EFTA Document EFTA01458989

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 of shut-ins would be unlikely, in our view. First, operating expenses per barrel of oil produced are quite low. We estimate that 1.92 mmb/d of global 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 unlikely to occur in this volume as there are myriad reasons to avoid the 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 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 our view. The US adjustment still has much further to go 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. The decline so far of 440 kb/d will be extended over the coming months. A key assumption is that rig productivity growth will remain subdued in the major basins of the Bakken, Permian and Eagle Ford as the rate of contraction in drilling activity also slows. This is explained by the notion that a sharper rise in productivity is only possible as activity falls materially. In this phase, producers can selectively drill the most economic assets and exclude marginal plays, thereby raising the initial production rate from the average well. However, as the decline in drilling activity flattens, this process of winnowing out the losers is no longer possible to the same extent. We can observe the resulting slowdown in productivity gains beginning around August in the Permian, October in the Bakken, and in forecast figures for the Eagle Ford in December. A second and more neutral assumption is that the level drilling activity remains 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 certainly deteriorate but would be helped by higher gains to rig productivity. On these expectations then we find that a continued decline of US production 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. With OPEC potential production in 2017 of 32.4 mmb/d matching the modelled "Call on OPEC", this suggests that the market will recognise a need to stabilise and eventually raise the level of investment in supply both in the US and globally. Page 62 Figure 3: An extended surplus In US commercial crude inventory 550 SOO 450 400 350 300 Jan Feb PON Ap, la y Jan NI Au0 Se Oct Nov Dec Santos abornerp nrrc. LP, Pusan an AINIIVO [Figure Dec- lineIn US oil !production has further to go . 440.034:5 ngs Ohs —Prow ta(01.1 1400 1 Rigs khe OCCO 1200 1030 BOO 3505 600 Stener10005) Scele4014n) SO) KX) 530 4 1000 0 •0 2007 2006 MO 2911 2012 2014 2015 2016 Saucer aortint Pang IA O.. ink Rath !Figure 6: DB Oil price deck WTI (LISDibbb Brent (USD/WA) 2015F 49.2 S? .5 012016E 48.0 52.0 02 2016F 50.0 55.0 032018F 54.0 58.0 042016E 54.0 58.0 2015E 51.5 58.3 2017E 58.0 03.0 201E* 85.0 70.0 ainangesposemees. sane Oneche Dant Mann* Deutsche Dank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119169 CONFIDENTIAL SDNY_GM_00265353 EFTA01458989