INTERTANKO Istanbul Tanker Event Demand Developments David Martin Industry & s Division david.martin@iea.org - Istanbul, April 20-23, 2008
Medium-Term Outlook What is driving oil prices? Fundamentals or Speculation? What are the prospects for oil demand? What are the drivers? What are the prospects for oil supply Where is the response to prices? Refining industry growth Implications for crude trade Changes to regional product balances Conclusions
Prices
Crude prices set new record highs 120 115 110 105 100 95 90 85 80 Physical Crude Prices ($/bbl) Source: Platts Jan Feb Mar Apr Dated Brent WTI M th1(adj) Dubai M th1(adj) 30 25 20 15 10 NYMEX Crack Spreads ($/bbl) Front Month Closing Prices Jan Feb Mar Apr WTI breaks $119/bbl, Dated Brent grazes $116 Support from tight global distillate markets, weaker dollar and flare-up of tension in southern Iraq and Nigeria Fuel oil price not fully reflecting move up in crude oil prices 5 0 RBOB No.2 Heating
No single cause of high prices Investment costs Service sector Engineering Equipment Commodities Funds Product supply Demand growth Supply growth Structure of demand growth Marginal cost of supply Crude prices Environmental regulations Geopolitics Upstream capacity Crude grade availability OPEC policy Crude and product stocks Refining capacity
Spare capacity low by historical standards US$/Bbl OPEC 'Effective' Spare Capacity Dated Brent mb/d 100 8 90 80 70 60 50 40 30 20 10 7 6 5 4 3 2 1 0 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 0 Depends on your viewpoint, but strong demand growth, upstream bottlenecks, low refining flexibility, producer policy, lower inventory cover, geopolitics, speculative money and tight spare capacity all contribute
Tight OPEC Spare Capacity why it matters Nigeria in 2008?? 2-3 mb/d Iran in 2008?? 3-4 mb/d Iraq in 2008?? 2-3 mb/d Katrina & Rita 1.5 War in Iraq Venezuelan strike Iraqi export suspension 2.1 2.3 Iraqi invasion of Kuwait 2.6 4.3 Outbreak of Iran-Iraq war 4.1 Iranian revolution Arab oil embargo Six day war Suez crisis 2.0 2.0 Major oil supply disruptions gross peak supply loss, mb/d 4.3 5.6
Is it the dollar? The weaker dollar may have had a day-to-day impact, but oil prices have been rising in all currencies In gold terms, (Gold is the traditional store of value or inflation hedge) oil prices have been falling.
A flood of hot money? Far from clear '000 Contracts 2,200 2,100 2,000 1,900 1,800 1,700 1,600 NYMEX WTI Mth1 Open Interest in all contracts Source: CFTC, Platts 1,500 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 110 100 90 80 70 60 50 '000 Contracts 160 110 60 10 NYMEX WTI Futures Mth1 Net Speculators Position Non-commercials' net position NYM EX WTI M th1 Source: CFTC, Platts -40 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 $/bbl 115 105 95 85 75 65 55 45 NYMEX WTI Mth1 % 27% Non-commercial & non-reportable longs - % of open interest 25% 23% 21% 19% 17% 15% Source: CFTC, Platt s Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 NC & NR longs/open interest NYMEX WTI Mth1 $/bbl 110 100 90 80 70 60 50 NYMEX Open Interest on a downward trend since July Recent rise within range Net non-commercial (fund) positions not abnormally high Speculative buyers high as percentage of Open Interest But not historically high Estimates commodity index funds up by $10bn since start of year But not out of line with flows in other years
But are speculators wrong? Mb/d 3.50 World demand growth exceeds Non-OPEC supply growth 3.00 2.50 2.00 1.50 1.00 0.50 0.00-0.50 2000 2001 2002 2003 2004 2005 2006 2008 Every price peak since 2000 has been greeted with the cry that it is speculatively driven When we look back, there is a fundamental explanation Price is there to balance supply and demand Not just the spot market, but for medium term Where is the supply response? Demand absolute growth Supply absolute growth Seeing large investment, but so far little growth in non-opec supply If supplies fall short, OPEC has to fill the gap or prices have to rise
Rising marginal costs Source: IEA, Resources to Reserves, 2005 Tight service sector causes further cost inflation - $35 to $55/barrel? Call option for speculators/opec? Marginal cost of non-opec production influential when OPEC producing flat out When spare capacity exists, price OPEC are willing to keep spare capacity off the market is the key
Demand
Global demand growth - 2008 North America 244-190 -373 Latin America 275 191 238 Global Demand Growth 2006//2008 thousand barrels per day Europe 35 83-338 160 Middle East 377 298 251 Africa 131 107 FSU 35 64 Asia 489 511 769 World demand is now estimated at 86.0 mb/d in (+1.3% over 2006) and is expected to average 87.2 mb/d in 2008 (+1.5%) Global oil product demand growth cut by 460 kb/d in our most recent report: revised up by 140 kb/d and 2008 revised down by 310 kb/d Marked revisions to GDP forecasts by the IMF New FSU methodology Global Demand Growth (mb/d) 2006 0.97 1.2% 1.11 1.3% 2008 1.27 1.5% Baseline adjustments and revised data submissions -16
Demand Growth- Medium Term Average Global Demand Growth 1997-2002/2002-/-2012 thousand barrels per day North America 282 330 345 Europe 31 47 FSU 100 133-63 Middle East 333 265 136 101 358 Asia 727 788 Latin America Africa 18 140 135 69 80 102 Avg Global Demand Growth (mb/d) 1997-2002 0.83 1.1% 2002-1.69 2.1% -2012 1.94 2.2% OECD: demand sustained by North America, which will represent 53% of the total by 2012 Non-OECD: Asia demand will account for 47% and the Middle East for 19% of the total
Non-OECD Demand Dominates Growth kb/d 2,500 2,000 1,500 OECD vs. Non-OECD Demand Growth OECD Non-OECD 1,000 500 0-500 1995 2000 2005 2010 Non- OECD 37% 1991 World Demand Non- OECD 45% 2011 World Demand OECD 63% OECD 55%
What is driving demand? OECD vs. Non-OECD Cumulative Demand Growth by Use mb/d 1996-2012 30 OECD - Transportation OECD - Other Non-OECD - Transportation Non-OECD - Other 25 20 15 10 5 - (5) 1996 1998 2000 2002 2004 2006 2008 2010 2012 Geographical shift: demand growth will come from non-oecd countries mostly China and the Middle East Usage shift: growth will be fuelled by transportation fuels Subsidies in non-oecd countries Dieselisation trend, notably in Europe Limited role for biofuels less than 2% of demand by 2012
Supply
2008 Non-OPEC Supply Growth cut to 0.8 mb/d Plus 385 kb/d OPEC NGLs Non-OPEC Supply Growth 2006//2008 thousand barrels per day North America 11-439 Europe -245-401 FSU 456 521 397-48 -179 Middle East -102-99 -67 Asia 96 65 367 Latin America 185 99-5 Africa 51 51 71 Angola and Ecuador included in OPEC throughout Regional Totals exclude biofuel growth Global Biofuels (kb/d) OPEC NGLs (kb/d) 387 2006 525 214 270 2006 149 546 152 2008 817 2008 387 Total Non-OPEC Supply Growth (kb/d)
Non-OPEC supply growth 1997-2002 v 2002- v -2012 Slow-down evident in past decade continues, 68% of net non-opec growth comes from FSU, notably the Caspian, Brazil deepwater, Canadian oil sands, GOM & biofuels also rise Mexico, North Sea & onshore/conventional US/Canada continued decline Europe 2160 3230 1750-150 -360 285 N. America -140-1765 -1280 FSU 510 530 1020 L.America 130 80 150 Mid East/Africa 540 500 175 Asia plus OPEC NGL Total non-opec Supply Growth 3270 kb/d (1.4%pa) 1997-2002 2755 kb/d (1.1%pa) 2002-2585 kb/d (1.0%pa) -2012 520 1375 2225 50% of expected demand growth has to be met with OPEC crude
OPEC capacity growth : driven by price & market share aspirations kb/d 1,400 1,200 1,000 800 600 400 200 0-200 -400 Annual Increments in OPEC Crude Capacity -12 2008 2009 2010 2011 2012 Algeria Indonesia Iran Kuwait Libya Nigeria Qatar Saudi Arabia UA E Venezuela Angola Iraq mb/d 8 7 6 5 4 3 2 1 0 OPEC Gas Liquids Output 2003 2005 2009 2011 Saudi Arabia Algeria UAE Qatar Nigeria Iran Others Resources may be there, but what will drive their ideal level of supply?
Global oil supply: above-ground risks exceed below-ground risks BELOW- GROUND FORCE MAJEURE Above ground risks are key in current market SECTOR MATURITY HOST GOVERNMENT Impact is the same - higher costs, project delays and lower output INDUSTRY CYCLE but some above ground risks are reversible
No imminent resource scarcity but supply response to high prices is slow Company planning prices are rising partly reflecting a higher cost base But access constraints, industry bottlenecks, financial factors & competing calls on capital are curbing the price elasticity of supply: delays are becoming endemic 50 45 40 35 30 25 20 15 10 USD/b (Brent) oil-company "planning prices" 1999 2000 2001 2003 2004 2005 2006 source: SG Equity Research, SG Commodities Research, IEA
Refining
Global refining industry set for growth 2.5 mb/d Crude Distillation Capacity Additions 2.0 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 OECD FSU CHINA ASIA MIDDLE EAST ROW Crude distillation capacity forecast to total 10.6 mb/d by 2012 Expansion of existing refineries account for 4.0 mb/d New projects account for a further 5.1 mb/d Capacity creep in OECD regions account for remaining 1.5 mb/d
Upgrading investment adds flexibility mb/d 2.0 Upgrading Capacity Additions 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 Hydrocracking coking FCC RFCC Visbreaker Global refining system will benefit from addition of further upgrading capacity This will boost heavy sour crude processing ability Expansion focused on the addition of hydrocracking and coking capacity
Complexity increases faster than distillation 14 12 10 mb/d Cumulative Additions by Refinery Type 1 8 6 4 2 0-2 -4 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Hydrocracking Coking Visbreaking Catalytic Cracking Hydroskimming and Lubes CDU Capacity Growth 1: Includes re-classification of refineries to more complex type, follow ing installation of upgrading capacity CDU capacity linked to coking units increases by 11mb/d Corresponding declines in cracking and hydroskimming capacity as upgrading capacity as refineries are upgraded to coking/hydrocracking
Rising costs hamper project progress
Growth in global crude trade Net Export Growth -12 for Key Trade Routes* (million barrels per day) +0.4 * Excludes Intra-Regional Trade OECD North America +0.6 OECD Europe +0.5-0.4 +0.3 China +0.3 +0.8 +1.2 Other Asia +0.7 +1.0
Regional crude export growth kb/d 1,600 1,200 800 400 0-400 Regional Crude Export Growth 2008 2009 2010 2011 2012 Africa FSU Latin Am Mid East OECD Eur OECD Pac Other Asia Intra-Regional Net Trade Growth -12 Mid East-Oth Asia Mid East-China Mid East -OECD Nam Africa-China Africa-OECD Eur FSU-OECD Eur FSU-OECD Nam FSU-China Africa-OECD Nam Lat Am-OECD Nam Mid East-Africa Mid East-Lat Am Africa-Lat Am OECD Eur-OECD Nam Mid East -OECD Eur Other kb/ d -500 0 500 1000 1500
Gasoline balance eases Rising European exports and increasing ethanol production, Brazil and US, offset Mexican and African import growth
Distillate balance relatively tight Diesel demand rises in North America and Europe, suggesting increasing reliance on Middle East and Asian imports
Fuel oil balance tightens North American imports decline, but European imports increase However, exports from the Middle East and FSU are declining, while Asian imports are also expected to increase rapidly
Conclusion No single cause of high prices Lack of supply-side response so far Refining issues Spare capacity How much is there, how much can be used? Demand is moderating in response to high prices Transportation fuel demand growth in OECD - weak Economic growth outlook key to medium term Subsidies continue to support non-oecd growth, but at what cost? Supply side response may come But considerable barriers in the way Constraints on investment remain Crude trade to increase, driven by changing regional outlooks for supply and new refining capacity