Energy Prospectus

U.S. crude stocks fell by 2.342 million barrels vs. forecast 2.1 mn draw.
U.S. crude futures rallied after sharp losses to trade well above $45 after data.
Crude inventories stood at 519.5 mn barrels at the end of the week.
Distillate stocks fell by 241,000 vs. forecast rise of 600,000.
Gasoline stocks were up 911,000 barrels vs. expected fall of 833,000.

Crude oil in U.S. storage has now dropped 10 of the last 11 weeks. It should continue to fall through mid-September.

Market analysis below from Stifel:

Last year, a premature oil price rally commenced in March, peaked in mid-June when the WTI benchmark topped out at
$61, and lead to a 2H15 collapse. This year, a rally began in February, peaked in Mid-June and appears to be following
an eerily similar path to 2015. Global economic concerns, a strong dollar, and burgeoning oil product stocks will likely
continue to weigh on prices over the balance of 2016. However, while they are far from healed, global oil markets are
vastly improved y/y. Despite pervasive economic worries, price-induced demand growth remains well above the 10-year
trend. Saudi Arabia has adopted a more conciliatory market share policy. Supply disruptions have accelerated the
inevitable rebalancing of the global oil market 9 months ahead of our expectations. IEA data indicate the surplus shrunk to
only 0.2 MMBls/d in 2Q16 compared to 2.2 MMBls/d in 2Q15 while the agency projects a 2H16 call on OPEC of ~33.4
MMBls/d compared to the producer group’s June production level of 33.2 MMBls/d. Accordingly, we do not expect 2H16
NYMEX oil prices to follow the prior year’s road to destruction.

Rig Count Creep Will Not Reverse 2016 U.S. Supply Decline
Many companies have been hedging 2017 volumes at $50 or more. Few of the management teams we have spoken with
recently expect to change their 2016 plans although the U.S. oil-directed rig count has increased 6 of the past 7 weeks
and is now more than 40 rigs off its recent bottom. We expect U.S. production to continue to fall this year.

Holiday May Have Skewed Natural Gas Build
Last week’s storage injection of 64 Bcf was well below last year’s 95-Bcf build and the 5-year average of 77 Bcf but
deviated from a trend that suggested the market has tightened ~4 Bcf/d y/y on a weather adjusted basis. We suspect the
July-4 holiday, which fell on a Saturday in 2015 and a Monday in 2016, dampened this year’s demand. As such, we
continue to believe declining U.S. dry gas production, which has fallen since February, coupled with rising demand will
drive Street consensus gas prices higher over the next 12 months, given normal weather. We recently upgraded
gas-weighted RRC to Buy and continue to recommend AR, GPOR, and RICE.

Maintaining Price Forecast
We are maintaining our 2H16/2017 NYMEX oil and natural gas price forecasts of $50/$55 and $2.90/$3.10. All are within
4% of forward strip prices while our gas price estimates are 12%/6% above Street consensus.

Positive on Permian and Niobrara
Permian-centric companies are likely to see positive revisions to NAV estimates as operators extend the economic
boundaries of the Wolfcamp A, 2nd Bone Spring, Avalon Shale in the Delaware Basin and improve recoveries and
downspace the Wolfcamp A, Wolfcamp B, and Lower Spraberry in the Midland Basin. We like CXO, MTDR, PE, PXD, and
XEC for their deep Permian drilling inventories and strong balance sheets.

The Niobrara core generates returns that rank among the best in the industry although companies in the play are
inexpensive due to overblown Colorado political risk. In our view, APC, NBL, PDCE, and SYRG hold the best acreage in
the play. We are currently recommending the latter 3 largely based on these assets and solid balance sheets.

Dan, Help me with the importance of domestic storage. It seems to me that the level of domestic storage is a large function of imports. If I had the big bucks I would buy oil cheap, put it in storage and sell later. Domestic production would seem to be the most important.

Bob

The U.S. now imports close to 50% of the crude oil consumed each day by refiners. U.S. production continues to fall and imports will continue to increase.

Go here to see all the stats: http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm

Just keep in mind that all of EIA's weekly stats are estimates based on formulas. They really have no way of knowing what U.S. production, imports or storage levels are on a weekly basis. For example, the most current "actual" production numbers are for April.