Oil Markets into 26 Peter Davies Chief Economist, BP plc British Institute of Energy Economics London. 24 January, 26
Outline Oil and energy today How did we get to here? Prospects for 26 Into the medium term 1
Oil and Gas: A Perspective 6 5 Oil - Dated Brent US Gas - Heny Hub Refining Margins - BP GIM 1 8 US$/bbl equiv. 4 3 2 6 4 Ref. Margin - US$/bbl 1 2 1976 1981 1986 1991 1996 21 2
Real Oil Prices 9 US$/bbl 8 Real Oil Prices* 7 6 5 4 3 2 1 1976 198 1984 1988 1992 1996 2 24 * Brent prices deflated by US CPI (24 prices) 3
25: A Snapshot the 4% Year 25 24 % Change Current Oil Prices ($/bbl) Brent 54.52 38.27 +42.5% 63.46 WTI 56.59 41.49 +36.4% 66.85 OPEC basket 5.71 36.4 +4.7% 59.42 Gas Prices Henry Hub ($/mmbtu) 8.64 6.13 +4.9% 8.21 UK NBP (UKp/therm) 4.59 24.39 +66.4% 55.9 Refining Margins BP GIM ($/bbl) 8.6 6.8 +41.4% 3.24 4
World Fuel Shares 1965-24 Share of world primary energy consumption 5% Oil 4% Coal 3% 2% Gas 1% Hydro Nuclear % 1965 197 1975 198 1985 199 1995 2 5
Brent Oil Prices 7 Ave 25 $54.52/bbl 6 5 US$/bbl 4 3 2 1 Ave 1986-99 $17.8/bbl Ave 2-23 $26.7/bbl Ave 24 $38.27/bbl 1987 199 1993 1996 1999 22 25 6
Why High Oil Prices? Driven by: _ OPEC behaviour post 1999 _ Strong demand growth 24 _ Low spare capacity _ Geopolitics _ Energy as a financial commodity World Oil Consumption Growth 3 6 OPEC Spare Capacity Mb/d 2.5 2 1.5 ROW FSU China Million b/d 4 2 1.5 21 22 23 24 25 Est 1995 1998 21 24 7
Brent Oil Prices 25 7 65 6 Max price: 12 August - $67.35 Hurricane Katrina Hurricane Rita US$/bbl 55 5 45 4 35 Jan-5 Mar-5 May-5 Jul-5 Sep-5 Nov-5 Jan-6 8
Oil Markets in 25 Million b/d 25 Developments 84 83 82 Stock build Demand Growth 25 OPEC Growth 5 Non-OPEC Growth 5 Trend demand growth but with Chinese weakness Non-OPEC weakness: Hurricane disruption Russian slowdown Project delays 81 Demand 24 Supply 24 OPEC production growth led to stockbuild 8 Demand Supply 9
Oil Consumption in 25 GDP growth returns to trend Chinese oil consumption growth slows sharply Chinese Chinese oil oil consumption consumption growth growth in in 24 24 and and 25 25 Year-on-year growth Year-on-year growth b/d b/d 1 1 8 8 6 6 4 4 2 2-2 -2 Gasoline Gasoline LPG LPG Diesel Diesel LPG LPG Jet Jet Diesel Fuel Oil Diesel Fuel Oil Other Naphtha Other Fuel Oil Naphtha Fuel Oil 24 25 24 25 Gasoline Gasoline Other Naphtha Other Naphtha Jet Jet 11 11 1
Hurricane Impacts net tightened crude oil market loss of refineries temporarily raised refining margins hit US gas harder than oil revealed new dimensions of energy security it is not always the Middle East and embargoes 11
OPEC Crude Oil Production 24-5 31 Iraq 3 OPEC 1 29 28 27 26 25 24 23 Jan- 4 Apr- 4 Jul- 4 Oct- 4 Jan- 5 Apr- 5 Jul- 5 Oct- 5 12
25 Oil Markets: The Conundrum Why did market fundamentals weaken but prices still rise? 13
OECD Commercial Inventories 27 265 OECD Commercial Inventories 25 2 Million bbls 26 255 25 245 5 yr average Inventories relative to 5 year average Above average Below average 15 1 5 Million bbls 24-5 Jan- 4 Apr- 4 Jul- 4 Oct- 4 Jan- 5 Apr- 5 Jul- 5 Oct- 5 14
Brent Contango & Backwardation US$/bbl 4 3 2 1-1 -2-3 -4-5 -6-7 M2-M1 M6-M1 2 21 22 23 24 25 26 Contango Backwardation 15
Brent Contango & Backwardation 24-5 US$/bbl 4 3 2 1-1 -2-3 -4 Jan-4 Apr-4 M2-M1 M6-M1 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Contango Backwardation 16
Brent Contango & Backwardation 25 4 3 M2-M1 M6-M1 Contango US$/bbl 2 1 Backwardation -1-2 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 17
Brent Contango & Backwardation 25 4 M2-M1 Contango 8 US$/bbl 3 2 M6-M1 Brent 7 6 5 US$/bbl 1 4 3 2-1 Backwardation 1-2 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 18
Brent Forward Price Curves 7 6 Forward Price Curves on 1 st trading day of January 26 5 US$/bbl 4 3 2 1 22 25 24 21 23 2 1 2 3 4 5 6 7 8 9 1 11 12 Months Forward 19
25: The Explanation Inventories built in face of oversupply and enabled through flip into contango 4Q saw: _ Hurricane net tightening as production was slow to return _ Colder than average weather _ High gas prices stimulating resid demand Geopolitical concerns _ Iran _ Iraq Spare capacity remained low Emerging consensus on OPEC price objectives floor of $45-5 OPEC basket 2
Entering 26 Prices breakthrough $6 in face of rising concerns over Iran Global economic momentum and expectations of trend economic growth in 26 OPEC wait and see through the winter 21
Oil Markets in 25/6 Million b/d 86 25 26 26 Prospects 85 Non-OPEC Growth 6 Trend demand growth with Chinese acceleration 84 83 82 81 Stock build Demand Growth 25 Demand 24 OPEC Growth 5 Non-OPEC Growth 5 Supply 24 Demand Growth 26 Demand 25 Supply 25 Non-OPEC acceleration: Hurricane restoration Project delivery Starting from a stockbuild in 25 8 Demand Supply Demand Supply 22
26 supply growth outside of OPEC quotas Million b/d 1.4 1.2 1 Brazil CA Oil Sands.8.6.4.2 -.2 -.4 -.6 Angola Kazakhstan OPEC NGLs Azerbaijan US Russia Other UK Mexico FSU Growth Decline 23
26 Oil Price Prospects Drivers _ 26 call on OPEC less than current OPEC production levels _ OPEC capacity rising _ Geopolitical uncertainties Risks _ Economic growth _ Supply delays and outages _ Geopolitics OPEC may need to trim production to achieve price objectives but production already at historical high levels Reasonable expectation of $5-6 Brent for 26 24
OPEC: Spare Capacity 6 Mb/d Spare capacity should recover but OPEC likely to remain in control 5 4 3 2 Recession and demand destruction Range Delays and interruptions 1 1995 1997 1999 21 23 25 21 25
Conclusions Oil prices driven up in 24 by demand surge and low spare capacity and further in 25 despite rising inventories 26 shows further momentum but OPEC may need to trim production. $5-6 oil prices likely Spare capacity expected to build back to historic levels through 21 but call on OPEC still projected to edge upwards. Potential for prices to remain over $4. Market forces expected to respond but could take a long time to reassert. 26