Oil Price Outlook

BBVA Research USA

Houston, TX June 2016

2

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Disclaimer

As expected

• U.S. production continues to adjust

• Further bankruptcies and declining investment

• Oversupply has eased

• Sustained demand growth, particularly in emerging markets

Major surprises

• Output disruptions in Nigeria, Libya and Canada have helped to mitigate oversupply

• Dollar volatility as markets reassessed expectations of interest rates hikes

• The U.S. rig count increased for three consecutive weeks, feeding concerns that the price rally

happened too soon to clear oversupply entirely

Upward bias in the short-term, but caution going forward

• Short-run risks persist such as financial volatility, further supply disruptions, and negative

surprises to the global outlook

• Although declining, oversupply conditions remain

• Inventories are still at historically high levels

• A sustained prices rebound could halt further cuts in U.S. production

4

Oil prices in 2016

Crude oil prices $ per barrel

Prices have moved up by about 80% since last bottom

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 $49.17 as of June 17, 2016

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

U.S. retail gasoline prices $/gallon

1

3

5

7

9

11

13

15

U.S. natural gas, Henry Hub $/gallon

5

Market balance

Supply & demand balance, and oil prices

The market is gearing towards rebalancing at the expense of some

producers and solid demand, mainly in non-OECD countries

Source: Haver Analytics

-400

-200

0

200

400

600

800

1000

0

20

40

60

80

100

120

140

-4

-3

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016

Oil Supply/Demand Balance: Stock Change Needed To Balance(Mil b/d) - Seasonal Adjustment, All

European Free Market Price: Brent Crude Oil ($/Barrel, rhs)

050

100150200250300350400450500

OECD Non-OECD(excluding China

& India)

China India

Net change: +1.2 million bbl/d

Net change: +1.7 million bbl/d

Source: Haver Analytics

Wellhead production change by country

April 2015 to April 2016. Thousand bbl/d

Demand change by country

April 2015 to April 2016. Thousand bbl/d

6

Short-term volatility Supply disruptions have contributed to the acceleration of market rebalancing…

Event Description Price Bias

Canadian wildfires At peak, wildfires cut 1.5 million bbl/d of

production capacity, but blazes are now 82%

contained.

Economic and political

conflict in Venezuela

60-day state of emergency imposed.

Production declined to 2.37M bbl/d—largest

MoM decline in a decade.

Libya supply disruption

ends

Rival Libyan oil factions strike deal in Vienna

allowing exports from East Libya to resume.

Slowing output in Iraq Power outages, bad weather in Basra Gulf and

Kirkuk crude export cut contribute to 50K bbl/d

rise in average disruptions.

Pipeline attacks in

Nigeria

Pipeline bombings continue in southern

Nigeria, and production drops to 20-yr low of

1.51M bbl/d

June OPEC Meeting OPEC fails to reach oil output deal, but

appoints Nigeria’s Mohammed Barkindo as

new secretary-general.

7

Short-term volatility

Brent spot price $ per barrel

Source: BBVA Research and Haver Analytics

41

42

43

44

45

46

47

48

49

50

51

52

53

54

05/0

8/1

6

05/0

9/1

6

05/1

0/1

6

05/1

1/1

6

05/1

2/1

6

05/1

3/1

6

05/1

4/1

6

05/1

5/1

6

05/1

6/1

6

05/1

7/1

6

05/1

8/1

6

05/1

9/1

6

05/2

0/1

6

05/2

1/1

6

05/2

2/1

6

05/2

3/1

6

05/2

4/1

6

05/2

5/1

6

05/2

6/1

6

05/2

7/1

6

05/2

8/1

6

05/2

9/1

6

05/3

0/1

6

05/3

1/1

6

06/0

1/1

6

06/0

2/1

6

06/0

3/1

6

06/0

4/1

6

06/0

5/1

6

06/0

6/1

6

06/0

7/1

6

06/0

8/1

6

06/0

9/1

6

06/1

0/1

6

06/1

1/1

6

06/1

2/1

6

06/1

3/1

6

06/1

4/1

6

06/1

5/1

6

06/1

6/1

6

Saudi Arabia

reshuffles cabinet,

replacing oil minister

Nigeria: Terrorist

groups attack pipelines

for the third time in a

week..

Average= $49.29

IEA predicts that

inventories will decline by

200K bbl/day in 2H16

Austria: No

agreement on oil

production reached at

OPEC meeting

Iran announces supply

disruptions due to bad

weather and power

outages

Libya: East Libya oil

exports resume

Venezuela: President

Maduro imposes state

of emergency

U.S. crude inventories

decline. China’s oil imports

stay strong. Further attacks

in Nigeria

Stronger

USD

U.S. Rig count

increases for three

consecutive weeks

Brexit polls

narrow

…however, the positive impact on prices has recently diminished

8

Financial markets

Oil prices and U.S. dollar

Oil prices and stock market

Source: Haver Analytics Source: Haver Analytics

25

30

35

40

45

50

55

15000

16000

17000

18000

19000

20000

21000

22000

Feb-16 Mar-16 Apr-16 May-16 Jun-16

Hang Seng (Jul-31-64=100)

Dow Jones (May-26-1896=40.94)

Brent ($/bbl, rhs)

20

25

30

35

40

45

50

55

114

116

118

120

122

124

126

128

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

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

Brent ($/bbl, rhs)20

40

60

80

100

120

140

0

10

20

30

40

50

60

70

80

90

100CBOE Crude Oil Volatility Index, OVX (Index)

Brent ($/bbl, rhs)

Oil prices and volatility index

Improving risk perception on

emerging markets and weaker dollar

compared to early in the year create

a favorable environment for crude

prices

9

Demand

3.3

3.5

3.7

3.9

4.1

4.3

4.5

4.7

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Ja

n-1

2

Apr-

12

Ju

l-1

2

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

Oil Product Demand: China (Ths b/d) -Seasonal Adjustment, All

Oil Product Demand: India (Ths b/d) -Seasonal Adjustment, All2 (rhs)

U.S. demand for finished motor gasoline Million bbl/d, seasonally adjusted

Oil product demand Million bbl/d

Demand growth remains solid mainly because of emerging markets

and the U.S.

7.8

8.0

8.2

8.4

8.6

8.8

9.0

9.2

9.4

9.6

Ja

n-1

2

Apr-

12

Ju

l-1

2

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

Source: Haver Analytics Source: Haver Analytics

10

Futures

Brent crude futures

$ per barrel

WTI crude futures

$ per barrel

Despite the short-term increase, the forward curve reflects skepticism

about the strength of the recent rally

Source: Bloomberg

30

35

40

45

50

55

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

Months Ahead

06/17/16

1 month ago

3 months ago

6 months ago

30

35

40

45

50

55

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

Months Ahead

06/17/16

1 month ago

3 months ago

6 months ago

11

OPEC

Crude oil production Million barrels per day

Change in OPEC production by country Quarterly, thousand barrels per day

Given current price levels and supply disruptions, OPEC has less

incentive to engage in an output deal that helps to boost prices further

-400

-300

-200

-100

0

100

200

300

400

4Q15 1Q16

Indonesia

Venezuela

United Arab Emirates

Saudi Arabia

Qatar

Nigeria

Libya

Kuwait

Iraq

Iran

Ecuador

Angola

Algeria

49

50

51

52

53

54

55

56

57

29

29

30

30

31

31

32

32

33

33

Ju

n-1

3

Aug

-13

Oct-

13

Dec-1

3

Feb-1

4

Apr-

14

Ju

n-1

4

Aug

-14

Oct-

14

Dec-1

4

Feb-1

5

Apr-

15

Ju

n-1

5

Aug

-15

Oct-

15

Dec-1

5

Feb-1

6

Apr-

16

OPEC Crude Non-OPEC

Source: Haver Analytics

12

United States

Total oil production by shale play

Thousand barrels per day

U.S. crude oil production

Million barrels per day

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: Haver Analytics

0

300

600

900

1200

1500

1800

2100

Th

ou

san

ds

Bakken

Eagle Ford

Haynesville

Marcellus

Niobara

Permian

Utica

13

United States

Crude oil production and oil prices U.S. active rig count and oil prices

However, slight surge in the rig count raises questions about how long

the decline in production can last

30

35

40

45

50

55

380

390

400

410

420

430

440

450

Baker Hughes Active Rig Count: US (Units)

Spot Price: West Texas Intermediate 40 Deg ($/Barrel)

Source: Haver Analytics

0

10

20

30

40

50

60

8500

8600

8700

8800

8900

9000

9100

US Weekly Crude Oil Field Production (Thous. Barrels/Day)

U.S. Weekly Crude Oil Field Production (Thous. Barrels/Day, 4-Week MA)

Spot Price: West Texas Intermediate 40 Deg ($/Barrel)

14

Inventories

Global oil inventories EOP, Million barrels

U.S. stocks of crude oil excluding SPR

EOP, Million barrels

Moreover, high levels of inventories will prevent prices from

rebounding quickly

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 2016

Oil Inventories: OECD (EOP, Mil.Bbl)

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

15

Oil price forecasts Change in our baseline scenario reflects a better outlook in the short-term

but some caution going forward

Crude Oil Price Forecasts* Brent, $ per barrel, avg.

*Forecast may be subject to change.

Source: BBVA Research & Haver Analytics

Crude Oil Price Forecasts* Brent, $ per barrel, avg.

Baseline Upside Downside

2015 52.8 52.8 52.8

2016 46.2 55.3 32.3

2017 55.0 72.6 26.4

2018 58.2 79.6 26.8

2019 59.6 87.1 23.7

2020 59.6 94.6 21.4

0

20

40

60

80

100

120

Ma

r-14

Aug

-14

Ja

n-1

5

Ju

n-1

5

Nov-1

5

Apr-

16

Sep

-16

Fe

b-1

7

Ju

l-1

7

Dec-1

7

Ma

y-1

8

Oct-

18

Ma

r-19

Aug

-19

Ja

n-2

0

Ju

n-2

0

Nov-2

0

Actual Baseline

Upside Downside

16

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