U.S. SECTOR STRATEGYNed DavisResearch

Group

PUBLISHED MONTHLY JUNE 13, 2014

John LaForge Commodity StrategistWarren Pies, ERP Senior Commodity AnalystSawyer Lambert Commodity Intern

COMMODITY CORNER FOCUS

Please see important disclosures at the end of this report. www.ndr.com | Periodical | Issue #COMF2014061311

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Iraq Day 2 – Only the Beginning for Oil

REFERENCED CHART LINKS

BOTTOM LINE

� History of Middle East crisis events suggests oil could still go higher.

KEY COMMODITY PRICES

� Gold . . . . . . . . . . . . . .$1273/oz.

� Copper . . . . . . . . . . . . .$3.03/lb.

� Oil . . . . . . . . . . . .$113.09/barrel

� Natural Gas . . . . $4.73/MMbtu

As the Iraq story appears ripe to heat up this weekend, we’ve pieced together the stats/questions we’d like to have you ponder. At the end, we’ll show you that the history of Middle East crisis events sug-gests that oil could see additional upside.

1. Military action is in northern Iraq, but not the majority of oil. Only 17% of Iraq’s oil reserves are located in the north, according to the Energy Infor-mation Agency (EIA). And roughly 25% of the oil is produced in the north. As for exports, oil leaves the coun-try mainly through two areas: north through Turkey, or south through the Persian Gulf. Of the 2.9 million barrels produced per day (chart), roughly 2.3m bbl/d is exported; the south gets 2.1-2.2 million barrels/day, and the north the remaining 100,000 to 200,000 bar-rels/day. The south is where most Iraqi oil is reserved, produced, and exported.

2. So why is everyone spooked about action in the north?

a. Country/regional instability is an obvious first answer. Iraq is one of the few countries in the world grow-ing oil production (chart, blue line). Instability puts production and ex-ports at risk.

b. Secondly, the north is slated to be-come a large future exporter. We’ve seen estimates that call for Iraq to produce between 9.5 million and 12 million bbl/d by 2017, and the coun-try has signed oil contracts for much of it. Most of that will flow through the south, but the north will be im-portant. Existing northern pipeline COM30705

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Petroleum-Producing Countries That Should Be In The News Monthly Data 1994-01-31 to 2013-12-31

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Petroleum-Producing Countries That Should Be In The News Monthly Data 1994-01-31 to 2013-12-31

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25Petroleum Production By Country*

Country Barrels Produced Per Day (Millions) 2013-12-31

Iraq ( ) 2.9

Mexico ( ) 2.9

Brazil ( ) 2.6

Norway ( ) 1.8

United StatesJapanChinaBrazil

*Includes crude oil and petroleum products.Sources: United States Energy Information Agency, EIA

capacity sits around 1.65 mb/day (al-though only 600,000 is functioning), and it appears that an additional 1.5 million b/day of capacity may be built. Baghdad is relying on the north to help hit the ludicrously high produc-tion mark, which comes with fat roy-alty payments to Baghdad. The north effectively said to Baghdad yesterday, with gun in hand, “no thanks, we’ll just export the oil through Turkey to the north and keep the royalty payment”.

c. Thirdly, the north may contain more oil than official estimates. The Inter-

national Energy Agency (IEA) states that the northern region contains 4 billion barrels of oil reserves, but local authorities claim that number could be in the 40-45 billion range.

IRAQ OIL PRODUCTION

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NED DAVIS RESEARCH GROUP U.S. Sector Strategy: Commodity Corner Focus | JUNE 13, 2014

www.ndr.com | Periodical | Issue #COMF2014061312

3. Iraq’s extra production has helped keep a lid on world oil prices, so world economies should be con-cerned with disruptions. Oil pro-duction from emerging countries has not kept pace with emerging appetites (chart right). An unstable Iraq puts exports at risk, and the dif-ference will need to be found else-where. Most oil-producing countries, however, remain in terminal decline.

COM30706© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Petroleum Consumption vs. Production - Emerging Markets Monthly Data 1994-01-31 to 2014-05-31

COM30706© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Petroleum Consumption vs. Production - Emerging Markets Monthly Data 1994-01-31 to 2014-05-31

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

90

95

100

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

180

185

190

195

200

90

95

100

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

180

185

190

195

200Non-OECD Country Petroleum ConsumptionNon-OECD Country Petroleum Production

Sources: United States Energy Information Agency, EIA*Series allocated to 100 on 1994-1-31.

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U.S. Onshore Crude Oil Production Monthly Data 2000-12-31 to 2013-09-30

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U.S. Onshore Crude Oil Production Monthly Data 2000-12-31 to 2013-09-30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Source: U.S. Energy Information Administration

Total U.S. Onshore Crude Oil Production - 12-Month-Growth (%)

4. The U.S. is producing more oil, but it is not exportable at this time. U.S.-refined product is exportable, but its worldwide impact is relatively small (growing, but small). Do not expect the U.S. shale boom (chart left) to help global oil prices anytime soon.

U.S. IS ONE OF THE FEW EXPANDING OIL

PRODUCTION

EMERGING COUNTRY OIL

DEMAND

EMERGING COUNTRY OIL

SUPPLY

Please see important disclosures at the end of this report.

NED DAVIS RESEARCH GROUP U.S. Sector Strategy: Commodity Corner Focus | JUNE 13, 2014

www.ndr.com | Periodical | Issue #COMF2014061313

5. The Saudis may not be able to come to the rescue, as ex-pected. The Kingdom continues to hold the line that they can produce more oil. We do not have evidence to doubt the claim. But we do have evidence that suggests that little of the added production will eventually make it to the out-side world. Since 1995, the Saudis have produced an extra 2.4 mb/day, but only 600,000 barrels/day has made it to the outside world. The Kingdom is using its extra production to help exert control over its youth bulge, not to help the out-side world keep a lid on oil prices.

6. Libya is a scary example of what could happen to Iraqi exports, should the situation spiral out of control. Prior

COMF201406131C_C

to the overthrow of Prime Minister Gaddafi in March 2011, Libya produced 1.6 mb/day. Now three years later, Libya is roughly producing 200,000 mb/day, and increases remain a distant dream.

7. Day one of turmoil is normally only the beginning of higher oil prices. The chart below tracks oil prices after other war/incursion-type events in the Middle East. It high-lights that oil prices tend to move up going into turmoil, and often continue higher for months after. Performance around each event is listed on the next page.

BRENT OIL PRICES

START OF MIDDLE EAST CRISIS EVENTS

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NED DAVIS RESEARCH GROUP U.S. Sector Strategy: Commodity Corner Focus | JUNE 13, 2014

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One point that stands out in the table is that Middle East cri-sis events do appear to pump up oil prices before and after the events. Brent oil has averaged a 1.08% monthly gain since 1987.

The average monthly gain moving into a Middle East crisis has been 2.47%, and the average gain one month post-crisis has been 5.42%.

BOTTOM LINE

The history of Middle East crisis events suggests that the move in oil prices may not yet be done.

BRENT OIL PERFORMANCE AROUND MIDDLE EAST CRISIS EVENTS (1987 TO 2013)

Start Date Event3 Months

Before1 Month Before Event

1 Month After

3 Months After

8/2/90 Gulf War (Operation Desert Storm) 34.2 44.48 I 24.94 57.53

3/1/91 Uprisings in Iraq -38.04 -7.07 I -6.88 -1.71

12/16/98 Bombing of Iraq (Operation Desert Fox) -14.07 -2.07 I 0.92 11.41

10/12/00 U.S.S. Cole Yemen Bombing 10.51 0.45 I -3.56 -23.38

10/7/01 War In Afghanistan -19.17 -22.08 I -12.12 -1.77

3/20/03 Iraq War -5.37 -14.53 I -9.43 -3.11

3/12/04 Al-Qamishli Riots 8.33 8.58 I 5.34 9.13

7/11/06 India, Israel, and Lebanon Bombings 6.74 5.8 I 2.8 -21.04

5/7/08 Lebanon Crisis 35.82 13.48 I 10.43 -2.77

12/27/08 Israel Invades Gaza -66.56 -31.71 I 27.07 50.64

4/27/09 South Yemen Insurgency 13.56 -4.21 I 25.91 43.37

6/13/09 Iranian Election Protests 57.04 24.24 I -17.52 -2.63

12/18/10 Arab Spring (Tunisia) Starts 17.67 8.85 I 7.38 25.27

1/25/11 Egyptian Revolution 18.13 3.34 I 15.2 27.78

2/14/11 Bahraini Uprising 19.81 5.38 I 9.53 9.66

2/17/11 Libya Uprising Begins 24.1 5.71 I 10.37 5.74

3/15/11 Syrian Civil War 21.66 8.42 I 12.17 3.2

10/20/11 Muammar Gaddafi Overthrown -8.03 -4.71 I -1.08 -0.46

1/16/12 Northern Mali Conflict -3.89 5.65 I 10.12 7.6

7/3/13 Islamic Unrest in Egypt -1.58 4.42 I 3.31 3.18

12/30/13 Anbar Clashes 2.43 -0.54 I -1 -3.47

Mean 5.39 2.47 I 5.42 9.25

Median 8.33 4.42 I 5.34 3.2

Mean of Total Time 3.37 1.08 I 1.08 3.37

Source: U.S. Energy Information Administration

Ned Davis Research Group T_COMF201406131.1

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