2018 oil price forecast: who predicts best? Information document

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1 2018 oil price forecast: who predicts best? Information document Amsterdam, March 2018

2 Since 2007, Roland Berger has published an annual review of available oil price forecasts Roland Berger study of oil price forecasts February 2018, WTI based > Since 2007, Roland Berger has published a yearly review of the oil price forecast > Major oil exporting countries use a forecasted value of the oil price in their annual budgets > We have studied the forecasting track records of the ten largest oil exporting countries from 1999 to 2017 > The budgeted oil prices of the top-3 most accurate countries are used to forecast the oil price for the year ahead > National oil price forecasts are compared to forecasts from the major energy institutions: NYMEX, EIA and OECD Last year's results Top-3 most accurate forecasting countries Average absolute year-on-year oil price forecasting 1) error [%] Period Iraq Nigeria Saudi Arabia USD 55 forecast 1) for 2017 Iraq Nigeria Saudi Arabia 1) To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (5-year moving average) and for budget deviations (5-year moving average, excluding 2001, 2009 and 2015) Source: Roland Berger 42 Ø Ø

3 In addition to analyzing forecasting accuracy, Roland Berger's annual review examines current market dynamics Elements of this year's study 1 Analysis of 2017 Oil price development & market dynamics of Accuracy of oil price forecasts Analysis of the accuracy of countries and institutions as forecasters of the oil price in 2017 and aggregate over the last years 3 Future oil prices Forecast of the 2018 oil price based on national and institutional forecasts Analysis of market dynamics for future oil supply and demand 3

4 1. Analysis of

5 1 Analysis of 2017 In 2017, the average barrel price was USD 51/bbl, slightly lower than the USD 55/bbl forecasted by the top-3 forecasters Development of monthly WTI averages [USD/bbl], Jan 2006 Dec average Top-3 forecasts USD Source: EIA; Roland Berger 5

6 1 Analysis of 2017 Both supply and demand grew in 2017 For the first time since 2013, 2017 saw a consistent period of undersupply Global supply and demand of oil and net differential [m bbl/day] Net change Oversupply Source: EIA; Roland Berger Undersupply Total global supply Total global consumption 6

7 1 Analysis of 2017 This undersupply was driven by OPEC's extended production quota, which they are reportedly adhering to OPEC production quota and actual production [m bbl/day] n/a 2009 Deviation from quota OPEC data 16.4% 17.7% 3.7% 8.9% 6.1% 3.0% 6.2% 10.9% -0.4% BP data 34.8% 39.2% 18.3% 23.3% 20.1% 20.1% 25.3% 29.4% n/a Quota Production OPEC reports Production BP statistical review Source: OPEC; BP Statistical Review of World Energy 2017; Roland Berger 7

8 1 Analysis of 2017 Overall, OPEC complied with the quota Libya and Nigeria were excluded from the quota and increased production significantly OPEC oil production and difference with quota OPEC oil production 2017 ['000 bbl/day] 1,039 Algeria 1,043 Angola 1,673 1,639 Ecudaor Equatorial Guinea 1) Gabon 1) ,797 Iran 3,811 4,351 Iraq 4,445 2,707 Kuwait 2,708 Libya 2) Nigeria 2) 1,556 1,660 Qatar Saudi Arabia 10,058 9,953 2,874 UAE 2,915 Venezuela 1,972 1,916 Quota Production 2016 Production ) Quota not published; estimated based on overall 4.6% production cut; 2) Excluded from quota due to internal conflicts production shown as quota Difference with quota ['000 bbl/day] [%] % -2.0% 1.7% -11.6% -5.1% 0.4% 2.2% 0.0% 109.5% 6.7% -1.8% -1.0% 1.4% -2.8% Source: Zero Hedge; OPEC; Roland Berger 8

9 1 Analysis of 2017 The OPEC production decline was compensated by an increase in swing capacity from US shale oil, which dampened prices Profitability and growth of US shale oil WTI price and shale oil profitability [USD/bbl] US shale oil production ['000 bbl/day] Other Shale 6,784 6, ,263 6, ,549 6, ,862 6,620 1,242 8,894 6,816 2,078 10,073 7,125 2,948 11,779 7,817 3,962 12,757 8,175 4,582 12,354 8,113 4,241 n/a Indicative break-even price of shale oil Profitability of shale oil US shale oil production Source: EIA; Rystad Energy; BP Statistical Review of World Energy 2017; Roland Berger 9

10 1 Analysis of 2017 The growth of US (shale) oil production by ~5.6 m bbl/day is the main reason behind the growth in global oil production Biggest changes in oil production between 2008 and 2016 Change in production ['000 bbl/day] Market share Rank World total 9,256 US 5, % 13.4% 3 1 Iraq 2, % 4.8% 12 5 Saudi Arabia 1, % 13.4% 1 1 Russia 1, % 12.2% 2 3 Canada 1, % 4.8% 7 6 Norway % 2.2% United Kingdom % 1,1% Mexico % 2.7% 8 11 Venezuela % 2.6% 6 12 Libya -1, % 0.5% Source: BP Statistical Review of World Energy 2017; Roland Berger 10

11 2. Accuracy of oil price forecasts 11

12 2 Accuracy of oil price forecasts Saudi Arabia, the historical top forecaster, was much too bullish in 2017 Institutions remain the better forecasters Absolute year-ahead oil price forecasting error, 2017 [%] Top 10 oil exporting countries and institutions 2017 forecast 1) 2017 forecasting error Actual 50.9 Historically top-3 best forecasters had a forecast error of 20% in 2017 Algeria Iran Iraq Kuwait Mexico Nigeria Norway Russia Saudi Arabia Venezuela % 1% 5% 16% 14% 18% 28% 32% 41% 48% Average forecasting error: 8% NYMEX EIA OECD % 1% 19% 1) To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (5-year moving average) and for budget deviations (5-year moving average, excluding 2015) Source: Ministry of Finance of selected countries; EIA; NYMEX; OECD; Press reports; Roland Berger 12

13 2 Accuracy of oil price forecasts In 2009, institutions started forecasting better than oil exporting countries Since 2012, they are unbeaten Yearly oil price forecasting error, institutions and top-3 countries 1), [%] "Countries predict best" "Institutions predict best" Institutions Top-3 most accurate countries 1) Updated top 3 based on up to year n-1. To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (5-year moving average) and for budget deviations (5-year moving average, excluding 2001, 2009 and 2015) Source: Ministry of Finance of selected countries; EIA; NYMEX; OECD; Press reports; Roland Berger 13

14 2 Accuracy of oil price forecasts The emergence of institutions as better forecasters coincides with the rise of the US as a major (shale) oil producer and exporter Crude oil production per country and US exports, ['000 bbl/day] CRUDE OIL PRODUCTION "Countries predict best" 15,000 10,000 "Institutions predict best" 5, EXPORTS (all petroleum products) 15,000 10,000 5, Saudi Arabia Russia USA Other producers Source: OPEC; EIA; Roland Berger 14

15 2 Accuracy of oil price forecasts Saudi Arabia's bullish forecast was driven by some misplaced estimates but mainly by management of the public budget Main drivers behind Saudi Arabia's bullish forecast 1 Management of the public budget > Between 1999 and ), Saudi Arabia's oil price forecast averaged 37% below the actual > The National Transformation Plan (NTP 2020) launched in 2016 has put extra pressure on Saudi Arabia's public budget > A less conservative estimate helps keep the public deficit as small as possible (8.9% of GDP in 2017), since the petroleum sector accounts for 87% of the public budget 2 Interpretation of US shale oil break-even price > Saudi Arabia had not expected shale oil prices to drop below USD ~75/bbl, so it underestimated US supplies at current oil prices 3 Outlook on Iran's exports > Saudi Arabia expected the oil ban on Iran to be reinstated, removing ~3 m bbl/day 2), or 3.8% of the total exported volume, from the market 1) Excluding crisis years 2001, 2008 and 2015; 2) Based on Iran's exports of crude oil and petroleum products in 2016 Source: OPEC; CIA; Press reports; Roland Berger 15

16 3. Future oil prices 16

17 3 Future oil prices The oil price is now at about USD 58 For 2018, both institutions and the top-3 most accurate countries predict a price of around USD WTI price forecasts 1) [USD/bbl] NYMEX 55 WTI oil price as of Dec 2017 Prediction of institutions EIA OECD Average Both countries and institutions expect the oil price to decrease Corrected prediction of top-3 countries Iraq Nigeria Saudi Arabia Average ) Updated top 3 based on up to year n-1. To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (5-year moving average) and for budget deviations (5-year moving average, excluding 2015) Source: Ministry of Finance of selected countries; National banks; Press reports; Roland Berger 17

18 Global oil consumption [m bbl/day] 3 Future oil prices Historically, global oil consumption has followed global GDP growth Global oil consumption [m bbl/day] vs. global GDP, ) oil crisis oil crisis peak oil prices Global GDP [constant 2010 USD] 1) 2016 forecast based on OECD GDP growth, applied to World Bank data Source: The World Bank Development Indicators; BP Statistical Review of World Energy 2017; Roland Berger 18

19 Oil [m bbl/day] per trillion USD GDP 3 Future oil prices However, since a peak in 1973, the correlation between oil consumption and GDP growth has weakened Global oil consumption [m bbl/day] per trillion USD GDP, ) peak: 2.5 m bbl/day per USD tn GDP 1979 oil crisis : USD ~22 tn GDP with 56 m bbl/day oil consumption : 1.2 m bbl/day per USD tn GDP 2016: USD ~78 tn GDP with 91 m bbl/day oil consumption ) 2016 forecast based on OECD GDP growth, applied to World Bank data Source: World Bank Development Indicators; BP Statistical Review of World Energy 2017; Roland Berger 19

20 3 Future oil prices Depending on the scenario, BP predicts global oil demand to peak between 2025 and 2035 Global oil demand [m bbl/day] per year Expected peak oil Actuals Evolving transition Faster transition Even faster transition ICE 1) transition 1) Internal combustion engine Source: BP Energy Outlook 2018; Roland Berger 20

21 3 Future oil prices With its proven reserves, the US can ride it out until peak oil, maintaining pressure on the oil price as a swing supplier Proven reserves and production rate of 10 biggest oil producing countries Country Proven reserves ['000 million bbl] Production 2016 ['000 bbl/day] Time left [years] US 48 12, Saudi Arabia , Russia , Iran 158 4, Iraq 153 4, Canada 172 4, UAE 98 4, China 26 3, Kuwait 102 3, Brazil 13 2, ) Based on years Source: BP Statistical Review of World Energy 2017; Roland Berger 21

22 3 Future oil prices CEOs of major oil companies generally agree that the oil price will see a slight increase in the coming years Selection of quotes on the oil price Lower forever; yeah, that's the mindset. Yeah, to be perfectly honest, I do think we will have quite a bit of movement in the oil price going forward, and there is a better than chance that we will see oil prices trend up , Ben van Beurden CEO, Shell I don't expect there to be a real spike in the markets, barring some geopolitical event I've always said we're in the USD range until the end of the decade , Bob Dudley CEO, BP I think we will most likely be below USD 70 a barrel , Eldar Sætre CEO, Statoil It's very hard to predict what will be the oil price We see the prices for the medium term between USD 65 and USD 55 per barrel , Pedro Parente CEO, Petrobras A continuation of these market trends, combined with further steady draws in global oil inventories, is now creating the required foundation for further upward movement in oil prices and subsequent growth in global E&P investment , Paal Kibsgaard CEO, Schlumberger While the outlook for commodity prices has improved, our operating plan remains unchanged and we have already taken clear actions to demonstrate our commitment to maintain discipline and follow our priorities , Ryan Lance CEO, ConocoPhillips Source: Press; Roland Berger 22

2017 oil price forecast: who predicts best? Information document

2017 oil price forecast: who predicts best? Information document March 2017 Since 2007, Roland Berger has published a yearly overview of available oil price forecasts Roland Berger study of oil price forecasts,