Oil Market Outlook

Oslo, May 2017

Oil market rebalancing taking longer than expected

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• World oil demand growth expected to grow by 1.3mb/d in 2017, down from 1.4 mb/d in 2016 as impact of lower oil price wearing off

• Oil demand growth slowing in OECD Americas, ME Gulf countries, China and India

• Russian oil product demand gaining momentum, due to cold weather and stronger industry demand

• World economy to grow by 3.5% in 2017 (IMF, Apr-17), up from 3.1% in 2016

• Improvement, led by US and developing economies, despite of a some serious risk factors

• Monetary policies to tighten in the US, will remain accommodative in Europe

• Trade growth expected to pick up from weak 2016 (WTO 2016: 1.7%)

• US oil production growing faster than expected, to reach 10 mb/d in 2018 (EIA)

• OPEC crude production of 31.9 mb/d in Q1-17 vs. 33.2 mb/d in Q4-16

• OPEC compliance at 99% (Q1-17), 1.2 mb/d cuts xpected to be rolled over from June-17

• Non-OPEC cuts phased in gradually, adherence rate was about 50% in Q1-17

• Reducing stock overhang taking longer than expected

• L&S oil price outlook for 2017 of US$ 55.7 bl

• Market uncertainties

Oil market outlook

Oil supply

Oil demand

Macroeconomic outlook

Outlook for 2017 and 2018 has improved since Jan-17!

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World economic outlook

Source: IMF, Lorentzen & Stemoco Research

• World GDP growth of 3.5% expected in 2017, up from 3.1% in 2016

• Higher growth both in industrialized and emerging economies

• Prospects improving from buoyant financial markets and cyclical recovery in manufacturing and trade

• Uncertainties: ✓ Low productivity growth✓ Inward looking trade policies posing risk to

growth leading emerging markets✓ High income inequality✓ Deleverage of US$ 13.000 billion of

Government bonds issued globally since 2008✓ Chinese financial market

• Reduced deflationary pressures

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Annual growth %

IMF Oct-16 IMF Jan-17 IMF Apr-17

World GDP (constant prices)

Lorentzen & Stemoco

• US oil products demand averaged 19.4 mb/d in Q1-17, down 65 kb/day (-0.3%) y-o-y

✓ Gasoline consumption stalled in Q1-17 due to higher pump prices, weaker consumer confidence, slowing vehicle sales and continued efficiency gains (avg. of 22.5 mpg expected in 2017 up from 21.8 mpg in 2015)

✓ Gasoil demand, mirroring industrial activity, returned to growth in Q4 and could support a modest overall US demand growth in 2017

✓ Total US demand for 2017 forecasted at 19.7 mb/d up 0.1 mb/d from 2016

• Canadian demand grew by 30 kb/day y-o-y in Jan-17, due to strong gasoil gains

• Mexican demand has declined y-o-y since March-16 due to weak LPG and residual fuel oil demand

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North American oil products demand

Source: IEA, Apr-17

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• Chinese demand grew by 381 kb/d in 2016 (+3.3%)and similar growth expected for 2017, as previousestimates have been adjusted higher

• Accelerated gains in industrial activity and businessconfidence in Q1-17 is boosting gasoil, residual fuel,LPG and naphtha demand

• Domestic production slipped to 3.9 mb/d throughJan-Feb-17, down 265 kb/d from same period 2016

• The government has ordered oil companies toproduce 4 mb/d of crude in 2017, target looks toooptimistic

• China’s big three PetroChina, CNOOC and Sinopectarget investments of US$ 39.4 bn in 2017, up from32.3 bn in 2016 (+23%), encouraged by higher andmore stable prices

• Production from China’s big three is still projected toslip by another 200 kb/d in 2017

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Chinese oil product demand growing while domestic production slipping

Chinese oil product demand showing strong gains in Q1-17, pulled up by industrial activity

Source: Lorentzen & Stemoco Research, IEA

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Chinese oil product demand

LPG & gasoline demand increasing, gasoil decreasing as economy shifts

Source: Lorentzen & Stemoco Research, IEA, Statista

• IEA oil historical oil demand for 2016 revised up

• Oil product demand in Q1-17 grew by 430 kb/d (3.7%)y-o-y

• Oil product demand in Q1-17 of 12.2 mb/d, pulled upby strong gains in manufacturing, petrochemicalfeedstock demand (LPG) and jet/kerosene (inlandaviation sector)

• Urban population of 730 million, 76% or 550 millionwill be defined Middle class population by 2022. Chinais now the world’s second largest aviation market.

• Average kerosene growth has been 11% in the last 5years

• Aviation market to continue growing at rapid pace andexpected to overtake the US as largest air trafficmarket by 2020

• Residual fuel oil demand contracting rapidly, butsmall part of total product demand

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• Indian currency reform, withdrawal of 86% of allcash in the economy, has negative short-termimpact on the economy

• GDP growing at a slowing pace, rate of expensioncould ease to 6.5% in the year through March,down from 7.9 the previous year (Source: financeministry)

• Products demand in January-17 showed a declineof 130 kb y-o-y

• Demand for the heaviest products saw thesteepest falls, while demand for naphtha and LPGcontinued to grow, although at a slower pace

• Demonetization reforms will continue to impacteconomic activity and oil demand in 2017, but IEAstill expects a growth of 265 kb/d taking totaldemand to 4.5 mb/d this year

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India oil demand growth slowing as economic activity

Indian oil demand to grow by 265 kb/d in 2017

Source: Lorentzen & Stemoco Research, IEA

OPEC & non-Opec country agreed production cuts

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• OPEC production of 31.9 mb/d in Q1-17

• OPEC quota compliance at 99% of the pledged 1.2 mb/d cuts in Q1-17

• Next OPEC meeting on May 25 2017, cuts from November-16 agreement expected to be extended as favored by Saudi Arabia and other Gulf states

Source: IEA, Oil Market Report April-17

Non-OPEC crude supply commitments

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Source: IEA Oil Market Report April-17

• Some non-Opec countries (Russia, Azerbaijan, Kazakhstan, Mexico and Oman) pledged cuts of 558 kb/d to be phased in gradually from Jan-17

• Q1-17 a compliance rate has been about 50%

Global E&P spending (onshore and offshore)

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• E&P investment may have bottomed in 2016

• OPEC cuts are expected to be rolled over from June as the organization target US$ 60 bbl oil

• As a result, we expect that investors will find attractive investment opportunities in the oil sector both onshore and offshore

• Increasing offshore sector interest follows dramatically lower break-even levels for new projects in the North Sea and in the Gulf of Mexico with reductions of up to 50% since 2014

• A stronger upward trend in investment is expected from 2018 onwards

Drilled footage in feet per day

Energy companies are increasing production in response to higher oil prices

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Source:Barclays

Barclays expect spending to increases by 7.3% over 2016

Lorentzen & Stemoco

US crude production up by 0.8mb/d since low point in 2016 as rig count responding to higher crude prices

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US oil production has seen a strong recovery since mid-2016

Sources: Lorentzen & Stemoco Research, Reuters, EIA, IEA, Baker &Hughes

• US oil production more resilient to low oilprices than expected due to production of“fracklog” as well as sharply lower drillingcosts and efficiency gains

• US energy sector capital spending totaled US$19.8 bn in Q1-17, a near trebling compared toQ1-16

• US oil rig count has increased from 300 unitsin May-16 to 688 units currently

• Current US crude production at 9.25 mb/d(EIA, April 14th)

• IEA expects US crude production to average9.1 mb/d in 2017, which is looking highlyconservative

Lorentzen & Stemoco

OECD crude & product Industry stocks were 336mb above 5-year avg. (Feb-17)

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OECD crude & products stocks

• OECD industry stocks drew by 8.1 mb to 3055 mb in February as falling product stocks more than offset continuing builds in US crude stocks

• OECD America crude & products stocks grew by 16.8 mb in February, but have now started to ease

• End February OECD total stocks remained 336 mb above the 5 year avg., the equivalent of 7.2 days of forward demand

• Preliminary data suggest a build in industry stocks in Q1-17 of 38.6 mb due to strong gains in January more than offsetting draws in February and March

Sources: Lorentzen & Stemoco Research, EIA, IEA

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U.S. Ending Stocks of Crude Oil and Petroleum Products (Thousand Barrels)

5 year avg.

Oil market outlook

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• Global oil supply greater than demand in Q1-17, but demand should overtake supply for rest of year• Global oil demand growth expected to slow moderately in 2017

✓ Impact of low prices wearing off✓ Tax hikes in producing countries

• Strong growth in US shale production reducing market inpact of OPEC cuts• OPEC delivered 99% of the pledged production cuts in Q1-17• Non-OPEC has delivered 50% of the close to 0.6mb/d cuts • We expect the current OPEC cuts to be rolled over from June for another 3-6 months

Source: Lorentzen & Stemoco Research, EIA

Oil price forecast

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Source: Lorentzen & Stemoco Research, Indexmundi

• The L&S base case forecast for Q1-17 turned out reasonably accurate at US$ 0.6 bl above the actual price of US$ 53.7 bl

• Still, we have adjusted down our oil forecast for 2017 to US$ 55.7 (base case) as necessary stock reductions take longer than expected

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2017:

• We expect the price of Brent Blend to average US$ 55.7 bbl (base case)

• Market uncertainties:

✓ Degree of OPEC and Non-OPEC continued adherence to announced production cuts

✓ Will OPEC and non-OPEC cuts be rolled forward from June?

✓ Pace of recovery in US shale production

✓ Oil stocks, when will inventories reduce to “normal” levels around the 5 year average

2017 onwards

• Cost of developing N. Sea offshore fields reduced by 50% since 2014

• Energy efficiency of world economy improving, slowing demand in high growth countries

• Environmental concerns slow down transportation sector demand (diesel ban/restrictions in large cities through substitution (LNG/CNG fuel, electric propulsion)

• Renewable energy (wind and solar) becoming profitable without subsidies at current oil prices

• Depletion rates of large fields masked by boost in production from many small fields

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Oil market outlook summary

Slower pace of oil demand growth ahead!

Source: Lorentzen & Stemoco Research

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