MAPPING OIL MARKET VOLATILITY

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2 1 MAPPING OIL MARKET VOLATILITY The global market price of oil is a closely watched benchmark of current and expected global economic and geopolitical conditions. After reaching $107 per barrel in mid-2014, world oil prices have fallen significantly trading at $29 per barrel as of February 12, More than anything, this sharp movement downward was indicative of the high volatility of the market in the past year. Wikistrat ran a unique voting exercise in February 2016 to assess the impact that geopolitical and economic events would have on oil price volatility, assuming a $60 per barrel stabilization point was eventually reached. 1 Prior to the exercise, a team of energy market experts from Wikistrat s analytic community developed 60 events that can be expected to affect the price of oil. These were later voted on by a group of over 80 of Wikistrat s energy and geopolitics analysts in terms of their expected impact on oil prices. For each event, participants cast one or more votes in the following categories. SIGNIFICANT DECREASE (of more than $30/barrel) MODERATE DECREASE (of less than $30/barrel) NO CHANGE MODERATE INCREASE (of less than $30/barrel) SIGNIFICANT INCREASE (of more than $30/barrel) 1 A $60 stabilization point as a basis for the survey was a methodological choice so as to enable downward price impacts to be fully incorporated into the simulation. This allowed participants to answer the survey in terms of the real impact of events, rather than the impact on today s unusually low and likely temporary price. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

3 2 MASTER NARRATIVES AND MACROSCENARIOS Voting results were organized into four master narratives based on the assessed change in price points (direction and velocity) and organized into macroscenarios. Of the 15 scenarios rated most likely to cause an increase in oil prices (i.e., top quartile), all events were related to geopolitics and terrorist attacks not to economic or regulatory changes. Thus, the most salient macroscenarios were those composed of a terror event and geopolitical event (not necessarily related to one another), with only minor influence from an economic/environmental event or technological/supply event. OIL PRICE INCREASES OIL PRICE DECREASES SIGNIFICANT CHANGE OIL SPIKES Significant price increase of more than $30 per barrel THE BARREL CRASHES Significant price decrease of more than $30 per barrel MODERATE CHANGE MARKET BRACES Moderate price increase of less than $30 per barrel CRUDE LOWERS, GASOLINE STALLS Moderate price decrease of less than $30 per barrel

4 3 Following are select examples of macroscenarios: OIL SPIKES (Significant price increase of more than $30 per barrel) U.S. Naval Dominance Challenged The ability of the U.S. Navy to keep shipping lanes open is fundamental for American global power and a functional global economy. In this macroscenario, the Iranian presence in Yemen threatens the Saudis, leading to mutual threats to disrupt each other s oil shipments in Gulf. Before long, both countries ships are indeed attacked in the Bab-el-Mandeb Straits as the war in Yemen continues. Meanwhile, a limited conflict between China and Taiwan breaks out and threatens to drag in the United States. About 75 percent of analysts saw these challenges as having the potential to stretch U.S. naval assets and disrupt the global petroleum trade, driving up prices rapidly and significantly. Saudi Arabia Destabilizes A Saudi oil facility is attacked and ISIS claims responsibility. ISIS also seizes the Grand Mosque in Mecca in a redux of the 1979 attacks. These attacks seriously threaten the legitimacy and efficacy of the monarchy, prompting a palace coup that reorganizes the regime (King Salman and his favorite son, Mohammad bin Salman, are removed in favor of more conservative leadership) in response to these threats. Oil prices spike as production drops and uncertainty grows that the monarchy will be able to retain power in the face of mounting attacks. Over 60 percent of analysts voted that these events would cause the price of oil to increase. Such a spike would also be expected to be significant and rapid. MARKET BRACES (Moderate price increase of less than $30 per barrel) Global Hotspots Spark An independent Kurdish state is declared, encompassing majority-kurdish areas in Iraq, Syria and Turkey. While the Syrian and Iraqi governments are not strong enough to prevent secession, Ankara launches a new offensive to regain control of the Kurdish region and uncertainty over the oil-producing regions abounds. Meanwhile, Nicolas Maduro declares martial law in Venezuela to stave off increasing protests against his government, but this results in a further drop in oil production as he struggles to maintain control. Tensions rise in the South China Sea as Vietnamese ships blockade contested atolls where China is building bases. Nearly 50 percent of analysts saw these events as causing a moderate increase in oil prices and likely at a slower rate than the macroscenarios above. Eurasia Struggles Civil war erupts in Kazakhstan following the death of President Nursultan Nazarbayev, pulling the Russians to the border to prevent spillover. Meanwhile, tensions between Russia and the West rise again as conflict in Ukraine flares and threats are issued over the Baltic states. Both events strain Europe s supply of crude oil (1.46 billion barrels of which came from former Soviet states in 2014). European states plan to shift public power consumption towards nuclear sources; however, an incident takes place at a French nuclear power plant. The plant suffers limited damage, but the European public (and the French public in particular) panics at the alleged dangers of nuclear energy. Over 40 percent of analysts saw the elements of this macroscenario as moderately driving up the price of oil. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

5 4 CRUDE LOWERS, GASOLINE STALLS (Moderate price decrease of less than $30 per barrel) Political Settlements in Libya and Ukraine The price of oil drops slowly and moderately as a result of the resolution of political conflicts. The political settlement in Libya holds and ISIS there is defeated with help from Egypt and the UAE. The country begins to recover and rebuild from years of war, both settling the market and allowing for Libyan reserves to be tapped. Likewise, the conflict in eastern Ukraine is resolved, allowing for a normalization of ties between Europe and Russia, which lessens the strain on oil imports in Europe and lowers prices. U.S. Leads the Charge The U.S. oil industry is leading the way in terms of price-setting, and analysts do not expect this to change anytime soon. In this scenario, Congress the cuts federal corporate tax rate to 15 percent with a 5 percent tax on repatriated income, which increases investment and spikes the oil industry s revenue without increasing production. This allows for deep reductions in North American oil and gas operation expenditure, but productivity improves due to technological advancement. While the crowd sees the announcement of large gas reserves potential in Georgia and Poland as impacting prices, they also see the economic difficulties in bringing them to market given (1) the geopolitical challenges and potential for tension with Russia; (2) the difficult geologies requiring large investment and the best technologies in a low-price environment; (3) the takeaway pipeline and processing infrastructure needed; and (4) the clouded ownership and development rights all reasons why shale development has been easier and more successful in the U.S. than elsewhere. THE BARREL CRASHES (Significant price decrease of more than $30 per barrel) Trouble in China One of the only economic scenarios voted to have a major impact by analysts was that of a Chinese economic crisis. Nearly 70 percent of analysts voted that a decrease in China s 2016 GDP growth forecast from 6.3 to 5.9 percent as exports sputter and the global economy enters recession would have a major negative impact on oil prices. In the case that this slower growth and global recession caused repeated stock market crashes in China, experts assessed this as having a very negative impact on oil prices. Experts interpreted Chinese market volatility as indicating loss of control over the economy and its engines of growth which are now proceeding to make economic conditions more volatile (more numerous and more frequent swings), resulting in deeper economic disruption with more significant ripple effects across the global economy. Outliers The crowd ranked some issues as having a low impact on oil prices, including major oil company losses and near-bankruptcy; lack of capital access to North American onshore oil producers cutting CAPEX an additional 50 percent; and consolidation of onshore shale assets by hedge funds. Each of these are benchmarks of weakening economic fundamentals with direct impacts on oil supply and demand. The expert view is that the worse the impact of any of these three issues, the lower oil prices are likely to go and the longer they might stay low.

6 5 BOTTOM LINES With oil fundamentals leading to low prices and only a slight price increase over the next year due to current oversupply, geopolitics and terrorism remain the largest drivers for oil price variations in the short term. In particular, only strong, sudden ( shocking ) events would have the impact power of winning against fundamentals in bringing prices up rapidly. This is also the case because of the reversal of financial speculation expectations. Threats to supply lines (especially sea lanes) could impact prices upwards especially if multiple threats arise that limit alternative routes in key areas. An increase of prices would be caused both by a direct threat to supplies and to indirect effects like higher insurance premiums for oil tankers imposed by insurance companies. The U.S. remaining a leading producer will help keep prices low, especially if coupled with emerging economies continuing to struggle. In particular, a Chinese economic crisis involving stock market crashes and slowing growth forecasts were voted as having the largest downward effect on oil prices. Trouble in Saudi Arabia is considered a key factor in future oil price increases. In particular, a possible ISIS attack on (or seizure of) the Grand Mosque in Mecca was voted to have the most significant increase on oil prices due to the shock effect and fear of the country and its oil assets becoming frequent targets. Markets have already absorbed the thought of Libya s oil production being threatened. Therefore, only a solution to the crisis would provoke an effect, lowering prices if stability (and production) return to higher levels. In general, ISIS and other terror groups are considered a threat to oil markets only if they severely impact key producers like Saudi Arabia. Due to current oil fundamentals, geopolitical and economic issues partly reducing marginal players production (like Indonesia) are not considered relevant enough to provoke an increase in prices. The European immigration crisis, Brazilian political stability and a Saudi nuclear program were assessed to have little to no impact on the price of oil. A growth in gas reserves alone is considered to have only a limited effect on oil prices due to often non-linked dynamics. Commercial in Confidence Copyright 2016, Wikistrat Inc. All Rights Reserved. Patent Pending.

7 6 ABOUT US Wikistrat is the world s first crowdsourced consultancy. It leverages a global network of subject-matter experts via a patent-pending Collaborative Competition methodology to provide a variety of analytic services. Scenario generation, policy planning, risk assessment and red-teaming exercises are conducted by Wikistrat on a real-time, interactive online platform. DISCLAIMER This report is for informational purposes only and does not constitute financial, investment, economic, financial planning, trading or any other advice. You should consult with a competent independent financial advisor before making any investment or other decisions and should independently verify information on which you rely. The report is provided without any express or implied warranty of any kind including warranties of accuracy, completeness, or fitness for any particular purpose. Without limitation, although we have prepared this report based on sources we believe to be reliable, legally derived, and unbiased, we can provide no assurance with respect to the objectivity or any other aspect of its content. In addition and without limitation, this report may contain predictions, estimates or other information that might be considered forward-looking or predictive. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. We assume no obligation to update the report or any part thereof or to correct any inaccurate or outdated information and reserve the right to remove or modify the report, in each case without notice to you or any other party. Without limitation, this report is subject to the Terms of Service posted on our internet website at

8 MAPPING OIL MARKET VOLATILITY For more information on Wikistrat s crowdsourced solutions and systems, contact: info@wikistrat.com