Transcript Slide 1

Oil prices: Implications
for supply and demand
National Energy Commission
Madrid, 18 December 2007
David Martin
Oil Market Analyst
Oil Industry and Markets Division
International Energy Agency
[email protected]
© OECD/IEA - 2007
Oil prices – a dynamic equilibrium of factors
Demand
Oil Price
Stocks
Supply
Source: IEA Oil Market Report
2
Oil price near $100, but why?
$/bbl
100
Crude Futures
Front Month Close
95
90
85
80
75
70
65
Aug 07
Source: Platts
Sep 07
Oct 07
NYM EX WTI
Nov 07
Dec 07
ICE B rent
• Tight crude and product fundamentals push oil near $100/bbl in late-November
•Resilient demand growth – driven by non-OECD regions
•Concern over inventory cover ahead of winter demand
•OPEC-10 production has fallen, despite rising oil prices
Source: IEA Oil Market Report
3
Close to inflation-adjusted record highs
Nominal vs. Real WTI Prices, base 2007
100.00
90.00
80.00
US$/bbl
70.00
60.00
50.00
40.00
30.00
20.00
10.00
WTI Nominal
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
Jan-70
0.00
WTI Real, 2007 base
4
Source: IEA Oil Market Report
4
OECD/IEA - 2007
No single cause of high prices
Funds
Product
supply
Demand
growth
Service sector
Engineering
Equipment
Commodities
Supply
growth
Structure
of demand
growth
Investment
costs
Crude
prices
Marginal cost
of supply
Environmental
regulations
Upstream
capacity
Geopolitics
Refining
capacity
Crude grade
availability
OPEC policy
Crude and
product stocks
Source: IEA Oil Market Report
5
OECD industry stock cover falls
days
mb
OECD Total Oil
OECD Total Oil
2,800
57
56
2,700
55
54
2,600
53
2,500
52
51
2,400
50
49
Jan
2,300
Mar
May
Jul
Range 2002-2006
2006
Sep
Nov
Jan
5-year Average
2007
Jan
Mar
May
Range 2002-2006
2006
Jul
Sep
Nov
Jan
5-year Average
2007
•Total OECD industry stocks fall in October
•Continues trend seen since middle of 2007
•End-October OECD forward demand cover falls to 52.6 days; below the five-year
average for the first time in two years.
Source: IEA Oil Market Report
6
European product stocks drop in November
days
66
65
64
63
62
61
60
59
58
57
Jan
mb
Europe
Europe
1000
980
960
940
920
900
880
Mar
May
Jul
Range 2002-2006
2006
Sep
Nov
Jan
5-year Average
2007
860
Jan
Mar
May
Range 2002-2006
2006
Jul
Sep
Nov
Jan
5-year Average
2007
•OECD European product stocks fell by 17.4 mb in October, of
which 12.6 mb in distillates.
•Preliminary November data shows further EU-16 distillates drop of
11.8 mb.
Source: IEA Oil Market Report
7
…pushing futures structure towards
backwardation
$/bbl
2
OECD stock cover compared to average vs. Brent time spread
Days
6.0
Contango
0
0.0
Backwardation
-2
-6.0
2000
2001
2002
2003
2004
2005
OECD stock cover: Diff to Rlg 5yr Av (RHS)
2006
2007
ICE Brent M2-M1
8
Source: IEA Oil Market Report
8
The market will always balance
Monthly Balances (mb/d)
90
World Dem and (RHS)
89
World Supply (RHS)
88
87
86
If the supply is not
there, prices rise to
encourage stock sales
85
84
83
Jan 07
Mar 07
May 07
Jul 07
Sep 07
Nov 07
Jan 08
Mar 08
“No one is buying our crude – there must be no demand - this is speculation”
No – this is a price response, consumers are drawing on stocks to fill the gap
Source: IEA Oil Market Report
9
Global demand growth
Global Demand Growth 2006/2007/2008
thousand barrels per day
Europe
237
171
FSU
138
37
North America
213
241
-208
-275
Asia
Middle East
841
385
286
307
571
375
-202
Latin America
Africa
214
124
182
161
-10
109
Global Demand Growth
(mb/d)
2006
2007
2008
0.84
0.95
2.11
1.0%
1.1%
2.5%
• World demand is now expected to average 85.7 mb/d in 2007 (+1.1% over 2006)
and 87.8 mb/d in 2008 (+2.5%)
•However latest economic data leave 2008 demand growth vulnerable
Source: IEA Oil Market Report
10
OECD demand
m b/d
52.5
OECD: Total Oil Product Demand
51.5
50.5
49.5
48.5
47.5
46.5
45.5
Jan
Apr
Range 2002-2006
2006
Jul
Oct
5-year avg
2007
OECD demand forecast
 Average of 49.2 mb/d in 2007 (-0.3% year-on-year), 49.8 mb/d in 2008
(+1.3%)
 Key assumptions: heating needs will drive increase (normal weather);
transportation demand will be subdued
Source: IEA Oil Market Report
11
OECD demand – price response
Mixed signals
US Weekly Motor Gasoline Demand Growth
(4-week avg vs previous year)
5.5%
4.5%
3.5%
2.5%
1.5%
0.5%
-0.5%
-1.5%
-2.5%
-3.5%
09-Nov-07
23-Nov-07
26-Oct-07
28-Sep-07
12-Oct-07
31-Aug-07
14-Sep-07
17-Aug-07
20-Jul-07
03-Aug-07
22-Jun-07
06-Jul-07
08-Jun-07
11-May-07
25-May-07
13-Apr-07
27-Apr-07
16-Mar-07
30-Mar-07
02-Mar-07
02-Feb-07
16-Feb-07
05-Jan-07
19-Jan-07
SpendingPulse
EIA
Contradictory indications regarding current demand trends
 North America: resilient transportation deliveries – but is US gasoline demand on a
clear downward direction? It depends on the data source
 Europe: continued heating oil and residual weakness – but autumn has been
colder than average – gas substitution or German consumer caution?
 Pacific: downward revisions in 3Q07 – but 4Q07 outlook stronger on the back of
persistent power needs
Source: IEA Oil Market Report
12
OECD demand
High prices are reducing growth
OECD: Demand by Driver, Y-o-Y Chg
m b/d
0.8
0.6
0.4
0.2
(0.2)
(0.4)
(0.6)
(0.8)
(1.0)
Transportation
Pow er Generation
Total Dem and
2005
2006
Heating
Other
2007
2008
 Weaker North American and European outlook
 Data revisions: US and Mexican demand is softening (subprime effects?), Germany
continues to delay consumer heating oil stock refilling
 Reassessment of economic conditions, price effects and inter-fuel substitution
 Prices may be starting to bite: slowing gasoline demand in the US, consumer backlash
in Europe
Source: IEA Oil Market Report
13
Non-OECD demand
Cushioned by end-user subsidies
m b/d
37.0
Non-OECD: Total Oil Product Demand
36.5
36.0
35.5
35.0
34.5
Jan
Apr
2006
Jul
Oct
2007
 Non-OECD oil demand forecast
 Avg of 36.5 mb/d in 2007 (+3.1% year-on-year), 37.9 mb/d in 2008 (+3.6%)
 Key assumptions: China and the Middle East – over half of global demand growth – will
remain largely untouched by the US subprime woes and insulated from international oil
prices given the prevalence of subsidies to end-user prices
 But administered price regimes are raising new problems in many developing
countries as international oil prices reach record levels
Source: IEA Oil Market Report
14
Non-OECD demand
Responsive to market prices
kb/d
1,200
China: Residual Fuel Oil Demand
1,100
1,000
900
800
700
600
500
Jan
Apr
Jul
Range 2002-2006
2006
Oct
5-year avg
2007
 Chinese domestic prices are capped by Government pricing policies
 However, fuel oil prices are not subject to pricing controls.
 Independent teapot refineries process straight-run fuel as feedstock for producing poor
quality gasoil
 Processing economics have become increasingly unattractive, leading to a collapse in
demand for fuel oil, primarily by teapot refiners
 This has contributed to product shortages in China in recent months
Source: IEA Oil Market Report
15
Non-OPEC supply growth
2006/2007/2008
thousand barrels per day
Europe
454
North America
-435
11
-294
FSU
472
490
-393
-9
Middle East
-191
-102
-105
411
Asia
96
-74
132
Africa
51
Latin America
262
104
51
143
-27
Angola included in OPEC throughout
Regional Totals exclude biofuel growth
Total Non-OPEC Supply Growth (kb/d)
2006
2007
2008
532
513
1057
Global Biofuels (kb/d)
352
257
214
OPEC NGLs (kb/d)
2006
2007
2008
149
178
599
16
Source: IEA Oil Market Report
OPEC - Back in the black
Back in the Black
kb/d
OPEC Crude Output v Year-Ago
2000
Iraq & Angola
Indon,Nig,Ven
2000
OPEC core
Total
1000
1000
0
0
-1000
-1000
-2000
-2000
Jan 06




Apr 06
Jul 06
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
OPEC-10 increased by 0.2 mb/d in October, but Angola + Iraq also higher
Rising supplies in November from Saudi Arabia, Iraq, Nigeria and Angola?
But potential offset from UAE maintenance
OPEC reticence to increase too much ahead of winter demand. Spare capacity remains
tight
17
Source: IEA Oil Market Report
Above-ground risks exceed below-ground
risks - currently
Net impact is the
Weather
Accelerating
decline
BELOWGROUND
same (lower output
& higher costs)…
Rebel
attacks
Complex
reservoirs
FORCE
MAJEURE
Industrial
unrest
Access
restrictions
Reserve
risk
Project
complexity
SECTOR
MATURITY
Ageing
infrastructure &
outages
Slower
capacity
expansion
HOST
GOVERNMENT
INDUSTRY
CYCLE
Tight
drilling &
service
capacity
Labour, &
raw
material
shortage
Fiscal
changes
Environmental
regulation
Pipeline
delays
…but at least some
above ground risks
are reversible
Source: IEA Oil Market Report
18
Industry response – raise planning assumptions
USD/b
45
oil-company "planning prices"
(Brent)
40
35
30
25
20
15
10
1999
2000
2001
2003
2004
2005
2006
2007
source: SG Equity Research, SG Commodities Research, IEA
IOC’s have raised capital budgeting assumptions:



Shifting opportunity set – more expensive projects
Rising service sector and raw material costs
Increased incentive to explore for oil
Source: IEA Oil Market Report
19
Some Big Fish Still Lurking Offshore
Selected major offshore fields - recoverable oil, bb
Buzzard
Bonga
Dalia
Thunder Horse (oil & gas)
Sakhalin 2 complex
Nanpu - 1P (Govt)
Nanpu - 3P (Govt)
Azeri-Chirag-Guneshli
Tupi - recoverable
Cantarell - remaining
Zakum
Kashagan
Safaniyah - remaining
0




5
10
15
20
25
30
35
Recent offshore discoveries in Brazil and China
Circa 10 billion barrel or reserves and 1.5 mb/d of production potential from the combined
Tupi (Brazil) and Jidang Nanpu (China)
Global uptick in exploration can make a difference although, notably, these are NOC
discoveries
Neither field is a quick fix; further appraisal to confirm reserves and development may be
costly
20
Source: IEA Oil Market Report
Rising costs hamper projects
Rising costs pressure
project timeframes
Credit squeeze adds
further difficulty to
project finance
Delays in awarding
contracts
Fixed price tenders
increase risks for
contractors
Increased order times
delay projects further
Uncertainty reflected in
bids, pushing costs up
further
Source: IEA Oil Market Report
21
Cost inflation dampens investment impact
(long-term futures prices remain above $80)
Source: Resources to Reserves, IEA, 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
22
Source: IEA Oil Market Report
22
Biofuels: marginal but significant addition
Biofuel Production & Capacity
m b/d
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2006
2007
2008
US Ethanol
Brazil Ethanol
Other Ethanol
Other Biodiesel
2009
2010
2011
2012
OECD EUR Ethanol
Asia Ethanol
OECD EUR Biodiesel
Potential Capacity
 Global biofuel production doubles to 1.75 mb/d by 2012
 Potential supply capacity even higher: 2.9 mb/d by 2012
Source: IEA Oil Market Report
23
Concerns over economic viability remain
Gasoline price (US $/gallon)
Ethanol Profitability
c/gl
3.5
3.0
400
Profitable
Forward curve
from 24 Sept '07
350
2006
2.5
2005
2.0
CBOT Ethanol Crush Spread forward curve
2007
300
1.5
250
1.0
200
¢51/gln blending
subsidy
0.5
0.0
1
2
Unprofitable
3
4
150
5
Corn (US $/bushel)
The pro fitability line (net o f subsidies) has been estimated to take into acco unt
the value o f ethano l o n an energy basis, a price premium fo r o ctane and o xygen
and a price premium fo r the sale o f co -pro ducts.
100
50
0
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
 We maintain our cautious stance on medium-term production
 Price pressures on feedstocks (corn, sugar, soybeans, wheat, palm oil etc.)
 Competition between first-generation biofuels and the food chain
 Second generation technologies look promising but depend on
technological breakthroughs
Source: IEA Oil Market Report
24
Biofuels: Is the cure worse than the disease?
“The potential of current technologies of choice –ethanol and
biodiesel – to deliver a major contribution to the energy
demands of the transportation sector without compromising
the environment is very limited.”
Background paper produced for the OECD roundtable on Sustainable Development
Source: IEA Oil Market Report
25
Gas and Coal to Liquids : reality bites?
Project
Sponsor
Oryx
QP/Sasol/Chevron
Pearl Train 1
QP/Shell
Pearl Train 2
QP/Shell
Location
QATAR
QATAR
QATAR
Total frim projects through to 2012
Project
Oryx 2
Palm GTL
?
?
?
?
Sponsor
QP/Sasol/Chevron
ExxonMobil
SasolChevron
ConocoPhillips
ConocoPhillips
Marathon
Possible projects
Capacity
34,000
70,000
70,000
Output
Diesel
Diesel
Diesel
Start-date
2007 ?
2011
2012
Output
Diesel
Diesel
Diesel
Diesel
Diesel
Diesel
Start-date
2013
2015 +
2015 +
2015 +
2015 +
2015 +
174,000
Location
QATAR
QATAR
QATAR
QATAR
QATAR
QATAR
Capacity
66,000
154,000
130,000
80,000
80,000
120,000
630,000
 XTL relies on cheap gas/coal to justify low energy efficiency
 CO2 emissions per tonne of diesel produced is high
 CTL forecast to reach 145kb/d in China by 2012, but CO2 and water use may limit further
development. Potential for 600kb/d by 2020?
Source: IEA Oil Market Report
26
Medium-Term supply-side response
limited so far
Medium-Term Growth Balance
m b/ d
3.0
+/- 1%
GDP
2.0
1.0
0.0
2007
2008
2009
No n-OP EC Gro wth (excl. B io fuels)
OP EC NGLs Gro wth
Wo rld Demand Gro wth
Lo w Demand 2
2010
2011
2012
B io fuels Gro wth
OP EC Capacity Gro wth
High Demand
 Adjusted call on OPEC/stock chg: +5 mb/d by 2012
 OPEC spare capacity to fall from 2.5 ->1.5 mb/d
Source: IEA Oil Market Report
27
Conclusions
 No single cause of high prices

Tight crude supplies
 Leading to stock draws

Lack of supply-side response –so far
 Both short and medium term – function escalating cost pressures

OPEC spare capacity
 How much is there, how much can be used?
 Signs demand is moderating in response to high prices


Anemic transportation fuel demand growth in OECD
Non-OECD countries looking to lower subsidies?
 But structural shifts not in place just yet

Will take a while before car fleet becomes more efficient
 Supply side response may come

But considerable barriers in the way
Source: IEA Oil Market Report
28