What caused the 2014-2015 oil crash and will it get better anytime soon?

1. End in Sight
The Twin Oil Crashes of
2014-2015
Nawar Alsaadi
December 2015

2. What caused the 2014 oil crash?
High oil prices 2010-2014
Record CAPEX (2010-2014)
Shale oil gusher
Slowing global oil demand growth
Increasing Supply-Demand imbalance
OPEC change of strategy in late 2014

3. High prices
• Conventional oil resources scarcity, mid-east instability, a weak dollar along with an
urbanizing emerging world created a sustained period of almost uninterrupted rise in
oil prices and especially so from 2010 to 2014:
From 2010 to 2014 Brent averaged $102 per barrel

4. CAPEX
• Sustained high prices combined with
advancement in technology lead to record
capex spending on global conventional
and unconventional oil resources:
• North America lead the growth in O&G
capex spending between 2010 and 2014:
N.A. World Total
14.4% 10.2% 11.4%
Average O&G capex growth 2010 -2014:

5. Shale Oil Gusher
• More then any other unconventional resource, the development of shale oil resources
in the United States leads to a surge in US oil and NGLs production, which in turn
caused a sizable jump in global oil supply:
US Supply
84
85
86
87
88
89
90
91
92
93
94
95
2010 2011 2012 2013 2014
6.3m increase
From 2010 to 2014 US supply grew by an annual rate of 11.3% vs. 0.34%
annual growth rate for the rest of the world (ROW) supply (ex-OPEC).
Global Oil Supply
IEA, Semper Augustus

6. Slowdown in oil demand
• Sustained high prices along with a slowdown in Chinese growth lead to a slowdown
in global oil demand growth especially in 2014:
0
0.5
1
1.5
2
2.5
3
2010 2011 2012 2013 2014
Average demand growth from 2010 to 2014 stands at 1.38m
IEA, Semper Augustus

7. Supply-Demand Imbalance
• The previous factors conspired to cause a significant supply and demand imbalance
by 2014:
0
0.5
1
1.5
2
2.5
3
2010 2011 2012 2013 2014
Demand
Growth
Supply Growth
US was the largest source of supply
growth in 2013 and 2014:
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014
OPEC supply US supply ROW supply
IEA, Semper Augustus
IEA, Semper Augustus

8. OPEC changes policy
• Fearing a loss of market share due to the rise of
competing oil supply sources (shale oil, Brazil
deepwater, oil sands..etc) OPEC refrains from
cutting its production to balance the market, thus
worsening the emerging oil “glut”.
• The substantial spike in non-OPEC
oil investments compared to OPEC
oil investments was a key driver
behind the increase in non-OPEC
production.

9. Reversal in the US dollar
• The period of high oil prices correspond with
a period of continued USD weakness :
• According to the World Bank the historical
correlation between oil prices and the US
dollar ranges from 100% to 30%, thus it is
safe to say that a sharp increase in the US
dollar should have a meaningful effect on oil
prices.
• Meanwhile the sharp decline in oil prices in
2014 was associated with a big increase in
the US dollar:
Empirical estimates of the size of the U.S.
dollar effect cover a wide range: the high
estimates suggest that a 10 percent
appreciation is associated with a decline of
about 10 percent in the oil price, whereas
the low estimates suggest 3 percent or less.
January 2015, World Bank

10. Crash!
• Excess supply, slow demand, rising dollar, OPEC change of policy lead to a sharp readjustment in
the oil price:
The sharp price decline was sending a strong signal for the petroleum industry to slowdown
production, but due to factors (to be discussed in the next slides) the price warning was ignored
and a second crash ensued in 2015.

11. What caused the second oil crash?
OPEC production surges
Long lead time conventional supply projects come online
Excessive inventories persist

12. What caused the second oil crash?
• It is generally believed that excess
supply (especially the US shale oil
supply surge) was the cause of the
current oil crisis. This is true for what
drove the 2014 oil crash, however
what sustained the 2014 oil crash into
2015 is a second supply surge by
OPEC.
• Not content with sustaining a high
level of production in November 2014,
OPEC flooded the market with
additional oil production in the spring
of 2015.
• OPEC supply surge was lead by Saudi
Arabia and Iraq. Iraq’s supply increase
was largely due to maturing IOC long
lead time supply projects, however the
Saudi increase seems to have been
designed to send a message.
32
33
34
35
36
37
38
39
2010 2011 2012 2013 2014 2015
OPEC Supply (including NGLs)
1.7m BOE
increase
IEA, Semper Augustus

13. Long Lead Time Projects come online
• Record oil industry capex levels (slide 4) from 2010 to 2014 lead to a notable increase in the Rest
of the World (ROW) (ex-OPEC, ex US) supply in 2014 and 2015, thus exacerbating the global
supply problem:
Key areas benefiting from long lead production increase: Canada, Brazil and the North Sea.
43
43.5
44
44.5
45
45.5
46
2010 2011 2012 2013 2014 2015
0.5m production
decline
1.3m cumulative
production
increase
IEA, Semper Augustus

14. Inventories Skyrocket
• The net result of the sustained supply-demand imbalance since 2014 has created a
historic increase in global petroleum inventories:
Elevated inventory levels have weighed heavily on prices, and will likely continue to
pressure prices in the foreseeable future.

15. I
What will solve this crisis?
Higher oil demand
Lower oil supply
Lower inventories

16. Demand
• Demand has responded to lower oil prices.
2015 oil demand growth has been the
strongest in 5 years:
Markets experiencing strong demand growth in
2015 are: China, India and the United States.
1.8m increase
88.4
89
90.7
91.9
92.7
94.6
85
86
87
88
89
90
91
92
93
94
95
96
2010 2011 2012 2013 2014 2015
Global oil demand is running at least one year
ahead of what the IEA projected in its Medium
Term Oil Market Outlook released in February
2015.
IEA, Semper Augustus

17. Will demand grow further?
• Oil demand elasticity is small, however due
to the large size of the market, slight
elasticity is sufficient to have a meaningful
impact on the supply-demand balance.
• An IMF study covering oil demand
elasticity between 1990 and 2009
concluded that a 1% change in oil prices
leads to 0.019% change in demand over the
short term, and a 0.072% over the long
term. The predicted combined short term
increase in oil demand for OECD and non-
OECD as per the IMF study corresponds
with the extent of the demand acceleration
witnessed in 2015.
• In the context of stable global GDP growth
in 2016. The effect of the sharp and
sustained decline in oil prices since 2014
should lead to an acceleration in oil
demand growth in 2016.

18. Low oil prices at work
• The sizable price decline in the years following the
1986 oil crash had a major impact on global oil
demand growth compared to the pre-1986 crash
years:
• In the three years post the 1986 oil crash, oil prices
averaged 46% lower then prevailing prices in the
three years preceding the price collapse. Global
GDP grew at consistent levels, before and after the
crash, yet oil demand grew at 6.9 folds (2.2 folds
excluding the 1983 decline) the rate it did prior to
the price collapse.
• This accelerated demand growth took place despite
a sizable increase in car fleet efficiency worldwide
and especially in the US, the largest oil consumer by
far in 1980s.
• A similar trend can already be observed in the oil
demand data for 2015 as a result of the ongoing oil
price crash:
• In light of the continued weakness in oil prices,
consistent global GDP growth, and based on the
IMF observations on oil demand elasticity, it is
highly likely that oil demand growth in 2016 will
prove consistent with 2015 above trend growth
levels.
• Yet, despite evidence to the contrary, the IEA is
forecasting oil demand growth to slowdown to 1.2%
in 2016.
Data sources: World Bank, US Department of Transportation, Index Mundi, Statista, IEA.
About 2
folds
the pre-
crash
average

19. Supply
• Global oil supply is still growing
strongly due to the 2015 OPEC surge
and continued supply growth from
long lead oil supply projects.
• Global supply growth in 2015 has
reached a whopping 3m barrels, thus
bringing cumulative 2014-2015 supply
growth to a massive 5.4m barrels.
• Despite the apparent strength in
supply, the fundamentals
underpinning the recent strong supply
performance are unraveling.
1.9
1.3
2.2
0.4
2.4
3
0
0.5
1
1.5
2
2.5
3
3.5
2010 2011 2012 2013 2014 2015
Global Annual Supply Growth
IEA, Semper Augustus

20. Can supply growth be sustained?
• Non-OPEC supply growth has decelerated
materially.
• OPEC strong supply growth in 2015 is
unlikely to be repeated in 2016, despite the
removal of Iranian sanctions.
• Substantial CAPEX cuts are leading to an
acceleration in the global net decline rate
from 2.5% to 3.1% (CoreLabs).
• 2016 new capacity additions appear
increasingly insufficient to replace net
declines and meet demand growth.
• Prices are too low to incentivize new supply
to come online.
Historic Non-OPEC supply growth (including the 2016 IEA
estimates):
1.1
0.2
0.5
1.3
2.4
1.3
-0.6
-1
-0.5
0
0.5
1
1.5
2
2.5
3
2010 2011 2012 2013 2014 2015 2016
3m barrels swing
New supply
projects
approvals
down to
multi year
lows.
*WSJ -
WoodMac
IEA, Semper Augustus

21. Prices are substantially below the breakeven cost for new supply
Declining by 3.1%
a year or 2.6m
barrels per years
as of
October 2015
(CoreLabs)
18m to 27m
barrels must be
produced from
these fields over
the next 6 years
assuming a 2% to 4%
net decline rate
Non-producing fields must replace
Net declines from producing fields.,
As well as meet demand growth

22. $50-60 Brent is the minimum required
to stabilize non-OPEC supplies.
• Super Majors such as BP, Total and Shell
have indicated that $60 Brent is the price
they requires to balance their business by
2017.
• Rystad Energy indicates that a price in
excess of $70 Brent is required to meet long
term demand:
Already adjusted for lower service costs and exchange rates

23. Below $50 Brent virtually all unconventional oil is uneconomic
An eventual rebound in activity could lead to higher service costs, and thus an increase
in the prices required to develop these unconventional resources.

24. Brent Futures prices are too far below global breakeven levels
• Brent futures doesn’t cross $50 until
January 2017:
• Brent futures doesn’t cross $60 until
November 2019:
Brent prices are too low to incentivize investments in additional supplies

25. The world is already at risk of a supply
shortfall
• Wood Mackenzie's analysis estimates that $1.5
trillion of uncommitted spend on new conventional
projects and North American unconventional oil is
uneconomic at $50 a barrel. (September 2015).
• Mr James Webb, Upstream Research Manager for
Wood Mackenzie explains: "As the upstream
industry responds to the low oil price, investment is
down $220 billion in 2015 and 2016 compared with
our pre-oil price crash projections. (September
2015).
• Oil companies have canceled or delayed final
investment decisions on about 150 projects that are
tied to 125 billion barrels of oil equivalent (19m in
future production, 60% liquids), which could stay
underground for several years longer than expected
amid a steep drop in crude prices, energy investment
bank Tudor, Pickering, Holt & Co. (December 2015).
• “By not sanctioning projects today, you’re putting a
hole in production in 2017, 2018 and 2019 —
potentially a big hole,” said David Pursell, head of
macro research at Houston energy investment bank
Tudor, Pickering, Holt & Co. (December 2015).
• The oil industry needs to replace 34 billion barrels of
crude every year – equal to current consumption,
investment decisions for only 8 billion barrels were
made in 2015. This amount is less than 25% of what
the market requires long-term. Rystad Energy
(December 2015).

26. Declines never sleep
• Global natural decline rates in mature fields
(70% of production) stand at 9% (WEO
2013), equating to 5.3m in annual decline
on 85m barrels of crude production.
• Mitigated decline rates (70% of production)
stand at 6.2% to 6.4% (WEO 2013),
equating to 3.75m at mid-point on 85m
barrels of crude production.
• Current Net decline (100% of production)
rates stand at 3.1% (CoreLabs – October
2015), equating to 2.6m on 85m barrels of
crude production. This is compared to a
historical net declines of 1.5% to 2% (DNB
Markets– August 2015).
• Lowered capex spending is driving an
acceleration in the net global decline rate.

27. Declines will likely accelerate
• “If you go back to the 2008 and 2009 period ...
we saw an increase worldwide in decline rates
for all companies, basically for the entire
industry, increase by a percent or two. And
that's very significant" John Watson – Chevron CEO.
• Using data going back to the oil drop in the
mid 1980s, analysts at Bernstein calculated the
rise in depletion rates was 3 percentage points
within two years after an oil price collapse
began. Reuters, February 2015.
• We have identified 5 mb/d of project delays
and cancellations between 2017 and 2019,
while the reduction in maintenance Capex,
infill drilling and EORs is likely to raise global
average decline rates to over 5-5.5%. All of this
will start to show up in steep declines in 2017
supplies. Energy Aspects – October 2015.
• Mitigated decline rates increased
meaningfully in 2009:

28. Offshore managed mature
declines to accelerate as
infill drilling collapses
• Total offshore production stood at 22m in
2015. (Rystad Energy)
• Mature offshore production stood at 15m in
2015. (Rystad Energy)
• Collapse in infill drilling is expected to
remove 1.5m in mature offshore production
in 2016 (up from 750K in prior years) as
managed declines accelerates to 10%. (Rystad
Energy)
• New offshore projects sanctions scratches to
a halt as industry gets squeezed by low
prices.
Reduced infill drilling and slow new
Project sanctions will further
accelerate decline rates.

29. Accelerating decline rates have a
strong impact on supply
Needed oil supplies at 2% decline rate
and 1m per year demand growth:
Needed oil supplies at 4% decline rate
and 1m per year demand growth:
An increase in the net decline rate from 2% to 4% means
an additional 9m barrels of new capacity is required to satisfy demand over
the next 6 year.

30. US offshore strength is masking
the weakness in onshore production.
• Total US production appears resilient:
• GoM long lead time production is surging:
9243
9345
9531
9585
9382
9257
9375 9346 9389
9000
9100
9200
9300
9400
9500
9600
9700
2.1% decline
1497 1482
1414
1535
1432 1437
1583
1650
1688
1250
1300
1350
1400
1450
1500
1550
1600
1650
1700
1750 19.37% increase 7241
7369
7606
7540
7477
7373
7342
7288
7229
7000
7100
7200
7300
7400
7500
7600
7700
5% decline
Onshore shale and conventional production declining
much faster then total production declines:
EIA, Semper Augustus
EIA, Semper Augustus

31. US shale productivity hits a wall
• After rising sharply from early 2015 until the
summer months, US shale rig productivity
plateaued since October 2015:
• Expiring hedges, shrinking cash flow, rising debt
service burden and a collapsing rig count indicate
that US production declines will continue beyond
2016 and well into 2017:
EIA, Semper Augustus
-
100
200
300
400
500
600
700
800
900
Eagle Ford
Bakken
Permian

32. How large is the 2016 imbalance?
• Assuming 31.8m barrels (ex-NGLs) in OPEC production in 2016 (up from 31.3m in 2015).
• Assuming 57.7m barrels of non-OPEC supply as per IEA November OMR.
• Assuming 1.2m of demand growth (95.8m total demand) as per IEA November 2015.
• The market will be over supplied by 500K barrels.
82
84
86
88
90
92
94
96
98
2010 2011 2012 2013 2014 2015 2016
Demand
Supply
-1.1
-0.4
0.1
-0.7
0.9
2
0.5
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
2010 2011 2012 2013 2014 2015 2016
Excess supply shrinking
IEA, Semper Augustus IEA, Semper Augustus

33. Can 500K imbalance sink the market?
• A 500K average imbalance on standalone basis is small, however when combined
with an already elevated inventories, it is problematic:
An additional 500K in excess production could add an additional 182m barrels to
storage or basically double the current 200m barrels excess.

34. Several factors could eliminate the 500K IEA assumed
imbalance for 2016
• According to the IMF data (slide 17),
demand growth accelerates long term in
response to low prices. Yet, the IEA is
forecasting a deceleration in demand
growth in 2016 despite higher IMF global
2016 GDP estimates compared to 2015
(3.5% to 3.1%) and persistent low prices
which argue for a boost in demand.
Demand growth on par with 2015 would
add 800K of additional demand to the
IEA 2016 demand estimate.
• Decline rates are likely to accelerate as
both investments in existing production
and new production are curtailed. An
additional 1% acceleration in net declines
leads to 800K-900K decline in global oil
supplies.
The IEA has historically underestimated
demand by an average of 700K per year:

35. Will OPEC ever act?
OPEC policy is lead by Saudi Arabia and Saudi oil
policy is driven by three key factors:
• Maximize oil revenues.
• Maximize long term oil demand.
• Contain emerging supply competition.
Saudi Arabia constantly seeks to balance these
three policy drivers. A close examination of
these objectives reveal that Saudi interests will be
optimized at $60 to $70 Brent ($55 -$65 WTI). At
such a price range high cost oil supply growth
will be contained. Global oil demand will remain
robust. Oil revenues will be maximized. Long term
volatility will be reduced as sufficient industry
investments lead to stable oil supply. Recent
comments by Saudi officials have signalled $60 to
$80 Brent (FT November 2015) as their desired price
range. Saudi royals and officials have also recently
stressed the need sustained investments in the
industry to ensure future stability.
Current oil prices and the associated severe industry
capex cuts run contrary to the three key Saudi oil policy
objectives. A change of Saudi oil policy over the next 6
months is highly likely should oil prices fail to rally to
$50 Brent in 1H-2016. A modest 1m cut by the GCC
countries (Saudi Arabia, UAE, Kuwait and Qatar) could
radically change the outlook for the oil market in 2016
and align prices with Saudi objectives.
OPEC historical production has
rhymed with their quota.

36. How much supply can
Iran bring to the market
in 2016?
• Despite Iranian claims that they can ramp up
production by 1m barrels in short order. Those
claims have been disputed by a number of experts.
• An extensive analysis of Iranian fields and decline
rates by Sanford Bernstein concluded the following
in November 2015:
Our analysis of production recovery after
significant negative events including
wars/sanctions enhanced by our technical
knowledge of Iranian fields and historical
development problems show us that an immediate
Iranian recovery to the tune of 500,000 bpd as
soon as sanctions are lifted in early 2016 is
untenable.
• A more bullish report by Reuters Oil Research
(December 2015) concludes that Iranian
production will average 3.38m in 2016 vs. 2.8m in
2015, thus equating to 580K barrels increase. Most observers suggest that 3–3.5 million b/d is a
more realistic target over a period of a year after
the removal of sanctions, if not longer.
Chatham House
March 2015

37. How about the rest OPEC?
• Iraq production growth has been strong in
2015, however reduced investments due to low
oil prices will likely restrain supply growth
going forward. The IEA expects Iraq’s 2016
production to be broadly flat with Q3-2015
levels at around 4.2m barrels. Bullish
forecasters (Thomson Reuters Oil Research)
expect Iraq’s production to average 4.38m
barrels in 2016 or about 200K increase from
current levels.
• Saudi Arabia has theoretical sustainable
capacity in excess of 12m, thus can potentially
add an additional 2m barrels to the market,
however there is no indication that Saudi
Arabia is planning to pump beyond its 10.25m
2015 average. Saudi Arabia have always
maintained an excess capacity cushion.
• The rest of OPEC is pumping at maximum, and
according to the IEA MTOMR, beside Iraq and
Iran no other OPEC country is expected to add
meaningful capacity between 2015 and 2020.
• Libya is a wild card, potential stability in Libya
could lead to a sizable increase in their
production.
IEA MTOMR 2015

38. Call on OPEC & Market Balance
• According to the November IEA OMR, the call on
OPEC for 2016 has been raised to 31.3m barrels
from 29.7m in 2015. (Current OPEC production is
31.7m).
• The call on OPEC is expected to rise to 31.9m by
Q3/2016 and to 32.1m by Q4/2016.
• Oil prices have a high correlation with “call on
OPEC” changes.
• The rising call on OPEC signal that the market will
balance by 2H-2016.
Source: CIBC

39. What’s the proper long term price for oil?
• According to Sanford Bernstein oil prices
always trend back toward the marginal cost
of production:
• Depending on the source, the current
marginal cost of oil production ranges from
$70 to $85 Brent.
• A Monte Carlo simulation by ConocoPhillips
(November 2015) conclude that long term oil
prices should average in the $70 to $75
range.
Several credible oil price forecasting models indicate that current oil prices are
substantially divergent from their projected long term average.

40. Goldman says lower for
longer, are they right?
• In January 2015 Goldman Sachs made the
bearish prediction that oil prices will stay
low for longer. As we exit 2015, we see that
Goldman Sachs was right, but where they
right or just lucky?
• In their January 11th 2015 bearish call
Goldman Sachs made the following supply
and demand assumptions for 2015?
Non OPEC supply: 57.7m
OPEC crude supply: 30.15m
OPEC NGLs: 6.6m
Total Supply: 94.45m
Demand: 93.8m
Supply/demand imbalance: 650K
How did 2015 actual demand and supply
numbers turned out compared to what
Goldman Sachs expected?
IEA Non OPEC Supply: 58.3m
Goldman miss: 600K
IEA OPEC crude supply: 31.3m
Goldman miss: 1.15m
IEA Demand: 94.6m
Goldman miss: 800K
GS bearish 2015 projection was saved by
an unexpected 1.15m OPEC production
increase.
Goldman Sachs expects 2016 Supply/demand imbalance to average around 400K*
Will they get lucky again?
* Lower for Even Longer September 2015

41. Is this a repeat of the 1980s multi-decade oil crash?
• Between 1979 and 1985 global oil demand declined
by 9m barrels (14.5% decline) due changes in
consumptions habits after the 1970s oil crisis and a
recession in the free world economies (80-82). *
• In the meantime non-OPEC supply increased by
6m barrels during the same period, a 20%
increase.*
• In a vain attempt to shore up oil prices from 1979 to
1985 ,OPEC lead by Saudi Arabia, cut its oil
production by 14m barrels, thus reducing the cartel
output from 30.9m barrels in 1979 to a mere 16.1 m
by 1985. Which meant reducing OPEC market
share from 50% to 30%.*
• Saudi Arabia and the GCC countries shouldered the
bulk of the decline in production (9m barrels). The
rest of the production decline was done by Iraq and
Iran (4m barrels), as a result of the damage caused
by the Iraq-Iran war and the Iranian revolution.
The OPEC cuts lead to an explosion in excess
capacity (14m at the peak) that took over 10 years to
exhaust. *
• With Saudi production dipping below 3m in 1985
from over 10m barrels in 1980. Saudi Arabia and
the GCC countries opted to re-gain their market
share back in December 1985, thus flooding the
market in 1986.
The situation in 2014/2015 couldn’t be more different:
• Global oil demand was increasing at a steady clip prior to the
current crash, compared to a sharp decline in 1979-1983 and
flattish growth in 1984 and 1985.
• The Non-OPEC supply increase prior to the recent crash was
modest in comparison to the percentage increase in 1979 to 1985, a
10% increase vs. 20% increase at the time.
•Current OPEC excess capacity is 4.1% (including Libya and Iran)
vs. 24% in excess capacity in 1985.
• Unlike 1985, Saudi Arabia and the GCC countries have no market
share to gain, only a market share to defend, a vastly different
dynamic.
•Saudi Arabia doubled its crude exports in 1986 to gain market
share and counter the price crash. This compares to a mere 5%
increase in production in 2015.
*Data: St. Louis FED – July 1987
Source: CIBC

42. Long cycle vs. short cycle
• Despite the emergence of shale oil production, the oil
industry is still dominated by long cycle supply projects
with 95% of total oil supply (92% non-OPEC) emanating
from long lead time projects.
• The 1980s price collapse had a notable impact on non-
OPEC oil investments and a notable impact on non-
OPEC supply growth within 2 years of the Non-OPEC
Capex cuts.
• The sharp decline in non-OPEC Capex between 1982 and
1986 translates into a sharp slowdown in non-OPEC growth
by 1984 followed by a flattening phase lasting until 1988,
which in turn was followed by a 3.5% production decline by
1991 (post 1991 non-OPEC declines are driven by the USSR
collapse). Non-OPEC production only reached its 1988
production peak again in the year 2000.
• Applying the above to today indicates that a meaningful
impact on global conventional supply from the 2015 Capex
cuts (and the expected 2016 Capex cuts) will increasingly
show by 2017.
• The adjustment in US onshore/shale production in 2015 (and
its expected continued decline in 2016) is likely the prelude to
the real supply response in 2017 to 2020.
CAPEX cuts
Production declines
Source: peakbarrel.com
Flattening phase
As OPEC
production
increases
and non-
OPEC
production
declines
OPEC
captures
9m of the
9.5m
barrels in
global oil
demand
between
1985 and
1991.

43. How low can oil prices go before the market rebalances?
• Historically oil prices have bottomed at the
marginal cash cost of oil production:
Source: Sanford Bernstein
• Based on the current marginal cash cost estimates,
current oil prices should represent the bottom price
for this down cycle based on historical precedent:
Brent futures as
of December 8th 2015:
Source: PIRA Energy
Prices have
always
rebounded
at the
marginal
cash cost of
production
since 1990.
A sharp decline from current levels will be unprecedented over the last 25 years and could lead to
sizable production shut ins, and a quick rebalancing.

44. Conclusion
• The conditions leading to the 2014 oil collapse
such as record capex, strong non-OPEC supply
growth and weak demand have been reversed.
• OPEC’s 2015 supply surge is unlikely to be
repeated.
• Global decline rates will likely accelerate in
2016 and beyond.
• Global inventories remain elevated, and will
take at least a year of sizable supply deficits to
reduce.
• Oil prices are too low to incentivize new supply,
the prospects of an oil shortage in 2017 to 2019
are increasing.
• Most supply and demand models indicate a
balancing market by 2H-2016. Capex cuts will
increasingly impact global supply as we
approach 2017.
• There is an increasing chance that OPEC/Saudi
Arabia will act to reduce supply in the next six
months if prices fail to rally above $50 Brent.
• A multitude of supply and demand models
indicate that long term oil prices should exceed
$70 Brent.
• OPEC excess capacity is limited, comparisons
to the 1980s are misguided.
• Current prices are trading at the cash marginal
cost, which has historically represented the
bottom for the oil price.
• A renewed sharp appreciation in the US dollar
from current levels appear highly unlikely.
“I buy when other people are selling”
J. Paul Getty