Crude Oil Price Expectation Drivers

“Crude Oil Price Expectation Drivers”

Antonio Merino. Repsol Chief Economist

Global Interdependence Center´s Central Banking Conference Madrid, March 27

Disclaimer

The views and opinions expressed in this presentation are those of Antonio Merino and do not necessarily reflect the official policy or position of Repsol.

2

Discussion Points



Oil Price & Inflation Expectation Relationship



Oil Supply Curve and Price Expectations: OPEP and Unconventionals



Unconventional Production: Cyclical Costs and Sustainability



Conclusions

3

Discussion Points



Oil Price & Inflation Expectation Relationship



Oil Supply Curve and Price Expectations: OPEP and Unconventionals



Unconventional Production: Cyclical Costs and Sustainability



Conclusions

4

Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations

BRENT Crude Price Spot & USD Inflation Swap Forward 5Y5Y 130

3,5 USD

3,3

WTI (RHS)

110

3,1

100

2,9

90

2,7

80

2,5

70

USD/Bl

(%)

120

60

2,3

50

2,1

40 30

1,7

20 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

1,9

Source: Bloomberg and Repsol Economic Research Department

5

Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations

BRENT Crude Price & EUR Inflation Swap Forward 5Y5Y 110 EUR BRENT EUR (RHS)

100

2,4

90

2,2

80

2

70

1,8

60

1,6

50

1,4

40

1,2

30

1

20

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

(%)

2,6

EUR/Bl

2,8

Source: Bloomberg and Repsol Economic Research Department

6

Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations

BRENT Crude Price EUR & EUR Inflation Swap Forward 5Y5Y 120

Correlation coefficient = 0,91 R² = 0.828

Jul-2010 - Feb-2017

100

Lineal (Jul-2010 - Feb-2017)

EUR/Bl

80

60

40

20

0

1.2

1.4

1.6

Source: Bloomberg and Repsol Economic Research Department

1.8

2 (%)

2.2

2.4

2.6

2.8

7

Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations

BRENT Crude Price EUR & EUR Inflation Swap Forward 5Y5Y 120

Correlation coefficient = 0,91 R² = 0.828

Jul-2010 - Feb-2017

100

Lineal (Jul-2010 - Feb-2017)

EUR/Bl

80

60

40

20

0

 1.2

1.4

1.6

Source: Bloomberg and Repsol Economic Research Department

1.8

2 (%)

2.2

2.4

2.6

2.8

8

Discussion Points



Oil Price & Inflation Expectation Relationship



Oil Supply Curve and Price Expectations: OPEP and Unconventionals



Unconventional Production: Cyclical Costs and Sustainability



Conclusions

9

Oil Supply Curve & Price Expectations

The traditional view is that Ligth Tight Oil acts as marginal supplier at a range between 50 and 100 US$/Bbl Production Cost Curve 120

Ultradeepwater

Artic

GTL

Production cost (2012 $/bl)

100 CO2-EOR

80

Kerogen Extra heavy & bitumen

60 Other conventional oil

40

Already produced

20

MENA

Ligth Tight Oil

CTL

Non-CO2EOR

0 0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Remaining technically recoverable oil resources (billion barrels) Source: IEA and Repsol Economic Research Department

10

Oil Supply Curve & Price Expectations

Conventional production in Non-OPEC countries has been declining during the period of high prices and high E&P investment Crude Oil Production by Region 80 70

Non-OPEC Conventional Crude Oil Production

50 40

Million Bbl/d

60

30 20 10

Source: Enerdata and Repsol Economic Research Department

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

0

11

Oil Supply Curve & Price Expectations

Conventional production in Non-OPEC countries has been declining during the period of high prices and high E&P investment Crude Oil Production by Region 80 70

Non-OPEC Conventional Crude Oil Production

50 40

Million Bbl/d

60

30 20 10

Source: Enerdata and Repsol Economic Research Department

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

0

12

Oil Supply Curve & Price Expectations

Non-OPEC unconventional production has just compensated the conventional decline in the region Crude Oil Production by Region 80

Non-OPEC Unconventional Crude oil production

70

Non-OPEC Conventional Crude Oil Production

50 40

Million Bbl/d

60

30 20 10

Source: Enerdata and Repsol Economic Research Department

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

0

13

Oil Supply Curve & Price Expectations

In the long run OPEC production will be increasingly relevant, but markets are paying more attention to unconventionals in the U.S. Crude Oil Production by Region 80

OPEC Crude Oil Production Non-OPEC Unconventional Crude oil production

70

Non-OPEC Conventional Crude Oil Production

50 40

Million Bbl/d

60

30 20 10

Source: Enerdata and Repsol Economic Research Department

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

0

14

Oil Supply Curve & Price Expectations

The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2016 Venezuela

-8

Iran

2005-14

-2.7

Ecuador

-1

UAE

-0.9

Iraq

0.2

Nigeria

0.5

Russia

1.7

Algeria

2

Angola

2.4

Saudi Arabia

10.7

Qatar

11.4

Kuwait

20.8

-20

-10

Source: Oxford Economics and Repsol Research Department

0

10

20

30

15

Oil Supply Curve & Price Expectations

The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2016 Venezuela

-11.5

2005-14

Iran

2016

-2.7

Ecuador

-5.9

UAE

-6.9

Iraq -18.4 Nigeria

-4.4

Russia

-3.4

Algeria -17.6 Angola

-6.1

Saudi Arabia -16.8 Qatar

-8.2

Kuwait

-7.3

-20

-10

Source: Oxford Economics and Repsol Research Department

0

10

20

30

16

Oil Supply Curve & Price Expectations

The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2026 (Brent Futures price) Venezuela

-5.5

2005-14

Iran

-2.4

Ecuador

-2.4

UAE

-0.7

Iraq

-0.7

Nigeria

2026 (Brent futures)

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

-3.9

Russia

-4.5

Algeria

-7.5

Angola

-7.8

Saudi Arabia

1.5

Qatar

Brent Price Futures 56.5 56.5 56.0 56.0 57.0 57.5 58.5 59.5 60.5 61.5

2.3

Kuwait

5.4

-20

-10

Source: Oxford Economics and Repsol Research Department

0

10

20

30

17

Oil Supply Curve & Price Expectations

The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2026 (Brent IEA NP Scenario Price) Venezuela

1.0

Iran

0.9

2005-14

Ecuador

2026 (IEA NP)

-1.3

UAE

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

1.8

Iraq

9.0

Nigeria

-2.2

Russia

0.4

Algeria

-7.2

Angola

0.1

Saudi Arabia

6.1

Qatar

Brent Price IEA NP 55.4 66.3 77.6 89.3 94.7 100.2 105.9 108.0 110.5 112.8

2.3

Kuwait

8.4

-20

-10

Source: Oxford Economics and Repsol Research Department

0

10

20

30

18

Oil Supply Curve & Price Expectations

In fact OPEC production growth is the main explanation for price evolution since January 2015 OIL production increases 55,0

40,5 40,0

-0.88 MMBbl/d

54,5 54,0

Million bl/d

39,5

53,5

39,0

53,0

38,5 38,0 37,5

52,5

+2.63 MMBbl/d

37,0

OPEC

52,0 51,5

Non-OPEC

36,5

51,0

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

50,5

Fuente: International Energy Agency (IEA) y Direcciรณn de Estudios de Repsol

19

Oil Supply Curve & Price Expectations

What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Shale Crude Oil and Condensate Production vs. Break-even in Price Scenarios

Source: IHS

20

Oil Supply Curve & Price Expectations

What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Tight Oil Production Forecast by the EIA 160

7.5 AEO-17 Brent Forecast (RHS)

Source: Annual Energy Outlook (EIA) and Repsol Economic Research Department

US$/Bbl

2040

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

20

2028

4.0

2027

40

2026

4.5

2025

60

2024

5.0

2023

80

2022

5.5

2021

100

2020

6.0

2019

120

2018

6.5

2017

140

2016

7.0

2015

MMBbl/d

AEO-17 Tight Oil Production (LHS)

21

Oil Supply Curve & Price Expectations

What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Tight Oil Production and Brent Price Forecast by the EIA 160

7.5 AEO-17 Brent Forecast (RHS)

Source: Annual Energy Outlook (EIA) and Repsol Economic Research Department

US$/Bbl

2040

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

20

2028

4.0

2027

40

2026

4.5

2025

60

2024

5.0

2023

80

2022

5.5

2021

100

2020

6.0

2019

120

2018

6.5

2017

140

2016

7.0

2015

MMBbl/d

AEO-17 Tight Oil Production (LHS)

22

Discussion Points



Oil Price & Inflation Expectation Relationship



Oil Supply Curve and Price Expectations: OPEP and Unconventionals



Unconventional Production: Cyclical Costs and Sustainability



Conclusions

23

Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?

Breakeven in the 3 main unconventional plays

160 140

$/bl

120 100 80 60 40 20

2012

2014 2016 Midland

2012

2014 2016 Delaware

2012

2014 2016 Eagle Ford

2012

2014 2016 Williston

2012

2014 2016 Miss. Lime

2012

2014 2016 Gulf Coast

Permian Source: RS Energy and Repsol Economic Research Department

24

Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?

Breakeven in the 3 main unconventional plays

160 140

$/bl

120 100 80 60 40 20

2012

2014 2016 Midland

2012

2014 2016 Delaware

2012

2014 2016 Eagle Ford

2012

2014 2016 Williston

2012

2014 2016 Miss. Lime

2012

2014 2016 Gulf Coast

Permian Source: RS Energy and Repsol Economic Research Department

25

Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?

Breakeven in the 3 main unconventional plays

160 140

$/bl

120 100 80 60 40 20

2012

2014 2016 Midland

2012

2014 2016 Delaware

2012

2014 2016 Eagle Ford

2012

2014 2016 Williston

2012

2014 2016 Miss. Lime

2012

2014 2016 Gulf Coast

Permian Source: RS Energy and Repsol Economic Research Department

26

Unconventional Production and Price: Cyclical and Structural Factors

CYCLICAL FACTORS Costs deflation (Low activity, idle capacity, low prices –cost deflates ~1/3 of price decreases-)

Costs inflation (High activity, full capacity , high prices -cost increases more than 1/3 of price increases-)

STRUCTURAL FACTORS Efficiency gains related to technology advances and new operational practices (Drilling location high-grading, reduced drill times, propant quality, advanced fracture stages performance, etc.)

27

Unconventional Production: Cyclical Costs and Financial Sustainability

E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160

Downward Cycle

140

96 → 98 00 → 01 08 → 09

100

WTI Spot

Cost -18% -17% -21%

-71%

14 → 16

140 120 100

-33%

* From max to min of each serie

80

Source: Thomson Reuters and Repsol Economic Research Department

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

0 Jan-03

0 Jan-02

20

Jan-01

20

Jan-00

40

Jan-99

40

Jan-98

60

Jan-97

60

Jan-96

December 2012=100

120

80

Price -55% -44% -71%

160

PPI Drilling oil and gas wells

28

Unconventional Production: Cyclical Costs and Financial Sustainability

Productivity per well could be considered an STRUCTURAL BEHAVIOUR related to technology advance Monthly Rate of Change - Maximum Production per New Oil Horizontal Well in Main Shale Oil Plays 10%

8%

Bakken + Eagle Ford + Permian Horizontal Well weighted average

Rate of change

DI / Repsol: Oil Production per Well 6%

12 Month MA

4%

?

2%

0%

Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16

-2%

Source: Drilling Info and Repsol Economic Research Department

29

Unconventional Production: Cyclical Costs and Financial Sustainability

Productivity per well could be considered an STRUCTURAL BEHAVIOUR related to technology advance Monthly Rate of Change - Maximum Production per New Oil Horizontal Well in Main Shale Oil Plays 10%

8%

Bakken + Eagle Ford + Permian Horizontal Well weighted average

Rate of change

DI / Repsol: Oil Production per Well 6%

12 Month MA

4%

Cost deflation High grading

?

2%

0%

Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16

-2%

Source: Drilling Info and Repsol Economic Research Department

30

Unconventional Production: Cyclical Costs and Financial Sustainability

E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160

Upward Cycle

140

94 → 97 99 → 00 01 → 08 10 → 14

100

16 → ?

WTI Spot

Cost +54% +40% +200% +48%

+76%

140 120 100

+9%

* From min to max of each serie

80

80

Source: Thomson Reuters and Repsol Economic Research Department

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

0 Jan-03

0 Jan-02

20

Jan-01

20

Jan-00

40

Jan-99

40

Jan-98

60

Jan-97

60

Jan-96

December 2012=100

120

Price +75% +25% +500% +52%

160

PPI Drilling oil and gas wells

31

Unconventional Production: Cyclical Costs and Financial Sustainability

E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160

Upward Cycle

140

94 → 97 99 → 00 01 → 08 10 → 14

100

16 → ?

WTI Spot

Cost +54% +40% +200% +48%

+76%

140 120 100

+9%

* From min to max of each serie

80

80

Source: Thomson Reuters and Repsol Economic Research Department

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

0 Jan-03

0 Jan-02

20

Jan-01

20

Jan-00

40

Jan-99

40

Jan-98

60

Jan-97

60

Jan-96

December 2012=100

120

Price +75% +25% +500% +52%

160

PPI Drilling oil and gas wells

32

Unconventional Production: Cyclical Costs and Financial Sustainability

To come back to past production growth, due to cost reduction we will need other prices. The rate of growth in productivity per well remains stable….

Production of U.S. crude and WTI Price 145 Production 130

WTI Price (RHS)

Source: Bloomberg and Repsol Economic Research Department

3Q 2020

1Q 2020

3Q 2019

1Q 2019

3Q 2018

1Q 2018

3Q 2017

1Q 2017

25

3Q 2016

5,5

1Q 2016

40

3Q 2015

6,0

1Q 2015

55

3Q 2014

6,5

1Q 2014

70

3Q 2013

7,0

1Q 2013

85

3Q 2012

7,5

1Q 2012

100

3Q 2011

8,0

1Q 2011

115

3Q 2010

8,5

usd/barrel

9,0

1Q 2010

millions of barrels of oil equivalent per day

9,5

33

Unconventional Production: Cyclical Costs and Financial Sustainability

To come back to past production growth, due to cost reduction we will need other prices. The rate of growth in productivity per well remains stable….

Production of U.S. crude and WTI Price 145 Production 130

WTI Price (RHS)

Source: Bloomberg and Repsol Economic Research Department

3Q 2020

1Q 2020

3Q 2019

1Q 2019

3Q 2018

1Q 2018

3Q 2017

1Q 2017

25

3Q 2016

5,5

1Q 2016

40

3Q 2015

6,0

1Q 2015

55

3Q 2014

6,5

1Q 2014

70

3Q 2013

7,0

1Q 2013

85

3Q 2012

7,5

1Q 2012

100

3Q 2011

8,0

1Q 2011

115

3Q 2010

8,5

usd/barrel

9,0

1Q 2010

millions of barrels of oil equivalent per day

9,5

34

Discussion Points



Oil Price & Inflation Expectation Relationship



Oil Supply Curve and Price Expectations: OPEP and Unconventionals



Unconventional Production: Cyclical Costs and Sustainability



Conclusions

35

Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional

Resources is not the question but production/break-even relationship

STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)

2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Increase in activity → Ciclical Cost inflation → Price increase

Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 36

Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional

Resources is not the question but production/break-even relationship

STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)

2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Increase in activity → Ciclical Cost inflation → Price increase

Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 37

Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional

Resources is not the question but production/break-even relationship

STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)

2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Cyclical Cost inflation → Price increase needed and more declining prod.

Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 38

Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional

Resources is not the question but production/break-even relationship

STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)

2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Cyclical Cost inflation → Price increase needed and more declining prod.

Demand elasticity to prices higher than expected. Demand growth overpass Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 39

Thank you

Š Economic Research Department