Delta Index Trading Summit - Trading Oil

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An Operator & Investor Perspective Over 29 Years: David Horgan has studied the oil market for 29 years Initially at Boston Consulting Group for clients (1982–89) At Harvard Business School (1984–86) Helped establish Pan Andean to seize opportunities from opening of Latin American markets – now as Clontarf Energy, a London AIM-listed stock with exploration in Peru, Ghana and production in Bolivia & the USA • Launched Petrel Resources to target the Iraqi opportunity in 1997 - now London AIM-listed stock with exploration & development interests in Iraq & Africa

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Oil Price is Complex but Quantifiable

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Energy combines money, science & politics Oil is the biggest trade (by value & volume) Oil also drives other energy costs, & therefore economies But oil (like commodity prices generally) is volatile: – Wide variation between low & high cost suppliers – High value to marginal consumers – Need to hedge, and trading opportunities

• So players seek to control markets: – OPEC’s control is imperfect: easier to impose a floor than a ceiling – But most producers try to take a long view & balance consumer & producer interests

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Data relationships are impressive

www.petrelresources.com Data Source: Cornerstone Analytics

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5 Views of Oil Markets: 1)

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Classical view is that speculation vindicates rather than leads fundamentals – no net impact on average price.

Supply and demand must drive markets.

But supply and demand of oil or money? Commodities are a new asset class: financial flows dominate. Oil is a hard dollar.

Successful traders exploit market trends, but manage risk.

They profit from excess – arbitrage and speculate intelligently. But markets are unstable & can go anywhere temporarily.

Physical markets no longer explain price. Financial / emotional factors predominate. Fundamentals provide a longer-term anchor around which speculation operates.

Reluctance to regulate derivatives. Speculators are smart and mobile. Answer is transparency & reasonable capital. www.petrelresources.com

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Commodities are the market’s hot play

www.petrelresources.com Data Source: Cornerstone Analytics

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But don’t high energy prices mean recession?

www.petrelresources.com Data Source: Cornerstone Analytics

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Energy is inversely correlated with growth

www.petrelresources.com Data Source: Cornerstone Analytics

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Logical that Gold & Energy move together

www.petrelresources.com Data Source: Cornerstone Analytics

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All prices are moving in tandem

www.petrelresources.com Data Source: Cornerstone Analytics

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…both energy and other commodities

www.petrelresources.com Data Source: Cornerstone Analytics

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Crises, like Libya, spook markets

www.petrelresources.com Data Source: Cornerstone Analytics

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And not just the Middle East:

www.petrelresources.com Data Source: Cornerstone Analytics

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Iran another worry – But due to politics, not geology Iran officially has 2nd reserves (155bn) in gas & oil worldwide Iran dominated oil exports (15%) until 1979 Revolution Now produces 4.3 mmbo – but net exports are 2.6 mmbo Imports gas periodically US & now effectively EU companies excluded by sanctions Others not sanctioned but risks have risen, hence: Non--US players deterred by insufficient economic return Non - 12% was ok for development when political risks low - even c. 17% insufficient for exploration – need 25% • Iranian BuyBuy-Back mechanism restricts investment • Attacks would not impact oil facilities – Iran could temporarily halt exports but has limited power to block Hormuz • • • • • • •

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But security is normally maintained

www.petrelresources.com Data Source: Cornerstone Analytics

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And Libya the only important casualty

www.petrelresources.com Data Source: Cornerstone Analytics

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Saudi remains critical for oil cushion

www.petrelresources.com Data Source: Cornerstone Analytics

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Saudi remains critical for oil cushion

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And another 2 million + available soon

www.petrelresources.com Data Source: Cornerstone Analytics

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Who pays for spare capacity?

www.petrelresources.com Data Source: Cornerstone Analytics

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Demand & Supply React to Price Changes:

Source: Oil Market Intelligence

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Demand no longer as sensitive

www.petrelresources.com Data Source: Cornerstone Analytics

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Past price surges cut oiloil-fired power generation:

Source: ISI

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But NonNon-OPEC supply is not drying up

www.petrelresources.com Data Source: Cornerstone Analytics

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High Price generally stimulates production:

Source: ISI

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Though easy nonnon-OPEC supply gone

www.petrelresources.com Data Source: Cornerstone Analytics

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Unconventionals development take time:

www.petrelresources.com Data Source: Cornerstone Analytics

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But will have a huge impact:

www.petrelresources.com Data Source: Cornerstone Analytics

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Supply curve for World oil capacity means price could be high or low

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While demand grows inexorably:

www.petrelresources.com Data Source: Cornerstone Analytics

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But in new geographic markets:

www.petrelresources.com Data Source: Cornerstone Analytics

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China is driving growth:

www.petrelresources.com Data Source: Cornerstone Analytics

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China is the biggest energy consumer

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Developed world is 10% off peak

www.petrelresources.com Data Source: Cornerstone Analytics

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Economic growth matters to citizens

www.petrelresources.com Data Source: Cornerstone Analytics

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Demand now almost evenly balanced

www.petrelresources.com Data Source: Cornerstone Analytics

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How long can hyperhyper-growth continue?

www.petrelresources.com Data Source: Cornerstone Analytics

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You need to think about China

www.petrelresources.com Data Source: Cornerstone Analytics

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What price will kill demand?

www.petrelresources.com Data Source: Cornerstone Analytics

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Commercial Inventories are normal

www.petrelresources.com Data Source: Cornerstone Analytics

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Strategic Reserves are high

www.petrelresources.com Data Source: Cornerstone Analytics

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Price surge began with fundamentals

Source: Cargill

www.petrelresources.com Data Source: Cornerstone Analytics

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Then diverged‌

Source: Cargill

www.petrelresources.com Data Source: Cornerstone Analytics

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Inventories no longer explain price

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Non--OPEC supply will stay stable Non

www.petrelresources.com Data Source: Cornerstone Analytics

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Gas--related liquids and biofuels help Gas

www.petrelresources.com Data Source: Cornerstone Analytics

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Draw on OPEC oil will be modest

www.petrelresources.com Data Source: Cornerstone Analytics

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Demand will be supplied

www.petrelresources.com Data Source: Cornerstone Analytics

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The market is driven by speculation:

www.petrelresources.com Data Source: Cornerstone Analytics

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Brent is surging above comparable crudes

www.petrelresources.com Data Source: Cornerstone Analytics

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Especially against crudes that are not much traded

www.petrelresources.com Data Source: Cornerstone Analytics

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Brent’s premium hit a record $14 over WTI

www.petrelresources.com Data Source: Cornerstone Analytics

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Greed Drew Many Players:

Source: Cargill

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Roll--overs are heaping bets upon bets Roll

www.petrelresources.com Data Source: Cornerstone Analytics

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Establishment was in Denial:

Source: Cargill

www.petrelresources.com Data Source: Cornerstone Analytics

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Peak Oil Theory drives sentiment: • Fossil fuels are finite – not recycled • Supply peaks long before depletion • Conventional, cheap, onshore oil peaked in 2001 – but supply continues to rise from deeper offshore and unconventional sources • The shape of the supply curve changes with price and technology: • 1 trillion barrels of conventional oil produced to date, usually stated to be 1.2 trillion barrels to produce + about another 1 trillion barrels yet-to-find or eventually extractable • Of the c. 4 trillion barrels of unconventional oil-in-place maybe 1 can eventually be recovered • So only about 24% is already consumed

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Industry’s Professionals Agree:

Source: IHS

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Assumptions vary, but improving with Technology & Price Expectations:

Source: IHS

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Supply worries are economics, extraction and policypolicy-related, rather than reserve risk:

• Instability in Arab World, Nigeria & Venezuela • Worries over Saudi Arabia & Iran • 80% of conventional reserves held by National Oil Companies – 93% controlled by NOCs – not agile or efficient • Resource nationalism limits access: Arabia, Mexico & Iraq are open only for services • Economic returns are low and title problematic from Russia to Iran, & some South America (Venezuela, Bolivia & Argentina) – this jeopardises potential oil recovery, as poor practices result • Unconventional developments are capital-intensive and longterm: Need stability & incentives to justify development.

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Free Access Would Reduce Worries:

Source: Odell

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Inventories have fallen from record peaks

www.petrelresources.com Data Source: Cornerstone Analytics

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High premiums usually precede a price fall

www.petrelresources.com Data Source: Cornerstone Analytics

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Contango usually signals an imminent price surge

Source: ISI

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Volatility Signalled the last Bubble’s End :

Source: ISI

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Arbitrage opportunities – but not like 2009

www.petrelresources.com Data Source: Cornerstone Analytics

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The 2004 to date Oil Price Engine:

Source: Cargill

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Traders like cheap-to-trade, gearable, volatile markets

There is no shortage nor imminent threat of stock-outs But much production is in unstable places And over-capacity is shrinking - who pays for the safety cushion?

The strong price trend is driven by fear (politics, peak oil, inflation) this destabilises societies (fuel & food inflation) All bubbles eventually over-extend But the era of cheap oil (c. $24) is over $80 is a logical long-term average (justifies unconventional and renewable energy, while allowing growth) Sensible trades include selling Brent and Integrated oil companies – to buy WTI & drillers www.petrelresources.com

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Where To Now? • The commodities price surge hit a bump in 2008 – but speculative activity continued, and so did the bull market • We’re in a long-run boom driven by growth-fuelled demand & constrained supply • OPEC has no appetite or ability to impose a cap (as opposed to a floor) • But prices are now driven by financial, not physical flows • Fundamentals dictate a price in the $80s – enough to justify non-conventionals & renewables • + a price premium due to renewed political risk • The bubble will inflate till it bursts - then prices will fluctuate: low marginal costs vs. high marginal value

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WWW.PETRELRESOURCES.COM T: +353 1 833 2833 E: info@petrelresources.com www.petrelresources.com

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Petrel Resources plc

• AIM listed oil explorer focused on Iraq • Current projects in Iraq; – Block 6 (Exploration) – Merjan Field (Technical Agreement) – Dhufriya Field (Technical Agreement) – Subba & Luhais (EPC – Engineering, Procurement and supervision of Construction) • Ghana Tano 2A Block (30%) • Current Share Price – 20p

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Clontarf Energy plc • AIM listed oil and gas producer and explorer in South America and Ghana • Production – GoM – High Island 30 & High Island 52 – Bolivia – Joint Ventures with Bolivian State Oil Co. and separately Repsol and Petrobras • Exploration / Development – Peru – 2 blocks – Ghana Tano 2A Block (60% • Current Share Price – 6p

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Supply & demand are clearly understood

www.petrelresources.com Data Source: Cornerstone Analytics

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Higher Price & technology facilitate Tapping more hydrocarbons types:

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Era of easy oil and gas is over

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Prices are strong and likely to rise over coming years

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Technology allowing to produce difficult oil for a range of players, not just the biggest players

Source: ADL

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