Oil Report Oil Markets Keep Calm, Producers Carry On

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1 June 30, 2017 Oil Report Oil Markets Keep Calm, Producers Carry On Price Per Barrel Exhibit 1 $55 $45 $35 $30 $25 Exhibit 2 Price Per Barrel $58 $56 $54 $52 $48 $46 $44 $42 Oil prices are back at levels prior to announced OPEC cuts Daily data as of June 29, 2017; Source: Bloomberg L.P. Brent Daily Prices & Volatility $46/bbl support level Implied volatility remains subdued Brent 1st Mo. (LH) 100 Day MA (LH) Implied Volatity (RH) Brent Futures Curves Recent curve has steepened while longer term expectations remain intact Curves are averages of daily prices except for the most recent dashed curve; Source: Bloomberg L.P. 1M 4M 7M 10M 13M 16M 19M 22M 25M 28M 31M 34M 37M 40M 43M 46M 49M 52M 55M 58M 61M 64M 67M 70M 73M 76M Feb-17 Mar-17 Apr-17 May Jun Implied Volatility Executive Summary: Oil markets are showing signs of losing patience with the OPEC production cuts based on the record number of short positions in Brent contracts and the pullback in prices. While the cuts have been supportive of prices, increases in production from Libya, Nigeria and the U.S. are seen as offsets. This would help explain the recent steepening of the futures curve. Yet the oil market remains calm with relatively low volatility and the oil majors are carrying on with offshore projects. Exhibit 1: The Brent 1 st month contract has tested the ~$46/bbl support level that has been in place prior to the announcement of OPEC cuts on November 30. This would suggest that the impact from the cuts has been diminished. Implied volatility indicates that traders are not expecting large price moves within the next month. Exhibit 2: Complicating OPEC s efforts to reduce oil inventories, the recent futures curve for Brent has steepened. Firstly, this can allow traders to take delivery of oil today, put it into storage and sell it forward at a higher price on the curve for a profit. Secondly, smaller shale producers can hedge/sell future production at higher prices on the curve while national oil companies tend to sell at current prices. We probably have to help Saudi s goal of reducing inventory, said Pioneer Natural Resources Chairman, Scott Sheffield, on June 26. If they choose not to do it themselves through additional cuts, the U.S. producer has to contribute. Pioneer Natural Resources is the second largest oil producer in Texas. If the need arose, would President Trump strong arm the U.S. oil industry into production cuts? Reasons could include supporting the U.S. oil industry through price increases, helping a U.S. ally (Saudi Arabia) and preventing a destabilization in the Middle East. As the U.S. enters the 4 th of July holidays, those on the road will be glad to see lower prices at the pump. According to the U.S. Department of Energy, prices for unleaded regular gasoline/petrol are at the lowest in 12 years at an average of $2.29/gallon (~$0.60/liter). Patrick Duffy pduffy@waypointleasing.com Ian Gurekian igurekian@waypointleasing.com Page 1

2 Exhibit 3 $120 $110 $100 $90 $80 $70 $30 $20 Exhibit 4 Number of Contracts ('000) Count of Active Rigs Exhibit Source: Bloomberg L.P. and ICE Record short positions Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan st Month Brent vs. U.S. Dollar Index Number of Contracts in Brent Held by Money Managers Count based on number of futures contracts outstanding (Open interest) and futures equivalent positions in options Clarksons Count of Active Offshore Rigs Source: Clarksons Research OPEC announced production cuts (Nov 30, 2016) Daily data as of June 29, 2017; Source: Bloomberg L.P. and Federal Reserve Brent 1st Mo. (LH) Long Net Short Floater Rigs Jack-Up Rigs Right axis is inverted--> US Trade Weighted Dollar Index (RH) Rebound due? Rig count has remained stable during 2017 $100 $105 $110 $115 $120 $125 $130 $135 Exhibit 3: Will a weaker U.S. Dollar support oil prices? Ordinarily, this is a yes given that commodities are typically traded in USD. However, with the OPEC cuts in place, oil appears to have taken its own path. With the erosion of confidence in the OPEC cuts, oil prices may find some support from a lower U.S. Dollar that has declined 4.5% YTD. Exhibit 4: Short positions held by money managers in Brent futures and options contracts (Red line) are at a record based on data since 2011 from the Intercontinental Exchange (ICE). Some analysts would interpret this as excessive bearishness by speculators that can result in short covering rallies as they rush to buy back positions. Also of note is the net positions (Longs Shorts) shown in the blue line which appears to be due a rebound. Exhibit 5: Clarksons recent monthly report shows that the number of active offshore rigs has stabilized from December 2016 with a pickup in demand for jack-up rigs. For offshore oilfields in production, Clarksons is forecasting that this will increase from 275 fields in 2016 to 279 fields in 2017 and 300 fields in Please refer to the appendix for details of active rig counts by region. BHP Billiton Chairman, Jacques Nasser, regrets the timing of its $20B spree into shale in "In terms of shale, if you had to turn the clock back, and if you knew what we knew today, you wouldn t do it." (Bloomberg, June 29) Eager to wean off coal for cleaner air, China plans to invest $7B into Floating Liquefied Natural Gas (FLNG) projects in Africa. Both the Commercial Bank of China and Bank of China have committed ~ $1.75B to finance the Coral South FLNG project off Mozambique. Separately, the China State Shipbuilding Corp plans to finance the Fortuna FLNG project off Equatorial Guinea with a $1.2B loan. (Reuters, June 26). According to Equatorial Guinea s petroleum minister, there is scope for another two offshore FLNG projects. Meanwhile, there are reports that BP and joint venture partner, Kosmos Energy, are considering two FLNG projects off Senegal and Mauritania. Exxon Mobil and its partners have approved a $4.4B project to develop part of the Liza oilfield off Guyana (June 16). This is the fifth deepwater project to gain approval this year. Just prior, BP and Reliance Industries approved a $6B project to develop natural gas reserves off India. The Port of Esbjerg, the main base for activity in the Danish North Sea, is looking to expand. It is expecting increased activity towards 2030 both within oil and gas and new business sectors (Offshore Energy Today, June 26). Page 2

3 Appendix Clarksons Research Offshore Drilling Rig Report June 2017 Page 3

4 Clarksons Research Offshore Drilling Rig Report June 2017 Page 4

5 Clarksons Research Offshore Drilling Rig Report June 2017 Page 5