Markets Have De-Valued Oil Prices: How Long Will It Last?

Markets Have De-Valued Oil Prices: How Long Will It Last? Art Berman MacroVoices September 2, 218 Slide 1

Comparative inventory: The most important approach to oil & gas price formation Ivnetories of Crude Oil + Products (mmb) 1,2 1,15 1,1 1,5 1, 95 9 85 8 75 Comparative Inventory is the difference between current stock levels of crude oil & select refined products and their 5-year average Late 214 Source: EIA & Early 216 Inventories Feb 217 1,171 WTI Price May 217 Mar 218 1/3/14 2/3/14 3/3/14 4/3/14 5/3/14 6/3/14 7/3/14 8/3/14 9/3/14 1/3/14 11/3/14 12/3/14 1/3/15 2/3/15 3/3/15 4/3/15 5/3/15 6/3/15 7/3/15 8/3/15 9/3/15 1/3/15 11/3/15 12/3/15 1/3/16 2/3/16 3/3/16 4/3/16 5/3/16 6/3/16 7/3/16 8/3/16 9/3/16 1/3/16 11/3/16 12/3/16 1/3/17 2/3/17 3/3/17 4/3/17 5/3/17 6/3/17 7/3/17 8/3/17 9/3/17 1/3/17 11/3/17 12/3/17 1/3/18 2/3/18 3/3/18 4/3/18 5/3/18 6/3/18 7/3/18 8/3/18 9/3/18 983 2 Sep 218$8 $2 WTI Price ($/barrel) Comparative Inventory (C.I.) is the difference between current stock levels of crude oil & select refined products, and their 5-year average. C.I. has accurately predicted most of the changes in oil pricing since the 199s when inventory data first became public. C.I. explains the 214 oil-price collapse and subsequent recovery. Over-supply and weakening demand for oil led to lower prices and a build up of oil in storage. As C.I. fell, prices increased and eventually led to the present C.I. deficit. That appears to be ending as C.I. moves back toward the 5-year average. This is the context for understanding the near- to medium term direction for supply, demand and prices. WTI Price ($/barrel) 15 1 5 $95 $9 $85 $8 $7 $65 $55 $5 $45 $35 $3 $25 $2 5 $5 Comparative Inventory (C.I.) is approaching the 5-yr avg for 1st time since became negative in Mar 218 at WTI price of $61.28 The last time C.I. was negative was in Nov 214 when price was $72.36 Apprximate amount of price devaluation since oil prices collapsed 214 mid-cycle price $72.36 Nov 214 Oil Over-Supply Positive C.I. Oil Under-Supply Negative C.I. Source: EIA & April 215 239 Feb 217 212 WTI Spot Price May -36 $74.3 $68.1 15. $61.28 $66.15 Mar 218 Sep 218 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-18-16 3. 25. 2. 1. 5.. -5. Crude + Refined Product Comparative Invneory (mmb) Slide 2

Comparative inventory ordinarily correlates negatively with price Comparative Inventory (mmb) 3 25 2 15 1 5-5 -1-15 -2 Jan-95 Comparative Inventory & oil price ordinarily correlate negatively At times, perception about supply security may cause markets to use price as a signal to producers to drill either more or less regardless of C.I. Jan-96 Comparative Inventory Oil Over-Supply Oil Under-Supply Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 199s muted response to deficit because of supply confidence Pre-tight oil ramp-up positive correlation of C.I. & price Jan-5 Jan-6 Jan-7 Jan-8 WTI Spot Price Jan-9 Jan-1 Jan-11 Jan-12 "Eerily Calm" IEA Report 12 AUG 214 Jan-13 Jan-14 $97.17 Jan-15 Jan-16 Jan-17 Jan-18 Source: EIA & 6 4 2 $8 $2 -$2 WTI Price ($/barrel) Comparative Inventory & oil price ordinarily correlate negatively. At times, perception about supply security may cause markets to use price as a signal to producers to drill either more or less regardless of C.I. Before the ramp up of tight oil production in 21, markets drove prices higher because of fears about supply security following flat global output 1998-22 and 24-27 despite a C.I. surplus. Similarly, price response was muted 1995-1998 despite deep C.I. deficits because markets were confident of adequate supply. The recent price rally after July 217 correlated with a period of flat production early 216- early 218. March-July 218 world crude + condensate output increased +1.5 mmb/d leading to market confidence. Preliminary August data suggests flat production with July & may account for recent price rally. Millions of Barrels Per Day 1 8 6 4 2 Periods of flat world crude + condensate production generally followed by oil-price increases Latest period of flat production appears to have ended Mar 218 +1.5 mmb/d increase Mar-July 218 1998-mid-22 Flat Production 23-26 Source: EIA & mid 24-27 Flat Production 27-28 Other Liquids (3%) Refinery Gain (3%) NGPLs (11%) Crude Oil Including Lease Condensate (83%) early 216-early 218 Flat Production Brent Price 217-218 +1.5 mmb/d Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 $22 $2 8 6 4 2 $8 $2 Brent Price (January 217 $/Barrel) Slide 3

Markets devalued WTI and Brent ~35% during the last year Comparison of three price cycles defined by comparative inventory vs WTI price from 1995-218 214- June 217 July 217-218 1995-24 2 1 $9 $8 $7 $5 $3 $2 WTI Price ($/barrel) Comparative Inventory (C.I.) Millions of Barrels -15-1 -5 5 1 15 2 25 3 1995-24 214-June 217 218 Source: EIA & - Aperio Energy Research Jul-Aug data defined new OECD-Brent yield curve with mid-cycle price ~$69 OECD minus U.S. Comparative Inventory (C.I.) decreased -19 mmb to -56 mmb in Aug Lowest level since Jun 214 when Brent was 12/barrel but Aug avg was $72.53 Jun 214 (-58, 11.8) Aug 218 (-56, $72.53) Late 213-early 214 Market Optimism 35 3 25 2 15 1 5 Brent Price ($/barrel) $95 $9 $85 $8 $7 $65 $55 $5 $45 $35 $3 $25 $2 5 Mid-Cycle Price Spring 215 Optimism Early 217 OPEC+ Optimism July 216 Late 215-Early 216 Market Pessimism $5 Source: EIA & Comparative Inventory (C.I.) Millions of Barrels -2-15 -1-5 5 1 15 2 The C.I. vs oil-price yield curve intersects the y-axis at the 5-year average & is called mid-cycle price. It is the market clearing price of the marginal barrel needed to maintain supply thru the price cycle. Mid-cycle price for 214 to mid-217 was ~-$85 but a new yield curve has developed with midcycle price of -$7 but more significantly, with a much flatter trajectory than the previous yield curve. August OECD C.I. of -56 mmb corresponds to a Brent price of $72.53. A similar C.I. for June 214 of -58 mmb corresponded to a Brent price of 11.8. That represents a 35% price devaluation. The 1995-24 price cycle had a flat yield curve trajectory. Despite very negative C.I. levels, prices remained correspondingly flat. This was based on market sense of supply security. Nov '14 OPEC Mtg $69 Mid-Cycle Price 214-217 211-213 21-211 218 Yield Curve Slide 4

Markets devalued WTI and Brent ~35% during the last year WTI Price ($/barrel) 2 15 1 5 $95 $9 $85 $8 $7 $65 $55 $5 $45 $35 $3 $25 $2 Market devalued price of WTI partly because tight oil rig count tripled (2.9x) from 193 to 568 at prices less than /barrel from May 216 to Apr 218 5 Source: Baker Hughes, EIA & Rig Count /barrel 193 May 216 1 9 8 Aug 7 Apr 218 218 61 568 6 $69.98 WTI Price 3-month lagged Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 5 4 3 2 1 Tight Oil Horizontal Rig Count (lagged 12 weeks) Tight Oil Production (mmb/d) Market devalued price of WTI partly because U.S. tight oil rig count tripled (2.9x) from 193 to 568 rigs at prices less than /barrel from May 216 to Apr 218. Producers have been claiming profits at successively lower break-even prices since the 214 oil-price collapse. Markets hate to overpay. Part of price discovery is to see what happens with lower prices. Tight oil production returned to pre-oil price-collapse peak level (4.1 mmb/d) at WTI prices of $47-$53/barrel by July 217. Markets take that as confirmation that adequate supply will be available at relatively lower oil prices than before the 214 collapse. Output has continued to increase at prices less than the lowest levels from 211-214. 6 5 4 3 2 1 Tight oil production returned to pre-oil price-collapse peak level (4.1 mmb/d) at WTI prices of $47-$53/barrel Output has continued to increase at prices < lowest levels from 211-214 Source: Baker Hughes, EIA & Feb 215 4.14 /barrel Tight Oil Production Jul 217 Sep 216 4.14 3.68 $46.71 $53.47 WTI Price 4-month Lagged Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 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 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Sep2 218 5.29 1 $9 $8 $7 $5 $3 $2 WTI Price Lagged 4 Months ($/barrel) Slide 5

Managed money has been unwinding net long positions Net Long Poisitions in WTI, Gasoline, Heating Oil & Fuel Oil (mmb) 8 7 6 5 4 3 2 1 WTI crude + product net long positions -33 mmb wk ending Sep 7 WTI wkly avg price fell -.86 from $69.39 to $68.53 Current front-month price is $68.98 Net long positions -225 mmb since January 218 & -14 mmb since wk ending Jul 1 * Includes crude oil, gasoline, heating oil & fuel oil futures & options Jun 16 217 Source: CFTC, St. Louis Fed, Quandl & 82 73 Net Long Positions WTI NYMEX Price 582 $73.71 Normalized Trade-Wtd Dollar/WTI Ratio 12/31/16 1/14/17 1/28/17 2/11/17 2/25/17 3/11/17 3/25/17 4/8/17 4/22/17 5/6/17 5/2/17 6/3/17 6/17/17 7/1/17 7/15/17 7/29/17 8/12/17 8/26/17 9/9/17 9/23/17 1/7/17 1/21/17 11/4/17 11/18/17 12/2/17 12/16/17 12/3/17 1/13/18 1/27/18 2/1/18 2/24/18 3/1/18 3/24/18 4/7/18 4/21/18 5/5/18 5/19/18 6/2/18 6/16/18 6/3/18 7/14/18 7/28/18 8/11/18 8/25/18 9/8/18 $66.12 478 1 $9-33 $8 $69.39 $7 $68.53 $5 NYMEX WTI Price ($/barrel) & Normalized Trade-Weighted U.S. Dollar-WTI Ratio Brent + WTI Positoins (mmb) 1,3 8 3-2 -7 1/3/17 Brent + WTI net long positions fell -4 mmb from 83 to 799 mmb wk ending Sep 7 Brent avg weekly price increased +.11 $76.9 to $77.1 Net long positions have fallen -335 mmb since Jan 218 2/3/17 95 $56.27 3/3/17 4/3/17 5/3/17 6/3/17 358 Jun 23 217 Source: CFTC,Quandl, ICE & 7/3/17 8/3/17 9/3/17 1/3/17 11/3/17 12/3/17 1/3/18 1,134 $7.9 2/3/18 $63.77 3/3/18 1,18 Net Long Positions Brent Price 4/3/18 5/3/18 $78.76 6/3/18 7/3/18 8/3/18 666 Long Positions 83 $71.82 Short Positions 799 $76.9 $77.1 *NYMEX WTI, ICE WTI & ICE Brent managed money futures & options 9/3/18 2 15 1 5 $95 $9 $85 $8 $7 $65 $55 $5 $45 $35 $3 Brent & WTI Futures Price ($/barrel) From mid-june 217 to Jan 218, net long positions increased +615 mmb for WTI crude + products, and +776 for WTI + Brent. Brent + WTI net long positions have fallen -335 mmb since Jan 218. WTI crude + refined product net long positions have fallen -225 mmb since January 218 and -14 mmb since the week ending July 1. Despite high frequency price fluctuation, the overall trend is down. Slide 6

The U.S. export party seems to be losing momentum Exports (mmb/d) 2 1.8 1.6 1.4 1.2 1.8.6.4.2 Crude oil & hydrocarbon gas liquids account for 46% petroleum exports YTD 218 Distillate & Gasoline account for 29% 24% 1.76 22% 1.57 Crude Oil Hydrocarbon Gas Liquids Source: EIA & 17% 1.26 Distillate Fuel Oil 12%.86 Finished Motor Gasoline 8%.6 Petroleum Coke 5%.33 Residual Fuel Oil Distillate Exports & 5-Year Average (mmb/d) 1.8 1.6 1.4 1.2 1.8.6.4.2 35 294 174 136 23 394 Source: EIA & Jan-17 TYD 218 avg distillate exports have fallen -123 mmb/d compared to 217 but remain above the 5-year average Feb-17 Mar-17 Apr-17 May-17 Jun-17 422 Jul-17 Distillate Exports 314 Aug-17-81 Sep-17 263 Oct-17 18 Nov-17 18 Dec-17 2 Year-over-year Distillate Exports Avg mmb/d 217 1,38 218 1,257 Change -123 Jan-18 157 Feb-18-4 Mar-18 5-Year Avg 174 Apr-18 71 May-18 15 Jun-18 8 7 6 5 4 3 2 1-1 -2 Year-over-Year Distillte Exports (kb/d) Distillate exports have been the cash cow driving U.S. refined product exports. Distillates comprise ~17% of product exports Distillate exports remain strong and above the 5-year average but have declined compared with record levels in 217. Big drop off in exports to Mexico and Brazil where refinery expansions have occurred. Exports may increased again when Latin American refineries begin maintenance toward the end of the year. Slide 7

Distillate and gasoline inventories have been building Gasoline Comparative Inventory (mmb) 5 4 3 2 1-1 -2-3 -4-5 1/2/15 3/2/15 Distillate comparative inventory (C.I.) is -4.3 mmb below the 5 year avg but at the highest level since wk ending Mar 3, 218 Stocks & C.I. have increased dramatically since June Source: EIA & 5/2/15 7/2/15 9/2/15 11/2/15 1/2/16 3/2/16 5/2/16 7/2/16 9/2/16 11/2/16 1/2/17 3/2/17 Distillate C.I. Distillate Stocks Distillate 5-Yr Avg 5/2/17 7/2/17 9/2/17 11/2/17 1/2/18 Wk End Wk End Mar 3 18 Sep 7-4.88-4.29 3/2/18 5/2/18 7/2/18 9/2/18 24 22 2 16 14 12 1 Gasoline Stocks & 5-Year Average (mmb) Gasoline Comparative Inventory (mmb) 3 25 2 15 1 5-5 1/2/15 3/2/15 Gasoline comparative inventory (C.I.) is +17.6 mmb above the 5 year avg the highest level since mid-june 217 Gasoline stocks flat to rising during normal destocking period 5/2/15 Wk End Aug 7 215 7/2/15 -.99 Source: EIA & 9/2/15 Gasoline C.I. 11/2/15 1/2/16 3/2/16 Gasoline Stocks 5/2/16 7/2/16 Wk End Aug 19 216 2.83 9/2/16 11/2/16 1/2/17 3/2/17 5/2/17 7/2/17 9/2/17 11/2/17 1/2/18 3/2/18 Gasoline 5-Yr Avg 5/2/18 7/2/18 9/2/18 3 29 Wk End 28 Wk End Jun 23 Sep 7 217 218 27 17.46 17.62 26 25 24 23 22 21 2 Gasoline Stocks & 5-Year Average (mmb) U.S. storage reports in recent weeks have featured substantial crude oil withdrawals but sizeable distillate, gasoline and other products builds that have led to disappointing overall outcomes. Distillate comparative inventory (C.I.) is -4.3 mmb below the 5 year avg but at the highest level since the week ending Mar 3, 218. Stocks & C.I. have increased dramatically since June. Gasoline comparative inventory (C.I.) is +17.6 mmb above the 5 year average and at the highest level since mid-june 217. Gasoline stocks have been flat-to-rising during the normal destocking period. Slide 8

Crude exports are lower but the Brent-WTI differential sends another message $8 Brent-WTI premium vs 5-yr avg up from.13 to $3.43 (25x) since wk ending Aug 17 Premium increased +$4.46 from $3.67 to $8.13 These changes reflect concerns about Brent supply security $9 Difference Between Brent -WTI Premium& 5 Year Average $6 $4 $2 -$2 -$4 -$6 -$8 Positive Brent-WTI Premium minus 5 Yr Avg Negative Brent-WTI Premium minus 5 Yr Avg Brent WTI $5.21 -.32 -.57.13 $2.14 $3.43 Brent WTI Premium 5-Yr Avg Premium vs 5-Yr Avg 8/31/18 $76.8 $69.66 $6.42 $4.28 $2.14 9/7/18 $76.64 $68.51 $8.13 $4.7 $3.43 Change.56 -.15.71.43.28 8/17/18 $69.82 $66.15 $3.67 $3.54.13 Change $6.82 $2.36 $4.46.17 $3.29 $76.64 $68.51 $8 $7 $5 $3 $2 Source: EIA, Quandl & - 1/6/17 2/6/17 3/6/17 4/6/17 5/6/17 6/6/17 7/6/17 8/6/17 9/6/17 1/6/17 11/6/17 12/6/17 1/6/18 2/6/18 3/6/18 4/6/18 5/6/18 6/6/18 7/6/18 8/6/18 9/6/18 Brent & WTI Futures Price ($/barrel) Crude oil exports remain strong but have fallen sharply from 2-3 mmb/d levels from April through July. Last week s exports were 1.6 mmb/d, 2 kb/d less than the 218 YTD average of 1.8 mmb/d. At the same time, the Brent-WTI premium vs 5-yr average is up from.13 to $3.43 (25x) since week ending Aug 17. Premium increased +$4.46 from $3.67 to $8.13. These changes reflect increased market concerns about supply security. This could mean increased U.S. exports on the horizon. Yet foreign refiners have begun to understand the limitations of high-gravity U.S. crude. Slide 9

Front (CL1) -to-back (CL7) Month WTI Futures Spread ($/barrel) WTI and Brent spreads are moving in opposite directions $8 $6 $4 $2 -$2 -$4 8/3/17 9/9/17 9/19/17 9/29/17 1/9/17 WTI 6-month calendar spreads have fallen -$6.78 since July 3 from $7.77 to.99 Front-Month Spread Fri Close Wkly Avg Fri Close Wkly Avg 9/14/18 68.99 68.95.99 1.4 9/7/18 67.75 68.53 1.25 1.49 Change 1.24.42 -.26 -.45 CL1 - CL7 WTI NYMEX Price 1/19/17 1/29/17 11/8/17 11/18/17 11/28/17 Contango (Future > Spot Price) $66.14 $59.19 Source: Quandl & 12/8/17 12/18/17 12/28/17 1/7/18 1/17/18 $63.91 $65.88 Backwardation (Spot > Future Price) 1/27/18 2/6/18 2/16/18 2/26/18 3/8/18 3/18/18 3/28/18 4/7/18 $62.6 4/17/18 4/27/18 5/7/18 $72.13 5/17/18 5/27/18 6/6/18 6/16/18 $74.11 $7.46 $7.77 6/26/18 7/6/18 7/16/18 7/26/18 8/5/18 $65.1 8/15/18 8/25/18 9/4/18 $67.75.99 9/14/18 $7 $68.99 $65 Wk ending Sep 7 $55 $5 $45 Front-Month CL1 Futures Contract Price ($/barrel) WTI 6-month calendar spreads and front-month prices are falling. Brent spreads and price are generally increasing. WTI spreads have fallen -$6.78 since July 8, from $7.77 to.99. Brent spreads went into contango in July but have increased from -.81 to.95 in August and early September. Increasing Brent backwardation and positive pricing relative to WTI reflects supply security concerns. Front (BZ1) To Back (BZ7)Month Brent Calendar Spread ($/barrel) $6 $5 $4 $3 $2 - -$2 -$3 -$4 6/1/17 6/11/17 6/21/17 7/1/17 7/11/17 7/21/17 7/31/17 8/1/17 Brent 6-mo spreads fell from $3.88 to -.81 in July but have increased to.95 Front-Month Spread Fri/Fri Wkly Avg Fri/Fri Wkly Avg 9/14/18 78.9 78.49 1.95 1.93 9/7/18 76.83 77.1 1.58 1.35 Change 1.26 1.48.37.58 BZ1 - BZ7 8/2/17 8/3/17 9/9/17 9/19/17 9/29/17 1/9/17 Brent Futures Price Source: Quandl & 1/19/17 1/29/17 11/8/17 11/18/17 11/28/17 12/8/17 12/18/17 12/28/17 1/7/18 1/17/18 $7.52 1/27/18 $67.5 $63.61 $62.59 2/6/18 2/16/18 2/26/18 3/8/18 $7.45 $67.11 $79.8 $79.44 Backwardation (Spot > Future Price) Contango (Future > Spot Price) 3/18/18 3/28/18 4/7/18 4/17/18 4/27/18 5/7/18 5/17/18 5/27/18 6/6/18 6/16/18 $3.88 6/26/18 $71.84 7/6/18 -.81 7/16/18 7/26/18 $7.76 8/5/18 8/15/18 8/25/18 9/4/18 $76.83.95 9/14/18 $85 $8 $78.9 9/24/18 $7 $65 $55 $5 $45 Brent Futures Price ($/barrel) Slide 1

Markets have been sensitive to supply concerns in recent weeks Incremental Crude + Condensate Production (mmb/d) Since Jan 217 1. 9.5 9. 8.5 8. 8.93 Iran-Nigeria-Libya-Venezuela crude + condensate output has fallen 1 mmb/d since Jan 218 &.5 mmb/d since May 218 LB & NG output increased +295 & +86 kb/d as IR & VZ fell -236 & -47kb/d in Aug Incremental production is calculated by subtracting the minimum monthly level from all values in the time series & adding the minimum values back into the base Jan 217 Jul 217 9.54 Venezuela Libya Nigeria Iran Jan 218 9.3 -.55 mmb/d May 218 8.75 -.48 mmb/d Aug 218 8.27 8.17 Oil-Directed Rig Count (Saudi Arabia, Kuwait & UAE) 24 22 2 18 16 14 12 1 Saudi Arabia, Kuwait & UAE output fell slightly (-18 kb/d) in August & for now, is losing the battle to compensate for falling exports from Iran +9 rigs were added in August +1,69 kb/d Mar '13 - Jun '15 Mar 213 14.61 +94 kb/d Jan '13 - Jun '15 Jan 214 15.36 SaudiArabia, Kuwait & UAE Production Jun 215 16.3 156 Nov 216 16.84 432 kb/d Spare Capacity 161 Rig Count +542 kb/d since April Aug 218 16.42 16.5 16.4 15.86 149 17. 16. 15.5 155 146 143 15. Apr 218 14.5 Saudi Arabia, Kuwait & UAE Crude + Condensate Production (mmb/d) 7.5 Source: EIA & Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 BASE Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 8 Source: BakerHughes, EIA & Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 14. The price rally that began in mid-august reflected renewed market concerns about tighter world supply. This is an artificial problem created by U.S. sanctions on Iran but real nonetheless. Iran, Nigeria, Libya & Venezuela production has fallen 1 mmb/d since January &.5 mmb/d since May 218. Saudi Arabia, Kuwait & UAE have increased production 542 kb/d since April but there is considerable doubt about true spare capacity. Maximum output was 16.84 mmb/d just before the 216 production cuts. If that represents spare capacity then, there is little left to overcome tighter supplies in the future. Slide 11

Two Different Views of Supply-Demand Balance OPEC lower supply forecast leads to increasing supply-demand deficit in 218 moving to a surplus of 1. mmb/d in 2Q 219, returning to a deficit by 3Q 219 OPEC supply forecast* averages -93 kb/d less than IEA-EIA 3Q 218-4Q219 Market Balance (Supply Minus Demand mmb/d) 2 1.5 1.5 -.5-1 -1.5..... 1Q13 2Q13 -.2 -.4 Brent Price 3Q13 -.8 4Q13-1.3 1Q14 -.2 -.59.5.5 2Q14 3Q14 1.2 4Q14 1.5 1Q15 1.8 2Q15 1. 3Q15 Source: IEA, EIA & 1.7 4Q15 Supply-Demand Surplus 1.4 1Q16 +.96.3.1 2Q16 3Q16 1.4 4Q16.2......1. Q117 Period Avg Supply-Demand Balance Q217-1. Q317 Supply-Demand Deficit Q417 Q118 Q218E -.5 -.3 -.38 +.39 Q318E Q418E.9 Q119E.6 Q219E Forecast.7 Q319E.2 Q419E Brent Price ($/barrel) World Liquids Market Balance (Supply minus Demend mmb/d) 5 4 3 2 1-1 -2.5.6 1Q13 2Q13 3Q13 4Q13 -.3 -.5 OPEC minus IEA-EIA 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 AVG Supply -.63 -.96 -.79 -.97-1.12-1.13 -.93 Demand -.16.13 -.13-1.41 -.17.2 -.29 1Q14-1.2 1.6 2Q14.5 3Q14 1.1 4Q14 3. 1Q15 3.5 2Q15 2. 3Q15 Supply-Demand Surplus 1.1 4Q15 Source: OPEC, IEA, EIA & 1.8 1Q16.6 2Q16 3Q16.8 4Q16.2 1Q17 2Q17 -.4 -.4 *Supply after 2Q18 is calculated using EIA production estimates with a scalar applied to adjust for true supply since OPEC does not provide supply forecasts. 3Q17 4Q17-1.2-1.3.1 1Q18 2Q18 3Q18E -.2 -.41 Brent Price 4Q18E -1.1.2 1Q19E 1. 2Q19E Supply-Demand Deficit 3Q18E 4Q19E 4 2 $8 -.24 $2 -.97 Brent Price ($/barrel) IEA and OPEC world supply balance forecasts suggest different potential scenarios for the remainder of 218 and for 219. IEA suggests that markets have been more-or-less in balance in 218 and are likely to move into substantial over-supply in 219. OPEC forecasts show 217 deficits continuing through 218, and reaching a maximum in Q4. OPEC indicates over-supply by mid-219 returning to deficit for the rest of that year. No wonder investors are confused! Slide 12

Closing thoughts and observations Oil fundamentals are only part of the story the global economy is the main factor going forward. Current U.S. interest rates of 1.9% are 15 times higher (1483%) than the average.12% from 29 through 215. Emerging markets are taking the blows for now & a recent study by Oxford Institute for Energy Studies places global economic growth risks above geopolitical risk or shale growth risks for oil price. Oil supply threat from Iran probably over-stated: sanction relief likely and Iran will find ways to export crude through Iraq & black market. OPEC spare capacity may be greater than assumed. Above all, it is critical to recognize that oil markets remain in a period of secular deflation that begain in 214. However things turn out, they are not going to return to the old normal. I expect prices to remain range-bound near or below current levels for the near term and will probably fall in 219 (but nothing would completely surprise me!). Slide 13