Multi-year Expert Meeting on COMMODITIES AND DEVELOPMENT. 6-7 April 2009, Geneva. The oil market. Mr. Daniel Jaeggi Mercuria, Global Energy Solutions

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1 Multi-year Expert Meeting on COMMODITIES AND DEVELOPMENT 6-7 April 2009, Geneva The oil market by Mr. Daniel Jaeggi Mercuria, Global Energy Solutions "The views expressed are those of the author and do not necessarily reflect the views of UNCTAD"

2 UNCTAD Multi-Year Expert Meeting «Commodities and Development» Geneva April Daniel Jaeggi

3 What about Peak oil? Peak oil has an underlying price assumption Reducing oil demand Improving recovery New discoveries PRICE Environmental constraints (CO2) 40$/bbl oil will certainly run out At 150$/bbl, peak oil is most probably pushed forward

4 What can we anticipate? 100 $/bbl Energy supply remain very tight, not to say tighter than before the crisis Producers are reluctant to enter long term markets $ April Spot Once oil demand restarts, the market will switch into backwardation 5 years

5 Excessive price volatility disrupts market functions A Futures Market provides participants with : - Price discovery - Risk offsetting -BUT Oil price 150$ 80$ A producer is required to hedge 30% of his production Margin calls 4,500 lots x 70$ = $315m Actual production 2,000 lots Turn over = $300m Cumulative Production profile 15,000 lots = 4,500 lots of hedge There is a point when margin calls are no longer covered by operating cash flows = One using Futures as a tool to manage the risk gets into liquidity issues

6 Is hedging wise? The 2008 rally puts into question the wisdom of hedging «Companies that do have ample physical barrels have learned the downside of being too quick to lock in seemingly record prices for their oil.» When producers need to cover the potential loss, they actually were forced to buy back the hedge During last summer, Newfield Exploration reported losses from hedging of $380 million Noble Energy lost $237 million Encana lost more than $1 billion Shareholders must be wondering when their oil companies became hedge funds.

7 Interconnected markets : a problem of proportion In May 2008, oil markets were 50 times smaller than US equity markets Oil markets were strongly disconnected from current fundamentals INVESTMENT MONEY US EQUITY MARKETS 13 trillion $ (10 12 ) Nymex 255 billion $ Allocating 2% of investment money to oil markets = doubling the size of Nymex This puts in question the role of market regulation : more ore better?

8 Improving market information related to money invested in energy markets August 5 : CFTC has quietly boosted the number of oil Futures contracts held by speculators $/Bbl 70% WTI oil prices - 0% Jan-00 May-00 Sep-00 Jan-01 % of open interest held by non-commercials May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Information on market size is crucial Reporting tools need to be reliable and stable Cross commodity exposures Various categories Sovereign funds, 60% 50% 40% 30% 20% 10% Backward revision : From 32% to 42%

9 Better market information certainly helps finding a price consensus $/Bbl ICE Brent Term Structure Anticipations of economic agents remain stable Poor economic growth Switch in oil demand New alternatives In search of a consensus on Long Term oil prices OPEC strategy F&D rising costs Non-OPEC supply growth Trend of demand - Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 In interconnected markets, the flow of information increases volatility

10 What about the transition? But apparently, the market is not really pricing yet the need for Alternatives We are here!! When oil demands recovers, new energies may get their chance Source : PIRA