Oil Price Outlook

BBVA Research USA

Houston, TX May 2016

2

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Disclaimer

Bottom line: April-May 2016

As expected

• U.S. production continues to adjust

• Further bankruptcies and declining investment

• Oversupply conditions remain

Major surprises

• Supply disruptions in Nigeria, Lybia and Canada

• Dollar weakness despite solid US performance and aggressive ECB accommodative actions

• Saudi Arabia’s new oil minister confirmed current strategy of maintaining market share

Moderate upward bias in the short-term, but caution going forward

• Oversupply persists, estimated between 1.5 and 1.9 million bbl/d

• Crude oil inventories still at record levels

• Low probability of an output deal during next OPEC meeting (June), limited impact

• Short-run risks persist such as financial volatility and negative surprises to the global outlook

• A long-lasting rebound could halt further adjustments in U.S. production

4

Oil prices in 2016

Crude Oil Prices $ per barrel

After hitting a bottom in February, oil and gasoline prices are on the rise

Source: Haver Analytics

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

0

20

40

60

80

100

120

140

160

Brent

WTI

Brent $47.90 as of May 13, 2016

1.5

2.0

2.5

3.0

3.5

4.0

4.5

U.S. Retail Gasoline Price $/gallon

1.5

3.5

5.5

7.5

9.5

11.5

13.5

U.S. Natural Gas, Henry Hub $/gallon

5

Futures

Brent Crude Futures

$ per barrel

WTI Crude Futures

$ per barrel

Markets have begun to reassess expectations to the upside, but the

forward curve has also flattened

Source: Bloomberg

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12

Months Ahead

05/12/16

1 month ago

3 months ago

6 months ago

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12

Months Ahead

05/12/161 month ago3 months ago6 months ago

6

Financial markets

Oil Prices and U.S. Dollar

Brent and Fed’s Broad Index

Oil Prices and Financial Markets

2016

Dollar depreciation and improving financial markets supported the upturn

Source: Haver Analytics Source: Haver Analytics

25

30

35

40

45

50

15000

16000

17000

18000

19000

20000

21000

22000

Jan-16 Feb-16 Mar-16 Apr-16 May-16

Hang Seng (Jul-31-64=100)

Dow Jones (May-26-1896=40.94)

Brent ($/bbl, rhs)

20

25

30

35

40

45

50

114

116

118

120

122

124

126

128

Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16

Trade-Weighted Exchange Rate, $ (Jan-97=100)

Brent ($/bbl, rhs)

7

Demand

0

10

20

30

40

50

60

70

80

90

100

0

50

100

150

200

250

300

350

400

450

500

Crude oil imports (lhs)

Crude oil inventories (rhs)

Global Crude Oil Demand SA, Million Tonnes

China: Crude Oil Imports and Inventories (NSA, Million Tonnes & EOP Million barrels)

Demand remains solid, with Chinese imports and inventories reaching

record highs

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2008 2009 2010 2011 2012 2013 2014 2015

Source: Haver Analytics

Avg. 2011-16: 1.4%

8

Inventories

Global Oil Inventories EOP, Million barrels

U.S. Stocks of Crude Oil Excluding SPR

EOP, Million barrels

Inventories have not shown signs of correction and remain at record highs

250

300

350

400

450

500

550

Source: BBVA Research and Haver Analytics

1500

1700

1900

2100

2300

2500

2700

2900

3100

3300

2011 2012 2013 2014 2015

Oil Inventories: OECD (EOP, Mil.Bbl)

Oil Inventories: Non-OECD (EOP, Mil.Bbl)

9

Short-term volatility

Brent Spot Price $ per barrel

In addition, unplanned disruptions to production and other events

have added to price fluctuations

Source: BBVA Research and Haver Analytics

40

41

42

43

44

45

46

47

48

49

50

04/1

1/1

6

04/1

2/1

6

04/1

3/1

6

04/1

4/1

6

04/1

5/1

6

04/1

6/1

6

04/1

7/1

6

04/1

8/1

6

04/1

9/1

6

04/2

0/1

6

04/2

1/1

6

04/2

2/1

6

04/2

3/1

6

04/2

4/1

6

04/2

5/1

6

04/2

6/1

6

04/2

7/1

6

04/2

8/1

6

04/2

9/1

6

04/3

0/1

6

05/0

1/1

6

05/0

2/1

6

05/0

3/1

6

05/0

4/1

6

05/0

5/1

6

05/0

6/1

6

05/0

7/1

6

05/0

8/1

6

05/0

9/1

6

05/1

0/1

6

05/1

1/1

6

Doha, Qatar:

Deal to cut

production fails

due to S. Arabia

& Iran tensions

Alberta, Canada:

Ongoing wildfires erupt in

prominent oil town,

leading to production

cuts/shutdowns

Riyadh, Saudi Arabia:

S. Arabia reshuffles

cabinet, replacing oil

minister who supported oil

production cuts

June 2 / Vienna, Austria: next

OPEC meeting

Marsa el-Hariga, Libya:

Oil cargo ship stranded

after stand-off between

eastern and western

political factions

U.S.: Oil inventories

reach record high of

543M barrels

Nigeria: Further treats of

attacks to Nigerian pipelines

made after February attacks

Average= $45.02

IEA predicts that

inventories will decline by

200K bbl/day in 2H16

10

Short-term volatility The price impact of events in Libya, Canada and Nigeria is likely

to be short-lived

Event Description Bias

Wildfires in Canada The fires affected about 1.07 million bbl/day

of Alberta’s oil sands capacity. Operations in

some areas are still on hold

S. Arabia’s Oil Minister

Replacement

Confirmation of intent to keep production

level high, currently at 10.2 million bbl/day,

and maintain market share

Pipeline attacks in

Nigeria

Pipeline attacks and violence have risen in

response to political turmoil. Production is at

levels not seen since 2009

Increase in U.S. Oil

Inventories

At 543.4M bbl, crude inventories reach

historically high levels again

Civil Unrest in Libya Political conflict preventing loading of Libyan

oil cargos and leading to output cuts.

Current production at just over 200K bbl/day

Next OPEC Meeting No proposals to cut production on the table

for next OPEC meeting (June 2)

11

What’s next for oil prices? Oil prices have been moving closer to our upside scenario. Our model shows

an upward bias for the short-run, but no significant bias for the long-run

Crude Oil Price Forecasts* Brent, $ per barrel

*Data for 2Q16 is average as of May12. BBVA Research Oil Model results are not official and may be subject to change.

Source: BBVA Research & Haver Analytics

0

20

40

60

80

100

120

Ma

r-1

4

Jul-1

4

No

v-1

4

Ma

r-1

5

Jul-1

5

No

v-1

5

Ma

r-1

6

Jul-1

6

No

v-1

6

Ma

r-1

7

Jul-1

7

No

v-1

7

Ma

r-1

8

Jul-1

8

No

v-1

8

Ma

r-1

9

Jul-1

9

No

v-1

9

Ma

r-2

0

Jul-2

0

No

v-2

0

Official Baseline

Upside

Downside

BBVA Research Oil Model (as of May 12, 2016)

Actual

-3

-2

-1

0

1

2

3

4

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-1

3

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-1

4

Oct-

14

Ja

n-1

5

Apr-

15

Ju

l-1

5

Oct-

15

Ja

n-1

6

Apr-

16

6-month MA

Stock Change Needed to Balance the Market Barrel/day

12

Global production

Supply of Crude Oil

2004 = 100

Crude Oil Production by Country

Million barrels per day

OPEC production cushions the effect of non-OPEC declines

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2012 2013 2014 2015 2016

Saudi Arabia

Iran

Iraq

Source: Haver Analytics

0.1

0.6

1.1

1.6

2.1

2.6

3.1

0

2

4

6

8

10

12

2012 2013 2014 2015 2016

Th

ou

san

ds

U.S.

Brazil (rhs)

Mexico (rhs)

13

OPEC fails to cut production

Iran: Crude Oil Production

Million barrels per day

Rising production and exports from Iran remain a downside for prices

Source: BBVA Research and Haver Analytics

• After failure of Doha meeting,

Iran/Saudi Arabia rivalry could hinder

potential deal in June OPEC meeting

• Tehran has said that it would not

engage into any production deal

unless sales have reached pre-

sanction levels (between 3.6 and 3.8

million bbl/day)

• It is expected that Iran will increase

crude exports to 2 million bbl/d this

month, a similar level as before

sanctions (2011) 2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Actual

Baseline

Alternative

14

OPEC fails to cut production

Saudi Arabia: Foreign Reserves

Total minus gold, EOP, Billion US$

Despite mounting pressures on public finances, Saudi Arabia’s best option

is still not to cut production

0

100

200

300

400

500

600

700

800

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Source: IMF and Haver Analytics

• The newly appointed petroleum minister,

Khalid al-Falih, has confirmed the strategy to

continue producing until high-cost producers

are out of the market

• In the meantime, the Kingdom has announced

a strategy to reduce its dependence on oil by

selling a small fraction of Saudi Aramco,

creating a Sovereign-Wealth Fund to invest in

different assets, and boosting strategic non-oil

industries (mining, military hardware).

• In the near future, Saudi Arabia may spend

less time and effort dealing with OPEC and

more on internal reforms.

15

Declining U.S. production

Total Oil Production by Shale Play

Thousand barrels per day

U.S. Crude Oil Production

Million barrels per day

U.S. production continues to decline in line with expectations. The

adjustment differs significantly across regions

0

2

4

6

8

10

12

Texas

North Dakota

U.S. Total

Source: BBVA Research and Haver Analytics

0

500

1000

1500

2000

2500

Th

ou

san

ds

Bakken

Eagle Ford

Haynesville

Marcellus

Niobara

Permian

Utica

16

Declining U.S. production

U.S. Real Private Fixed Investment: Mining

Exploration/Shafts/Wells

(SAAR, % change)

Cumulative North American E&P

Bankruptcy Filings

2015-2016

Adjustments to production will continue to be reinforced by bankruptcies

and lack of investments in the industry

Source: Haynes and Boone Source: Haver Analytics

-100

-80

-60

-40

-20

0

20

40

60

80

100

0

10

20

30

40

50

60

70

80

1/1

/20

15

2/1

/20

15

3/1

/20

15

4/1

/20

15

5/1

/20

15

6/1

/20

15

7/1

/20

15

8/1

/20

15

9/1

/20

15

10/1

/20

15

11/1

/20

15

12/1

/20

15

1/1

/20

16

2/1

/20

16

3/1

/20

16

4/1

/20

16

17

Impulse-Response: USD to Oil Prices ($40/bbl @ t=0)

Financial: A 20% dollar depreciation would bring

prices up to $60/bbl in a short period of time

Impulse-Response: Supply to Oil Prices ($40/bbl @ t=0)

Geopolitics: a supply reversion to pre-2014 levels

would lift prices to $50/bbl by 1Q17

Global recession: A sharp drop in demand would send

prices back to $30’s/bbl for a prolonged period

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

1 2 3 4 5 6 7 8 9 10 11 12 13

months

Cummulative IRF

Lower bound

Upper bound

Impulse-Response: Demand to Oil Prices ($40/bbl @ t=0)

-10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13

Cummulative IRF

Lower bound

Upper bound

-150%

-100%

-50%

0%

50%

100%

150%

1 2 3 4 5 6 7 8 9 10 11 12 13

months

Cummulative IRF

Lower bound

Upper bound

Source: BBVA Research

U.S. Crude Oil Production vs. Peak Oil

Geological: shale revolution challenges models

incorporating “peak oil” assumptions

0

500

1000

1500

2000

2500

3000

3500

4000

1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011

US Crude Oil Production (Mil. B.)

Projection based on peak oil theory

Alternative scenarios

18

Forecasts

Crude Oil Price Forecasts Brent, $/barrel, EOP

Source: BBVA Research, Bloomberg

Baseline Upside Downside Market

Consensus

2015 44.7 44.7 44.7 44.7

2016 38.5 60.2 25.5 41.0

2017 49.3 67.6 26.2 55.0

2018 59.6 81.6 27.3 62.0

2019 59.6 83.5 22.0 65.0

2020 59.6 89.1 21.3 n.a.

19

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