Oil Price Outlook February 2017 U.S

US OIL PRICE OUTLOOK FEBRUARY 2017 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017

Key Messages

1. OPEC output deal may have a limited impact on prices. Despite signs of compliance, implementation and monitoring is challenging in some countries 2. Going forward, inventory correction and the lagged effect of CAPEX cuts should lead to higher prices 3. The recovery of U.S. shale production is expected to prevent a steep upturn in prices; nevertheless, there is uncertainty on the extent and speed of the rebound 4. Little to no upside from demand. Demand growth continues to be supported by emerging markets and the U.S., but it has eased 5. Slow recovery and convergence to $60/bbl, which would be a sweet spot for both consumers and producers

2 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

BRENT CRUDE OIL PRICES OPEC DEAL $ per barrel OPEC deal carries 60 OPEC prices back above 58 Meeting $50/bbl 56 54

• Deal should be seen as an 50 effort to stabilize the market 48 • Rather than triggering a rapid 46 and sustained increase in prices, cuts imposed an 44 effective price floor 42

10/04/16 02/07/17 09/20/16 09/27/16 10/11/16 10/18/16 10/25/16 11/01/16 11/08/16 11/15/16 11/22/16 11/29/16 12/06/16 12/13/16 12/20/16 12/27/16 01/03/17 01/10/17 01/17/17 01/24/17 01/31/17

Source: BBVA Research & Haver Analytics 3 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

FUTURES Futures rise as markets perceive that OPEC has retaken its role of market stabilizer

WTI CRUDE FUTURES BRENT CRUDE FUTURES $ per barrel $ per barrel 60 60

55 55

50 50

45 45

40 40 02/09/17 02/09/17 1 month ago 35 35 1 month ago 3 months ago 3 months ago 6 months ago 6 months ago 30 30 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Months Ahead Months Ahead

Source : BBVA Research & Bloomberg 4 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

OPEC MONITOR January was first big test for OPEC production deal, with estimated compliance more than halfway to target

OPEC PROGRESS TOWARDS PRODUCTION COMMITMENTS* Production Cut Goal Achieved? Status Update Goal (K, bbl/d)

Saudi Arabia 486  Estimated cuts of 500K bbl/d, surpassing target

Iraq 210  Kurdistan region unwilling to cooperate with cuts; difficulties in lowering output (120) without triggering contractual obligations to pay IOCs

UAE 139  Estimated cuts of 160K bbl/d, surpassing target

Kuwait 131  Estimated cuts of 150K bbl/d, surpassing target

Venezuela 95  Announced in late December that cut would be implemented starting Jan. 1, but (70) then Maduro announced plan to stabilize oil prices

Angola 78  State oil company has announced output cuts in accordance with deal (0)

Algeria 50  Estimated cuts of 70K bbl/d, surpassing target

Qatar 30  Started informing customers in December of supply cuts starting Jan. 1 (5)

Ecuador 26  Reduction to be result of allowing production at mature oil fields to fall; peak (20) reductions to occur in March and April

Gabon 9  Estimated cuts of 15K bbl/d, surpassing target; rejoined OPEC in July; faced falling oil production last year, headlined by a large-scale strike by oil workers

*No production adjustment for Libya or Nigeria; Proposed production increase of 90K for Iran 5 Source: BBVA Research, Bloomberg & news sources U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

NOPEC MONITOR Bulk of non-OPEC production cuts to come from Russia, but achievement of goal will take time

NON-OPEC PROGRESS TOWARDS PRODUCTION COMMITMENTS

Production Cut Goal Achieved? Status Update Goal (K, bbl/d)

Russia 300  Surpassed Jan. goal of 50K; expect to reach 300K by end of 1H2017, but has (117) announced increase in oil exports in 2017

Mexico 100 ? Reduction to be result of allowing production at mature oil fields to fall

Oman 45 ? Energy minister said that daily production quotas for oil producing companies have been set, but that country will maintain production of 1M bbl/d this year.

Azerbaijan 35  Began implementing production cuts on January 1. Energy minister said output had been cut to 789K in Jan

Kazakhstan 20  Energy ministry stated that commitment had already been met, but plans to increase output in 2017

Malaysia 20 ? State oil firm to implement cuts starting in January; 2nd straight year of production decline

Equatorial Guinea 12 ? Applied to join OPEC

Bahrain 10 ? No status update

South Sudan 8  In the process of doubling crude production after 2 year halt

Brunei 4 ? No status update

Sudan 4 ? No status update 6 Source: BBVA Research, Bloomberg & news sources U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

SUPPLY Upside risks from Libya and Nigeria remain subdued

OPEC: CHANGE IN CRUDE OIL PRODUCTION BY COUNTRY YoY, million barrels per day

600

400

200

0 Nigeria -200 Libya -400

-600

-800

-1000

-1200 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Source: BBVA Research & Haver Analytics 7 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

OPEC DEAL OPEC could decide to extend its production quotas in 2H17, but some members say this may be unnecessary

CRUDE OIL SUPPLY SUPPLY AND DEMAND BALANCE Million barrels per day

2.5 140 34 58 2.0 120 33 57 1.5

1.0 100 32 56 0.5 80 31 55 0.0 60 -0.5 30 54 -1.0 40 29 53 -1.5 20 28 52 -2.0 -2.5 0 27 51 2011 2012 2013 2014 2015 2016 2017 Stock Change Needed To Balance (Mil b/d, 6-mo moving average) European Free Market Price: Brent Crude Oil ($/Barrel, rhs) OPEC (lhs) Non-OPEC (rhs)

Source: BBVA Research & Haver Analytics 8 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 OPEC

SUPPLY A more competitive environment will continue to hinder the ability of OPEC to stabilize the market

NET ADDITIONS IN GLOBAL LIQUIDS SUPPLY BY SUPPLY SEGMENT GROUP YoY, million barrels per day

3.0 Forecasts OPEC 2.5 Other Onshore 2.0 Shale/Tight oil

1.5 Non

Oil sands - 1.0 OPEC

Offshore shelf

0.5

0.0 Offshore midwater -0.5 Offshore deepwater -1.0 Total Supply -1.5 2013 2014 2015 2016 2017 2018 2019 2020

Source: Rystad Energy UCube; production forecasts could differ from BBVA Research baseline based on variance in assumptions 9 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 USA

INVENTORIES Signs of a more balanced market will emerge as inventories continue to decline

U.S. STOCKS OF CRUDE OIL EXCLUDING SPR GLOBAL OIL INVENTORIES EOP, million barrels EOP, million barrels 550 3300

3100 500 2900

450 2700

2500 400 2300

350 2100

1900 300 Oil Inventories: OECD (EOP, Mil.Bbl) 1700 Oil Inventories: Non-OECD (EOP, Mil.Bbl)

250 1500 2011 2012 2013 2014 2015 2016 2017

Source: BBVA Research & Haver Analytics 10 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 USA

CAPEX Shale producers to increase CAPEX in response to upturn in prices

CAPITAL AND OPERATING EXPENDITURES FOR U.S. SHALE OIL Billion USD 250 • Slowdown in capital spending resulted from a weak price Opex environment Exploration Capex 200 Capex • Many shale companies covering CAPEX with cash flows, moving 150 away from strong reliance on debt

CAPEX expected to rise this 100 • year, especially as larger U.S. companies spend on drilling and

50 completing wells

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Rystad Energy UCube 11 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 USA

U.S. RECOVERY Economics of fracking continue to remain favorable

ASSET BREAKEVEN OIL PRICE BY SHALE PLAY, PRODUCING USD/bbl, Brent-linked 60

50 Average 40 Oil Price (2/8/17)

Source: Rystad Energy UCube & Haver Analytics 12 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 USA

U.S. RECOVERY Recent production gains explained by uptick in completed wells

U.S. ACTIVE RIG COUNT AND CRUDE OIL PRODUCTION U.S. RATIO OF DCU TO COMPLETED WELLS Units 9400 800 120

9200 700 100 600 9000 500 80 8800 400 60 8600 300 8400 40 200

8200 100 20

8000 0 0

2011 2012 2013 2014 2015 2016

Jul-16

Apr-16 Oct-16

Jan-16 Jun-16 Jan-17

Feb-16 Mar-16 Feb-17

Nov-16 Dec-16

Aug-16 Sep-16 May-16 Bakken Eagle Ford US Weekly Crude Oil Field Production (Thous. Barrels/Day) Haynesville/Bossier Marcellus Niobrara Permian Delaware Tight Baker Hughes Active Rig Count: US (Units, rhs) Permian Midland Tight Utica

Source: BBVA Research & Haver Analytics Source: Rystad Energy UCube 13 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 USA

POLICY Trump’s America First Energy Plan: Make oil & gas great again

• Destination Based Cash Flow Tax (DBCFT) – would lower corporate tax rate to 20% Corporate Tax U.S. oil industry incentivized to export more crude oil and products and import less; Reform • refiners would shift toward domestic crude sourcing

• Advancing pipelines is expected to decrease costs of moving oil to refineries and lower Keystone and breakevens Dakota Access Pipelines • However capacity to generate further investments in oil and gas will be challenged by the current levels of oil prices

• Withdrawal from CPP, COP21; elimination of Climate Action Plan Deregulation • Suspending social cost of carbon calculation • Possibility of turning over federal lands to local control, which could facilitate drilling

Source: S&P Global Platts, The Brattle Group, White House, Bloomberg 14 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 DEMAND

DEMAND Non-OECD countries expected to lead demand in long-term, despite signs of slowing growth

OIL PRODUCT DEMAND YoY % change, million barrels per day 3000

2500

2000

1500

1000

500

-500

-1000 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Western Europe United States China India Total World

Source: BBVA Research & Haver Analytics 15 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 DEMAND

CHINA China's rebalancing and transition to a cleaner economy may result in slower growth of demand for fossil fuels

CHINA: OIL PRODUCT DEMAND AND INDUSTRIAL CHINA: CRUDE AND TOTAL PETROLEUM PRODUCTS PRODUCTION INVENTORIES YoY % change EOP, million barrels

25% 700 280 Industrial Production Oil Product Demand Crude Oil Total Products (rhs) 600 20% 260

500 240 15% 400 220 10% 300 200 200 5% 180 100

0% 0 160

2008 2009 2010 2011 2012 2013 2014 2015 2016

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: BBVA Research & Haver Analytics 16 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 DEMAND

ELECTRIC VEHICLES Improvements in lithium-ion batteries could make electric vehicles cost competitive by 2020

U.S. NEW PLUG-IN VEHICLE SALES PHEV* BATTERY ENERGY COST AND DENSITY Thousands $USD/kwh & Wh/L

25 $1,200 500

Battery Cost 450 $1,000 20 Energy Density 400

350 $800 15 300

$600 250

10 200 $400 150 5 100 $200 50 0 $0 0 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015

Source: BBVA Research & Electric Drive Transportation Association *PHEV = Plug-in hybrid electric vehicle 17 Source: BBVA Research & U.S. Department of Energy, International Energy Agency

U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 FORECASTS

OIL PRICE FORECASTS Slight upward revisions to 2017 and 2018 figures

CRUDE OIL PRICE FORECASTS CRUDE OIL PRICE FORECASTS Brent, $ per barrel, avg Brent, $ per barrel, avg

120 Baseline Upside Downside Actual Baseline 100 2015 52.8 52.8 52.8 Upside Risk Downside Risk 80 2016 45.2 45.2 45.2 60 2017 57.0 66.9 46.2 40

2018 58.7 75.8 36.6 20

2019 59.6 79.3 34.1 0 2014 2015 2016 2017 2018 2019

Source: BBVA Research & Haver Analytics 18 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 FORECASTS

EXCHANGE RATE Prices are expected to move above our previous baseline, but increases could be limited by a strong dollar

OIL PRICES AND U.S. DOLLAR 130 60

128 55

126 50

124 45 122 40 120 35 118

30 116

114 25 Trade-Weighted Exchange Rate, $ (Jan-97=100) Brent ($/bbl, rhs)

112 20 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

Source: BBVA Research & Haver Analytics 19 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 FORECASTS

SUPPLY More than half of liquids from new supply sources are expected to be commercial below $60/bbl

GLOBAL LIQUIDS PRODUCTION BY LIFE CYCLE AND BREAKEVEN PRICE Million barrels per day 110 Forecasts Undiscovered

Above 125

100 Non Non sanctioned projects 100-125

90 80-100

60-80 80 40-60

70 20-40 Below 20

60 Under development

Producing 50 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: Rystad Energy UCube 20 U.S. OIL PRICE OUTLOOK │ FEBRUARY 2017 FORECASTS

SUPPLY $60/bbl would make several projects profitable again, but high-cost producers would still be out of the market

COST OF SUPPLY CURVE 160

Producing Onshore Middle East Extra heavy oil 140

Shelf North American Shale Ultra deepwater

Row onshore Russia onshore Deepwater 120 Oil sands Weighted average breakeven

100

40 Breakeven Breakeven OilPrice, USD/barrel

0 420 520 620 720 820 920 1,020 1,120 1,220 Remaining resources as of 2016, Million bbl

Source: Rystad Energy UCube 21 US OIL PRICE OUTLOOK FEBRUARY 2017