iWar3: Iraq + Oil Status26 June 2014

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I. Market Update

II. Middle East TurmOIL Scenarios

III. History of Middle East Oil Shocks

IV. Energy Exposure – Good + Bad

iWar3: Iraq + Oil Status

HiddenLevers

MARKET UPDATE

Market UpdateBill Gross losing it

Rates divergence – EU/UKDubai Market Crash

Winter devoured Q1 GDP

sources: HiddenLevers, Forbes, Bloomberg, WSJ, BBC News, Business Insider

Q1 2015 Rate Hike?

Macro Snapshot

GDP is still positive + home prices rising = bond market signals no fear at all!

-2.9%

MIDDLE EAST TURMOIL – SCENARIOSHiddenLevers

iWar3 – Mapping the Players

African Warlords

US Tea Party

Authoritarian

Democratic

Extremist Legit Govt

GOP/Dems

Al Qaeda Taliban

ChinaGovernment

Occupy Wall Street

Latin America Drug Cartels

Iraq Government

source: HiddenLevers, Foreign Policy

ISIS

Conflict Contained

Iran + US + Syria stable Iraq good

for all three

recent uptick in Oil burns off

US involvement only diplomatic

oil fields NOTin hands of

ISIS extremists

Iraq govtmore inclusive

or replaced

sources: HiddenLevers, New Yorker,

$95usd

Oil = 95usd

iWar3Civil war,

not anti-US insurgency

US Strikes Raise Tensions

firepower will not fix Iraq situation

Overt US actions ruin Iran detente

Arab Spring113usd high

Iraq matters more than

Russia Ukrazy

Oil = 115usd

sources: HiddenLevers, New Yorker

$115usd

Israel will not get involved

War Engulfs Gulf

Iraq govt gonefailed state

Oil all-time high$135usd

look for burning oil fields

Easy tellBaghdad

in ISIS control

sources: HiddenLevers, Fox News NY Times

Lebanon civil war 15 years

Oil = 150usd +

distinct from Iran nuclear

threat

$135usd

Scenario: Middle East TurmOILGoodconflict

contained

BadUS strikes

raise tensions

Uglywar engulfs

gulf

If the conflict remains in Syria and outside of major Iraqi oil fields, the market eventually forgets.

Absent further risk to oil fields, US strike only raises oil risk premium mildly.

If oil fields in southern Iraq or Kurdish-Iraq are set aflame or taken offline, oil prices will spike substantially.

HiddenLevers

HISTORY OF MIDDLE EAST OIL SHOCKS

Middle East Oil Shocks – Never Forget

sources: HiddenLevers

Levers OPEC Embargo Iran Revolution

2011 Arab Spring iWar1 iWar2

Oct ‘73 - Mar ‘74 Apr ‘79 - July ‘80 Jan ‘11 - Feb ‘12 July ‘90 - Oct ‘90 Mar ‘03 - July ‘08

Oil +135% +166% +30% +95% +335%

S&P -17% +20% +5% -15% 46%

Gold +76% +182% +29% +10% +179%

10 Year Rates +11% +21% -44% -8% 0%

USD Index - - - - -29%

+135% +30%

Middle East Oil Shocks – iWar1 + iWar2

sources: HiddenLevers, CNN

iWar1 1990-91- spike: US invaded Iraq- retreat: Iraq pushed out of Kuwait

iWar2 2003-08- spike: ME tension + rising

speculation + USD down

- retreat: Iraq drilling ban ends + oil bubble pops + financial crisis

+95%

+335%

US Withdrawal from Oil Addiction

sources: US Dept of Energy EIA, USA Today

Shale oil explosion is driving US oil production back toward all time high

Oil imports have fallen below 9M bbl/day from peak of 15M

Production has risen so much that White House is ending ban on US oil exports

US Withdrawal from Oil Addiction

source: Our Finite World , Oil & Gas Journal

Total US miles driven down 3% from 2007 peak while GDP up 7%

Less driving + better mpg oil demand down 15% from peak

US fuel economy rising after being flat for decades

New govt standards require 54 mpg for 2025 model year

Iraq + Oil Status – Recap

US + Iraq both Oil Exporters oil shock history = history

US oil addiction over--> better policy decisions

burning oil fields move the needle

HiddenLevers

ENERGY EXPOSURE – GOOD + BAD

In Azerbaijan, bathing in pure crude is encouraged

Bad Oil Exposure – Don’t trust ETF marketing

source: HiddenLevers

Oil Futures ETFs Don’t Track Oil. Physical Oil Funds Don’t Exist.

Gold ETFs Track Gold Perfectly.

Physical Gold Easy to hold. Physical Oil difficult to hold.

Good Oil Exposure – High Oil Correlation

Get investment ideas across industries, ranked by Oil Beta

Macro Picture – Global Deflation Risk

sources: HiddenLevers, Economist

technology automation commodities sinking

first world baby bust decreasing birth rate

sluggish GDP growth

So far, deflation trumps geo-political worries

HiddenLevers Use Cases

scenarioOil Prices

scenarioGlobal Deflation

iWar3 – Iraq + Oil Status

macro themeHigh Oil Beta

Funds

data centerCommodities

scenarioMiddle East

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