Transcript Demand Destruction: Market Dynamics In Uncertain Times

The Outlook for Oil and Gas
Presented by
Mary Novak
Managing Director
Energy Services
*
Global Insight (USA), Inc.
September 2004
Copyright  2004 Global Insight, Inc.
Crude prices were above $30/bbl for most of 2003
and Increasing ...
U.S. West Texas Intermediate Crude Oil Price
($/Barrel)
West Texas Intermediate
12 Month Moving Average
Regime
45
40
28.70
29.32
35
30
25
20
15
19.07
10
5
Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04
Copyright  2004 Global Insight, Inc.
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Due to Demand Growth …


In 2003, world oil demand rose at an unprecedented rate
due to

cold Q1, high US natural gas prices, the economic
recovery led to stronger growth than anticipated in the
US

phenomenal growth in China and other Asian/Pacific
countries.
The rise in Chinese oil consumption was 1.5 mmbd of the
global increase of 2.5 mmbd
Copyright  2004 Global Insight, Inc.
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Producers’ Response …

Non-OPEC Production: Taps Wide Open, but anticipated
increases in productive capacity are delayed

OPEC


At beginning of Iraq War, Saudi Arabia increased
production
At ‘end’ of Iraq War (summer), Saudi Arabia cut
production

Late September, OPEC announced cut in quota to take
effect November 1

With continuing demand strength, OPEC does not cut
production in q4 – but, OPEC does not increase
production.
Copyright  2004 Global Insight, Inc.
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2004 – first quarter …


Prices had been expected to fall

As new supplies are developed in non-OPEC and OPEC

And temporary factors that held up demand in 2003 fade
But …

Demand continues to be stronger than expected in the
US and China

US stocks remain low

Due to environmental regulations, refiners must change
gasoline specifications

Hedge funds increase their position in oil

Political tensions escalate
Copyright  2004 Global Insight, Inc.
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2004 – second quarter…



Prices rise through April and explode in early May
 Demand remains strong
 Concern about US gasoline markets escalate
 Political tensions continue
 OPEC does not increase production significantly
Prices hit $40/bbl in May
 Non-OPEC supplies are not building fast enough to
meet the ‘new’ demand from China
 Stocks levels are improving, but not quickly
 OPEC is now producing flat out … except for the
Saudis
$40/bbl -- the Saudis finally announce that they will
increase production
Copyright  2004 Global Insight, Inc.
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2004 – second half…

Prices remain above $40/bbl …

Demand remains strong

Political tensions continue

OPEC (the Saudis) are producing more, but
Is it enough?
Copyright  2004 Global Insight, Inc.
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2005-2007 …

Prices are expected to fall, but not sharply,
because …

Demand continues to grow

Political tensions continue

New non-OPEC supplies are making their way
into the market – but there have been many
disappointments.

Few OPEC countries have excess capacity,
capacity expansion will take time, and that will
keep the rise in supplies to a moderate pace
Copyright  2004 Global Insight, Inc.
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Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Crude Oil Price Outlook
WTI (US dollars per barrel)
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Copyright  2004 Global Insight, Inc.
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Long-term Crude Oil Price Outlook:
Prices are expected to settle at a higher level
Crude Oil Price Forecast
2003 $ per barrel
50
40
30
20
10
0
2000
2003
WTI
2006
2009
Brent
2012
2015
PCOF
2018
2021
2024
PCOD
Copyright  2004 Global Insight, Inc.
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Natural gas prices have been increasingly volatile
Daily Natural Gas Prices
($ per mcf)
20
18
15
13
10
8
5
3
0
1/1/2004
1/1/2003
1/1/2002
1/1/2001
1/1/2000
Copyright  2004 Global Insight, Inc.
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Natural gas price volatility occasionally exceeds
that of electricity price
Volatility of Electricity and
Natural Gas Markets
Sigma HenryHub
Sigma PJM
8
7
6
5
Annualized
4
Sigma
3
2
1
0
1/1/2004
7/1/2003
1/1/2003
7/1/2002
1/1/2002
7/1/2001
1/1/2001
7/1/2000
1/1/2000
Copyright  2004 Global Insight, Inc.
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In addition to the increased volatility,
natural gas price levels have been increasing …
Monthly and Long-term Average Spot Prices
(Henry Hub)
11
10
9
8
7
(Dollars per
Million Btu)
6
5
4
3
2
1
$1.66
$2.17
$4.18
0
Copyright  2004 Global Insight, Inc.
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… reflecting their relationship with power prices.
ERCOT Power Prices ($/MWH)
ERCOT On Peak
WSC INDUSTRIAL
7*Wellhead Gas
60
55
50
45
40
35
30
25
20
15
10
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Electric power demand for natural gas has surged
and will continue to grow (short and long) …
U.S. Power Generation Net Capacity Additions
(Megawatts)
Coal
Gas
Nuclear
Oil
Hydro
Renewable
60,000
50,000
Boom in
Combined Cycle
Gas Turbines
40,000
Changing Mix of
Capacity Driven
by Regulation
30,000
20,000
10,000
0
-10,000
20
28
20
25
20
22
20
19
20
16
20
13
20
10
20
07
20
04
20
01
19
98
19
95
19
92
19
89
19
86
19
83
-20,000
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… while energy intensive industry is
weathering hard times (million tons)
Physcial Unit Forecast
Cement
Glass
Steel
Aluminum
Paper
Ethylene
Ammonia
Methanol
350
300
250
200
150
100
50
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Natural gas demand is projected to grow
US Natural Gas Demand
Residential
Electric Generators
Commercial
Pipeline Fuel
Industrial
Lease And Plant Fuel
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2010 2015 2020 2025 2030
Copyright  2004 Global Insight, Inc.
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while lower 48 supplies are much tighter …
Natural Gas Demand Outpaces Production
Demand
U.S. Production
30
28
25
Total U.S. Demand
Trillion
Cubic
Feet
23
Imports, Alaska
20
U.S. Lower 48 Production
18
15
2020
2015
2010
2005
2000
1995
1990
1985
1980
Copyright  2004 Global Insight, Inc.
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Leading to a continuation of high, volatile natural
gas prices in the short-term …
Table 1: Scenario Prices
(Dollars per million Btu)
Henry Hub Prices
Scenario
Base
Low
2004 Q1
5.61
5.61
Q2
6.10
6.10
Q3
5.61
4.50
Q4
6.20
4.00
Avg.
5.88
5.05
2005
5.83
3.50
2006
5.47
3.50
High
5.61
6.10
7.50
8.00
6.80
7.00
7.00
Copyright  2004 Global Insight, Inc.
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… and longer term.
U.S. Natural Gas Price Outlook
($2002/Million Btu)
Average Wellhead
Henry Hub
New England Citygate
7
6
5
4
3
2
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
1
Copyright  2004 Global Insight, Inc.
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