Stability and Volatility in the Global Oil Market: Past, Present, and Future

Transcription

1 Stability and Volatility in the Global Oil Market: Past, Present, and Future Instituto Brasileiro de Petróleo, Gás, e Biocombustiveis November 11, 2014 Robert McNally President, The Rapidan Group, LLC Nonresident Fellow, Center on Global Energy Policy t Bob.McNally@RapidanGroup.com

2 Uncontrolled Supply = Wild Price Gyrations $9 Crude Oil Prices Nominal, Source for prices: BP $8 $7 $6 US Dollars Per Barrel $5 $4 $3 $2 $1 $ US Average Arabian Light posted at Ras Tanura Brent dated. 2

3 The New Normal is Tight, Fearful, and Volatile OPEC spare capacity remains very low by historical standards amidst high disruption risk distributed without the author s permission 3

4 Surprise #1: Supply Curve is Steeper than Thought The mantra the solution for high oil prices is high oil prices has not held 4

5 Surprise #2: US Shale Boom Total US Crude Produc0on Forecast, Reference Case Source: EIA Annual Energy Outlook mb/d Forecast 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast 2013 Forecast 2014 Forecast

6 But the US Shale Boom Alone is No Global Game-Changer 6

7 Surprise #3? GDP Growth Thirstier than Assumed? Medium Term IEA Revisions In Direction of More Oil Per Unit of GDP 7

8 No Scalable Alternatives to Oil in Transportation World Energy Outlook (WEO), InternaYonal Energy Agency,

9 Last Time Volatility Was This Low For This Long Was in the Early 80s Mainly Due To Saudi Arabia s Playing the Swing Producer Role From , low volatility (below 20%) lasted 133 weeks and was the product of active (and unilateral) supply decisions taken by Saudi Arabia to manage prices. Saudi swings A combination of high non-opec supply growth and weak demand brought on by a protracted recession and OECD fuel-switching threatened to flood the market and crush prices. Saudi swings Saudi refuses to swing To keep prices stable, Saudi Arabia cut production from 10 mb/d in 1980 to 3.5 mb/d in The period of low-volatility ended in 1985 when Riyadh abruptly flooded the market (in part to re-instill discipline in OPEC), causing oil prices to collapse and volatility to skyrocket. 9

10 Unlike 1980s, Current Low-Vol is Due to a Variety of Factors (1) Record Saudi Output Helps As Does (2) Booming North American Supply But Tepid GDP Growth (3) Is A Big Factor As Is Until Recently (4) OECD Destocking, Chinese Understocking 10

11 1. Sharply weakening GDP (ex- US) Why Are Oil Prices Falling Sharply? Three Reasons 3. Libya s surprising return 2. Sharply declining oil demand growth 11

12 Someone Has a Lot of Cutting to Do OPEC October 2014 Monthly Report Sep OPEC producyon (secondary sources) Mb/d H15 Call on OPEC 28.5 Difference 2.0 OPEC, October

13 If Big Cuts are Needed, OPEC Will Expect LTO Producers to Make Them However Saudi Arabia would likely cut if prices approached or entered the $60 range World Energy Outlook 2013 OECD/IEA, 2013, fig , p

14 Rapidan Group s Long Held View Saudi Won t Swing Becoming Consensus The market s recent realization Riyadh sees shale oil economics establishing the price floor has upended core perceptions of price behavior 14

15 Longer Term Issues: GDP Growth, Demand Efficiency and OPEC Policy We disagree with consensus forecasts, such as BP s, mainly about the pace of efficiency gains and substitution. GDP growth is thirstier than commonly assumed. OPEC s spare capacity is unlikely to rise above 4-5 mb/d, assuming strong GDP growth. If GDP growth slows, OPEC disunity and preference for shale cuts may prevent timely and adequate supply cuts, leading to larger than expected price drops. OPEC is not investing enough to meet demand for its crude (assuming healthy GDP) and to keep an adequate spare capacity cushion. World can have stable oil prices or healthy GDP growth, but not both. If OPEC fails to regain control of the market, oil prices are likely to gyrate widely. 15