EPIC MOVE IN THE ENERGY SPACE

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1 EPIC MOVE IN THE ENERGY SPACE HEDGEYE QUANTITATIVE SET-UP WTI Crude Oil ($/Spot) TREND Resistance ($57.64) TAIL Resistance ($71.38) As always, we rely on our topdown, datadriven process to generate the quantitative risk management levels Our model continues to generate sell signals for crude oil, energy stocks and all assets leveraged to commodity inflation. DATA SOURCE: HRM, BLOOMBERG HEDGEYE 1

2 FUELED BY THE USD TEAR HEDGEYE QUANTITATIVE SET-UP U.S. Dollar Index TREND Support (93.12) TAIL Support (89.05) Starting last May with the inflection in the Euro, the U.S. dollar has gone on a big run, but long-term U.S. Dollar #History suggests this can last. a long time DATA SOURCE: HRM, BLOOMBERG HEDGEYE 2

3 PRICE ACTION HAS BEEN MIXED TOP-DOWN SIGNALS SUPPORT THE COUNTER-TREND MOVE DATA SOURCE: BLOOMBERG, CME HEDGEYE 3

4 SUPPLY ADJUSTMENTS LAG TOP-DOWN MACRO DISPELLING THE PRICE FLOOR BACKSTOP WTI ($Spot) Production From Major Shale Plays (MM/BD) First significant sequential deceleration in March and ensuing negative turn projected for April Meaningful Production Slowdown despite rangebound prices in 2015 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr Spot WTI prices have remained range bound for 4 months now and production has steadily declined while rigs have been idled week-after week throughout this year Key Takeaway: Top-down macro will continue to lead with physical markets reacting to prices DATA SOURCE: EIA HEDGEYE 4

5 SUPPLY ADJUSTMENTS LAG, BUT ITS IN THE WORKS DISPELLING THE PRICE FLOOR BACKSTOP Baker Hughes Oil Rig Count Production From Major Shale Plays (MM/BD) April-to-date We ll be the first ones to tell you that supply/demand adjustments lag topdown macro However, recently we have seen fundamental signs of a domestic production slowdown Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr DATA SOURCE: EIA HEDGEYE 5

6 BUT WHEN WILL IT MOVE DELTA NEGATIVE? PRODUCTION WEIGHTED DELTA OF MAJOR PLAYS 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% DATA SOURCE: DOE, EIA Haynesville Marcellus Utica Niobrara Bakken Eagle Ford Permian YY % 6M % 3M % 1M % Aggregate production is hovering just over 9MM B/D and close to moving delta negative on a shortterm duration HEDGEYE 6

7 GLOBAL PRODUCTION MONITOR ALL COUNTRIES >= 1% GLOBAL PRODUCTION DATA SOURCE: BLOOMBERG, DOE, EIG HEDGEYE 7

8 NON-OPEC PRODUCTION OUTPACING NON-OPEC PRODUCTION POSITIVE SINCE Non-OPEC Production YY% Change (2YR Avg.) Non-OPEC Production (MM/BD) Last Year of negative growth in non-opec supply (2007) OPEC Production YY% Change (2YR Avg.) OPEC Production (MM/BD) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% HEDGEYE 8

9 GLOBAL CRUDE BALANCE (MM/BD) PRODUCTION OUTPACING FOR SEVERAL YEARS BP Statistical Review YY% Change Crude Oil Consumption (MM/BD) EIG Crude Oil Production YY% Change (MM/BD) 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% DATA SOURCE: EIG, BP HEDGEYE 9

10 SUPPLY GLUT?... NOT ENOUGH TO SEND OIL PLUMMETING -50%+ 2M Avg. Differential (MM/BD) EIG Global Crude Demand (MM/BD) EIG Global Crude Oil Production (MM/BD) Production-Demand Differential (MM/BD) DATA SOURCE: EIG, BP HEDGEYE 10

11 MONTHLY PRODUCTION MORE TELLING PRODUCTION HAS PICKED UP IN 2015 ABOVE NORMAL GROWTH RATES Global Crude Oil Production YY% Change (2M Stacked) 1YR Avg. YY% Change 5-Yr Avg. YY % Change Global Crude Oil Production (MM/BD) 3YR Avg. YY% Change 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% DATA SOURCE: EIG HEDGEYE 11

12 MONTHLY PRODUCTION IN B/D INCREMENTAL PRODUCTION ABOVE NORMALITY Current-1Yr Differential (MM/BD) YY Incremental Barrels 2M Stacked (MM/BD) 1Yr-Avg. YY Change (MM/BD) 3Yr-Avg. YY Change (MM/BD) 5Yr-Avg. YY Change (MM/BD) Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar DATA SOURCE: EIG HEDGEYE 12

13 OPEC MARKET SHARE AND INFLUENCE EMBARGO YEARS IN THE DISTANT PAST Non-OPEC Production (MM/BD) OPEC Market Share (% Global Production) 42.0% 40.0% 38.0% OPEC Market Share of global production in 1970 was closer to 50% during the embargo years % % % 30 Apr-90 Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08 Apr-11 Apr % DATA SOURCE: ENERGY INTELLIGENCE GROUP HEDGEYE 13

14 OPEC PRODUCTION CONTINUES WHO WILL ABSORB DECLINING OPEC IMPORTS TO THE U.S.? YY% Change OPEC Crude Oil Production (1000/BD) TTM Average 20.00% % % 5.00% 0.00% -5.00% % % % DATA SOURCE: OPEC HEDGEYE 14

15 LARGEST MONTHLY SURPLUS SINCE 2012 OPEC Monthly Production Surplus (MM/BD) and YY% Change % % 250% 200% 150% 100% 50% 0% -50% -100% DATA SOURCE: OPEC HEDGEYE 15

16 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% BATTLE AGAINST U.S. SHALE? SAUDI ARABIA IMPORTS TO U.S. FALLING FASTER THAN OPEC YY% Change U.S. Crude Imports From Saudi Arabia YY% Change U.S. Crude Imports From OPEC U.S. Imports From Saudi Arabia (% Total Imports) 41.1% 42.6% 11.0% 7.5% Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan % -11.5% -15.0% -17.8% -16.1% -28.9% -6.6% -5.5% -17.3% -21.4% -19.7% -25.3% -26.0% -26.8% -32.9% -34.8% -34.8% -39.3% -46.5% -46.1% DATA SOURCE: DOE HEDGEYE

17 800, ,000 SAUDI ARABIA IS COMFORTABLE SAUDI ARABIA FX RESERVES IN USD EX. GOLD ($MM) Dire Straights? No 600, , , , , ,000 0 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 DATA SOURCE: IMF HEDGEYE 17

18 OIL NEEDS BECOMING LESS TRADE DEPENDENT OIL EXPORTS IN AGGREGATE STALLING WITH U.S. COMING OF AGE Global Crude Exports (MM/BD) YY% Change Peak 6.86% 6.44% 6.20% 5.46% 4.94% 4.51% 2.94% 2.66% 2.13% 2.02% 1.68% 1.91% 2.51% 2.64% 1.02% 1.01% 1.44% -0.43% -1.03% -0.97% -0.88% -2.28% -3.67% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% DATA SOURCE: BP HEDGEYE 18

19 PRODUCTION VS. CONSUMPTION DOMESTIC CONSUMPTION FILLING THE GAP Differential (MM/BD) Crude Oil Production (MM/BD) Crude Oil Consumption (MM/BD) DATA SOURCE: OPEC, IEA, HRM HEDGEYE 19

20 IRANIAN PRODUCTION UTILIZED INTERNALLY REFINERY ADDITIONS TO ACCOMPANY DOMESTIC DEMAND Domestic Crude Refining Capacity (MM/BD) Jan-13 Jan-10 Jan-07 Jan-04 Jan-01 Jan-98 Jan-95 Jan-92 Jan-89 Jan-86 Excess Consumption Need (MM/BD) Jan DATA SOURCE: OPEC HEDGEYE 20