

• The market is short on oil price when C.I. is positive, or more than the 5-year average, & long when

C.I. is negative or less than the 5-year average.

• The slope of the yield curve reflects the market’s sense of urgency about supply.

Comparative Inventory (C.I.) Supply Less Certain Supply More Certain

Mid-Cycle Price Marginal barrel or mmBtu price at the 5-year average needed to maintain supply

Yield Curve

Higher Price Needed to Maintain Supply Lower Price Needed to Maintain Supply

Source: Aperio Energy Research & Labyrinth Consulting Services, Inc.

• +

Slide 5 Labyrinth Consulting Services, Inc. artberman.com

2018 Oil-Price Collapse Was More Than a Correction: Markets Devalued Brent

• The price collapse was in reaction to global over-supply and was not merely a correction.
• Some analysts mistakenly think that everything is back-to-normal now that prices have

stabilized—comparative inventory yield curves suggest that they are wrong.

• Markets appear to have de-valued Brent from October to December 2018.
• OECD minus U.S. comparative inventory (C.I.) crossed the 5-yr avg at ~$57.
• Previous crossing in Mar-Apr 2018 was ~$72--suggests ~20% price devaluation.
• WTI comparative inventory data back on July 2017-2019 yield curve after sentiment-based

excursions above & below October – February.

• EIA inventory forecasts put Dec 2019 on YC at +24 mmb & $58 WTI price.

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120

• 50 -40 -30 -20 -10

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

$54 Mar 2019 Mar-June 2015 False Optimism Late 2015-Early 2016 Market Pessimism Dec '16 - Apr '17 Production-Cut Optimism Early 2014 Market Optimism

Crude + products comparative Inventory (C.I.) Millions of Barrels

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research

WTI Price ($/barrel)

WTI comparative inventory data back on July 2017-2019 yield curve after sentiment-based excursions above & below October - February EIA inventory forecasts put Dec 2019 on YC at +24 mmb & $58 WTI price

July 2017-2019 Yield Curve 2014-June 2017 Yield Curve

2019 crude selected product inventories based on March EIA STEO forecast Nov Sep Aug

$62

Mid Cycle Price Dec

$70

May 2018

$71 Oct 2018

Jan

$58 Dec 2019

Jan 2014 - June 2017 July 2017 - Dec 2018 2019 Forecast Feb

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 $130 $135

• 200 -180 -160 -140 -120 -100
• 80
• 60
• 40
• 20

20 40 60 80 100 120 140 160 180 200 2010-2011 2011-2013 2014- Jun 2017 Jul 2017-2019

Comparative Inventory (C.I.) Millions of Barrels Brent Price ($/barrel)

Source: EIA STEO & Labyrinth Consulting Services, Inc.

July 2016 (+157,$44.95)

2014-2018 Yield Curve

Late 2015-Early 2016 Market Pessimism Early 2017 OPEC+ Optimism Late 2013-early 2014 Market Optimism Spring 2015 Optimism

Oct

Jun 2014 (-58, $111.80)

Sep $79

Markets appear to Have de-valued Brent from October to December 2018 OECD minus U.S. comparative inventory (C.I.) crossed the 5-yr avg at ~$57 Previous crossing in Mar-Apr 2018 was ~$72--suggests ~20% price devaluation

Dec Nov Jan

EIA 2019/STEO/ STEO Master

$57 mid- cycle price Feb $64

Nov 2014

2019 Yield Curve?

Slide 6 Labyrinth Consulting Services, Inc. artberman.com

Mechanics of Comparative Inventory

• Comparative Inventory = Current Inventory Level minus 5-Year Average of Inventory Levels.
• Inventories consist of crude oil plus a basket of price-critical refined products.
• These include gasoline and diesel.
• When inventories exceed the 5-year average, C.I. is in surplus and vice versa.
• $50

$0 $50 $100 $150 $200 $250 $300 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventory (RHS)

Inventories (LHS)

Nov 2014 OPEC+ Cut Spring 2015 False Price Rally Mar 2016

5-Year Avg (LHS)

Mid Jan 2019 Mar 2018

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus

2018 Oil-Price Collapse

C.I. Deficit C.I. Surplus

Feb 2017

EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI

Slide 7 Labyrinth Consulting Services, Inc. artberman.com

• The 2014-2015 oil-price collapse coincided with the end of C.I. deficit that had characterized 2011-

2014.

• Inventories climbed relative to the 5-year average resulting in a massive C.I. surplus by early 2016.
• WTI prices fell below $30/barrel.
• The ”false” oil-price rally to $60 in the spring of 2015 was because of a short-term drop in C.I.
• The surplus began to decline in the 2nd half of 2016 (reduced capital flows in 2015) & decline began

in earnest after the OPEC+ production cut in early 2017.

• C.I. went into deficit in March 2018. Capital flows and oil prices increased to $75 by October.
• The 2018 oil-price collapse coincided with a change from C.I. deficit to surplus in late September.
• That surplus continues to increase.

Comparative Inventory Explains WTI Price History since 2014

• $50

$0 $50 $100 $150 $200 $250 $300 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventory (RHS)

Inventories (LHS)

Nov 2014 OPEC+ Cut Spring 2015 False Price Rally Mar 2016

5-Year Avg (LHS)

Mid Jan 2019 Mar 2018

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus

2018 Oil-Price Collapse

C.I. Deficit C.I. Surplus

Feb 2017

EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI $0 $20 $40 $60 $80 $100 $120 750 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

WTI Price (RHS)

Inventories (LHS)

Jun 2014 Nov 2014 C.I. Surplus Began Feb 2016 Nov 2016 OPEC+ Cut Announced Jun 2015 Jun 2016 Jun 2017 Late Dec 2018

5-Year Avg (LHS)

Late Sept 2018 C.I. Surplus Began Mar 2018 C.I. Deficit Began

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus C.I. Deficit C.I. Deficit C.I. Surplus C.I. Surplus

EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI

Slide 8 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory has Explained Price Cycles Since Data Was Available

• Nine price cycles defined by comparative inventory vs WTI price from 1995-2019.
• U.S. inventory data first publicly available in 1990.
• This history shows that negative C.I. does not always result in high oil prices.
• This is best illustrated by the 1995-2004 cycle in which markets expressed little supply

urgency despite strongly negative C.I. (beware of outages with just-in-time supply).

• A similar situation exists with natural gas markets today in the U.S.
• The important take-away is that the current perception of low-supply urgency suggests that

price may never return to 2011-2014 levels unless that perception changes.

• Markets are ruthless & hate to over-pay.

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

• 150.00
• 100.00
• 50.00

0.00 50.00 100.00 150.00 200.00 250.00 300.00

Nine Price Cycles Defined by Comparative Inventory vs WTI Price from 1995-2019

1995-2004 2005-NOV 2006 DEC 2006-2007 2008 2009 2010-2011 2012-2013 2014-2017 2018

Comparative Inventory (C.I.) Millions of Barrels WTI Price ($/barrel)

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research 2017- 2018 2014-17 1995-2004 2008 2014-17 2012-13 2006- 2007 2010- 2011 2005- 2006 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120

• 150
• 100
• 50

50 100 150 200 250 300

Comparison of three price cycles defined by comparative inventory vs WTI price from 1995-2019

1995-2004 2014-June 2017 2018-19

Comparative Inventory (C.I.) Millions of Barrels WTI Price ($/barrel)

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research

1995-2004 July 2017-2018 2014- June 2017

Slide 9 Labyrinth Consulting Services, Inc. artberman.com

More History Explained by Comparative Inventory

• Until about 2004, price fluctuations were low-amplitude compared to C.I. changes. Much

smaller deficits after 2007 resulted in much higher prices.

• Markets became concerned about flat supply in the face of increasing demand from Asia.
• Geopolitical concerns arose about Middle Eastern oil supply with death of Saudi king, Iraq

war & Iran’s nuclear program. Also unrest in Nigeria, U.S. hurricanes Katrina & Rita, and refinery outages in the North Sea and U.S. contributed to supply concerns (we think there are geopolitical risks today!).

• Oil prices increased despite growing C.I. surplus.
• Demand destruction partly responsible for a price collapse in 2006-2007.
• 130
• 80
• 30

20 70 120 170 220 270 320 1/6/95 1/6/96 1/6/97 1/6/98 1/6/99 1/6/00 1/6/01 1/6/02 1/6/03 1/6/04 1/6/05 1/6/06 1/6/07 1/6/08 1/6/09 1/6/10 1/6/11 1/6/12 1/6/13 1/6/14 1/6/15 1/6/16 1/6/17 1/6/18 1/6/19 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 Comparative Inventory (mmb) WTI Price ($/barrel) Source: EIA & Labyrinth Consulting Services, Inc.

Over-Supply (Positive C.I.) Under-Supply (Negative C.I.) WTI Price (LHS) 2006-2007 Price Collapse

2006-07 oil-price collapse completely different from 2008-09, 2014-15 & 2018 Price rally was geopolitical during period of comparative inventory (C.I.) over-supply Later collapses began during C.I. under-supply & largely independent of outages

Slide 10 Labyrinth Consulting Services, Inc. artberman.com

C.I. Just As Useful With Brent

• OECD minus U.S. is the measure for C.I. vs Brent calibration.
• Different data frequency & reliability compared to WTI.
• Shape of Brent yield curve suggests similarly low supply urgency as WTI.
• Mid-cycle price is ~$60/barrel.
• September 2018 C.I. minimum almost identical to July 2014 C.I. minimum but there is a -$29

price difference. That is a measure of oil-price devaluation & effect of yield curve slope.

• December average Brent price of $57.36 was appropriately valued.
• Current price of $68 is a few dollars over-valued.

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 $130 $135

• 200 -180 -160 -140 -120 -100
• 80
• 60
• 40
• 20

20 40 60 80 100 120 140 160 180 200 2010-2011 2011-2013 2014- Jun 2017 Jul 2017-2019

Comparative Inventory (C.I.) Millions of Barrels Brent Price ($/barrel)

Source: EIA STEO & Labyrinth Consulting Services, Inc.

July 2016 (+157,$44.95)

2014-2018 Yield Curve

Late 2015-Early 2016 Market Pessimism Early 2017 OPEC+ Optimism Late 2013-early 2014 Market Optimism Spring 2015 Optimism

Oct

Jun 2014 (-58, $111.80)

Sep $79

Markets appear to Have de-valued Brent from October to December 2018 OECD minus U.S. comparative inventory (C.I.) crossed the 5-yr avg at ~$57 Previous crossing in Mar-Apr 2018 was ~$72--suggests ~20% price devaluation

Dec Nov Jan

EIA 2019/STEO/ STEO Master

$57 mid- cycle price Feb $64

Nov 2014

2019 Yield Curve?

Slide 11 Labyrinth Consulting Services, Inc. artberman.com

Betting Against the Market Using C.I.

• All 3 major excursions—Mar-Jun 2015, Late 2015-Early 2016 & Dec 2016-Apr 2017—were

recognized as excursions as they were happening.

• The September – October 2018 & November – December 2018 were also recognized as excursions.
• Symmetry to latest excursions: December 28 price of $45.26 as undervalued as Oct 5 price of

$75.34 was overvalued.

• The market is not wrong during excursions: uncertainty leads to price discovery.
• The key to betting against the market is having the calibration to know what is happening & to

what level price is likely to return.

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120

• 50

50 100 150 200 250

Crude + products comparative Inventory (C.I.) Millions of Barrels

Source: EIA , HSNO & Labyrinth Consulting Services, Inc.- Aperio Energy Research

Mar-June 2015 False Optimism

Early 2014 Market Optimism Late 2015-Early 2016 Market Pessimism WTI Price ($/barrel)

Dec '16 - Apr '17 Production-Cut Optimism

Crude + Products C.I. decreased -5.64 mmb to +9 mmb wk ending Mar 8 WTI ~$4.00 under-valued at wkly avg price of $56.35 based on C.I. yield curve Current front-mo price of $58.26 is under-valued by ~$2.00

Mar 1 C.I. MIN May 4 $71.25

C.I. WTI 3/8/19 9.07 $56.35 3/1/19 14.71 $56.12 Change

• 5.64

$0.23 5/4/18

• 36.20

68.38 Change 45.27

• $12.03

C.I. is current crude + products stock level minus 5-yr avg

$62 Extreme Market Pessimism

EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI

MAX Price 2015-18 Oct 5 $75.34

Jan 2014 - June 2017 July 2017 - Dec 2018 2019

Mar 8

Slide 12 Labyrinth Consulting Services, Inc. artberman.com

World Production Surplus for 2019-2020

• EIA revised production surplus 170 kb/d lower for 2019-2020 based on OPEC+ aggressive

production cuts but surplus persists

• Previous estimate was +610 kb/d, now at +440 kb/d.
• Forecast is for $63 average Brent in 2019 & $62 in 2020.
• World Over-Supply of Oil Expected to Peak at 1 mmb/d in 2Q 2019.
• IEA/EIA +0.8 mmb/d average supply-demand surplus in 1H 2019.
• +0.5 mmb/d surplus in 2H 2019 and +0.65 mmb/d average for 2019.

0.5 0.5 1.2 1.5 1.8 1.0 1.7 1.4 0.3 0.1 1.4 0.1 0.0 0.4 1.1 1.6 0.6 1.0 0.6 0.4

• 0.2
• 0.4
• 0.8
• 1.3
• 0.2
• 1.2
• 0.6
• 0.5

20 40 60 80 100 120

• 1.5
• 1
• 0.5

0.5 1 1.5 2 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119E Q219E Q319E Q419E Market Balance (Supply Minus Demand mmb/d)

Supply-Demand Surplus (LHS) Supply-Demand Deficit (LHS)

Source: IEA, EIA & Labyrinth Consulting Services, Inc.

Forecast

Annual Avg Supply-Demand Balance (LHS)

• 0.59

+0.80

• 0.55

+0.80

Brent Price (RHS)

OPEC+ Output Cut OPEC+ Output Cut

+0.75 +1.48 +0.51 +0.70 +0.51

IEA/IEA MASTER FILES/IEA MASTER.xlsx

Slide 13 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory is Central For Understanding Oil Markets

• Oil markets are extraordinarily complex because oil is the master resource.
• It therefore, underlies and connects all elements of the global economy including the human

psychology behind markets.

• The C.I. yield curve seems to integrate much of that complexity into two factors—price &

comparative inventory.

• The approach is not a solution but it provides outstanding calibration.
• 200
• 100

100 200 300 400 1/4/08 7/4/08 1/4/09 7/4/09 1/4/10 7/4/10 1/4/11 7/4/11 1/4/12 7/4/12 1/4/13 7/4/13 1/4/14 7/4/14 1/4/15 7/4/15 1/4/16 7/4/16 1/4/17 7/4/17 1/4/18 7/4/18 1/4/19 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 Comparative Inventory (mmb) WTI Price ($/barrel) Source: EIA & Labyrinth Consulting Services, Inc.

Over-Supply (Positive C.I.) Under-Supply (Negative C.I.) WTI Price (LHS)

Comparative Inventory Generally Correlates Negatively With Oil Price Unless Security Urgency Supercedes Present Fundamentals

Slide 14 Labyrinth Consulting Services, Inc. artberman.com

• Oil prices are likely to move toward $60 WTI & $70 Brent along an uneven pathway.
• There will be opinion leaders who proclaim a return to $90-$100 prices in the relatively near term.
• Don’t believe them.
• Proclamations about peak demand, the dominance of electric vehicles & renewable energy will
• persist. Neither believe the time frames nor that living standard will be more-or-less as it is today.
• Humans have never gone from a higher to a lower density source of energy.
• That path will be traumatic.
• Capital flows define oil market cycles. Supply and demand proceed naturally from capital flows.

The Path Forward: A Slide I Made in January

$26.21 $76.41 $42.53 $52.07 63.14 78.97 66.09 55.09 34.23 18.43 27.42 65.17 57.16 42.99 37.03 10 20 30 40 50 60 70 80 90 $0 $20 $40 $60 $80 $100 $120 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 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19

Oil Volatility Index NYMEX Oil Futures ($/Barrel)

Extreme Frequency & Magnitude of Volatility Changes Since Oct 19 Road to higher oil prices may be less certain than in previous price cycles Sentiment about broader economy will have even more effect than usual

Source: EIA, CBOE, Bloomberg & Labyrinth Consulting Services, Inc.

NYMEX WTI (LHS) Oil-Price Volatility (RHS)

Nov 23 2018 Feb 11 2016 Feb 24 2016 Jun 7 2017 Feb 11 2016 Feb 5 2015 Nov 29 2016 Dec 18 2017 Oct 3 2018 Dec 24 Oct 19 2018

$70.76 $49.52

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 $160 $170

Jan-70 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

CPI Adjusted WTI Prices (December2018 Dollars Per Barrel)

1974-1985

Oil Shocks

• ->

Massive E&P Investment (North Sea, Mexico, Siberia) Over-Supply, Demand Destruction & Price Deflation Debt-Fueled Economic Expansion & Rapid Growth in China & East Asia

2004-2014

Massive E&P Investment (Shale, Deep Water, Heavy Oil) 2015-2018 Over-Supply & Price Deflation

End of Cheap Oil Average 2018 WTI price 77% higher than avg 1986-2004 price & 21% higher than 2015-present avg price in Dec 2018 dollars

Source: EIA,U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.

$37 Avg

1st Bubble 1974-1985 2nd Bubble 2005-2013

$94 Avg $72 Avg $24 Avg $54 Avg

Depressed Prices 1986-2004 2015-2018 avg price 45% higher than 1986-2004 avg price