Merrill Lynch analysis of Saudi credit risk and oil market outlook (2016‑2020)

Exhibit 2: Saudi credit risk prices in rating downgrades 1000 900 800 700 600 500 400 300 200 100 AA AA At A *& BBB+ BBB BBB- BB+ BB BB- B+ B B- ccc+ ccc Source: Bloomberg BofA Merrill Lynch Global Research. Commodities: NTP adds to medium-term oil market tightness Francisco Blanch Peter Helles MLPF&S MLI (UK) francisco.blanch@baml.com peter.helles@baml.com The Saudi National Transformation Plan (NTP) suggestion that production capacity is to be maintained at the current level until 2020 reinforces our conviction of medium-term oil market tightness. We continue to see a call on OPEC of 4.1mn bpd in the next five years to “balance the market”, and see oil prices of US$55-75/bbl over 2016-2020. Although the NTP incorporates a target of boosting domestic gas production by 50% to 18 bcf/d by 2020 which could crowd out oil demand, we expect Saudi Arabia’s ability to switch to reduce oil burn in power generation to 2020 to be quite limited, in our view. We see oil averaging US$55-75/bbl over 2016-2020 Real Brent prices are at one of the lowest levels in decades, and will likely encourage very strong demand growth ahead, while we see supply falling across non-cartelized producers. As such, we see global light sweet crude oil averaging US$55 to USS75/bbl over the 2016-2020 period, depending on how much incremental production OPEC can and will supply over the next five years. We think it likely that Saudi will dig into its untested spare capacity to go for increased market share, though uncertainty over how much Saudi can and will produce remains. We also remain concerned about output sustainability among weaker cartel members given the rapid credit profile deterioration. 36 GEMs Paper #26 | 30 June 2016 3S Merrill Lynch HOUSE_OVERSIGHT_016146