Transcript Globalization in commodity demand, but fragmentation in
The Goldman Sachs Group, Inc.
Commodities
The fundamental factors behind rising food and fuel prices
June 2008 Samantha Dart
Goldman Sachs International 44-(0)207-552-9350 [email protected]
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For Reg AC certification, see page 40. For other important disclosures, see page 42, go to http://www.gs.com/research/hedge.html, or contact your investment representative. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam.
The structural oil price rally resumes, and starts to contaminate (tighten) the cyclical balance
Decomposing the price into timespreads (cyclical component) and the long-dated price (structural component)
$/bbl 180 160 140 120 In a cyclical bull market the spread is typically positive, reflecting a premium for prompt delivery
The short-term, cyclical component of price
100 80 60 40 20 0 2008 In a cyclical bear market the spread is negative reflecting the cost of carrying inventory 2009 2010 2011 2012
The long-dated, secular component of price
Price = MC + d, where d is a delivery premium in a bull market or a discount in a bear market
2013 2014 Source: Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 3
WTI timespreads continue to reflect near-term fundamentals, such as inventory levels…
% 1m/60m WTI timespreads (vertical axis); total OECD stocks deviation from 10-year average in million bbls (horizontal)
80% 60% 40% 20% 0% -20% -40% -60% -200,000 -150,000 -100,000 -50,000
Source: IEA, NYMEX, and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 0 50,000 100,000 150,000 200,000 4
… while long-dated WTI prices continue to reflect long-term industry costs
$/bbl
33240
90.00
33971 34701 35432 36162 36893 37623 38354 39084
75.00
60.00
Marginal cost is defined as the average of the highest cost (or bottom quartile) producers
45.00
30.00
Long-dated oil 15.00
Marginal costs 0.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 5
There is more than 4.0 million b/d of extremely high-cost oil production
$/bbl (vertical axis); thousand b/d (horizontal axis)
120.00
100.00
80.00
60.00
40.00
It would now require 4 mb/d of extra low-cost spare capacity to sustainably push long-dated oil prices below $70/bbl Required oil prices shifted upwards dramatically after 2003
20.00
0.00
0 4,000
Source: Goldman Sachs Equity Research.
8,000
2006
12,000 16,000
2005
Goldman Sachs Global Investment Research 20,000
2004
24,000 28,000
2003
32,000 36,000 6
Increasing long-dated oil prices have driven the front of the curve higher
$/bbl
150.00
130.00
110.00
90.00
Jun 24, 2008 forward curve
70.00
Jun 12, 2007 forward curve
50.00
30.00
Nov 20, 2000 forward curve
10.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: NYMEX.
Goldman Sachs Global Investment Research 7
The structural oil price rally resumes,
Long-dated oil prices continues to drive the market higher
Log($/bbl)
5.5
5.0
4.5
4.0
3.5
Long-dated oil prices had found an equilibrium at biofuel price levels…
Vegetable oil price gave an indication in 2004/05 of where the new reprice would stop. This time such a price level is unknown
3.0
2.5
1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008
Long-dated WTI price Vegetable oil price Source: NYMEX and CBOT.
Goldman Sachs Global Investment Research 9
… making biofuels economically viable and creating significant growth in their supplies
Thousand b/d 3500 3000 Post-2004/05 repricing the world has become dependent upon biofuels and NGLS 2500 2000 1500
Biofuels
1000
Tar Sands
500
Orinoco Belt
0 Ja n 00 Ju l-0 0 Ja n 01 Ju l-0 1 Ja n 02 Ju l-0 2 Ja n 03 Ju l-0 3 Ja n 04 Ju l-0 4 Ja n 05 Ju l-0 5 Ja n 06 Ju l-0 6 Ja n 07 Ju l-0 7 Ja n 08 Ju l-0 8 Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 10
Substitution: Btu, bushel and barrel convergence started last year
$/mmBtu
30 25 20 15 10 5
Prices are converging on a Btu basis
0 Jan-95 Feb-96 Mar-97 Apr-98 May-99 Jun-00 Jul-01 Aug-02 Sep-03 Oct-04 Nov-05 Dec-06 Jan-08
WTI prices Corn prices Sugar prices Source: NYMEX, ICE and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 11
Food demand is stable, feed demand is rising, and fuel demand is exploding
Indices of per capita consumption, 2006=100 130 110 90 Food (grains) Feed (protein) 70 50 Fuel (biofuel) 30 10 -10 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Source: FAO, USDA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 12
Strong demand will require a substantial increase in acreage first time in decades
Index 1960 = 100 3.5
3.0
In the past, demand growth has been met through yield growth. However, the strong demand growth ahead will create a need for substantial acreage expansion. Demand 2.5
2.0
1.5
Yield 1.0
Acreage 0.5
Forecast 0.0
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Source: FAO, USDA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 13
Rapid expansion in fuel use has led to an increase in the trend demand growth for agricultural commodities
Billion metric tons 2.6
2.4
2.2
Fuel demand 2006 - 2015: 2.6%
2.0
1.8
1.6
1.4
1979-1988: 1.5% 1988-1997: 1.6% 1997-2006: 1.9% Feed demand
1.2
1.0
0.8
0.6
0.4
0.2
Food demand
0.0
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: USDA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 14
Nearly all recent capacity (not supply) increases have come from non-conventional resources
Thousand b/d
Oil supply growth World
OPEC Non OPEC
Total
1050 550 500
Crude*
115 250 -135
NGL/Cond
450 300 150
Biofuel
425 0 425 .
Total oil supply growth ( % composition) World
OPEC Non OPEC
Total
100% 100% 100%
Crude*
11% 45% -27%
NGL/Cond
43% 55% 30%
Biofuel
40% 0% 85% * for OPEC, average increase in 2008 production capacity
Tarsand
60 0 60
Tarsand
6% 0% 12% Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 15
Conventional oil supplies have remained stagnant since 2004
Thousand b/d
45000
Conventional oil supplies have been mostly stagnant since 2004
31000 30000 44000 43000 42000 41000
Non-OPEC (left axis)
29000
OPEC (right axis) This year OPEC simply brought back online capacity that was previously shutin
28000 27000 26000 40000 25000 39000 Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 24000
Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 16
Trend oil supply growth has slowed over the past several years to 1.0% per year
% change 5.0
4.0
3.0
2.0
Since 2004, annual trend supply growth has slowed to 1.0% from 1.8% and growth above this level would be difficult given the current politically constrained environment 1.0
0.0
-1.0
-2.0
1996 1997 1998 1999 Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research
2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E
17
Rising prices slow demand growth, not simply high prices
Percent
8.00
6.00
4.00
2.00
0.00
-2.00
-4.00
US retail motor gasoline price inflation (right axis)
-6.00
Jan-05 Jul-05 Jan-06 Jul-06
Source: DOE, NYMEX and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research
US motor gasoline demand growth
Jan-07
(left axis)
Jul-07 70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
-10.00
-20.00
Jan-08 -30.00
18
Rising prices over the past 6 years have already reduced demand by over 5.0 million b/d
Thousand b/d
95000 90000
Had price remained at $20/bbl, we would likely see global demand over 92.2 mmb/d
10000 9000 8000 85000 7000 80000 6000 5000 75000
Over 5 mmb/d of demand is being held out of market by higher prices
4000 3000 70000 65000 60000 1986 1988 1990 1992
Source: IEA and Goldman Sachs Commodities Research.
1994 Goldman Sachs Global Investment Research 1996 1998 2000 2002 2004 2006 0 2008 2000 1000 19
… at roughly the same rate at which it is currently rising, and at which is rose in 2004-2005
5-year forward WTI crude oil price in log($/bbl) 5.5
Exp(log(5)) = $148.41/bbl which would be the end of year target for long-dated oil prices given current rate of increase 5.0
4.5
The implied annual price change in 2004/05 was 54% 4.0
3.5
3.0
y = 0.0023x + 1.4384
R 2 = 0.947
2.5
2001 2002 2003 Source: NYMEX and Goldman Sachs Commodities Research.
2004 2005 y = 0.0023x + 0.4142
R 2 = 0.9313
2006 2007
Goldman Sachs Global Investment Research
The current implied annual price change is 56% 2008
20
OECD total petroleum inventories will likely increase to slightly above the 10-year average path
Million barrels
2900 2800 2700 2600 2500 2008
2007
2400 2300 Jan Feb Mar Apr May
10y mean
Jun
Source: IEA and Goldman Sachs Commodities Research.
Jul
10y max
Aug Sep
10y min
Oct Goldman Sachs Global Investment Research Nov Dec 21
We expect prices to rise to $149/bbl by year’s end
$/bbl 200.00
180.00
160.00
140.00
Goldman Sachs Forecast 120.00
100.00
Market Forward Curve 80.00
60.00
40.00
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Source: NYMEX and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 22
The Revenge of the old economy and beyond,
The investment phase continues, forcing demand to adjust
The industry has exhausted spare capacity, ending an exploitation phase and beginning a new investment phase
Global oil production and capacity
million b/d
90 80 50 40 70 60
Global production capacity Global output
30 20 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 Global refining capacity
million b/d 90 80 70 Global Refining Capacity World Petroleum Demand 60 50 40
World Petroleum Supply
30 20 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 Source: International Energy Agency (IEA), DOE, and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 24
The oil market is now six years into an investment phase as spare capacity was exhausted in 2001
US data in real 2000 log $
13.5
Exploitation Phase Investment Phase
13.0
Exploitation Phase Investment Phase Exploitation Phase Investment Phase Exploitation Phase Net Energy investment (right axis)
11.5
11.0
10.5
12.5
12.0
Net Energy Capital Stock (left axis)
11.5
8.0
7.5
11.0
1901 1908 1915 1922 1929 1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006 7.0
10.0
9.5
9.0
8.5
Source: US Bureau of Economic Analysis, Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 25
Prices rise in investment phases as costs increase
Log of real prices in $/bbl
7
Exploitation Phase
6 5
Investment Phase Exploitation Phase Investment Phase Exploitation Phase Investment Phase
4 3 2 1 0 1925 1933 1941
Source: Pennwell.
Goldman Sachs Global Investment Research 1949 1957 1965 1973 1981 1989 1997 2005 26
Returns have improved, but not significantly, as costs have also risen along with prices
Average cash return among oil integrated companies
20% 18% 16% 14% 12% 10%
But policy constraints put a cap on further increases and on the ability to attract capital, regardless of price increases The revenge of the old economy creates a rise in returns, which attracts capital back to the sector
8% 6% 4% 2%
Poor returns in the 1990s caused capital to be redirected into the new economy
0% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007E
Real cash return over cash invested 40-year average 5-year moving average Source: Goldman Sachs Equities Research.
Goldman Sachs Global Investment Research 27
Despite likely US recession, robust emerging market demand and tight supply continues to support market
Global growth is expected to moderate this year, particularly in 1H08, but is expected to start recovering in 2H08
Percent 1 0 3 2 5 4 7 6 13 12 11 10 9 8 BRICS China Source: Goldman Sachs Economics Research.
Goldman Sachs Global Investment Research
US Euroland Trend Japan '05 '06 '07E 09E
'08E
World
29
… however, OECD oil demand growth has been comparable to recessionary levels for the past 2 years
Year-over-year growth in %
6.5% 8.5% 5.5% 4.5%
OECD GDP (right axis)
6.5% 3.5% 2.5% 4.5% 2.5% 1.5% 0.5% -0.5% 0.5% -1.5% -1.5% -2.5%
OECD oil demand (left axis)
-3.5% -3.5% 1986 1988 1990 1992
Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 1994 1996 1998 2000 2002 2004 2006 2008 -5.5% 30
Non-OECD countries have been the engine of oil demand growth over the past few years, and will likely remain so in 2008
Change year over year in thousand b/d
3500 3000 2500 2000 1500 1000 500 0 -500 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E2008E
OECD Non-OECD Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 31
Trend demand growth
Stagnation: producer country demand has squeezed the consumer countries' access to resources
8% 7% 6% 5% 4%
High-growth consumers
3% 2% 1%
Low-growth consumers Producers
0% -1% -2% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: BP Statistical Book and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 32
Middle East oil exports have not increased substantially since 2000
Thousand b/d (both axis)
28000 26000 24000 22000 20000 18000 16000 14000 12000
Supply is up 2.0 million b/d since 2000 (left axis) Middle East demand is up 35% since 2000 (right axis) However, exports are below 2000 levels (left axis)
10000
1Q 19 95 4Q 19 95 3Q 19 96 2Q 19 97 1Q 19 98 4Q 19 98 3Q 19 99 2Q 20 00 1Q 20 01 4Q 20 01 3Q 20 02 2Q 20 03 1Q 20 04 4Q 20 04 3Q 20 05 2Q 20 06 1Q 20 07 Source: IEA and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 7000 6500 6000 5500 5000 4500 4000 33
And despite the recent fuel subsidy cuts, estimated impact on demand is limited
Thousand b/d, unless otherwise indicated
Count ry
Indonesia Sri Lanka Taiw an Egypt Pakistan Russia Jordan Syria Chile M alaysia
2 0 0 7 oil dem and Level (k b/d) D em and grow t h Est im at ed 2 0 0 8 dem and loss Share of global Change (k b/d) Share of global A verage case High case What changed
1% 0% 1% 1% 0% 5% 0% 0% 0% 1% 5 1 33 48 21 31 (1) 4 6 24 2% (4) (8) 33% gasoline price increase to $2.44/gal; 28% diesel price increase to $2.23/gal in M ay08 0% (0) (0) 31% gasoline price increase to $5.97/gal; 38% diesel price increase to $3.86/gal in M ay08 16% (2) (3) 12% gasoline price increase to $4.35/gal; 17% diesel price increase to $3.97/gal in M ay08 23% (3) (6) 10% (1) (2) 50% gasoline price increase to $1.25/gal; 46% diesel price increase to $0.76/gal in M ay08 Four fuel price increases so far this year have raised gasoline and diesel prices 15% year on year, leaving current prices at $3.91/gal and $2.54/gal, respectively 15% (7) Gasoline prices up 11% year-on-year in 1Q2008, at $3.64/gal 0% (0) (1) 6% gasoline price increase to $3.98/gal in M ay08 2% (0) (1) 11% gasoline price increase to $3.37/gal in M ar08 3% 0 0 Announced an 8% subsidy to gasoline prices in Jun08 12% (2) (4) 40% gasoline price increase to $3.14/gal; 67% diesel price increase to $3.03/gal in Jun08 India 3% 147 71% (2) (5) 10% fuel price hike in Jun08, raising gasoline and diesel prices to $4.50/gal and $3.10/gal, respectively
China
Total 1
7 ,5 4 2 9 %
9% 148
1 5 9 %
71% (32)
(2 2 ) 1 6 % gasoline price increase t o $ 2 .8 4 /gal; 1 8 % diesel price increase t o $ 2 .9 7 /gal in Jun0 8
Bangladesh Total 2 0% 32% 2 798 1% (0) 386% (32) (0) Announced intentions to increase fuel prices in the near term * For Bangladesh, estim ated im pact on 2008 average dem and w as calculated assum ing a 25% fuel price increase as of June 2008.
Source: IEA, Bloomberg and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research 34
Speculation blamed, but not the cause
Once again speculators are the focus of attention
Number of cites (left axis); % change year over year (right axis) 250 200 150 100 50 Reference to oil speculators reached a peak in 2004, the last time the market re-priced Today the market is re-pricing and oil speculation references are increasing once again 0 2003 2004 2005 Media citations to 'Oil Speculation' Source: Factiva, NYMEX, and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research
2006 2007 % Change in long-dated oil price 2008 60% 50% 40% 30% 20% 10% 0%
36
Cyclically, the commodity markets have behaved normally, pricing an economic slowdown
%, 1-60 month WTI crude oil timespread (left axis);$/bbl, WTI crude oil price at $100/bbl back-end (right axis)
80% 60%
+2 Standard Deviations
40%
+1 Standard Deviation
20%
10-year average
0%
-1 Standard Deviation September 11, 2001
-20%
-2 Standard Deviations
-40% Jan-96 Jan-98
OPEC increases production into Asian Financial Crisis
Jan-00
Source: NYMEX and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research Jan-02 Jan-04
Historically warm winter, speculative liquidation
130 120 110 100 90
Cyclical weakening as world economy slows
80 70 60 Jan-06 Jan-08 180 170 160 150 140 37
Speculative positions mainly drive changes in WTI timespreads
1 st -60 th month timespread in $/bbl (left axis); million barrels (right axis)
20
300
5 0 15 10
Net speculative length (right axis)
-5 -10 -15 Jan-07 Apr-07 Jul-07
Source: NYMEX, CFTC and Goldman Sachs Commodities Research.
Goldman Sachs Global Investment Research
1st-60th month timespread (left axis)
Oct-07 Jan-08
250 200 150 100 50
Apr-08
0
38
Weaker timespreads (the cyclical component) have been offset by stronger long-dated prices (the structural component)
$/bbl
20 15 10 5 0 -5
1st-60th month WTI timespread (left axis) 5-yr forward WTI price (right axis)
130 120 110 -10 11-May-07 11-Jul-07
Source: NYMEX.
Goldman Sachs Global Investment Research 11-Sep-07 11-Nov-07 11-Jan-08 11-Mar-08 60 11-May-08 80 70 100 90 39
REG AC
I, Samantha Dart, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of the firm's business or client relationships.
Goldman Sachs Global Investment Research 40
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Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also be distributing research in Germany
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This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Current options disclosure documents are available from Goldman Sachs sales representatives or at http://www.theocc.com/publications/risks/riskchap1.jsp. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
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Copyright 2008 The Goldman Sachs Group, Inc.
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