The U.S. Over-Supply of Oil is Ending Pay-It-Forward Network Art - PowerPoint PPT Presentation

The U.S. Over-Supply of Oil is Ending Pay-It-Forward Network Art Berman Labyrinth Consulting Services, Inc. November 17, 2017 Labyrinth Consulting Services, Inc. Slide 1 artberman.com

The U.S. Over-Supply of Oil is Ending The U.S. Over-Supply of Oil is Ending 239 250 Stocks WTI Price 110 (LHS) 213 (LHS) 100 200 WTI Price ($/barrel), Stocks & 5-Year Average Stocks (mmb) 90 5-Year Avg Stocks 159 (LHS) 80 150 Oil Comparative Inventory (mmb) Over-Supply 70 60 100 50 48 40 50 30 Positive C.I. (RHS) 20 Negative C.I. (RHS) 0 10 Oil Under-Supply Source: EIA & Labyrinth Consulting Services, Inc. -50 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 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 • Comparative inventory (C.I.) has been dramatically reduced in 2017. • Levels have fallen 165 mmb since February and are now approaching the 5-year average for the first time in nearly 3 years. • The causes of the U.S. inventory drawdown are clear: increased exports of crude oil and greater domestic consumption. Labyrinth Consulting Services, Inc. Slide 2 artberman.com

Comparative Inventory Yield Curve Predicts $67+ WTI Prices By January 2018 The U.S. Over-Supply of Oil Is Ending Comparative Inventory Has Fallen 165 mmb in 2017 $115 2014-2017 $110 Data $105 $100 165 48 $95 mmb mmb $90 Mid-cycle price $85 Mar-June 2015 Nov. 2014 Early 2017 OPEC (5-year average) $80 False OPEC Production-Cut $75 Optimism 1 decision not Optimism Mid-Feb Yield Curve Nov 10 $70 2 to cut 4 2017 $65 2017 production $60 $55 Source: EIA & Labyrinth Consulting Services, Inc. $55 $50 $45 WTI Price ($/barrel) Nov 3 $40 $40 Price response will be 2017 $35 more pronounced $30 going forward because of increasing curvature $25 3 of the Yield Curve $20 Late 2015-Early 2016 $15 Pessimisim $10 (Cushing > 80% Capacity) $5 Comparative Inventory (C.I.) Millions of Barrels $0 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 An interpreted yield curve that correlates C.I. and WTI price is developed by cross plotting the same • data without the time dimension. The yield curve may provide price solutions to inventory reduction assumptions in the near term. • If C.I. continues to fall at the 9-month average of 4 mmb/week, oil prices may be approximately $67 • per barrel by the end of December. If C.I. falls at the 8 mmb/week average since late September, WTI could approach levels not seen • since before the price collapse in late 2014. Labyrinth Consulting Services, Inc. Slide 3 artberman.com

Crude Oil Exports and the Brent-WTI Spread Crude Oil Exports Back Above 1 mmb/d for Week Ending November 10 Crude Exports Increased +0.3 mm/d (+1.8 mmb/week) From Previous Week Exports 423 kb/d more than in 2016 & account for > 6mmb/week But ~1 mmb/d Less Than September-October Levels 2.5 9 2.1 mmb/d 4 $8 Net Crude Imports & 4- Oct 27 Annual Brent-WTI spread reached $7.24 Week Average (RHS) 8 Avg $7.24 last week $7 3.5 2 7.44 mmbpd 7 $6 7.10 mmbpd Brent-WTI Price Spread 3 & 4-Week Average $5 6 (RHS) Brent-WTI Price Spread ($/barrel) Crude Oil Exports (mmb/d) Net Crude Oil Imports (mmb/d) Crude Oil Exports (mmb/d) 1.5 Crude Oil Exports Have 2.5 $4 5 Averaged 0.9 mmb/d in 2017 2.13 1.1 Annual 2 $3 1.98 1.92 Avg 4 1.80 1 908 kbpd $2 1.5 1.49 3 1.13 $1 1 485 kbpd 2 $0 0.5 0.87 Crude Oil Exports & 4- Week Average (LHS) 0.5 1 Weekly Crude Oil Exports -$1 & 4-Week Average (LHS) Source: EIA & Labyrinth Consulting Services, Inc. Source: EIA & Labyrinth Consulting Services, Inc. 0 -$2 0 0 1/1/16 2/1/16 3/1/16 4/1/16 5/1/16 6/1/16 7/1/16 8/1/16 9/1/16 10/1/16 11/1/16 12/1/16 1/1/17 2/1/17 3/1/17 4/1/17 5/1/17 6/1/17 7/1/17 8/1/17 9/1/17 10/1/17 11/1/17 Feb-16 Mar-16 Apr-16 Jun-16 Sep-16 Oct-16 Nov-16 Feb-17 Mar-17 Apr-17 Jun-17 Sep-17 Oct-17 Nov-17 Jan-16 May-16 Jul-16 Aug-16 Dec-16 Jan-17 May-17 Jul-17 Aug-17 • Crude oil exports for the first half of 2017 averaged 0.8 mmb/d but rose to 1.8 mmb/d in September and October. • Increased exports now average 7-12 mmb/week and contribute substantially to reduced inventory levels. • Higher export levels correlate with the increased spread between Brent and WTI prices that began in late July. • Traders can sell U.S. crude oil overseas at less than international prices but at levels higher than domestic pricing allows. Record exports of 2.13 mmb/d occurred during the week ending October 27. • Exports have averaged ~1 mmb/d in 2017—almost double levels in 2016. Labyrinth Consulting Services, Inc. Slide 4 artberman.com

Crude Oil Exports and the Brent-WTI Spread Brent Premium to WTI At $7.24/barrel Caused By Middle East Fear Premium & WTI Transport Constraints (Now Easing Somewhat) Kurdish $8.00 30 Referendum Sept 25 $7.24 Cushing Comparative $7.00 Inventory (RHS) Qatar restored 25 $6.00 diplomatic relations with Iran Aug 24 Cusihing Crude Oil Comparative Inventory (mmb) Brent Premium to WTI Crude Oil Price ($/barrel) Saudi Purge $5.00 Oct 24 20 $4.00 $3.00 15 Brent Premium to WTI (LHS) $2.00 10 Qatar ransom to $1.00 Iraqi Shi'ite militants June 5 -0.02 $0.00 5/6/16 5/20/16 6/3/16 6/17/16 7/1/16 7/15/16 7/29/16 8/12/16 8/26/16 9/9/16 9/23/16 10/7/16 10/21/16 11/4/16 11/18/16 12/2/16 12/16/16 12/30/16 1/13/17 1/27/17 2/10/17 2/24/17 3/10/17 3/24/17 4/7/17 4/21/17 5/5/17 5/19/17 6/2/17 6/16/17 6/30/17 7/14/17 7/28/17 8/11/17 8/25/17 9/8/17 9/22/17 10/6/17 10/20/17 11/3/17 5 -$1.00 -$2.00 Source: EIA & Labyrinth Consulting Services, Inc. 0 Tight oil production levels, crude oil quality and U.S. refinery blending needs are behind the WTI • discount to Brent price. Most U.S. refineries are designed for international grades of oil like Brent which is heavier and • contains more sulfur than WTI. The U.S. has had a surplus of light sweet oil since the tight oil boom began, and the Brent-WTI • spread reached almost $30/barrel in September 2011 as a result. Middle East fear premium has been an important factor since June 2017. • Labyrinth Consulting Services, Inc. Slide 5 artberman.com

Structural Problems Getting WTI to East Coast Refineries The spread decreased to about $2.25 with the advent of rail shipments of WTI to East Coast • refineries, and associated reduced light oil imports. The transport cost was reasonable when oil prices were $100 per barrel but lower oil prices after • 2014 resulted in a progressive decline in rail shipments. East Coast refiners increasingly relied again on imported light oil mostly from West Africa to blend • with heavier grades of oil. A surplus of tight oil returned as production recovered as a result higher oil prices in 2016 and 2017. • Surplus supply caused discounted WTI prices, and the recent increase in the Brent-WTI spread. Some of excess oil has been exported in recent weeks but the price spread persists because import • levels are so far unaffected. Labyrinth Consulting Services, Inc. Slide 6 artberman.com

Increased Domestic Consumption is 2 nd Cause of Inventory Drawdowns U.S. Refined Product Consumption Fell -1.6 mmb/d This Week from 21.3 to 19.8 mmb/d (-11 mmb/week): The Main Factor in Comparative Inventory Increase 22.5 300 Beginning of Comparative Inventory 22.0 250 Inventory (RHS) Reduction 21.5 21.3 200 Crude Oil + Products Comparative Inventory (mmb) Csonumption (Product Supplied mmb/d) 21 mmb/d 21.0 150 Annual 20.5 Avg 20.1 mmb/d 100 20.0 19.8 50 19.5 4-Week Consumption 0 Avg (LHS) 19.0 Beginning of Consumption -50 Increase 18.5 Source: EIA & Labyrinth Consulting Services, Inc. -100 18.0 1/3/14 3/3/14 5/3/14 7/3/14 9/3/14 11/3/14 1/3/15 3/3/15 5/3/15 7/3/15 9/3/15 11/3/15 1/3/16 3/3/16 5/3/16 7/3/16 9/3/16 11/3/16 1/3/17 3/3/17 5/3/17 7/3/17 9/3/17 11/3/17 Consumption reached a 10-year record of 21 mmb/d during the summer of 2017. • August 2017 consumption was 300 kb/d more than in August 2016 and that difference accounts for • more than 2 mmb/week of incremental inventory reduction. In fact, the increase in consumption that began in January coincided with the beginning of • comparative inventory reduction that in February. Labyrinth Consulting Services, Inc. Slide 7 artberman.com