EFTA01458989.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity This is a time when markets are normally undersupplied and global inventories typically draw down, however, so a 'balanced' second half may still be regarded as bearish. Last year, OECD inventories rose over the second half. defying the typical profile, and they are on pace to do the same this year. While we believe any excursion of prices below the 2015 low would be short- lived, some uncertainty arises from the fact that producer support in the form Figure 3: An extended surplus In US of shut-ins would be unlikely, in our view. First, operating expenses per barrel commercial crude inventory of oil produced are quite low. We estimate that 1.92 mmb/d of global 550 production becomes cash negative at a Brent price of USD30/bbl including 660 kb/d of low-volume stripper wells in the US. Second, producer shut-ins are SOO unlikely to occur in this volume as there are myriad reasons to avoid the 450 expenses of shutdown and eventual restart, such as the need to decommission older fields and the possibility of reservoir damage. The only scenario in which 400 we could more reliably expect such closures is if producers become convinced that long-term real oil prices will remain below USD30/bbl, which is unlikely in 350 our view. 300 Jan Feb PON Ap, la y Jan NI Au0 Se Oct Nov Dec The US adjustment still has much further to go Santos abornerp nrrc. LP, Pusan an AINIIVO The focus of expectations for supply contraction in 2016 continues to be centered on the US, although other non-OPEC producers and some OPEC producers such as Iraq may also begin to suffer declines at existing investment levels. The susceptibility of US supply to contract is partly a result of a relatively short lag time between drilling and production, and also the responsiveness of the industry in which drilling contracts are relatively short, lasting from six to twelve months. Thus far, drilling activity in the US has contracted by -66% from the peak, versus 26% in the remainder of non-OPEC and -14% among OPEC producers. [Figure Dec - lineIn oil US The decline so far of 440 kb/d will be extended over the coming months. A key !production has further to go assumption is that rig productivity growth will remain subdued in the major . 440.034:5 ngs Ohs —Prow ta(01.1 Stener10005) Scele4014n) basins of the Bakken, Permian and Eagle Ford as the rate of contraction in 1400 1 Rigs khe OCCO drilling activity also slows. This is explained by the notion that a sharper rise in 1200 productivity is only possible as activity falls materially. In this phase, producers 1030 can selectively drill the most economic assets and exclude marginal plays, thereby raising the initial production rate from the average well. However, as BOO 3505 the decline in drilling activity flattens, this process of winnowing out the losers 600 is no longer possible to the same extent. We can observe the resulting KX) SO) slowdown in productivity gains beginning around August in the Permian, 1000 530 4 October in the Bakken, and in forecast figures for the Eagle Ford in December. 0 •0 2007 2006 MO 2911 2012 2014 2015 2016 A second and more neutral assumption is that the level drilling activity remains Saucer aortint PangIA O.. ink Rath constant going forward, despite an average decline of nine oil-directed rigs per week since September. We can think of the risks to our model as offsetting to some degree - if rigs do continue to decline, the production outlook would !Figure 6: DB Oil price deck certainly deteriorate but would be helped by higher gains to rig productivity. WTI (LISDibbb Brent (USD/WA) 2015F 49.2 S?.5 On these expectations then we find that a continued decline of US production 012016E 48.0 52.0 in 2017 contributes to a more normal profile of first-half surplus followed by second-half deficit and the possibility of the first meaningful inventory draws. 02 2016F 50.0 55.0 With OPEC potential production in 2017 of 32.4 mmb/d matching the modelled 032018F 54.0 58.0 "Call on OPEC", this suggests that the market will recognise a need to stabilise 042016E 54.0 58.0 and eventually raise the level of investment in supply both in the US and 2015E 51.5 58.3 globally. 2017E 58.0 03.0 201E* 85.0 70.0 ainangesposemees. sane Oneche Dant Mann* Page 62 Deutsche Dank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119169 CONFIDENTIAL SDNY_GM_00265353 EFTA01458989