OPEC Extended Production Cuts: Why Prices Fell Consulting Services, Inc. artberman.com Slide 1 OPEC Extended Production Cuts: Why Prices Fell • Last week’s price plunge was the

Slide1LabyrinthConsultingServices,Inc. artberman.com

OPECExtendedProductionCuts:WhyPricesFell

• Lastweek’spriceplungewasthethirdtimein2017thatpriceshaveadjusteddownwardtowardthe$45perbarrellevelsuggestedbymarketfundamentals.

• IEAcalculatedthatrecentproductioncutsearnedthecartelanadditional$75millionperdayyear-over-yearinthefirstquarterof2017.

• OPEC’sgoalhasbeentokeepafloorundercurrentpricesbutthemarketexpectedthecarteltomovepriceshigherthroughinventoryreduction.

• OPECwassatisfiedwithgreaterrevenuesfromhigherpricescomparedtoayearago,butthemarketwanteddeeperproductioncuts.

• OPECtakesthelongviewbutthemarketisconcernedwiththenearterm.• OPECextendedthecutsandthemarketreactedwithlowerprices.

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5/16/1

7

5/23/1

7

NYMEXW

TIFuturesPrice($/barrel)

ThirdDeflationoftheOPECExpectationPremiumin2017

The OPECExpectationPremium

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

$45PerBarrel

February-MarchDeflation

April- EarlyMay Deflation

LateMay

Deflation


OPEC’sGoal:KeepaFloorUnderOilPricesWithoutHelpingCompetitionTooMuch

• Atfirst,OPECdidnothingafteroilpricescollapsedin2014.• Whenpricesfellto$26perbarrelinearly2016,OPECfloatedtheideaofaproductionfreezeandthat

establishedafloorfromwhichpricesincreasedtomorethan$50perbarrelduringthefirsthalfoftheyear.

• InJune2016,marketslostfaithinOPEC’sresolveandpricesfellfrom$51tobelow$40perbarrel.• OPECthensetanotherpricefloorbyannouncingtentativeagreementonaproductioncut.• Whenpricesfellbelow$43inNovember,anotherpricefloorwascreatedwhenOPECenacted

productioncuts.• Theworldpricefloormovedupalmost75%from$26to$45perbarrelinjustoverayear.• Productioncutswereextendedlastweektoreinforcethecurrent$45floorwithouthelpingthe

competitiontoomuch—nottomeetmarketexpectationsofhigherprices.

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$0$2$4$6$8$10$12$14$16$18$20$22$24$26$28$30$32$34$36$38$40$42$44$46$48$50$52$54$56$58$60$62$64$66

Jan-15

Feb-15

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Apr-15

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Jun-15

Jul-1

5 Au

g-15

Sep-15

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Feb-16

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6 Au

g-16

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Dec-16

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Feb-17

Mar-17

Apr-17

May-17

Oil-PriceVo

latilityIndex

NYM

EXW

TIFuturesPrices($

/Barrel)

OilMarketsContinueTesting$55Ceiling&$45Floor

NYMEXFutures

Price(LHS)

Oil-PriceVolatilityIndex(RHS)

$62

$55PerBarrelCeiling

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

OPEC"Freeze"ProposedFeb2016

$43OPECCutNov2016

$26

$45Floor

$40OPECCutAnnouncedSept2016


OiltradersBeganUnwindingLongPositionsinFebruary

• OiltradersunderstandthisbetterthananalystsandtheybeganunwindingtheirlongpositionsinFebruary.

• NetlongpositionsonWTIfutureshavefallen25%sincethenbutmostofthesell-offhasbeensinceApril2017.

• Longpositionscommonlyover-shootpricetrendsandpricesfallafterhighestlevels.• TermstructureofWTIfuturescontractsinfairlysteepbackwardationsincemid-April.• Priceslessthan$50/barreluntil2020.

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7 3/1

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7 4/1

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4/25/1

7 5/9

/17

NYM

EXW

ITPrice($/barrel)

NetLongPositions(MillionsofBarrelsofW

IT)

NetLongFuturesPostionsHaveFallen17%SinceMid-April2017

NetLongPositions(LHS)

NYMEXPrice(RHS)

Source:CFTC, EIA&LabyrinthConsultingServices,Inc.

NetLongPositions(LHS)

NYMEXPrice(RHS)

Source:CFTC, EIA&LabyrinthConsultingServices,Inc.

&25%SinceMarch2017FebruaryPeak

AprilPeak

$45

$47

$49

$51

$53

$55

$57

Jan-17

Mar-17

May-17

Jul-1

7 Sep-17

Nov-17

Jan-18

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May-18

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8 Sep-18

Nov-18

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9 Sep-19

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0 Sep-20

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Jul-2

2 Sep-22

Nov-22

NYMEXW

TIIPrice($/barrel)

TheTermStructureofFuturesContractsChangedAfterOPECProductionCuts

NOV302016

MAR242018

APR132017

May52017

MAY192017

25-May2017

Source:CME& LabyrinthConsultingServices,Inc.

Mar24

May5

May19May26


ReasonsforLowerOilPrices

• ManyanalystsproclaimthatBrentpriceswillbenear$65bytheendoftheyear.• AlthoughIEAandEIAproductiondatasuggestsgoodOPECcompliancewiththeNovemberagreement.• IraqwillhaveahardtimemaintainingcutswithISISwarandotherfiscalpressures.• Russiaproductioncurrentlyinaseasonallowthatincreased500kb/din2H2016.

36.5

37.5

38.5

39.5

40.5

41.5

42.5

43.5

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

MillionsofBarrelsofCrudeO

ilPerDay

OPEC- NOPECCrudeOilProductionAtLowestLevelSinceJune2015

Venezuela

Iran

Iraq

Libya

Nigeria

UAE

SaudiArabia

Qatar

Kuwait

Angola

BaseAlgeria

Gabon-Ecuador Mexico

Russia

June2015

Source:EIAMaySTEO,EIAInternationalData&La

byrinthConsultingServices,Inc.

9.6

9.8

10

10.2

10.4

10.6

10.8

11

Jan Feb Mar Ap May June July Aug Sept Oct Nov Dec

CrudeOilProduction(m

mb/d)

RussiaCrudeProductionIncreasesSeasonallyEspeciallyin2016

2017

Source:EIAM

aySTEO,EIAInternationalData&LabyrinthConsultingServices,Inc.

2016

2015

2014


ReasonsforLowerOilPrices

• Still,globalmarketsremainwellsupplied.• OPECshipmentstoitsbiggestcustomers—theU.S.andChina—aremorethan10%higherthanayear

ago.• Productioncutsarenotreflectedinwell-suppliedmarketsnorareglobalinventoriesfallingmuch.


U.S.ProductionConcernsAreReal

• MarketconcernsarevalidthatU.S.tightoiloutputmaycancelOPECproductioncuts.• Despitefrackcrewshortagesandlimitstopressurepumpingequipment,2017wellcompletionrates

appearstrongintheBakken,EagleFordandPermianbasinplays.• EIAforecastisfortotalcrudeoilproductiontoincrease0.96mmb/din2017,another0.61mmb/din

2018(1.57mmb/dtotal2017-2018increase).• Mostofthedecreaseinbreak-evenpricesisbecauseofloweroil-fieldservicecostsandnotefficiency

andtechnology.

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400

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500

Jan-14

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Mar-14

Apr-14

May-14

Jun-14

Jul-1

4

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-1

5

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

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Apr-16

May-16

Jun-16

Jul-1

6

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

MonthlyPermianWellCom

pletions

Bakken&EagleFordMonthlyW

ellCom

pletions

IncreasedTightOilWellCompletionsin2017

Permian

EagleFord

Bakken

Source:EIA&LabyrinthConsultingServices,Inc.

9.63

8.57

9.15

9.74 10

.35

$0

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$120

0.00

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10.00

12.00

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May-18

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Sep-18

Oct-18

Nov-18

Dec-18

WTIPrice($/Barrel)

MillionsofB

arrelsofCrudeOilPerD

ay

U.S.Output9.15mmb/dUp58kb/dInApril

April

2015

Source: EIASTEOMay2017&LabyrinthConsulting Services,Inc.

-1.06mmb/d

OilProduction(LHS)

WTIPrice(RHS)

Apr2

017

Dec2

017

+0.58mmb/d

Sept

2017

Dec2

018

+1.2mmb/dApr2017-Dec2018

ForecastIs10.35 mmb/dand$57/barrelbyDecember2018+0.96mmb/d in2017,+0.61in2018,+1.57total2017-18

0

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1

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Sep-16

Norm

alize

dWTI&ProducerPrice

Index

TheCostofDrillingOilandGasWellsFell45%AfterTheOil-PriceCollapse;UnconventionalPlaysResultedIna4-foldIncreaseinDrillingCosts

Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.

WTIPrice

OIl&GasWell DrillingProducer PriceIndex

Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.

4-FoldIncreaseinO&GPPI

45%Decrease


ComparativeInventoryIndicates$45/BarrelPriceforBrentandWTI

$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$140

-200 -100 0 100 200 300 400 500

BrentPrice

(Apr2017$/Barre

l)

ComparativeInventory(mmbofliquids)

Aug2015- PresentData

May2015-July2015Data April

Data

Brentis~$7 over-valuedat$52.31

LastMonth$65

Itwill take12monthstoreduceinventories -130mmbtoreach$65

Brentontheyieldcurve


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$110

-40 -20 0 20 40 60 80 100 120 140 160 180 200 220

WTIIs~$4/barrelOver-Valuedat$49.24

Comparative Inventory (Millionsof Barrels)

WTIPrice($/barrel)

ThisWeek$40

$55

Source:EIA&La


Mar-June 2015PriceRally

$45

LastWeek

• Supply,demandandinventoryindicate$45/barrel“right”priceforbothBrentandWTI.• Current$52Brentis~$7overvalued,$49WTIis~$4over-valued.• BothOECDandU.S.inventories~130mmb above5-yearaverage.• Atcurrentratesofinventorywithdrawal,itwilltake~12monthstoreducestocksenoughtosupport

$65/barrelprices.


ComparativeInventoryIndicates$45/BarrelPriceforBrentandWTI

1.27

1.28

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1.34

1.35

1.36

1.37

3.0

3.0

3.0

3.0

3.1

3.1

3.1

3.1

3.1

May-17

Jun-17

Jul-1

7

Aug-17

Sep-17

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Mar-18

Apr-18

May-18

Jun-18

Jul-1

8

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

U.S.Stocks(bblliquids)

OECDStocks(bbliquids)

OECDInventoriesFlatin2017,Increasein2018U.S.InventoriesFallin2017,Increasein2018

U.S.Stocks(RHS)

Source: EIAMay2017STEO&LabyrinthConsulting Services,Inc.

OECDStocks(LHS)

• WorldproductionsurpluseshavebeenfallingforthelastyearbutEIAexpectsthesetostartincreasingasearlyasMay.

• Surplusesmaypersistthroughthemiddleof2018beforedecreasingagain.• ItsforecastisforBrentpricestoremainlessthan$60perbarrelthroughtheendof2018.• EIAforecastisforflatOECDinventoriesthrough2017,thenincreasein2018.• U.S.inventoriespredictedtofallin2018then,increasein2018.• MacquarieResearch

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-3.0

-2.0

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Bren

tPric

e(Feb

ruary2

017Do

llarsPerBarrel)

WorldLiqu

idsP

rodu

ctionminusCon

sumption(M

illionsofBarrelsPe

rDay)

EIAForecastsProduction SurplusToIncrease2H2017-1H2018


ProductionSurplus(LHS)

BrentPrice(RHS)

IncreasingSurplus

DecreasingSurplusThru

1H2017

DecreasingSurplus2H2018

IncreasingSurplus2H2017-1H2018

ProdDeficit(LHS)


$56 $5

6

$59

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$59

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$50

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$56

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$62

$64

Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419

BrentPrice

($/Barrel)

MacquarieForecastsBrentPricesBelow$60Through2Q2019

Source:M

acquarie&La


MacquarieResearchPredictsSub-$60BrentThrough2Q2019

• RecentmodelingbyMacquarieResearchsupportsthisviewandpredictssub-$60Brentpricesthroughthesecondquarterof2019.

• AlthoughOPECcutsappeartobereal,MacquarieseesU.S.,RussiaandBrazilproductiongrowthasbearishdriversonprice.

• MaintainingOPECcutsbeyondtheendof2017willbedifficult.• RecenttalkofsellinghalfofU.S.strategicreservespotentiallyputsanadditional300millionbarrelsofoil

onanalreadyover-suppliedmarket.• Termstructureoffuturestripinbackwardationwithpriceslessthan$51/barreluntilAugust2021.

$45

$47

$49

$51

$53

$55

$57

Jan-17

Mar-17

May-17

Jul-1

7 Sep-17

Nov-17

Jan-18

Mar-18

May-18

Jul-1

8 Sep-18

Nov-18

Jan-19

Mar-19

May-19

Jul-1

9 Sep-19

Nov-19

Jan-20

Mar-20

May-20

Jul-2

0 Sep-20

Nov-20

Jan-21

Mar-21

May-21

Jul-2

1 Sep-21

Nov-21

Jan-22

Mar-22

May-22

Jul-2

2 Sep-22

Nov-22

NYMEXW

TIIPrice($/barrel)

WTIFuturesHaveBeenBackwardatedSinceApril2017

NOV302016

MAR242018

APR132017

May52017

MAY192017

25-May2017

Source:CME& LabyrinthConsultingServices,Inc.

Mar24

May5

May19May26


MacquarieResearchPredictsSub-$60BrentThrough2Q2019$56 $5

6

$59

$59

$57

$56

$55

$56

$59

$60

$61

$63

$50

$52

$54

$56

$58

$60

$62

$64

Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419

BrentPrice

($/Barrel)

MacquarieForecastsBrentPricesBelow$60Through2Q2019

Source:M

acquarie&La


• RecentmodelingbyMacquarieResearchsupportsthisviewandpredictssub-$60Brentpricesthroughthesecondquarterof2019.

• AlthoughOPECcutsappeartobereal,MacquarieseesU.S.,RussiaandBrazilproductiongrowthasbearishdriversonprice--maintainingOPECcutsbeyondtheendof2017willbedifficult.

• RecenttalkofsellinghalfofU.S.strategicreservespotentiallyputsanadditional300millionbarrelsofoilonanalreadyover-suppliedmarket.

• Worldliquidsproductionwillincrease4millionbarrelsperdaybytheendof2018.• 62%ofincreasefromU.S.,28%fromOPEC—capitalmarkets&centralbankskeytocapitalavailability.• Thatwillmeanrelativelylowoilprices,arequisitefortheglobaleconomytomuddleforward.


Oil & Gas Company Return on Capital Employed

Oil & Gas Company Stock Performance

MajorPriceSpikeSometimeintheNext5Years

• Under-investmentwillensuretightersupplyinthefuture.• Reservereplacementata70-yearlow.• DespitegoodheadlinesaboutE&Pbreak-evenprices,ROCEisdeclining.• Oil&gascompanystockperformancewellbelowS&P500returns.


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CPIA

djustedWTIPrice

s(Ja

nuary2017DollarsPe

rBarrel)

Oil Shocks-->

Massive E&PInvestment(North

Sea,Mexico,Siberia)

Over-Supply, DemandDestruction&PriceDeflation

Debt-FueledEconomicExpansion&Rapid

GrowthinChina&EastAsia

MassiveE&PInvestment(Shale, DeepWater,Heavy

Oil)

Over-Supply, DemandDestruction&Price

Deflation

Current$51OilPrice>40%HigherThanJan1986- Dec2004AverageinApril2017Dollars

Source:EIA, U.S.Bureau ofLaborStatistics &LabyrinthConsulting Services,Inc.

Avg1986-2004 $36/barrel Avg2005-2014$91/barrel

All PricesinConstant April 2017Dollars

Avg1974-1985 $71/barrel<$23/barrel

$50/barrel

1stBubble:1974-1980

2ndBubble:1999-2014

$48/barrel

OilMarketsinEarlyRecoveryFromOilPriceCollapse

• Secondmajorbubblesince1970.• Whenoilpricesgottoohighin2008,thesystemcrashed.Realestateandbankingaretheexplanation

butthecostofenergywasaconstantunderlaying thosefactors.• Whenoilpricesgottoohighagainfrom2011-2014,therewasnofinancialcollapsebuttherewasanoil-

pricecollapse.Itdoesnotfeelascataclysmicas2008forthoseoutsidetheoilindustrybecauseitmadeenergymoreaffordable.

• Oilpricesstill40%higherthanduringperiodofGDPgrowthin1980sand1990s.• Averagepriceofoilsince1950inconstant2016dollarswas$46/barrel.

$0

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$0

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$120

1970

1971

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1976

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2011

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2013

2014

2015

2016

E

U.S.G

DP(2016$Trillions)

CPI-AdjustedW

TIPrice(2016$/Barrel)

GDPGenerallyIncreasesWhenOilPricesAreLow

andIsFlatWhenOilPricesAreHigh

OilPrice

GDP

GDP 5Yr

MovingAvg

Source:WorldBank,EIA,U.S.Bureau ofLabor Statistics&Labyrinth Consulting Services,Inc.

Avg1986-2004 $36/barrel Avg2005-2014

$91/barrel

GDP&Oil PricesInConstant2016Dollars

$48/

barrel

Avg1974-1985 $71/barrel<$23/

barrel


$0

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0%

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16%

18%

1955

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2016

U.S.Public,Corporate&

HouseholdDebt($Trillions)

FederalFundsEffectiveRate(Percent)

U.S.PublicandConsumerDebt&InterestRates

Reagan

Bush

Clinton

Bush

Obama

PublicDebt(RHS)

Source:U.S.Treasury,U.S.FederalReserveBankandLabyrinthConsultingServices,Inc.

InterestRates(LHS)

Carter

Nixon-FordKennedy-Johnson

Eisen-hower

AllDebt(RHS)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Jan-00

Jun-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-0

2 Dec-02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-0

7 Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

Feb-12

Jul-1

2 Dec-12

May-13

Oct-13

Mar-14

Aug-14

Jan-15

Jun-15

Nov-15

Apr-16

Sep-16

MillionsofBarrelsofCrudeO

ilPerDay

UnconventionalOilAccountsFor63%ofU.S.Production

Conventional

Unconventional

Source:Drilling Info,EIA,LabyrinthConsulting Services,Inc.&Crude OilPeak

U.S.DebtandTightOil

• U.S.hasbeenfundinggrowthwithdebtsincetheearly1970safterU.S.oilproductionpeaked.• Highinterestratesintheearly1980smadetheTreasurybondthereserveassetoftheworldandallowed

theU.S.toputgrowthonacreditcard.• Lowenergycoststhroughlate1990shelpedgrowth.• LowinterestratesanddollardevaluationaftertheFinancialCollapseproducedcapitalflowtotightoil

plays.• Now,tightoilismorethan50%ofU.S.oiloutputandincreasing.• BakkenandEagleFordplaysareprobablyinslowterminaldecline.• ThismeansthatthePermianbasinisthesolegrowtharea.• Furtherreasonforapricespikeinthecoming5years.

Documents

OPEC Extended Production Cuts: Why Prices Fell Consulting Services, Inc. artberman.com Slide 1 OPEC Extended Production Cuts: Why Prices Fell • Last week’s price plunge was the