Resource Scramble or Market Rebalance: Where Are Oil Prices Headed? Graham Loveland Senior Consultant, Oil
Presentation Outline & Approach Outline Key messages Demand Supply Costs & Prices Refining & Products Prices Approach Some graphics Some key questions Discussion Copyright 27 Global Insight, Inc. 2
Key Messages Uncharted Waters Uncertainties are greater than ever (demand, supply, refining, costs, geopolitics, etc.) Impact of sustained high prices on demand & supply? Demand: Some signs of slowing but impact of rising income in developing countries? End of spare capacity (upstream & downstream) means new demand will need new supply Supply mix will become more diverse and more complex Crude oil supply/demand balance plus OPEC attitudes point to continuing firm prices in to the long term GI base case forecast shows nominal prices are expected to flatten/rise, real terms prices to decline Downside price sensitivities are mostly related to demand, upside mostly to supply Product supply/demand balances are particularly uncertain. Return to refining boom/bust? Copyright 27 Global Insight, Inc. 3
Demand responding to price? World Oil Demand Growth Moving Average vs. Crude Oil Price Moving Average 1999-27 Oil demand growth million b/d 3.5 3 2.5 2 1.5 1.5 -.5 25 27 26 1 2 3 4 5 6 7 NSD $/barrel Copyright 27 Global Insight, Inc. 4
U.S. SUV Buying Very Sensitive to Pump Prices LCV Share of New Car Sales vs. Gasoline Pump Prices 62% 6% 58% LCV Share Retail pump price $/gallon 3.5 3.3 3.1 2.9 LCV Share 56% 54% 2.7 2.5 2.3 $/Gallon 52% 5% 2.1 1.9 1.7 48% Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 1.5 Copyright 27 Global Insight, Inc. 5
Demand Growth: Asia & the Transport Sector Dominate Global Oil Demand by Region Oil Demand Growth (25-25) Million Barrels a Day 12 1 8 6 4 FSU Africa Middle East Asia/Pacific S. Am erica E. Europe W. Europe N. Am erica Million Barrels per Day 12 1 8 6 4 2 Others Power Generation Transportation Petrochem ical Feedstock Industrial Sector Domestic Sector 2-2 199 1995 2 25 21 215 22 225 North America West Europe Eas te rn Europe South America Asia/ Pacific Middle Eas t Africa FSU Copyright 27 Global Insight, Inc. 6
Demand Outlook Key Questions When/where will demand respond to price? Will U.S. motorists forsake SUVs for minis? Will China et alia end domestic price control? Will China/India/other DCs enter an exponential growth phase? Will growing awareness of climate change provoke popular/policy responses? What impact would a major recession/geopolitical shock have on demand/prices? Copyright 27 Global Insight, Inc. 7
An End to Upstream Spare Capacity Spare Capacity % of Demand 9 8 7 6 5 4 3 2 1 Spare mostly Arab Heavy 7 6 5 4 3 2 1 Crude Oil Price $/barrel 199 1995 2 25 OPEC Spare Capacity (Left Scale, Percent of Demand) Brent $/barrel Real terms (Right scale) Copyright 27 Global Insight, Inc. 8
Peak Oil Is this the Future? Source: ASPO Copyright 27 Global Insight, Inc. 9
Peak Oil is certainly in sight for non-opec 7 6 Processing Gain GTL & Nonconventional Biofuels Million Barrels per Day 5 4 3 2 1 Russia Non-OPEC Ex Russia A plateau for Crude/NGLs but total supply rises 199 1995 2 25 21 215 22 225 Copyright 27 Global Insight, Inc. 1
Limitations on Access to over 5% of Global Reserves Copyright 27 Global Insight, Inc. 11
OPEC Output Will Have to Fill a Gap Call on OPEC vs. OPEC Capacity 5 45 4 Call on OPEC OPEC Capacity Without Replacing Natural Decline New Capacity Required 35 Million B/d 3 25 2 15 1 5 2 22 24 26 28 21 212 214 216 218 22 222 224 226 228 23 Copyright 27 Global Insight, Inc. 12
Currently Planned Investments Seem Adequate, but Thousand b/d 25 2 15 1 Nigeria Libya Indonesia Algeria UAE Qatar Iran Kuwait Saudi Arabia RED Sweet, mostly lighter crude BLUE Sour, mostly heavier crude 5 27 28 29 21 211 Copyright 27 Global Insight, Inc. 13
Supply Outlook Key Questions Peak oil? Could the pessimists be right? OPEC reserves? OPEC policies/aspirations? Outlook for Nigeria? Iraq? Iran? Venezuela? Non-OPEC: not much on the shelf beyond 29? Increasing resource nationalism & access? Outlook for non-conventionals (tar sands, biofuels, GTLs) Technological/cost breakthroughs? Copyright 27 Global Insight, Inc. 14
Prices & Inventories An End to Old Certainties 1 1996 1997 1998 1999 2 21 22 23 24 25 26 27 8 12 14 Crude stocks days cover WTI ($/bbl) Rising stocks AND rising prices 7 6 Days Cover 16 18 2 5 4 3 $/bbl 22 2 24 1 26 Copyright 27 Global Insight, Inc. 15
Futures Markets Chickens & Eggs NYMEX Crude Oil Non-Commercial Open Interest vs. WTI 8 7 6 5 Lots WTI spot (RH axis) 9 8 7 6 Lots 4 3 2 5 4 3 2 $/Barrel 1 1 1999 2 21 22 23 24 25 26 27 Copyright 27 Global Insight, Inc. 16
The Upward Push of Costs on Prices 35 3 25 F&D Steel Brent Nominal Terms: F&D Costs, Steel Prices, & Brent Crude (Index 199=1) Index 199=1 2 15 1 5-199 1992 1994 1996 1998 2 22 24 26 Copyright 27 Global Insight, Inc. 17
Full Costs & Required Oil Price to Achieve 13% ROCE $/Barrel 6 5 4 3 2 Net income to achieve 13% ROCE Income tax @ 4% Depletion (DD&A) (= F&D) Operating (Lifting) costs Production tax Differential to average well-head price 1 Mid 199s F&D Costs $4/barrel. Requires oil price of $18/barrel 21-23 F&D Costs $7/barrel. Requires oil price of $28/barrel 26 F&D Costs $13/barrel. Requires oil price of $48/barrel Copyright 27 Global Insight, Inc. 18
WTI Price Scenarios 26 Dollars 16 14 12 Supply Constrained Market Remanaged Demand Constrained Shock 1 26 $/bbl 8 6 4 2 1986 199 1994 1998 22 26 21 214 218 222 226 23 234 Copyright 27 Global Insight, Inc. 19
Saudi Arabia faces some difficult decisions 45 4 With 5% output growth requires $13/barrel by 23 1 9 Population (millions) 35 3 25 2 15 1 With GI base case prices, requires output of 22 million b/d by 23 With GI base case prices and 5% increase in output 8 7 6 5 4 3 2 Per capita income (26$) 5 1 197 1975 198 1985 199 1995 2 25 21 215 22 225 23 Copyright 27 Global Insight, Inc. 2
Prices Key Questions Impact of sustained high prices? On demand On supply Cost related issues Steel, manpower etc. Fiscal regimes Economies of scale and experience Technological advances OPEC aspirations? Impact of paper markets & speculators? Copyright 27 Global Insight, Inc. 21
An End to Refining Spare Capacity Demand and Capacity (Million b/d) 1 9 8 7 6 5 4 3 2 1 Refinery Capacity Demand Spare Capacity 2 18 16 14 12 1 8 6 4 2 Spare cacpity (Million b/d) 198 1985 199 1995 2 25 Source: BP Copyright 27 Global Insight, Inc. 22
The Investment Dilemma Facing Refiners Go ahead Invest! Tight capacity position implies good margins Whitening barrel/big discounts for heavy sours give incentive to upgrade refineries Domestically oriented refineries have more guaranteed markets, e.g. China, India, Iran In U.S.A.: Accusations of price gouging if don t invest Hold back Wait! So many new uncertainties: Biofuels GTL supply Bunkers FO vs. GO Demand for jet kero Regulations esp. re CC Possible overcapacity by 21 Beware cyclicality effect and return to poor margins Modelling the future for refining is just too complex Costs may come down Copyright 27 Global Insight, Inc. 23
199 s Revisited Refining Boom & Bust? Requirement for New Refining Capacity vs. Proposed Additions 4.5 4. 3.5 3. Demand growth Capacity Creep at.5% Biofuels Requirement for new refining capacity Putative additons to capacity Millions B/d 2.5 2. 1.5 1..5. 27 28 29 21 211 212 Copyright 27 Global Insight, Inc. 24
Margins will Narrow 2 15 1 North West Europe CIF Products Spreads vs. NSD Gasoline Naphtha Jet/Kero Gasoil 1% Fuel oil 3.5% Fuel oil 5 $/tonne -5-1 -15-2 -25 199 1994 1998 22 26 21 214 218 222 226 23 Copyright 27 Global Insight, Inc. 25
Refining & Products Price Key Questions How big is capacity creep globally? Capacity growth to 212. Plans vs. costs. Could boom and bust recur? Will margins be adequate to justify the investments required? What impact from new source refineries/new exporters? Copyright 27 Global Insight, Inc. 26
Thank you! Graham Loveland Senior Consultant, Oil graham.loveland@globalinsight.com