Multi-year Expert Meeting on Commodities Palais des Nations, Geneva 24-25 March 2010 Developments and challenges in oil markets by Mr. Benoit Lioud Head of Analysis, Mercuria Energy Trading Switzerland "The views expressed are those of the author and do not necessarily reflect the views of UNCTAD"
Multi-Year Expert Meeting «Commodities and Development» Developments and challenges in oil markets Geneva March 2010 Benoit Lioud
What was the message last year? 100 $/bbl Energy supply remain very tight, not to say tighter than before the crisis 90 80 Producers are reluctant to enter long term markets 75-80 $ 70 60 50 April 2009 40 Spot Once oil demand restarts, the market will switch into backwardation 5 years
Where are we today? $/Bbl 90 85 Prices have now reached the level that was foreseen on the forward market last year And the contango has nearly vanished 80 March 2010 75 70 65 60 55 April 2009 50 Fundamentals Supply and Demand factors have not really changed Supply is still constrained, and the financial crisis has delayed many investments
What s next?
Message 1 Oil demand growth has definitely shifted to the East Projected Annual Oil Growth 2010-2020 MMbbl/d Monthly oil imports (diff. to 2007) Source: Pira China : The automobile sales volume last year reaches a record high of 13.64 million, which is about 46% higher than that of 2008 Source: Morgan Stanley Economic growth in Eastern countries is still energy intensive The oil demand factors will never be the same as consumption patterns do not compare with OECD ones Towards more volatility
Message 2 : long term prices found a new equilibrium After a strong unusual correlation with spot prices, long term oil markets found an equilibrium 160 $/Bbl 140 Crude oil spot prices Long term (5 years) oil prices 120 100 80 60 40 20 A stable long term price signal is required to trigger new investments
And oil markets seem to now behave in a more «classical» way Brent Crude oil Term Structure Markets fluctuate between Contango and Backwardation Economic growth New consumption patterns Impact of alternatives and eventually find an equilibrium New consensus? At 60-90$ OPEC strategy E&P costs Non-OPEC production Impact of CO2 policies A long term price consensus remains stable when liquidity is available along the curve
But the liquidity along the curve is very scarce Nymex WTI Futures : daily volumes 400 350 Thousands of lots 300 M1 Maturities +250% M12 1990 2000 2005 250 200 150 100 50-2010 2007 Adjustments along the curve create additional volatility Higher volumes hardly extend to longer term maturities
Message 3 : Globalization and interconnection of oil and financial markets How to find a price consensus? Linked by a virtual price convergence Many new entrants Global clearing lowers the credit risk, but increase the short term liquidity requirements Oilseeds Bio energy Weather Shipping CO2 Oil Energy Coal Fertilizers Derivatives Credit Debt Forex Interest Rates Metals & Precious Equities Water? Biomass Soft Capital Financial techniques Liquidity Finding a consensus becomes more complex and translates into higher volatility
This obviously attracts more and more volumes on oil markets Million barrels equivalent 1,600 1,400 1,200 1,000 After a short period where volumes decreased, the trend is up again Global trading volumes on Oil Exchanges All oil exchanges ICE/IPE 800 600 400 200 Daily oil world consumption - Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Oil Futures markets have definitely found another function, different than pure oil pricing The markets will need to adapt new market trading schemes
Investment money is now a major market participant 40 % of the open interest of the Nymex WTI crude future contract are held by non Commercials WTI prices & Share of non-commercials traders in the Nymex open interest 140 50% 120 100 80 60 40 20 45% 40% 35% 30% 25% 20% 15% 10% 5% - 0% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 WTI Prices in $/Bbl % of open Interest held by non-commercials
Conclusion In search of liquidity Globalization of markets New fundamentals Different consumption patterns New trading flows Electronic platforms New markets Deterioration of credit worthiness Scarcity of capital Global clearing Transfer to Futures markets Margin calls Lower OTC liquidity Long term consensus? New Regulation Market access New limit systems Energy markets will certainly experience new episodes of volatility
Thank you