JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS Summary 1

In the last two weeks, Brent oil price has tested a strong technical support level of $55.6/bbl, the lowest price since March 16, on negotiations between Iran and six world powers regarding the lifting of sanctions. According to technical analysis, if Brent breaks through this support, the new technical target would be $52.4/bbl (the minimum price since January 2015). Fundamentally, we expect Brent to be in the range of $50-65//bbl in 2H15, supporting our 2015 average forecast of $60/bbl. The decision to lift sanctions against Iran was one of the main risk factors for the oil price. In April 2015, when news of a possible lifting of the sanctions was released, Brent dropped from $60/bbl to $55/bbl, but then bounced back, driven by uncertainty regarding the final decision. The reaction of the oil price over the last two weeks suggests that the market has priced in removal of the sanctions, as well as additional large-scale crude oil supplies from Iran. Nevertheless, the process of lifting the sanctions will take some time and it is still unclear how long it will take Iran to fully restore oil production.

Evgenia Dyshlyuk +7 (495) 980 41 29 (ext. 5 41 29) [email protected] Alexander Nazarov +7 (495) 980 43 81 (ext. 5 43 81) [email protected] Vladimir Kravchuk +7 (495) 983 18 00 (ext. 2 14 79) [email protected] Konstantin Asaturov +7 (495) 287 61 00 (ext. 5 45 84) [email protected]

On July 14, Iran and six world powers signed a nuclear deal agreement in Vienna; the agreement was approved by the UN Security Council on July 20. Now, the agreement is subject to approval by both houses of the US Congress (within a 60-day review period) and the Iranian Majlis (no deadline imposed). Once both parties approve the agreement, Iran will prepare for the lifting of sanctions and granting IAEA specialists access to its nuclear facilities. This procedure will likely last until December 15, after which the IAEA will embark on an inspection of the facilities. Thus, the sanctions are expected to be removed in early 2016. We assume that Iran will begin to restore its oil production after the sanctions are lifted, i.e. in roughly six months. Given that production ramp-up may take six to nine months, additional large-scale crude oil supplies from Iran may be expected no earlier than summer 2016. This lends credence to our earlier forecast, which suggests that Iran can deliver an additional 1 mln bpd of crude oil to the market no earlier than 2H16 (for details, see our Oil and Gas Weekly of April 10, 2015). As for Iranian crude oil stockpiles, which could enter the market by early 2016, we do not expect them to substantially affect the average oil price next year. According to information from US officials (based on satellite surveillance and other evidence), Iran’s oil inventories total 7-17 mln bbl. Other sources offer an estimate of 30-35 mln bbl, which is less than 0.2% of the global oil production and, thus, may have only a shortterm effect on the oil price. Once there is guidance on the timing and volumes of Iranian oil production restoration, we would expect the market to revise their medium- and long-term oil price forecasts. At the moment, we observe that market participants have not yet adjusted their fundamental forecasts on the news regarding Iran. Current Brent forecasts by major market participants (Russian oil and gas majors, analysts, and industry consultants) stand in the range of $70-77/bbl for 2017 and $72-85/bbl for 2018. On the back of high oil price volatility and uncertainty regarding long-term market outlook, Russian oil and gas majors tend to refrain from medium-term forecasting, relying on current oil price levels for business planning purposes.

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August futures contract

Research Department

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Copyright © 2003-2015. Gazprombank (Joint Stock Company)

JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS

Average Brent oil price — current forecast, $/bbl 2015

2016

2017

2018

Brent price, YTD

57.9

Russian oil and gas majors (average)

58.2

61.1

69.3

72.1

Analyst consensus (average)

62.0

71.7

77.0

79.3

IHS CERA (industry consultants)

59.3

65.5

73.2

84.8

Gazprombank

60.0

65.0

70.0

75.0

Source: Bloomberg, company estimates, Gazprombank estimates

Apart from anticipated substantial oil supply from Iran, which is positioned on the left side of the cost curve among global oil producers (price taker), other factors will affect the oil price in the medium term: 

OPEC strategy. In an environment of crude oil surplus and heightened competition among suppliers, OPEC may choose to pursue a strategy of growing its market share. The low level of per unit production costs (price taker) and spare production capacity (according to the US Energy Information Administration (EIA), up to 2.1 mln bpd in 2H15) will allow the cartel to execute this strategy amid weak oil prices. In March-June, for instance, OPEC was gradually ratcheting up oil production and growing its market share: according to the preliminary data, OPEC oil production in June stood at 31.4 mln bpd (33.4% share of the global oil production) vs. 30.2 mln bpd (32.4%) in December last year.

Dynamics of OPEC crude oil production in 2015 JAN

FEB

MAR

APR

MAY

JUN

Crude oil production, mln bpd

30.15

30.02

30.79

30.84

30.98

31.38

Share in global production, %

32.4%

32.1%

32.6%

32.8%

32.9%

33.4%

Note: preliminary data Source: OPEC



Dynamics of shale oil production in the US. The number of US oil rigs has declined for the 29th consecutive week, dropping to 628 in late June after having peaked in October 2014. A slowdown in drilling and fracking activities is also confirmed by the 2Q15 financials of the largest oilfield service companies (Schlumberger, Halliburton) that showed a substantial decline in revenues from North American operations due to weaker demand, among other factors.

US total rig count

Rig count, units

4Q14

1Q15

2Q15

15 MAY

15 JUNE

1,912

1,380

909

889

861 Source: OPEC



The above-mentioned factors have not yet affected US oil production, which, according to the EIA data, rose by around 13% YoY in 1H15, as producers worked through a backlog of uncompleted wells. Yet, reduced capex and a slowdown in drilling activity have already begun to have an impact on output volumes. According to the EIA’s latest forecasts, US oil production can be expected to decline in 2H15 until early 2016. Overall, according to the EIA’s forecasts, US oil production will increase from 8.7 mln bpd in 2014 to 9.5 mln bpd in 2015 (almost 9.6 mln bpd in 1H15) and will subsequently decline to 9.3 mln bpd in 2016. The EIA sees average US oil output at around 9.2 mln bpd in 1Q16.



In our view, the dynamics of US oil production in the medium-term will be primarily determined by shale oil performance. According to OPEC forecasts in early 2015, US tight oil production will increase by 590 kbpd to 4.5 mln bpd in 2015. However, the horizontal rig count points to a possible slowdown in the country’s shale oil production.

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JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS



According to Baker Hughes, the horizontal rig count has fallen for the 31st consecutive week. During the full 12 months ending on June 26, the number of horizontal rigs in operation fell by 609, or 48%. Typical oil wells in shale plays decline 60% annually, and this loss can be recouped only by drilling new wells. Thus, a slowdown in drilling activity should be followed by a decline in oil production.



Nevertheless, the rig count may not be an entirely representative indicator for US shale oil production, given that American producers continue to focus on increasing well efficiency and cost cutting. The wild card remains the ability of the US shale industry to deliver solutions that would make it possible to reach a new breakeven point.



According to Bloomberg , most shale projects in the US break even at an oil price of $80/bbl and below; yet only five out of more than 35 analyzed projects are able to break even at an oil price of $55/bbl. Analysts’ median estimate of the breakeven oil price for the two largest shale oil fields – Eagle Ford and Bakken (over 60% of US shale oil production in 2014) – is in the range of $50-75/bbl, and $60-75/bbl for Bakken (roughly a third of production) (see the table below). These estimates are underpinned by the fact that oil production at these fields declined in 2Q15, when the WTI oil price averaged $58/bbl (Brent oil price – $62/bbl).

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Estimated breakeven oil prices for the largest U.S. shale fields as of October 2014, $/bbl CREDIT SUISSE

UBS

ROBERT W. BAIRD

BLOOMERG

MORGAN STANLEY

GOLDMAN SACHS

VALUE RANGE

Eagle Ford liquids rich

$46

-

$53

-

-

-

$46-53

Eagle Ford oil

$55

$43

$65

$50-53

$60-80

$80-90

$43-90

Bakken core

$65

$65

$61

$67-74

-

$70-80

$61-80

-

-

$75

-

-

$90-110

$75-110

$46-65

$43-65

$53-75

$50-74

$60-80

$80-110

$43-110

FIELD

Bakken non-core Value range

Note: Discount of WTI to Brent oil price was, on average, $5.7/bbl in 2014. Sources: Reuters, Bloomberg, Gazprombank estimates

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

The EIA believes that the projected level of 2015 oil prices (average WTI – $55.5/bbl, Brent – $60.2/bbl), coupled with continued increases in well productivity and falling drilling and completion costs, will make it possible to continue drilling in the core shale basins (Bakken, Eagle Ford, Niobrara, Permian) and resume oil production growth in 2Q16.



IHS industry consultants believe that 80% of new tight oil production capacity additions in 2015 in the US will be profitable at $50-69/bbl due to increased efficiency in designing and operating wells. For instance, producers are applying “super fracking” technology, which involves pumping more sand and water into the well, enhancing well productivity, and using more geologic data in horizontal drilling thus making it possible to capture more productive spots.



Decrease of supply from high-end producers. In the context of anticipated oversupply on the oil market in the medium term, high-cost upstream projects positioned on the right side of the cost curve (price makers) are expected to be scaled back. Such projects may include deepwater drilling, North Sea oil projects, development of oil sands, and others.



For instance, earlier this month ConocoPhillips announced a reduction in its deepwater exploration program in the Gulf of Mexico, as part of the company’s cost-cutting strategy, and terminating its contract for the Ensco DS-9 deepwater drillship.



Even before the oil price decline, major players in the North Sea (Chevron, BG Group, and Statoil) were revising their investment in the region. North Sea oil fields

Break-Even Points for U.S. Shale Oil as of October 17, 2014.

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JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS

are highly depleted and oil production is continuing to decline (-1.1% YoY to 1.42 mln bpd in 2014, or around 70% of the peak output seen in 1999). After the fall in oil prices, many oil and gas companies (BP, ConocoPhillips and others) announced cost-cutting initiatives and divestments/shutting down of North Sea assets, and asked for additional tax relief. 

Weak oil prices may also affect new oil sand projects in Canada. In 2014, the EIA estimated that development of these fields is unprofitable at a price of $80/bbl. That said, producing fields have a low breakeven point, by various estimates, in the range of $10-35/bbl. Thus, low oil prices may affect Canada’s oil production profile in the medium- and long-term.



China’s oil demand growth rates. Projected oil consumption in China – which became the world’s largest net importer of oil at end 2013, surpassing the US, and which accounted for around 40% of growth and 12% of the world’s oil consumption in 2014 – remains a major uncertainty factor for global oil demand dynamics in the medium term.



The slowdown in economic growth, as well as policies on reducing emissions and substituting oil with other fuels (natural gas, coal), are the main downside risks for oil consumption in China. The economic downturn in China may also affect the country's trade partners, thus compounding the negative impact.



In May, OPEC revised its forecast of China’s real GDP growth in 2015 from 7.0% (the official target) to 6.9% amid slowing economic growth, particularly in manufacturing (overcapacity, weak production dynamics) and real estate. Additional measures taken by the Chinese authorities to stimulate the country’s economy highlight the government’s concerns of a possible further slowdown in 2Q15.



According to OPEC’s current forecast, at China’s real GDP growth rates in 20152016 of 6.9% and 6.5%, respectively, the country’s oil consumption will increase by approximately 350 kbpd to 10.81 mln bpd in 2015 and by another 330 kbpd in 2016.

China’s oil imports and change in commercial oil stocks in 2015

Net oil imports, mln bpd Commercial oil stocks, mln bbl

JAN

FEB

MAR

APR

MAY

6.57

6.64

6.15

7.28

5.46

260.7

255.5

249.9

251.1

254.3

Note: preliminary data Sources: OPEC, Bloomberg

Russian oil and gas majors’ forecasts Many Russian oil and gas companies rely on the current oil price levels for business planning purposes (a more conservative approach) on the back of pronounced oil price volatility and an unstable macroeconomic environment. Many companies refrain from medium-term forecasting and regularly update their in-house views on the oil price to reflect market volatility. For 2015 and 2016, Russian oil and gas majors forecast Brent price, on average, at $58-61/bbl (practically flat YoY). Beyond 2016, some companies expect the oil price to increase ($69-72/bbl in 2017-2018) on higher growth in demand vs. supply.

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JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS

Average Brent price forecast — Russian oil and gas majors, $/bbl 2015

2016

2017

2018

maximum

65.0

70.0

77.5

90.0

average

58.2

61.1

69.3

72.1

median

60.0

60.0

70.0

75.0

minimum

50.0

55.0

57.5

57.5

RUSSIAN OIL AND GAS MAJROS – CURRENT VIEW

Sources: company estimates, Gazprombank estimates

Bloomberg consensus The Brent price forecast by banks is generally less conservative than company estimates and tends to lag behind the market in periods of downturn. The current median consensus of analysts is for Brent to recover to $68/bbl by end 2015 (on average, $62/bbl in 2015) and be in the range of $70-74/bbl in 2016 (on average, $72/bbl in 2016). For 2017, analysts forecast Brent at $77/bbl on average, which is around $5/bbl below what they had expected at the beginning of this year. For 2018, analysts generally reiterate their forecast of $79/bbl (vs. $81/bbl at the beginning of this year). We note that the forecast range has expanded as compared to analyst expectations at the beginning of this year, reflecting a heightened degree of uncertainty. Earlier this year, the lower end of analysts’ Brent forecast for 2016-18 was $63-73/bbl, whereas it currently stands at $56/bbl. The upper end of the forecast was $90-95/bbl, while now it stands at $100-112/bbl. Average Brent price forecast — analysts, $/bbl 2015

2016

2017

2018

maximum

72.3

100.0

112.0

108.0

average

62.0

71.7

77.0

79.3

median

62.3

70.0

75.0

75.0

minimum

52.8

55.9

55.6

55.8

maximum

80.0

90.0

95.0

90.0

average

59.0

73.4

82.1

80.8

median

58.0

73.1

80.0

80.0

minimum

43.8

63.3

70.0

72.5

BLOOMBERG CONSENSUS — CURRENT

BLOOMBERG CONSENSUS — AS OF FEBRUARY 2015

Sources: Bloomberg, Gazprombank estimates

2015-16 quarterly average Brent price forecast — analysts, $/bbl 1Q15

2Q15

3Q15F

4Q15F

1Q16F

2Q16F

3Q16F

4Q16F

BLOOMBERG CONSENSUS — CURRENT maximum

53.9

62.1

83.0

90.0

98.0

99.0

98.0

95.0

average

53.9

62.1

63.9

68.0

69.5

69.9

73.1

74.4

median

53.9

62.1

65.0

68.4

70.0

70.0

71.5

75.0

minimum

53.9

62.1

45.0

50.0

55.0

50.0

50.0

55.2

Sources: Bloomberg, Gazprombank estimates

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JULY 27, 2015

CURRENT VIEW ON OIL PRICE AND MARKET FORECASTS

Industry consultants The current Brent price forecast by IHS CERA industry consultants is more conservative than the analyst consensus for the short term (on average, $59/bbl for 2015 and $66/bbl for 2016) and is broadly in line with the analyst consensus for the longer term ($73/bbl and $85/bbl, respectively, for 2017 and 2018). Again, in periods of downturn, the oil price forecast by industry consultants, like the analyst forecast, tends to be more conservative and accurate in the short term (in line with prevailing market sentiment) and more bullish in the medium term, reflecting higher uncertainty. Average Brent price forecast — industry consultants, $/bbl 2015

2016

2017

2018

65.5

73.2

84.8

INDUSTRY CONSULTANTS FORECAST — CURRENT IHS CERA

59.3

INDUSTRY CONSULTANTS FORECAST — AS OF FEBRUARY 2015 Wood Mackenzie

58.0

71.2

U.S. Energy Information Administration

57.6

75.0 Sources: company data, Gazprombank estimates

Gazprombank forecast In 2Q15, we downgraded our Brent price forecast to an average $60/bbl in 2015 on the back of prevailing downward pressure on the oil price from North American supplies and higher commercial oil stocks, as well as effective cost reduction of drilling at shale fields (current breakeven oil price estimated at $60/bbl and below vs. $70-80/bbl in the past). We believed that a selective approach to new projects and major capital inflows into the North American shale industry could result in the retention of oversupply on the oil market going forward. Nevertheless, we assumed that accelerating global oil demand growth, coupled with reduced supply from high-cost upstream projects (which are unsustainable at an oil price of $60/bbl) would produce a new equilibrium in the oil price ($70-75/bbl in the medium term). Average Brent price forecast — Gazprombank, $/bbl

Gazprombank

2015

2016

2017

2018

60.0

65.0

70.0

75.0

Sources: company data, Gazprombank estimates

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