Oil Markets: Where next? Christof Rühl, Global Head of Research Singapore September 2016 1
Content Oil and the economy: Recap Why did lower oil prices not support economic growth? OPEC vs. US two sides to supply Will demand growth balance the market? 2
Secular Stagnation? Real GDP growth 10-year moving average in percent Yield Real return on 10-year Government bonds 10 US UK 8% US 8 Japan France Italy Germany 6% Germany Japan 6 4% 4 2 2% 0 0% -2 1970 1980 1990 2000 2010 Source: The World Bank -2% 1983 '87 '91 '95 '99 '03 '07 '11 2015 Source: Datastream 3
Crude oil prices Weekly oil price Daily oil price and term structure $/bbl $/bbl $/bbl 140 Dated Brent 130 12M Dated Brent (rhs) 14 120 120 Dated Brent 12 110 10 100 100 8 80 60 40 90 80 70 60 50 Contango 6 4 2 0-2 20 0 Jan-00 Jun-05 Nov-10 Apr-16 Source: Bloomberg 40 30 Backwardation 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 4 Source: Bloomberg -4-6 -8
Central bank assets and global growth projections Central bank assets Revisions to 5-year GDP growth forecast Trillion US dollars Percent 12 BOJ ECB FED 9 Apr-13 Apr-16 10 8-2.4pp 8 7 6 6-1.1pp 4 2 5 4-0.7pp 0 2000 2004 2008 2012 2016 3 China Emerging World Source: Bloomberg Source: IMF WEO 5
Where is the shot in the arm? Oil price decline Revisions to 2016 GDP growth projections US dollars per barrel 120 July 2014 110 100 90 80 70 60 50 40 30 Dated Brent GDP growth 5% Jan-15 Jul-15 Jan-16 Jul-16 4% 3% 2% 1% 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Bloomberg 0% Source: IMF World US Advanced economies Emerging economies 6
Content Oil and the economy: Recap Why did lower oil prices not support economic growth? OPEC vs. US two sides to supply Will demand growth balance the market? 7
(1) US Dollar is appreciating Real trade weighted US Dollar index Index, Jan 1990 = 100 125 120 115 110 105 rises for good reasons 15% real appreciation since July 2014 (20% since July 2011): Relatively strong US growth and productivity gains The end of QE in the US 100 95 90 85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Source: Bloomberg 8
(2) Households are deleveraging Household debt as a share of GDP 100 90 US Euro area 1Q 2008 = 97.9% Change in household debt since peak: 80-19 percentage points 70 4Q 2009 = 63.6% 60-7 percentage points 50 40 1Q 99 1Q 01 1Q 03 1Q 05 1Q 07 1Q 09 1Q 11 1Q 13 1Q 15 9
(3) Structural change: Importers are becoming producers Share of local consumption produced at home 90% US Brazil 80% Decline in imports since 1995: - 470 Kb/d 70% - 2,710 Kb/d 60% 50% 40% 30% 1990 1994 1998 2002 2006 2010 2014 Source: BP Statistical Review of World Energy 10
(4) The long decline of oil intensity Barrels of oil per $1,000 of GDP 1.2 1979 1.0 0.8 0.6 0.4 OECD Decline since 1979: - 42% - 48% - 58% 0.2 Non-OECD World 0.0 1965 1973 1981 1989 1997 2005 2013 Source: BP Statistical Review of World Energy 11
Content Oil and the economy: Recap Why did lower oil prices not support economic growth? OPEC vs. US two sides to supply Will demand growth balance the market? 12
The resilience of US shale production Million barrels per day Dollars per barrel 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 Total US crude production US onshore crude production WTI price (rhs) 110 100 90 80 70 60 50 40 30 5.5 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Source: EIA 20 13
US shale break-even crude price US dollars per barrel 120 100 2012 2013 2014 2015 2016 80 60 Average 2016 WTI price so far: $41 per barrel 40 20 0 Source: Rystad Energy Eagle Ford Bakken Permian (Delaware) Permian (Midland) Niobrara 14
US E&P: Operating cash flow does not cover capex Million $ 40,000 30,000 20,000 Operating CF Capex Free Cash Flow 10,000 (10,000) (20,000) (30,000) (40,000) (50,000) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 15
Global liquids production and market share OPEC (crude & NGLs) Selected countries (crude and NGLs) Market share 47% Market share November 2014 15% November 2014 46% 14% 45% 13% 44% 12% 43% 11% 42% 41% 40% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: IEA 10% Russia 9% Saudi Arabia US 8% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: IEA 16
Crude oil market share within OPEC Iran and Iraq Saudi Arabia Market share within OPEC 14% Iran 13% 12% 11% 10% 9% 8% 7% Iraq Market share within OPEC 34% 33% 32% 31% 30% 29% 28% 27% 6% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: IEA 26% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: IEA 17
Cumulative supply growth since 2Q 2014 Key OPEC producers Thousand barrels per day (kb/d) North American producers Thousand barrels per day (kb/d) 3,000 Iran Iraq 3,000 Canada 2,500 2,000 UAE Venezuela Net change KSA Nigeria 2,500 2,000 US Mexico Net change 1,500 1,500 1,000 1,000 500 500 - - (500) (500) (1,000) 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 (1,000) 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 Source: IEA Source: IEA 18
OECD inventories at historic highs Million barrels of crude oil and oil products 3,150 3,050 2,950 2010-14 Range 2010-14 Average 2015 2016 2,850 2,750 2,650 2,550 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Source: EIA 19
Content Oil and the economy: Recap Why did lower oil prices not support economic growth? OPEC vs. US two sides to supply Will demand growth balance the market? 20
Demand growth above long-term average European and US demand growth OECD and Non-OECD demand growth Million barrels per day (Mb/d) 0.4 Europe 0.3 US 0.2 0.1 0.0-0.1-0.2-0.3 Million barrels per day (Mb/d) 2.0 1.5 1.0 0.5 0.0 OECD Non-OECD 1.6 Mb/d Global growth 1.1 Mb/d 1.5 Mb/d -0.4 Average 2011-14 2015 1H 2016-0.5 Average 2011-14 2015 1H 2016 Source: IEA Source: IEA 21
Global supply and demand Incremental global supply and demand growth since 2Q 2014 Thousand barrels per day (kb/d) 4,500 4,000 3,500 3,000 2,500 ~400 kb/d 2,000 1,500 1,000 500 - (500) Source: IEA North America Other FSU OPEC Global demand growth 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 22
Before Algiers: Where we stand Freeze production? YES Decision implemented? NO Decision implemented? YES NO NO YES Broken promises OPEC blinks Oil price supported Oil price under pressure Oil price supported Oil price under pressure Global market shares: - OPEC down - US up Market shares within OPEC constant (Iran up in case of a side agreement) Global market shares stabilizing Market share within OPEC: - those who cheat are up Global market shares: - OPEC down/ - US up Market share within OPEC: - those who blink are down Global market shares: - OPEC up - US down Market shares within OPEC determined by capacity Broken promises or OPEC blinking same same 23
Conclusion Oversupply (incl. inventories) to last for medium term Price ceiling restricts room for intervention ( freeze ) Meaningful intervention unlikely Effect of Capex cuts will support prices eventually 24