Energy Prospectus

Oil prices were sharply higher in North American trade on Monday, adding to strong overnight gains, after Goldman Sachs (NYSE:GS) said the market shifted into deficit in May due to falling production, while a disruption to supplies in Nigeria provided further support.

"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman wrote in a note on Monday, adding that the market "likely shifted into deficit in May ... driven by both sustained strong demand as well as sharply declining production."

The U.S.-based investment bank raised its oil-price forecast for the second half of the year to $50 from a March estimate of $45. [Raymond James is holding to their forecast of $60/bbl in Q3 and $65/bbl in Q4.]

Last week, London-traded Brent futures rose $2.46, or 5.14%, amid reports of a militant attack on a Chevron-operated offshore oil facility in Nigeria's oil-rich Niger Delta region. Output from Africa's largest oil producer has fallen to 1.65 million barrels per day (bpd) due to militant attacks, Finance Minister Kemi Adeosun said, from 2.2 million bpd.

Brent futures prices are up by roughly 75% since briefly dropping below $30 a barrel in mid-February, despite the collapse of talks at a Doha summit in April aimed at achieving a production freeze among OPEC and Non-OPEC producers. OPEC meets on June 2 in Vienna and may discuss the freeze initiative again.

On 5/12/2016, Reuters reported efforts by Canadian oil sands companies to restart production
are meeting with uneven results in the wake of a raging wildfire. Oil sands companies around the
Canadian energy center of Fort McMurray were starting to fly in employees, though about one
million b/d remained shut in. As we understand from various other media sources, several plants
are restarting at reduced rates while the majority remain shut down.

Libya: Another 130,000 b/d temporarily offline. On 5/9/2016 Reuters reported oil production from
two major oil fields in eastern Libya has been cut to less than 100,000 b/d down from 230,000 b/d
after exports from the country were blocked, a spokesman for Arabian Gulf Oil Co (AGOCO) said
last Monday. There were no technical or administrative problems with production at the Messla
and Sarir fields, but if the export blockage at the port continued AGOCO would be forced to shut
down output completely. The dispute over exports is between the internationally backed National
Oil Corporation (NOC) in Tripoli and a parallel version of the NOC created by Libya's eastern
government.

Today RJ has revised their global forecast of oil downward by 826,000 bbls a day. This along with GS forecast seems very bullish.

Bullish indeed.

At our April 25th luncheon in Houston, Raymond James said WTI would top $50/bbl by the end of June and $70/bbl by the end of Sept. That forecast now appears to be too conservative. Their primary reason is that oil demand will exceed supply this summer, weekly inventory reports would show increasing draws and the speculators would go long. Also, as supply & demand tighten, the market will react more to supply disruptions.

In prior oil price cycles, once Goldman Sachs gots all they could out of the downside, they went long and started putting out bullish reports. GS has made a fortune on commodity trades and they know how to drive the herd.

The Houston Chronicle today (on bottom of front page) had an article about Venezuela going into total meltdown. Deaths related to starvation and lack of medical attention are way up. Low oil prices are killing Venezuela and several other South American countries. Saudi Arabia could care less.

On the New York Mercantile Exchange, WTI crude for June delivery traded in a broad range between $46.15 and $47.85 a barrel before settling at $47.75, up 1.54 or 3.33% on the session. At session-highs, U.S. crude futures neared $48 a barrel – a level it has not reached since early-November. Since falling to 13-year lows at $26.05 a barrel on Feb. 11, WTI crude has surged by nearly 70%. On the Intercontinental Exchange (ICE), brent crude for July delivery wavered between $47.77 and $49.47, before closing at $48.95, up 1.12 or 2.34% on the day. With the sharp gains, North Sea brent futures reached their highest level since early-November. Brent futures last hit $50 a barrel on Nov. 4.

Crude surged to fresh six-month highs on Monday as investors reacted to a string of production outages in Nigeria and Venezuela, as well as a bullish call on near-term prices from Goldman Sachs Group Inc (NYSE:GS), providing some signals that the persistent supply glut on global energy markets may be on the verge of easing.

Energy traders kept a close eye on instability in Nigeria and Venezuela on Monday, as crude prices continued to move upward. On Monday afternoon, Reuters reported that Venezuela's state-run oil company PDVSA will honor all debt commitments this year while acknowledging the need for new debt restructuring in the coming months. Venezuela, which derives 95% of its total exports from oil, has seen its deficits soar amid crashing oil prices over the last two years. Every drop of $1 per barrel in oil, results in $685 million in crude income for the state, according to analysts from PDVSA. Oil is down considerably from its peak of $115 a barrel in June, 2014. PDVSA, meanwhile, is reportedly facing up to $5 billion in debt payments over the next year.

The report comes in the wake of comments from Nicolas Maduro over the weekend, in which the Venezuelan president threatened to take over the country's idle factories which have remained shut due to broad price controls. Maduro also extended the nation's emergency economic powers by 60 days as protesters lined the streets in Caracas calling for his ouster.

In Nigeria, meanwhile, Exxon Mobil Corporation (NYSE:XOM) halted exports from the nation's largest crude stream in the wake of a wave of attacks by an insurgent militant group on oil pipelines in the Southern region of the country. Combined with other closures by Royal Dutch Shell A (NYSE:RDSa) and Chevron Corporation (NYSE:CVX), Nigerian production has tumbled to 1.65 million barrels per day, its lowest level in more than a decade.

Elsewhere, Goldman Sachs said in a note to investors that it sees a re-balance in energy markets in the second half of the year pushing prices to near $50 a barrel. The forecasts reverse a call from earlier this year when analysts from the influential Wall Street bank noted that global oil prices could touch down to $20. Analysts from Goldman Sachs cited increase demand in India, China and Russia for the reversal.

"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman analysts said in the note. "The physical re-balancing of the oil market has finally started."

From RBC Capital Markets

EIA Drilling Productivity Forecast ( http://www.eia.gov/petroleum/drilling/#tabs-summary-2 )

"Big Four" oil plays expected to decline by 110 Mbbl/d in June

EIA Crude Oil Forecasts
The "Big Four" Oil plays forecasted to decline in June by 110 Mbbl/d. The EIA update had another sizeable prior-period upward revision, but they still indicate a declining trend. The EIA increased its May production estimate by 90 Mbbl/d. For June, the EIA expects declines in the Eagleford (-58 Mbbl/d), Bakken (-28 Mbbl/d), Niobrara (-15 Mbbl/d), and Permian (-10 Mbbl/d). This is the third consecutive month outlook that shows Permian production declining.

Last month's forecasts for the prior six months were revised higher by 89 Mbbl/d in aggregate. The EIA still estimates a decline by 110 Mbbl/d in May and now estimates a decline of 112 Mbbl/d in June.

We expect US oil declines of 600-700 Mbbl/d in 2016 and growth of 300+ Mbbl/d in 2017 using our $41/bbl and $57/bbl forecasts. Operators continue to report strong well productivity that supports production volumes, but base declines at lower activity levels should weigh on volumes into 2H16.

Our detailed oil & gas well analysis highlights the increased base decline rate in the onshore US.