Industry T rend Analysis - Weak Ahead: Four Events T hat Can Move T he Oil Markets

14 De c 20 15 Glo bal O il Marke t

BMI View: Our core view is that prices will hold above the 2008 financial crisis low o f around USD36.0/bbl. However, there is a material risk of an overshoot to the
downside, into the USD25.0-35.0/bbl range, triggered by a prospective interest rate hike by the US Federal Reserve, the IAEA vote on Iran or bearish rig or inventory data
out of the US.

In the wake of the OPEC meeting on December 4, the price of Brent has s unk below USD40.0/bbl. The decis ion by the cartel to maintain a policy of non-
intervention and the failure of its members to ag ree to a collective production targ et has inflamed fears of a g rowing overs upply in the market.

As of December 14, front month ICE Brent futures were trading at USD37.8/bbl, having los t 12.1% of their value s ince the meeting . With weak fundamentals
pres s uring prices to the downs ide, we expect a tes ting of the 2008 financial cris is lows around USD36.0/bbl. While our core view is that prices will hold
above this level, there is a material ris k of an overs hoot to the downs ide, into the USD25.0-35.0/bbl rang e. Net s peculative pos itions are not overextended. In
particular, long s are hig h and could revers e pos itions if Brent breaks below USD35.0-36.0/bbl.

We flag four potential catalys ts for a downs wing in the week ahead -

1. The US Federal Res erve's interes t rate decis ion

2. The International Atomic Energ y Ag ency's (IAEA) meeting on Iran

3. The US Energ y Information Adminis tration's (EIA) weekly data releas e on commercial crude inventories

4. Baker Hug hes ' weekly data releas e on the US oil-directed rig count

US Fed On Track To Hike: Stronger Greenback, Weaker Brent

There are s trong indications that the US Federal Res erve will rais e its benchmark interes t rates during its December 15-16 meeting . Recent economic data
out of the US have been broadly pos itive and Federal Res erve Chairwoman Janet Yellen has s ig nalled her expectations of a rate ris e, barring any major
economic s hock. Hig her interes t rates imply a s trong US dollar, which (all els e being equal) is bearis h for oil prices .

Dollar Strength Reaching Its Apex

US Trade Weig hted Broad Dollar Index, January 1997=100

Source: Bloomberg, BMI

We believe that the pros pective rate hike has been larg ely priced in to the market, reflected in continued s treng thening of the dollar in H215. As s uch, the
impact on crude prices s hould be relatively contained. However, a s trong er-than-anticipated s entiment-bas ed res pons e could s wing prices in the s hort run.

Iranian Sanctions Rollback To Stoke The Oversupply

A larg er impact on Brent may be s een from the IAEA's December 15 meeting . At the meeting , the board of g overnors will vote to approve a report by
Director General Yukiya Amano into the pos s ible military dimens ions of the nuclear prog ramme in Iran.

The vote will pave the way for the rollback of s anctions and the return of additional Iranian crude to market. There is broad cons ens us that s anctions will be
rolled off in Q116 and s o by-and-larg e this s hould now have been factored in to the futures price. However, as with the Fed's decis ion, there is the ris k of a
s horter-term, more reflexive movement in the price, s hould the report be approved. With Iran, we believe that the hig her level of uncertainty in the market

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 pos es a larg er downs ide ris k to Brent.

US Stock Builds A Bearish Indicator

The weekly petroleum s tatus report by the EIA - next releas ed on December 16 - contains commercial crude inventory data for the US. The releas e is clos ely
watched by the indus try, us ed as a proxy indicator for the broader health of the market. The December 9 releas e reported a draw of 3.6mn bbl in the week
ending December 4. Brent clos ed lower that day, but at 0.4% the drop was s ig nificantly s maller than in previous days . With the draw helping to s tem the fall
in oil prices , any s ubs tantive build in s tocks this week could have s ig nificant bearis h implications for the price.

December Stock Builds A Rare Occurrence

US Gulf Coas t Commercial Crude Inventories 1981-2015, Number Of Monthly Builds & Draws

Source: EIA, BMI

There is an element of s eas onality to s tockpiling and - larg ely due to end-of-year tax as s es s ments in the US - commercial crude inventories typically fall
month-on-month in December, with draws reported in 28 out of the las t 30 years . However, a narrower s pread between Brent and WTI has been pulling a
larg e number of arbitrag e barrels out of the Atlantic Bas in and into the US. There is a ris k that this , along s ide the ramp-up of production from new projects in
the Gulf of Mexico, will bleed throug h to inventory levels within the coming weeks . Given that the trend would be counter-s eas onal, the price effects could be
s ig nificant.

Rig Count Rise A Shock To The Industry

A final factor is the Baker Hug hes ' weekly US rig count. The influence of the rig count on prices has been s omewhat irreg ular, due to the non-linear
relations hip between rig counts and production. On December 11, Baker Hug hes reported a 21 drop in the number of oil-directed rig s in the US. While the
decline was uncharacteris tically s teep, it did little to pare a daily los s of 4.5% in the price of Brent.

There is a g eneral expectation that the number of rig s will continue to fall in December, due to a s eas onal s lowdown in drilling and the low oil price. As s uch,
a plateauing or ris e in the rig count would be a s hock to the market and would add further downs ide pres s ure on Brent.

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 Crumbling Rigs Has Mixed Impact On Prices
US Oil-Directed Rig Count

Source: Baker Hughes, BMI

This mate rial is pro te cte d by inte rnatio nal co pyrig ht laws , and us e o f this is s ubje ct to o ur Te rms & Co nditio ns .
© 20 15 Bus ine s s Mo nito r Inte rnatio nal Ltd