1. Texas oil and Gas Association Property Tax Representatives conference commodity price outlook
March 7, 2018

2. Agenda Natural Gas Price Outlook
Current Storage Balances and Forward Projections
Lower 48 Gas Production Growth
Texas Natural Gas Demand
Volatility – The Shift From NYMEX to Local Markets
Oil Price Outlook
Recent Trading Ranges & Term Structure Shape
Macro Market Correlation Risk
Global Demand Growth
Lower 48 Supply Growth – Price Dependency on the WTI/Brent Spread
Mid-Cush Differentials

3. NATURAL GAS STORAGE BALANCES

4. U.S natural gas storage

5. U.S natural gas storage – balance projections

6. balance projection calculation
End of March 2018 Market Expectation: Tcf
Prior Summer (April-October) Injection: Tcf
End of October 2018 Inventory Level with flat Y/Y S/D: Tcf
Current Production Growth Rate (Y/Y Winter-to-date Avg): 4.3 Bcf/d
Implication of extrapolated Y/Y production growth (cumulative injection): Tcf
Production growth Adjusted October 2018 Inventory Level: Tcf
Actual Winter-to-date Weather Adjusted S/D: +2 Bcf/d
Realistic End of October Inventory level in current price environment: Tcf

7. LOWER 48 NG PRODUCTION GROWTH

8. LOWER 48 TOTAL

9. REGIONAL PRODUCTION

10. REGIONAL PRODUCTION
Dry gas declines continue to outweigh associated gas production growth
As a result, overall TX gas production is not in a growth environment
Rebounding Haynesville production has unquestionably had an impact on the market
However, production growth has waned as Henry Hub prices have fallen back below $3.00/MMBtu

11. Price impacts on ng production

12. TX NATURAL GAS DEMAND

13. TEXAS POWER DEMAND
Natural gas consumption in the power sector remains price elastic, and highly sensitive to sub $3.00/MMBtu pricing
Additionally, weaker than normal basis pricing will increase the probability of gas fired power plants running ahead of their coal fired counterparts

14. TEXAS INDUSTRIAL DEMAND
Average annual industrial demand growth (NG) in Texas, over the past 6 years, has been +2.1%
This is substantially higher than the average U.S. growth rate, which indicates a healthy TX economy despite O&G price headwinds

15. Mexican exports

16. Mexican exports
The map at left illustrates recent, and pending pipeline expansions, which will allow for greater deliverability of piped natural gas to Mexico
Mexico’s domestic natural gas production has been in structural decline for over 5 years, and at present there are no signs of this trend being reversed
At present there is more than 2 Bcf/d of new Mexican natural gas pipeline capacity slated to come online in the next 2.5 years

17. THE SHIFT FROM NYMEX TO LOCAL MARKETS
NG PRICE VOLATILITY
THE SHIFT FROM NYMEX TO LOCAL MARKETS

18. Shifting price volatility

19. Shifting price volatility

20. Historical realization vs. forward curve

21. Historical realization vs. forward curve

22. NG PRICE OUTLOOK SUMMARY

23. KEY TAKEAWAYS
Price support at $2.75/MMBtu NYMEX is fundamentally driven by both supply and demand side factors
Regional pricing in the entire western U.S. gas complex, including Texas, is depressed beyond fundamental support. This is particularly true when considering NYMEX prices have been range bound between $2.50-$3.00
2018 natural gas price realizations are likely to begin reflecting both actual balances, and underlying S/D conditions by mid-to-late Q2

24. RECENT TRADING RANGES AND TERM STRUCTURE SHAPE
WTI
RECENT TRADING RANGES AND TERM STRUCTURE SHAPE

25. WTI Pricing

26. MACRO MARKET CORRELATION RISK
WTI
MACRO MARKET CORRELATION RISK

27. Crude/USD correlation

28. Crude/Equity correlation

29. GLOBAL DEMAND GROWTH IMPLICATIONS
WTI
GLOBAL DEMAND GROWTH IMPLICATIONS

30. IEA 2018 Global oil demand growth

31. IEA 2018 Global oil demand growth
IEA non-OECD oil demand growth for 2018, is pegged at approximately 1.3 million bbl/d which is slightly better than the long-term average, and importantly the lower bound of market expectations (DOE & OPEC)
IEA OECD demand growth for 2018 is substantially lower than both the DOE and OPEC forecast. For reference OECD demand growth has averaged 500K barrels/d for the past 3 years

32. U.s. oil demand actual

33. WTI – LOWER 48 SUPPLY GROWTH PRICE DEPENDENCY ON THE WTI/BRENT SPREAD

34. EIA Petroleum Supply Monthly EIA Weekly Status Report
U.s. oil production
EIA Petroleum Supply Monthly
EIA Weekly Status Report

35. Rationale for resumed sequential growth

36. Forward looking indicator

37. WTI – MID/CUSH DIFFERENTIALS

38. Realizations vs. benchmark pricing

39. WTI PRICE OUTLOOK SUMMARY

40. KEY TAKEAWAYS
Oil price support during 2018, and the potential for additional upside tests beyond $65/barrel, will be highly contingent upon an export incentivizing WTI/Brent spread
Downside risk over the remained of this year is likely driven by macro trends, such as an equity sell-off, or continually rising interest rates
Fundamentals, and A&D activity, indicate that WTI term structure may remain backwardated for the foreseeable future

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