OPEC after the shale revolution

Trading Strategy Commodity Strategy, November 17, 2014 USA versus OPEC: 1 0 OPEC after the shale revolution OPEC will not cut production on November 27 A united OPEC can balance Brent at about USD 90, but only in the short term Without OPEC, the price floor is soft on both sides of the Atlantic

Contents Summary 3 Armageddon after four years at around USD 110 5 Behind the chaos: the US production miracle 7 OPEC the cartel which finally came under pressure 10 Appendix 15 Disclaimers 17 Martin Jansson +46 (0)8 701 2343 nija03@handelsbanken.se Oil has fallen significantly after several years of stable high prices. OPEC s capacity to manage increasing US production from shale rock has come into focus and is being questioned. OPEC is split and has internal discipline problems. In the short term, OPEC can balance the market with a cut in November, but in the long term the cartel will continue to be under pressure from US production which grows fast when oil prices are above USD 80.

Summary After four years at levels of about USD 110, it came as a shock when the price of oil fell out of its trading range. Through many years of supply disruptions, OPEC has been able to sit back and relax. The high price has simultaneously attracted investment in new production outside the Middle East, and the resulting price pressure was a bolt out of the blue. Oil is far more than our largest commodity and fuel for our vehicles. It is a weapon and a form of leverage. This is the story of how the OPEC cartel finally came under pressure after fifty four years of value accumulation in the desert. Supply growth has occurred at the same time as demand expectations have been lowered A perfect storm with growing supply and weaker demand The fall in the price of oil during the autumn has largely been attributed to increased US production and Libya s recovery after a period of volatility following the end of Gaddafi s leadership in 2011. But the significance of demand must not be ignored; growth in supply has taken place at the same time as world GDP expectations have been sharply lowered, from 2.85% at the beginning of the year to 2.45% since then. Supply has risen significantly in 2014 Demand has been revised down Source: Bloomberg, Handelsbanken Capital Markets No production cut by OPEC in November Shale oil will be intact down to USD 65 Ahead of the OPEC meeting on November 27 We do not think that any production cuts will feature at the November OPEC meeting; we expect production levels to remain high during the first six months of 2015 and push Brent down to USD 70, when shale companies are still protected by hedges. During the second half, we expect US production growth to decline (as WTI reaches ~USD 65) and balance the market at around USD 80. With this scenario, we expect an average Brent price of USD 75 for 2015. US versus OPEC: 1-0 The US has an advantage due to a dramatic fall in the production cost of shale oil as a result of technical developments in recent years. Shale oil production has never been tested in a bear market and we believe it will remain intact down toward USD 60, but that growth will slow below USD 80. On average, 51% of production is hedged for the next six months and this is why we do not expect the growth rate to decline until the second half of 2015. Production is flexible with low capex and high opex making it difficult to compete with in the long term. 3

OPEC has done very little to raise the oil price None of the four big OPEC producers want to lower production in November If OPEC cuts, shale oil will continue to flourish at the high prices Simulations show that Saudi Arabia is not keen to reduce production OPEC is not responsible for high prices In our view, OPEC has been ascribed too much importance in recent years. With the exception of the financial crisis, its members have done very little to raise the oil price since 2001. China s economic progress and frequent supply disruptions in a destabilised Middle East are, in our view, the real reasons for the high oil prices. The doves dominate in the desert The OPEC members can be categorised as hawks or doves depending on whether they want to cut production to increase the price. OPEC s four largest oil producers Saudi Arabia, Iraq, Kuwait and UAE, which together have 60% of production are all doves and are therefore unlikely to cut production in November. Saudi Arabia, which represented 31% of OPEC production in October and thus dominates OPEC, is the biggest dove of them all since the country has huge reserves relative to its population, both in the ground and in the bank. In times of falling oil prices and harder competition of marginal buyers in Asia, it is therefore more important for Saudi Arabia to maintain its market share than to save its reserves now that the oil demand growth rate is trending down. OPEC lacks credibility and tools If OPEC is to start production cuts to defend a price of USD 90 per barrel, a reduction of 1-1.5 million barrels per day (mbpd) would be needed to compensate for US growth, which will continue to benefit from the high prices. Since June, OPEC s oil income has fallen by 25% from the average level since 2011. If production is now cut, this will be an increased burden at a time when several members are financially strained and in states of civil war. If a strategy of production cuts is launched, OPEC must convince the market that it will be followed. This will be difficult given the track record of cheating on volumes within OPEC. Ultimately, OPEC reductions will lead to the organisation cutting itself out of the market as production rises outside the cartel. A simple simulation of Saudi Arabia s income (price*production) for the following scenario shows that the country is not keen to cut production: November 14 meeting: If OPEC cuts by 1 mbpd, with Saudi Arabia accounting for 60% of this, the price will go to USD 90. A new cut must then be made in May/Jun to maintain a price of USD 90 since the US will continue to increase production while maintain profitably. Without a production cut, we will see prices of USD 70/80 in H1/H2 2015, as US growth will progressively slow when shale hedges expire during H1 2015. Brent price scenario for cut/no cut at the OPEC meeting Source: Handelsbanken Capital Markets 4

Armageddon after four years at around USD 110 Commodity sectors, which are cyclical by nature, constantly struggle with the supply and demand balance. China emerged as the largest commodity consumer ever in the early 2000s. Since then, the price of oil has seen an upward trend, and some fifteen years later it seems that the price peaked during 2013. The supply side of the pricing equation has two barriers in order to catch up with demand: investments and the time required to carry them out. For the oil market however, there is a third barrier; the OPEC price cartel. The oil cycle has not correlated with metals Seven Sisters kept the price low The first oil boom OPEC is formed Historically, the oil cycle has not correlated with other commodities such as metals. The second metal boom since the 1900s took place after World War II when Europe was being rebuilt, and there was a period of strong economic growth in Korea and Japan in 1950-1973. During this period, the oil price was controlled by the Seven Sisters the seven oil companies in the US, of which Exxon Mobil, Chevron and BP remain today. These seven companies were vertically integrated and controlled the whole chain from drilling to fuel stations. From oligopoly... The Seven Sisters only traded with each other and kept the price low to avoid volume growth outside the oligopoly. For this reason, the oil price was deflated in real terms during a period experiencing inflation in other commodities. Countries with oilfields wanted more influence, and OPEC was formed in 1960 as a counterreaction to the pricing oligopoly of the Seven Sisters and US import sanctions in 1959 which favoured imports from Canada and Mexico. Two oil booms in 114 years Source: Bloomberg, Handelsbanken Capital Markets OPEC tries to keep the price high...to cartel OPEC started functioning as a price cartel by using its power for political and economic purposes. It shocked the world with embargoes in 1973 and 1979. The record-high oil prices reached during these times still apply. In the 1980s, prices started to fall because large amounts of money were invested in exploration outside the OPEC countries. New fields were established and Angola (today an 5

OPEC member), Mexico, Norway and the former Soviet Union emerged as new oil countries. These new countries drove OPEC s share of total production down from 53% in 1974 to 30% in 1985. After this, we saw two decades of oil prices falling in real terms, which once again reduced investments in exploration and created the conditions for the boom period that started in 2001 and still exists today. China s progress contributed to increased demand for almost all commodities The second oil boom the self-playing piano The end of the dot.com bubble in 2001 coupled with the 9/11 terror attacks in the same year saw the next upswing, this time with China surging ahead as a central factor. China s economic progress contributed to increased demand for almost all commodities, including oil. At the same time, the US started to retaliate with the invasion of Iraq in 2003 as a central factor. There then followed more than a decade of production disruptions and destabilisation in the Middle East. This process culminated with the toppling of Libya s Gaddafi in 2011 after the progress of the Arab Spring. At the same time, President Obama imposed sanctions preventing Iran from exporting oil to the US, an action which Europe sympathised with. With the exception of the financial crisis, OPEC has therefore needed to do very little to support the price. Brent during the second oil boom Production deltas Source: Bloomberg, Handelsbanken Capital Markets Sanctions against Iran, oil thieves in Nigeria and destabilisation in Iraq and Libya have reduced production Russia s annexation of Crimea created a risk premium The Arab Spring Export sanctions against Iran, oil thieves in Nigeria and destabilisation in Iraq, together with civil war in Libya, have all reduced oil production since 2011. Total exports from these countries fell by at most 3 mbpd, which corresponded exactly to the increase by the US. This resulted in oil price stability without the need for strategic cuts in production from OPEC. During the second half of 2014, these problems have decreased and Iraq now has the highest level of production it has achieved since the US invasion of 2003. At the same time, Libya has recovered. Putin created a risk premium The supply effect started to become visible in the statistics in early 2014. However, it was Russia s annexation of Crimea in March that created a risk premium for oil due to fears of sanctions against the country s significant energy sector. Sanctions never became a reality and when the risk premium started to decline, there was a large gap between the oil price and the underlying market balance. 6

Behind the chaos: the US production miracle High oil prices have given technical expertise all the incentives to increase production. This is what has happened in the US, where forecasts for 2015 indicate that the US will vie with Russia and Saudi Arabia to be the world s largest oil producer after forty years of falling production. Horizontal boring and hydraulic blasting led to a revolution Revolutionary extraction of shale oil US shale oil resources became economically viable reserves with the assistance of technologies for horizontal drilling and hydraulic fracking to release gas and oil from a much larger area than was possible with traditional vertical drilling. The technology was developed in the US in the 1940s and was refined at the turn of the century. The extraction cost depends on each field s geological and engineering situation and wide variations are therefore seen. World s five largest oil nations Source: Bloomberg, Handelsbanken Capital Markets Higher production is reflected in lower oil imports Lower imports force oil to travel east Higher US production is reflected in a reduced need to import oil. Most of the new production in the US is of light, sweet oil (small amounts of sulphur) which is suitable for the production of gasoline. Reduced imports by the US therefore impact first on countries in West Africa because these countries produce similar qualities. Exporters of heavy oil qualities such as Canada, Venezuela and Saudi Arabia are therefore finding it easier to defend their market shares in the US. The oil which can no longer be exported to the US must find new buyers among the marginal buyers in Asia, and this is why it has become so important for the OPEC countries to defend their market shares in Asia. 7

US imports reflect production US crude imports from West Africa Source: Bloomberg, Handelsbanken Capital Markets Technical progress has quickly lowered extraction cost The production economy makes shale oil for marginal production Hedged gas producers operated at full capacity in a falling market Shale oil has never been tested in a bear market. The consensus has been hovering in the belief that the shale producers will be unprofitable at a level of USD 90. The technology was commercialised during a period of high oil prices but technical developments have quickly reduced the previously high extraction cost. However, following the most recent price fall, a completely different picture has emerged. Surprisingly little concern was voiced by executives of shale companies during their presentations of the Q3 results. In October 2014, the IEA s Mariana von der Hoeven said that 98% of US crude oil has a production cost of less than USD 80 per barrel and 82% of production can take place at USD 60 per barrel or lower. According to our analysis of Bloomberg data, 51% of shale production is hedged six months ahead. Protection against lower prices and low production costs is a competitive combination for the first half of 2015. Low capex and high opex make shale oil flexible Compared with traditional gas and oil production, the extraction of shale reserves is characterised by high production during the first year and then sharp reductions during following years. Typically, production during the second year is 40% lower than in the first year. Many new holes must constantly be drilled to ensure stable production. The supply therefore quickly adapts to falling prices, while the payback time for the investment in every wall is short. The financial structure of production makes shale an ideal swing producer, and this will disrupt all OPEC s attempts to maintain a high price. In the wake of shale gas Large-scale production of shale oil started several years after the breakthrough for shale gas, which has seen a stable production cost of around USD 4/MBtu since the financial crisis. Gas bottomed out at a price of around USD 2/MBtu during 2012, when hedged gas producers operated at full capacity in a falling market, just to execute their hedges. This is worth remembering as we approach 2015, since we expect the oil market to move into surplus and with producers hedges established at record levels. 8

Shale gas versus shale oil Japan has the world s highest gas price Source: Bloomberg, Handelsbanken Capital Markets A level of USD 80 per barrel maintains the US growth rate while USD 60 leads to a zero growth rate BP and Total allow their projects to continue at USD 80 per barrel Shale is a marginal product that causes OPEC to suffer A smaller difference between capex and opex means smaller differences between incentive price and breakeven. With the starting point that 82% of production is profitable at USD 60 per barrel, it can be assumed that incentive and breakeven prices are close to USD 60. If the price moves lower, a large part of the production will be unprofitable and drilling will stop. After this, production will continue to fall given the rapid rate of decline in each wall. If oil is traded in the range of USD 70-80, there are probably many incentives to increase investment and hence production. These levels have anecdotal support following the shale producers presentations of the Q3 figures. In summary, we assume that a level of USD 80 per barrel will maintain the US growth rate, while a level of USD 60 means that the growth rate will approach zero. Production outside North America and OPEC Statoil needs USD 50 per barrel to keep an average field in the North Sea profitable. ENI needs an average of USD 40 per barrel for its global portfolio. Statoil s prioritised projects that are related to existing infrastructure can survive on USD 40 per barrel. ENI s most expensive deep-water projects need USD 50 per barrel. BP and Total have stated that all their projects will continue to be developed at an oil price of USD 80 per barrel. These four are among the few large companies that talk about profitability levels. Given that they have these margins, we assume that these major players will go through a period of lower oil prices with their production intact. 9

OPEC the cartel which finally came under pressure Today, the US, Canada and Mexico produce more oil than the three largest OPEC members of Saudi Arabia, Iraq and Iran. The cartel s position of power finally came under pressure when US production broke all records and production disruptions decreased, while internal discipline is weak among OPEC members. Saudi Arabia responsible for cutbacks The market was shocked when Libya recovered The beginning OPEC s situation has appeared increasingly strained during the year. Members that have not been affected by supply disruptions or sanctions that have hindered exports have been able to sit back and take advantage of a high price while not needing to cut back on their own volumes to create this price. At an early stage, it was apparent that it was Saudi Arabia s responsibility to manage the surplus when one of Libya, Iraq or Iran managed to increase production. In practice, this meant that Saudi Arabia would need to hand over income either to Iraq, which is officially outside OPEC s production quota, or to Iran, with which Saudi Arabia has had a troublesome relationship historically. Back in May, we therefore questioned the obvious fact that Saudi Arabia would cut supply, and at that time we assumed an oil price of USD 90 per barrel. See A Commodity bust in slow motion from May. The return of Libya was the final straw... During the hunt for Gaddafi, oil production fell dramatically, but recovered just as quickly when Gaddafi was overthrown in October 2011. After this, internal strife in Libya has resulted in production levels falling. Rebels in the east have wanted to sell oil from the fields in that region, independently of Tripoli in the west. At the beginning of 2014, it seemed as if the parties would be able to agree, but production collapsed after fighting continued. So the market was particularly shocked when they finally managed to achieve a sustained production recovery in the second half of 2014. Libya s return brought OPEC down when Saudi Arabia did not cut production Source: Bloomberg, Handelsbanken Capital Markets Saudi Arabia started with a cut in August...when Saudi Arabia reduced the price instead of production Initially, Saudi Arabia responded proactively and cut supply in August by 408 kbpd. However, other members did not follow, and with September data at hand it was clear that several others actually increased production, which was also given an extra boost by Libya s recovery. Total OPEC production was now almost 31 mbpd the highest for three years and considerably in excess of the cartel s target of 30 mbpd which had existed since January 2011. 10

Saudi Arabia got tetchy and started a price war Reserve capacity is a buffer against potential crises Saudia Arabia got tetchy and decided to reduce the price to marginal buyers in Asia rather than cut back further on supply. This strategy was quickly followed by Iran, Kuwait and Iraq in an attempt to defend their market shares in Asia. It looked like a price war had started and the oil price fell dramatically when the market reassessed OPEC s role as price guarantor. Reserve capacity Capacity utilisation among the OPEC members is usually used as an indicator of how tight the oil market is, as well as whether OPEC is exercising its influence to support the price. The reserve capacity also functions as a buffer against potential crises which may reduce world oil supply. This is why oil is traded at a premium at times when there is low reserve capacity in OPEC. Other countries always produce at full capacity as they do not participate in price-setting organisations. The definition of reserve capacity is production which can be activated within 30 days and then maintained for at least 90 days. Obviously because Saudi Arabia has the largest share of the cartel s production, it also has the largest share of its reserve capacity. Historically, this reserve capacity has varied between 1.5 and 2 mbpd which is available to impact on the price. In the US, the DOE previously published reserve capacity per OPEC country but stopped publishing this information in 2011. OPEC s reserve capacity determines room for manoeuvre Source: Bloomberg, DOE, Handelsbanken Capital Markets During the economic boom, OPEC had very little scope to lower the price OPEC sets the floor rather than the ceiling During the economic boom of 2003-08, reserve capacity was below 2 mbpd (less than 3% of global production). This gave OPEC very little scope to reduce the price when demand increased significantly. Since the financial crisis, it is mainly supply disruptions which have kept reserve capacity at low levels; the price effect is however the same. Except for during the financial crisis, OPEC s opportunities during the last decade have involved supporting the price floor rather than the ceiling. Reserve capacity under 2.5 mbpd is considered to be a critical level. 11

Close to full capacity utilisation is OPEC s rule OPEC has problems with over-production and cheating by individual members The cartel enjoys immunity from normal anti-trust legislation The doves are countries with good reserves, while the hawks want to save the reserves for better prices Weak cartel OPEC has applied formal production quotas since 1982, but given the existence of widespread cheating, the price effect of these quotas is uncertain and probably weak. Except for Saudi Arabia, Kuwait and the UAE, the general rule among OPEC s member countries has been to produce at levels close to full capacity. Formal limitations to the expansion of production capacity have never been part of the cartel s toolbox. It is therefore reasonable to expect that OPEC has some ability but not particularly much to raise prices from the level determined by competition for a limited time period of maybe one to three years. But this requires all the stars to be aligned, i.e. strong growth in underlying demand for oil. OPEC s structure OPEC was formed in Baghdad by Iraq, Iran, Saudi Arabia and Venezuela in September 1960. Although other countries have been added over the years the most recent being Angola in 2007 the Arab countries have represented the core OPEC and still represent the countries with low costs of production. OPEC meets twice a year to decide the production quota, i.e. the highest amount that every country is permitted to produce. The individual quota has been replaced with a joint quota for the entire cartel, which officially excludes Iraq since the US invasion in 2003. OPEC has the same problems as most other price cartels over-production and cheating by individual members. As its most important player, Saudi Arabia bears a heavy burden, while other members get a free ride. Membership relates to each individual country and not the country s oil companies. This is why the cartel enjoys immunity from normal anti-trust legislation. During the 1970s, several OPEC members nationalised their country s oil assets, after which the cartel had much greater power. The ornithology of the desert OPEC s members have widely differing preconditions. In times of falling oil prices, rivalries between different countries have increased. Those who typically argue in favour of a higher oil price the hawks are countries with smaller reserves relative to their population. The predominant hawks are Iran and Iraq. Due to their strained government finances, Venezuela and Libya have joined the hawks, despite their relatively large reserves ahead of the November meeting. The doves are the countries with large reserves relative to their population and balanced fiscal budgets and which therefore prioritise maintaining market share during times of falling oil prices. Saudi Arabia, the UAE, Qatar and Kuwait are neighbouring countries and doves which usually follow the same policy. OPEC s 12 member countries Country Member since Population (millions) Reserves (billjon brl) Reserves/ population (kbrl) Oil production Oct 14 (kbpd) Reserves/ production (years) Dove/ Hawk Saudi Arabia 1960 26 267 10,3 9 750 77 Dove Iraq 1960 31 150 4,8 3 300 128 Dove Kuwait 1960 3 101 33,7 2 850 100 Dove UAE 1967 5 98 19,6 2 850 97 Dove Iran 1960 78 157 2,0 2 770 159 Hawk Venezuela 1960 28 298 10,6 2 471 339 Hawk Nigeria 1971 170 37 0,2 2 090 50 Hawk Angola 2007 18 12 0,7 1 700 20 Hawk Algeriet 1969 37 12 0,3 1 100 31 Hawk Libya 1962 6 48,5 8,1 850 160 Dove Qatar 1961 2 25 12,5 690 102 Dove Ecuador 1973 15 8,2 0,5 550 42 Dove Total 419 30 971 Source: BP, Bloomberg and Handelsbanken Capital Markets 12

Saudi Arabia gave Asia a discount in order to maintain volumes Widespread cheating There are several ways for members to cheat and produce larger volumes when the price is set jointly for the market using benchmarks: Increased credit to buyers Better qualities are sold at the same price as standard qualities A deduction for the shipping cost can be given to the buyer The buyer can get countertransactions or discounts For these reasons, Saudi Arabia s OSP (official sales prices) for deliveries in November and December have attracted a lot of interest. In November, Saudi Arabia gave its first discount from the benchmark to buyers in Asia to increase volumes there. This process was repeated in December with the US. In parallel with the embargo in 1973, OPEC reduced production Oil-consuming countries reduced consumption Saudi Arabia lobbied for production quotas to stabilise the market OPEC makes itself felt in 1973 OPEC s first effective action was the embargo against the US and the Netherlands in conjunction with their assistance to Israel in 1973. In parallel with the embargo, OPEC reduced production as a reaction to the US having implemented import quotas in 1959 which rewarded the import of oil from Canada and Mexico. This discriminated against oil from the Middle East and forced it to be sold at a discount. It was the reduction in production rather than the embargo that was responsible for the price increase associated with the first oil crisis. First headwind for OPEC After OPEC s actions during the oil crisis of the 1970s, the major oil-consuming countries started to reduce their consumption. Substitutes such as coal, natural gas and nuclear power started to emerge alongside the new oil production outside OPEC. Demand decreased by 5 mbpd at the same time as non-opec sources increased production by 14 mbpd up to 1986. By this time, OPEC s market share had fallen from 50% to 29%. Prices had fallen for six years and culminated in a fall of 46% in 1986. Production quota formed 1982 As a form of attack in defence of export income, Saudi Arabia lobbied for production quotas to reduce production and support the price. When this did not find favour with the OPEC members, Saudi Arabia acted alone and reduced production by 67%, from almost 10 mbpd in 1981 to just over 3 mbpd in 1984. This action proved futile and Saudi Arabia changed its strategy in September 1985 and let the oil flow. As a result, the price fell to USD 10. High cost producers like the North Sea became unprofitable while other OPEC members got the message and joined the quota system to tighten up the market. The greatest damage from production cuts occurs during a period of low prices and low production. It is therefore unlikely that OPEC, which has already seen a significant reduction in earnings during 2014, will want to reduce this further by lowering production. 13

USD/brl Commodity Strategy, November, 17, 2014 Saudia Arabia s actions during the 1980s price collapse, OPEC income 2011-14 Source: Bloomberg, Handelsbanken Capital Markets Balancing the fiscal budget The IMF usually publishes a yearly table of the oil price required to balance the national budget of some countries in the Middle East and Africa. The table has developed to become the consensus of the required oil price of each country. These prices are to be considered as budget prices and not floor prices. A country has no national right to sell its oil at the price required to balance the expenses created by its policies. In the current falling market, these arguments are therefore of less value. Venezuela is financially strained to breaking point The exception is Venezuela, which is financially strained to breaking point, partly as a result of its inflation rate of 63%. Here, prices at a level which leaves the country s fiscal budget out of balance will probably result in production going down because of destabilisation in basic state functions. Oil price to balance the national budget in MENA, Russia and Venezuela 180 160 140 120 100 80 60 40 20 Qatar Kuwait UAE Saudiarabia I r a q L i b y a Russia O m a n A l g e r i a Iran V e n e z u e l a 0 0 Accumulated production Source: Handelsbanken Capital Markets, Bloomberg, IMF Core OPEC will continue to produce even if the price falls below the budget price Production cost creates a softer floor The countries around the Persian Gulf ( core OPEC ) Qatar, Kuwait, UAE and Saudi Arabia still have a production cost of about USD 10-20 per barrel. Of course, these countries will continue to produce even if the price falls below the price needed to balance the national budget. In other words, a scenario where OPEC s production cost is tested is unlikely. 14

Appendix Benchmark prices are constantly changing Although daily market monitoring refers to Brent or WTI, every oil field has its own characteristics and is priced according to a formula from the closest benchmark. The major benchmark quotations have four common factors: Stable and real production Transparent pricing Geopolitically and financially stable trading point Sufficient storage capacity of delivery opportunities to guarantee that the prices reflect global supply/demand For many years, WTI was a global standard but when US production increased, WTI fell on the fourth point when the storage capacity and infrastructure to ship oil from the trading point in Cushing, Oklahoma were insufficient and WTI started to trade at a substantial discount to Brent. WTI thus no longer reflected the global balance between supply and demand and Brent became the standard outside the US. However, Brent is now close to being pensioned off, since its physically shipped volumes have fallen to critical levels after North Sea production levels fell by 55% since their peak in 2004. For the same reason, it is increasingly common to refer to the average value of Dubai and Oman, which were previously two standalone qualities. Dubai/Oman is important because it best correlates with OPEC s official basket price, for which there is no forward trading. Oil qualities have converged Spread to Brent Source: Bloomberg, Handelsbanken Capital Market Currency effects The last year has not only caused major movements in the oil price but also in several currencies. Japan is one of the countries with the largest imports of energy while Russia is one of those most dependent on energy exports. For both these countries, the major collapse in the oil price has almost been neutralised by currency changes against the USD. Among OPEC members, the equivalent of 51% of the production in the domestic currency has been pegged against the USD to reduce variations in export income. Saudi Arabia, Qatar, UAE and Venezuela have all pegged their currencies to the USD. In addition, Oman a non-opec member but a significant oil producer also has a USD peg. 15

Currency benefits Russian oil production but is bad for Japan s oil imports Currency change benefits Russian oil production and is bad for Japan s oil imports Source: Bloomberg, Handelsbanken Capital Markets 16

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Contact information Capital Markets Michael Green Head +46 8 701 43 56 Per Elcar Head of Securities, Fixed Income, +46 8 701 19 49 FX and Commodities Jan Häggström Head of Economic Research and +46 8 701 10 97 Chief Economist, SHB Peter Karlsson Head of Equity & Credit Research +46 8 701 21 51 Björn Linden Head of Securities, Fixed Income, FX and Commodities International +44 7909528735 Fixed Income Equity Sales, Foreign Exchange & Commodities Carl Cederschiöld Head of Sales +46 8 701 10 38 Eggert Mörling Head of Equity Sales +46 8 463 49 11 Henrik Franzén Head of Fixed Income Sales +46 8 463 46 72 Magnus Strömer Head of FX and Commodities Sales +46 8 463 45 63 Peter Carlberg Head of Derivative Sales +46 8 701 14 53 Lennart Living Head of Structured Saving Products +46 8 463 57 13 Martin Nossman Head of Cross Asset Execution +46 8 463 25 56 Debt Capital Markets Tony Lindlöf Head of Debt Capital Markets +46 8 701 25 10 Per Jäderberg Head of Corporate Loans +46 8 701 33 51 Måns Niklasson Head of Acquisition Finance +46 8 701 52 84 Ulf Stejmar Head of Corporate Bonds +46 8 463 45 79 Economic Research Jan Häggström Head of Economic Research +46 8 701 10 97 Sweden Petter Lundvik USA, Special Analysis +46 8 701 33 97 Gunnar Tersman Eastern Europe, Emerging Markets +46 8 701 20 53 Helena Trygg Japan, United Kingdom +46 8 701 12 84 Anders Brunstedt Sweden +46 8 701 54 32 Eva Dorenius Web Editor +46 8 701 50 54 Finland Tiina Helenius Head, Economic Research +358 10 444 2404 Tuulia Asplund Finnish economy +358 10 444 2403 Trading Strategy Claes Måhlén Head, Chief Strategist +46 8 463 45 35 Johan Sahlström Chief Credit Strategist +46 8 463 45 37 Ronny Berg Senior Credit Strategist +47 22 82 30 36 Ola Eriksson Senior Credit Strategist +46 8 463 47 49 Martin Jansson Senior Commodity Strategist +46 8 461 23 43 Nils Kristian Knudsen Senior Strategist FX/FI +47 22 82 30 10 Andreas Skogelid Senior Strategist FI +46 8 701 56 80 Pierre Carlsson Strategist FX +46 8 463 46 17 Paul Betton Credit Analyst +46 8 463 45 78 Denmark Jes Asmussen Head, Economic Research +45 467 91203 Rasmus Gudum-Sessingø Danish economy +45 467 91619 Bjarke Roed-Frederiksen China and Latin America +45 467 91229 Norway Knut Anton Mork Head, Economic Research +47 22 39 71 81 Nils Kristian Knudsen Senior Strategist FX/FI +47 22 82 30 10 Ingvild Borgen Gjerde Norwegian economy +47 22 39 70 05 Kari Due-Andresen Norwegian economy +47 22 39 70 07 Marius Gonsholt Hov Norwegian economy +47 22 39 73 40 Regional Sales Copenhagen Kristian Nielsen +45 46 79 12 69 Gothenburg Per Wall +46 31 743 31 20 Gävle Johan Magnusson +46 26 172 111 Helsinki Mika Rämänen +358 10 444 62 20 Linköping Fredrik Lundgren +46 13 28 91 10 London Ray Spiers +44 207 578 86 12 Luleå/Umeå Ove Larsson +46 90 154 719 Luxembourg Snorre Tysland +352 274 868 251 Malmö Ulf Larsson +46 40 24 54 04 Oslo Petter Fjellheim +47 22 82 30 29 Stockholm Malin Nilén +46 8 701 27 70 Toll-free numbers From Sweden to N.Y. & Singapore 020-58 64 46 From Norway to N.Y. & Singapore 800 40 333 From Denmark to N.Y. & Singapore 8001 72 02 From Finland to N.Y. & Singapore 0800 91 11 00 Within the US 1-800 396-2758 Svenska Handelsbanken AB (publ) Stockholm Copenhagen Blasieholmstorg 11 Havneholmen 29 SE-106 70 Stockholm DK-1561 Copenhagen V Tel. +45 46 79 12 00 Tel. +46 8 701 10 00 Fax. +45 46 79 15 52 Fax. +46 8 701 28 50 Helsinki Aleksanterinkatu 11 FI-00100 Helsinki Tel. +358 10 444 11 Fax. +358 10 444 2578 Oslo Tjuvholmen Allé 11, Postboks 1249 Vika NO-0110 Oslo Tel. +47 223 97 000 Fax. +47 2233 6915 London 3 Thomas More Square London GB-E1W 1WY Tel. +44 207 578 8668 Fax. +44 207 578 8090 New York Handelsbanken Markets Securities, Inc. 875 Third Avenue, 4 th Floor New York, NY 10022-7218 Tel. +1 212 326 5153 Fax. +1 212 326 2730 FINRA, SIPC