MacroVoices Oil Discussion: OPEC Can t Fix The Problem of Low Oil Prices

Transcription

1 MacroVoices Oil Discussion: OPEC Can t Fix The Problem of Low Oil Prices Art Berman November 30, 2016 Slide 1

2 Overview: OPEC Can t Fix The Problem of Low Oil Prices OPEC may reach some agreement today on an oil-production cut or not. In either case, execution will be more important than accord. There are at least 6 good reasons why a production cut can t fix the problem of low oil prices. Ø The Market Is Already In Balance, Ø There Is Too Much Oil In Storage, Ø Demand Growth Is Weak, Ø U.S. Production Has Started Increasing Again, Ø OPEC Is Not As Desperate For Higher Prices As Many Believe Yet, Ø It s The Economy Stupid. Slide 2

3 Reason 1: The Market Is Already In Balance World Liquids Market Balance 2.5 $ Brent Price (RHS) Supply Surplus (LHS) $140 Market Balance (Supply Minus Demand mmb;d) Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q Brent Price (2016 Dollars Per Barrel) Supply Deficit (LHS) -2 Source: IEA OMR& The idea of a production cut is to bring the market into balance by reducing supply. But the market is already as close to balance as it ever gets. It has been just 0.25 mmbpd above balance for 6 months. Prices have not responded. Any price increase has been from expectation of an OPEC cut. Slide 3

4 Reason 2: There Is Too Much Oil In Storage 3.1 OECD Inventories Are ~500 Million Barrels Above Late 2013 Levels U.S. stocks make up ~44% of OECD inventories $140 3 Brent Price (RHS) Billions of Barrels of Liquids Incremental Inventories (LHS) Brent Price (2016 Dollars Per Barrel) Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Source: EIA & Base The balance between production and consumption is only part of the story. Storage is part of supply. OECD inventories are 500 million barrels above late 2013 levels. That is the equivalent of almost a year of 1.5 mmbpd of surplus supply. Until inventories are drawn down ~350 million barrels, there is little possibility of a return to per barrel oil prices. Slide 4

5 Reason 3: Demand Growth Is Weak Demand Growth Has Declined But 2016 Forecast is 1.2 mmbpd 1.81 mmbpd in $140 4 Brent Price (RHS) 3.9 Year-Over-Year Demand Growth (Millions of Barrels Per Day) Q Q Q10 4Q Q11 Average 1.6 mmbpd Q11 3Q Q Q YOY Demand Growth (LHS) 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q Q Q Q Q15 1Q16 2Q Q16 Brent Price (2016 Dollars Per Barrel) -0.5 Source: IEA OMR& Demand growth is at a 2-year low of 0.9 mmb/d year-over-year. That is the same level as during the quarter that prices collapsed in late Demand growth has fallen from 2.5 mmb/d a year ago. The 4-year average is 1.6 mmb/d. That is because demand is highly price sensitive in a weak global economy. Higher prices will further weaken demand growth This in no way supports peak demand forecasts. Slide 5

6 Reason 4: U.S. Production Has Started Increasing Again Nov U.S. Crude Oil Production Increased 30 kbpd in October U.S. Incremental Production Is The Main Cause of The Oil-Price Collapse 64 OPEC, U.S., Canada, Russia & Brazil account for 66% of world crude oil & lease condensate production WTI Price (RHS) Millions of Barrels of Crude Oil Per Day Oil Production (LHS) April 2015 Oct-Sept Increase +30 kbpd Oct 2015 WTI Price ($/Barrel) Millions of Incremental Barrels of Crude Oil & Condensate Per Day Indonesia-Ecuador-Qatar-Gabon Libya Angola Mexico Algeria Nigeria Kuwait UAE Venezuela United States Iraq Iran Canada Russia Brazil Saudi Arabia Source: EIA STEO November 2016 & 7.00 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Source: EIA & 52 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Base Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 U.S. oil production has already started increasing based on relatively stable prices in the mid- range. U.S. incremental supply was the main reason for the over-supply that caused the price collapse in Higher oil prices will accelerate U.S. production additions. Iraq is a secondary contributor & Iran has increased 800,000 bopd since the end of sanctions. Overall, however, OPEC increases and decreases have balanced since 2012 except for recent additions by Iran. Slide 6

7 Reason 5: OPEC Is Not As Desperate For Higher Prices As Many Believe Yet Saudi Currency Reserves Remain Above 2010 Levels Most OPEC Members Have Considerable Cash Reserves Foreign-Exchange Reserves (Billions of 2016 Dollars) $700 0 $500 0 $ Source: World Bank & E Foreign-Exhange Reserves (Billions of 2016 Dollars) $700 0 $500 0 $300 0 Gabon & Ecuador Algeria Indonesia UAE Libya Iraq Qatar Nigeria Kuwait Venezuela Angola Source: World Bank & The press gives the impression that Saudi Arabia and most OPEC members are desperate for higher oil prices. In fact, Saudi foreign currency reserves are still above 2010 levels despite drawing down almost $220 billion since Many other OPEC countries have considerable cash reserves: Algeria,Libya and Iraq are surprisingly strong (Iran is unknown). Nigeria, Venezuela and Angola are certainly in trouble but because of more fundamental problems than just low oil prices. Slide 7

8 Reason 6: It s The Economy, Stupid Increasing Energy Costs Contributed To Debt & Economic Weakness U.S. GDP Growth Peaked With First Oil Shocks & Has Declined Ever Since $35 16% Govennment + Consumer + Non-Financial Corporate Debt (Trillions) $30 $25 $15 $10 $ Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Oil Price Oil prices after 2004 were 1.5 times higher than Debt Oil Shocks $34 Avg Price GDP $70 Avg Price $84 Avg Price U.S. Debt Exceeded GDP After Oil Shocks of 1970s & 1980s WTI Price in 2016 Dollars Per Barrel Year-Over-Year Debt & GDP Growth 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Oil Shocks Debt Growth (LHS) GDP Growth (LHS) Oil Price (RHS) Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & WTI 2016 Dollars Per Barrel The reason for low oil prices is more fundamental than market balance: it s the weak global economy. High oil prices from structurally altered the global economy and led to increasing debt. U.S. debt exceeded GDP in 1986 after the first oil shocks. GDP growth has declined ever since. The U.S. is not the world but it leads all economic trends. Energy is the economy. Money is a call on energy. Debt is a call on future energy. The second oil bubble lasted from , only briefly interrupted by the 2008 Financial Collapse. U.S. debt reached 100% of GDP in Today s depressed oil prices are 40% higher than in 2016 dollars. The oil-price collapse of 2014 is about affordability. Slide 8

9 Conclusions $160 The World Average Break-Even Oil Price Is More Than Per Barrel Tight Oil Rig Counts Increased Dramatically Since March 2016 Eagle Ford Has Lost Momentum Break-Even Price (Dollars Per Barrel) $137 $140 Yemen $119 $115 $110 Iran Algeria Bahrain $70 $69 $67 $97 $95 $94 $90 $89 $86 $82 $77 $75 $65 $61 $55 $50 $49 $49 Libya Oman OPEC Average New Oil Sands Qatar Saudi Arabia AVERAGE Source: IMF, Rystad Energy, Suncor, Cenovus, COS & *IMF OPEC estimates include revenue to balance fiscal budgets Average Break-Even Price Today is $82/Barrel Deepwater Wolfcamp Tight Oil UAE Iraq Eagle Ford Tight Oil Bakken Tight Oil Permian Tight Oil Spraberry Tight Oil Existing Oil Sands Bone Spring Tight Oil Kuwait Weekly Rig Count Change /5/15 7/3/15 7/31/15 8/28/15 9/25/15 10/23/15 NYMEX Price (RHS) 11/20/15 12/18/15 1/15/16 Eagle Ford (LHS) Source: Baker Hughes, EIA, Bloomberg & 2/12/16 March /11/16 4/8/16 Permian (LHS) 5/6/16 6/3/16 7/1/16 Bakken (LHS) 7/29/16 8/26/16 9/23/16 10/21/16 11/18/16 $70 $50 $30 $10 NYMEX Price ($/Barrel) Debt requires cash flow and zero-interest rates drive capital toward U.S. oil stock yields. Any increase in oil prices increases the flow of capital in a race to the bottom. More capital for drilling is followed by increased production. An OPEC cut will accelerate the self-destructive process. Saudi interests are focused on an Aramco IPO in a year when cash reserves may become critical. It has become increasingly clear that Saudi Arabia must bear a disproportional share of any production cut. A deal may result from today s OPEC meeting but I suspect that the real action will be later on after this effort fails following an initial boost in oil prices. Slide 9