11 th y 2014 Somya Dixit Research Analyst somya.dixit@nirmalbang.com Kunal Shah Research Head kunal.shah@nirmalbang.com Crude oil rose to $107.73/barrel (WTI) and $115.71/barrel (Brent Crude) in e 2014, the highest level seen this year. Prices rose to unreasonable high levels in the wake of a bold military campaign by Sunni insurgents in Iraq and continued supply outages in Libya. Production loss from other major producers such as US, North Sea and OPEC and seasonal demand for Crude oil from major consuming nations also added flame to the oil market. Global Supply & Demand (In ) 2009 2010 2011 2012 (F) Total World Supply 84.34 86.97 87.63 89.39 90.39 91.57 % Change -1.18 3.12 0.76 2.01 1.12-0.56 Total World Demand 84.77 87.40 88.57 89.16 90.38 91.57 % Change -0.93 3.10 1.33 0.67 1.37-0.70 Surplus/Deficit -0.43-0.43-0.94 0.23 0.01 0.00 Source: Reuters, NB Research Note F stands for forecast Adjoining chart depicts the global supply and demand scenario for crude oil, from past three years market is remaining well balanced. Rising oil production from OPEC as well as Non-OPEC nations has helped to neutralize the deficit in oil market seen in 2011. With the increase in shale oil production in the US and tar sands oil production in Canada and with a consistent OPEC oil production kept the supply side higher. Global crude oil supply is expected to average around 91.57 which is 1.3% higher or 1.18 higher as compared to 2013. Supply showed a significant increase mostly due to the increase in Non-OPEC production which also compensated temporary loss of output from OPEC members. The total contribution of the United States and Canada to global supply in 2014 is forecast at 11.99 million barrels a day and 4.13 million barrels a day, respectively. OECD (Organization for Economic Cooperation and Development) and Non-OECD supply is also expected to remain healthy this year. OECD supply is expected to rise from 23.65 to 24.92 in 2014, a rise of almost 5.4% on annual basis. Canada, US and Mexico remained the top contributor for the extraordinary supply growth. However, Non-OECD growth remains neutral and hovered around 2013 levels due to the decline in OPEC total supply, compensated by a rise in supply from China and Former Soviet Union. Global demand is also expected to rise in 2014 and to reach 91.57 similar to the supply leaving the market well-balanced for the current year. Global oil demand is set to increase sharply from a low of 91.4 in Q1 2014 to a high of 92.22 in Q4 2014 as the macroeconomic condition improves. IEA also raised its expectations for global oil consumption to 91.62 million barrels a day this year and 92.99 million barrels a day next year, up from 90.36 million barrels a day in 2013. Most of the growth will come from developing nations, especially China. 1
Jan 11 th y 2014 Global demand is forecasted to remain higher due to the expected improvements in the global economy, particularly in the developed nations. Consumption among the industrialized nations that comprise the OECD is expected to stay relatively flat, while emerging-market economies such as China will account for "almost all" consumption growth. In 2015, non-oecd demand will overtake flat OECD demand for the first time, exceeding it by nearly 1 million barrels a day. Rising Supply US Production Shale Oil Production 9.00 8.00 7.00 6.00 5.00 4.00 3.00 10.00 Total oil production Shale Oil 8.00 6.00 4.00 2.00 0.00 2008 2009 2010 2011 2012 Source: EIA, NB Research US: The US, known as the top importer of crude oil, has shown drastic improvement in its domestic production of oil. Oil production in the US rose from 5 in 2008 to 8.12 in 2013, the most significant increase seen till now. It stood at record highs, a level not seen in the last five years. The extraordinary rise in crude oil production in the US is largely due to the introduction of hydraulic fracturing and vertical drilling, a new method of exploring oil and gas from shale formations. U.S. production peaked in 1970, when it reached an annual average of 9.6 million barrels a day. However, in the start of 2014 the production dropped due to the severe winter weather in the nation which choked many of the shale oil drilling wells. This has forced EIA to lower its forecast for US oil production growth in 2014. The US is expected to produce 8.42 of oil this year down from 8.54 forecasted earlier. However, production remains high from 7.44 in 2013. U.S. oil production has been robust because of hydraulic fracturing and horizontal drilling techniques that have enabled energy producers to tap into supplies trapped in shale-oil fields. For 2015, the EIA forecasts production of 9.19 million barrels a day of oil, down from 9.29 million barrels a day previously. Shale Oil: US shale oil production has also been rising constantly with the implementation of new techniques such as hydraulic fracturing and horizontal drilling. There are huge shale deposits outside North America, which American companies and the government are trying to tap and convert into shale oil and natural gas to boost the energy industry. 2
Jan Jan 11 th y 2014 Basically, shale oil is defined as unconventional oil extracted from shale formations. Earlier, shale oil used to be extracted through vertical drill. However, now with the introduction of improved hydraulic fracturing and horizontal drilling, exploration of shale oil has become much more feasible. The current US shale oil production stands at around 4.07 at the end of 2013, up almost 34% on a year-on-year (y-o-y) basis, which is nothing less than extraordinary. This continuous rise in output data confirms the strong production growth in the US. Out of total oil production, shale oil output contributes more than 40% of oil and the major contributing geographic regions in the US are Bakken and Eagle Ford. Shale oil production has been rising since 2009, the highest level since 1990. It is expected to reach 11 by 2020 and the US could become the net exporter of oil. EIA expects net imports to decline from 6.2 million barrels a day last year to 5.49 million barrels a day in 2014 and 4.65 million barrels a day in 2015. Canada North Dakota 4.00 3.50 3.00 2.50 2.00 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Source: Bloomberg, Reuters, NB Research Canada: Canadian oil production has been rising steadily since 2008. It currently stands at more than 3.56 and is expected to maintain the same pace of oil production in the near future also. Eastern and Western Canada are the two sources of Canadian oil output. Eastern Canada contributes about 6 percent of the total Canadian crude oil production i.e. 2,13,600 bpd. Western Canada on the other hand accounts for 3.34, combining conventional and oil sands total production. In 2013, total Canadian production increased to 3.6 in the month of ember as compared to 3.31 in ember 2012, an increase of 5,00,000 bpd. The rapid growth in overall production numbers in Canada is mainly coming from tar sands, which contributed around 1.8-2. Tar sands production depends on cheap availability of natural gas. As long as cheap natural gas is available, Canadian oil production will continue to grow. Canadian crude oil production is expected to double to 6.7 by 2030, which stood around 3.6 in ember 2013. Of this, tar sands production will be nearly 5.2 by 2030, up from 1.8 in 2012. The rapid growth in oil sands and conventional oil production in Canada continues to strengthen the nation s position as a preferred supplier of crude oil to North American and global energy markets. 3
Jan Jan 11 th y 2014 North Dakota: North Dakota holds a place of significance in the rising US oil output. Rising North Dakota production led to an increase in the overall oil output in the US. The state s extraordinary oil production has helped achieve levels of 0.93 million barrels per day in ember 2013 as compared to 0.77 in ember 2012. Production rose by almost 3% in 2013 when compared with the production levels at the same period of 2012. Recently, North Dakota s oil production hit a record 1 in e 2014 recovering after affected by severe winter season in the US. OPEC Members Russia 33.00 32.00 31.00 30.00 29.00 28.00 27.00 26.00 25.00 11 10.8 10.6 10.4 10.2 10 9.8 9.6 OPEC: Overall, OPEC supply is growing at a healthy pace on an average since the past few years. The production from member nations of OPEC has been rising steadily since 2012. OPEC oil production averaged 30.15 in 2013, above the agreed OPEC quota. However, in the second half of 2013, OPEC total production was below the production quota and stood at 29.64 in ember 2013. The fall in production was mainly due to the loss in supply from Libya, Saudi Arabia and Iran. Libya faced a drastic fall in its oil production due to the various ports and oil field strikes, disrupting oil production. Production fell to almost 0.2, becoming almost neutral. Libya produced around 0.25 in ember 2013, dropping by more than 1 as compared to ember 2012 when the production was around 1.43. However, production rebounded in the first month of 2014 from the lows seen in 2013 and stood at 0.55. Further, the production is expected to ramp up and is expected to scale around 1-1.5, close to its pre-war levels in the second half of 2014. Crude oil production from Iran and Saudi Arabia also fell by close to 0.3 and stood at 2.7 and 9.7, respectively. Production from Iran was continuously declining after the US government enforced various sanctions on the nation to halt the ongoing nuclear programme. However, in the last quarter of 2013, some relief came when the US and Iran finally reached a deal. The fall in production became slow after that. However, Iran s production is expected to jump in the second half of 2014 due to les sanctions 4
Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 11 th y 2014 on the nation and thus generate further revenue for the growth of the country as the nation is totally dependent on revenue from oil exports. Recent violence in Iraq has not affected the nation s production and exports. Oil production in Iraq too has been rising at a pretty decent rate. Oil production was around 3.6 in 2014, 10.6% higher than production levels in 2013. According to sources in the Iraqi government, the nation s oil production is expected to jump to 4 by the end of 2014, 11% higher than the current oil production. Production rise from other members of the nation, including the nations discussed above, would neutralize the small fall in the output from Saudi Arabia. Further, OPEC production is set to rise in the second half of 2014 also with the help of all other members producing higher oil output. Russia: Russia, the top producer of oil, has constantly shown a year-on-year increase in oil output. The production was around 10.56 on an average in the first half of 2014, up by 1% when compared to 10.46 in the first half of 2013. Recently, Russian oil production reached an all-time high of 10.8 in the month of ember 2013. Further, oil production in Russia is expected to rise in the near future with the help of increased exploration of new oil fields. The nation has achieved higher production numbers by applying advanced technology like hydraulic fracturing and horizontal drilling, mainly used by the US for such activities. This has helped Russia to tap oil reserves, which were unreachable previously. Also, new techniques have helped increase production rates in oil fields that were witnessing a decline earlier. Demand Scenario Major Importers Total OECD & Non-OECD Demand 8.00 6.00 4.00 2.00 0.00 China Japan South Korea Germany US 10.00 9.00 8.00 7.00 6.00 5.00 49 47 45 43 41 39 37 35 Total OECD Total Non-OECD 47 Oil Demand in Non-OECD nations surpassed the demand of OECD nations for the first time in history. 2009 2011 2013 45 43 41 39 37 35 Crude oil imports from all major economies have shown higher-than-expected growth in the first quarter of 2014. There are several factors responsible for increased oil imports from these economies. Major among them could be the recovery in the overall economic growth. Also, a drop in the domestic oil 5
Jan Jan million barrels million barrels 11 th y 2014 production in the US due to the bad weather conditions and in OPEC due to the political unrest could be attributed to the same. For the first time in history, the demand from non-oecd nations has outpaced demand from OECD nations. Among the non-oecd nations in Asia, China was the leading contributor in the first half of 2014 in achieving the projected consumption growth. On the other hand, OECD demand growth softened, coupled with slower economic growth and higher domestic production. The best example could be the US whose domestic oil production has reduced its dependency on oil imports. The US, which is believed to be the net importer of crude oil, recently reported a record high domestic oil production. Oil production in the US surpassed imports for the first time since 1997 and stood at 8.12 2013 on the back of rising shale oil plays. The increase in oil production in the US has resulted in reduced volume of the nation s oil imports. In addition to this, rising oil production from North Dakota, through the use of hydraulic fracturing and horizontal drilling techniques, is helping the US to reduce its dependency on crude oil imports. In ember 2013, the overall US oil production outpaced oil imports by 1.2. However, the pace of oil imports from Asian as well as developed nations is expected to slowdown in the coming months. Oil imports would fall in the second half of 2014 due to unseasonal lower demand would push down the oil consumption. Stocks Scenario Total Stocks Cushing Stocks 410 390 370 350 330 310 290 270 250 60 50 40 30 20 10 0 The total oil stocks in the US too felt the heat of rising oil production in the nation. Oil inventories touched an 82-year high in il 2014 as the nation s production remained at an all-time high. However, in the first quarter of 2014, overall stocks declined and stood near the five year average as record low temperatures in the US increased fuel consumption for heating demand. Oil stocks held at Cushing declined drastically in the second half of 2013 as the US government partially approved the TransCanada pipeline project. Already three phases of the pipeline have got the approval and the fourth one is awaiting approval. The first two phases, were approved last year have a total 6
Jan-12-12 -12-12 Jan-13-13 -13-13 Jan-14-14 11 th y 2014 capacity to transport 5,90,000 bpd of oil into the Mid-west refineries. The third phase which got approved recently and started operating on January 2014 has the capacity to transport 70,000 bpd. The last phase awaiting approval could add up to 3,00,000 bpd more capacity to the total transportation of oil. However, the total flow of oil by the end of 2014 is expected to reach 8,30,000 bdp of oil. We believe going forward seasonal lower oil demand and higher domestic production would result into refilling of oil stocks at much higher pace. With the ample stocks available at the supply hub, we do not foresee inventories to remain a major concern in the oil market. Geopolitical Tensions Adding Premium to Oil Prices Oil prices always remain very sensitive to geopolitical tensions. Historically, oil prices carry a $5-$7 premium to various geopolitical tensions and weather-related developments. These types of developments generally raise concerns for future disruptions in supply and demand resulting into high volatility in oil prices. However, the price reaction is short lived and fizzles out as soon as the development subsides. Much of the world's crude oil is located in regions that have been prone historically to political disruption, or have had their oil production disrupted due to political events. Several major oil price shocks have occurred at the same time as supply disruptions triggered by political events, most notably the Arab Oil Embargo in 1973-74, the Iranian revolution and Iran-Iraq war in the late 1970s and early 1980s, and Persian Gulf War in 1990. More recently, disruptions to supply (or curbs on potential development of resources) from political events have been seen in Nigeria, Venezuela, Iraq, Iran, and Libya. Recently, the political unrest in Iraq is another example of the geopolitical premium in the oil prices. Iraq, the second largest oil producer in OPEC is facing political issues once again. Iraq oil production growth story is outstanding; at the end of 2012 Iraq overtook Iran and became the second largest oil producer in OPEC. Iraq s current oil production stands around 3.65 in 2014, a 10.6% rise as compared to same time last year. About 80% of total Iraq s crude oil production comes from the southern fields, and rest from the northern fields near Kirkuk. The majority of Iraqi oil production comes from just three giant fields: Kirkuk, the North Rumaila field in southern Iraq, and the South Rumaila field. Iraq Production & Exports OPEC Exports 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5 Production Exports (RHS) 3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 1.80 Year OPEC Exports () 2008 24.03 2009 22.31 2010 23.11 2011 23.46 2012 25.28 2013 25.31 7
11 th y 2014 OPEC total exports are continuously rising since 2009 with stable OPEC production and rose almost 13.4% in past 5 years. Iraq plays a major role in overall rise in OPEC exports; Iraq s exports rose almost 28% in last one year and stood at 3.17 in 2014. Iraq s robust production has helped to boost the country s exports. Iraq s production and exports both are expected to gear-up ahead on account of future production projects lined-up. However, the economy is currently facing many challenges in meeting the planned timetable for oil production. One of the major obstacles is the lack of an outlet for significant increases in crude oil production. Both Iraqi refining and export infrastructure are severely constrained, with bottlenecks preventing more crude oil processing. Iraqi oil exports are currently running at near full capacity in the south, while export capacity in the north has been restricted by sabotage, deteriorating pipelines, and the inability to receive more oil from the south of Iraq via a deteriorated Strategic Pipeline. Pipeline capacity would need to be expanded in any case to export significantly higher volumes. Another major reason for the slowdown in the process is because of political disputes between sections within Iraq, especially those between the central government in Baghdad and the Kurdistan Regional Government. Iraq also has disagreements regarding shared oil fields with Kuwait and Iran. However, the recent violence has not affected Iraq s oil production and exports. Although it created a panic that it may halt the oil production and exports resulting into higher volatility in the oil prices. Road Ahead Crude oil market is expected to remain under pressure in the second half of 2014 considering the robust supply growth and a slower pick-up in demand. We expect healthy supply to continue from both OECD and Non-OECD nation with China and the US being the largest contributor. Further, OPEC is also expected to ramp-up the production with the rising Libya, Iran and Iraq oil production. However, demand from all major consuming nations is set to fall in the second and third quarter of 2014 with the slowing demand. We believe that the factors discussed above would pressurize the West Texas Intermediate (WTI) as well as Brent oil prices in the second half of 2014. We expect WTI to drive lower and settle lower around $96/barrel in NYMEX and Brent to settle around $101/barrel in ICE in the second half of 2014. 8
11 th y 2014 RESEARCH TEAM Name Designation E-mail Kunal Shah Research Head kunal.shah@nirmalbang.com Devidas Rajadhikary Technical Analyst devidas.rajadhikary@nirmalbang.com Harshal Mehta Technical Analyst harshal.mehta@nirmalbang.com Mohammed Azeem Technical Analyst mohammed.gaziani@nirmalbang.com Ankita Parekh Research Analyst ankita.parekh@nirmalbang.com Somya Dixit Research Analyst somya.dixit@nirmalbang.com Ravi D'souza Research Associate ravi.dsouza@nirmalbang.com Sakina Mandsaurwala Research Associate sakina.mandsaurwala@nirmalbang.com Ishwar Kelwadkar Research Associate ishwar.kelwadkar@nirmalbang.com Disclaimer: This Document has been prepared by N.B. Commodity Research (A Division of Nirmal Bang Commodities Pvt. Ltd). The information, analysis and estimates contained herein are based on N.B. Commodities Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B. Commodities Research opinion and is meant for general information only. N.B. Commodities Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. N.B. Commodities Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. N.B. Commodities Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Address: Nirmal Bang Commodities Pvt. Ltd., B2, 301 / 302, 3rd Floor, athon Innova, Opp. Peninsula Corporate Park, Ganpatrao Kadam g, Lower Parel (W), Mumbai - 400 013, India 9