IHS ENERGY Presentation Oil Market Services Demand-pull or Supply-push? Changes in crude oil markets and possible implications for refining London, 10 th March 2015 ihs.com Damian Kennaby Director, OMS Research +44 (0)208 276 4784 damian.kennaby@ihs.com
Demand-pull or Supply-push: key messages OPEC remains on the sidelines since its stance to hold production at the November 2014 meeting, allowing the market to find the marginal producers. Several Gulf state members have actively talked the price down, speeding market response. US month-on-month production growth is expected to halt later this year as investment slows by an estimated 30%. However, the global overhang is expected to endure throughout 2015 on continued elevated OPEC production. Demand is expected to strengthen in 2015 and 2016, but will be insufficient on its own to balance the market without a supply adjustment. The weak fundamentals have allowed a strong contango to develop, hitting levels that are making floating storage an attractive option. This will limit the downside that prices could reach, but also extends the duration of weak prices as that storage is worked off eventually. Crude prices and refining margins do not always move together. Crude prices are susceptible to geopolitics and market psychology as well as changes in demand and supply; refinery margins, more the true commodity, more closely reflect economic growth and demand. 2
The return of Libyan production was the turning point for Brent prices as fundamentals came back into focus Global oil supply growth and the Brent forward curve (3 rd month 1 st month) $/b 2.5 mmb/d 2.50 2.0 1.5 1.0 US + Libya cumulative production change Tipping point mid 2014 2.00 1.50 1.00 0.5 0.50 0.0 0.00-0.5-0.50-1.0-1.00-1.5-2.0 Brent forward curve (3 rd to 1 st month) -1.50-2.00-2.5-2.50 Source: IHS Energy Crude Oil Markets 3
Understanding the 2014 Price Collapse A Perfect Storm But One That Has Been Brewing Tipping point Fuel Switching, Efficiency, Carbon Decreasing Disruptions - Libya Chinese Demand Growth Slowdown US Shale Revolution Supply +1.96 mmb/d Demand +900 mb/d Growth from the Frontier: Canada, Brazil, GOM OPEC Inaction Emerging economies slowdown The fall in prices has been as swift as it has been sizeable. However, most of the drivers that underpin it have been firmly structural, with the current decline the culmination of 2 years of artificial stability Global supply disruptions, much higher than historical levels since 2011, maintained supply in check for 2012 and 2013. However, the fact that the return of 500 mb/d from Libya alone tipped the global balance tells you how fragile stability actually was. There is limited upside for global disruptions: Even if Libya production were to fall again, other geopolitically stranded barrels are already re-entering the market in Northern Iraq and potentially Iran going forward Structural Drivers Subsidy Reform The collapse of prices in 2014 may look like a perfect storm, but lack of short-term adjustment Current mechanisms and future changes mean dramatically it alter will the old rather industry paradigm be akin when to new a supply prolonged came on slowly; monsoon discontinuities could shift price rapidly 4
OPEC s challengers are not just shale OPEC (and primarily Saudi Arabia) has many challenges and concerns about the future: External US shale oil Canadian oil sands Brazil and other deepwater Internal Iraq Iran Libya Its choices: Cut and hope to prop up the price significantly Focus on maintaining volume 5
Weak demand growth will continue to lead to stock builds in 2015, although builds will slow after 2Q15 A global oversupply is still expected as crude production from OPEC is projected to rise in 2015 and 2016, supported by higher Libyan output in 2015 compared with 2014 and increasing Iraqi output in 2015-16. 6
OPEC crude production Core OPEC production will remain at levels higher than needed as market share is maintained 7
Current account $/bbl Current account and fiscal budgets are stressed for most OPEC members at $60/bbl, but OPEC core strongest 2015 OPEC oil price thresholds: Current Account versus Fiscal Budget price needs 180 Libya 160 Iran Ecuador 140 Angola Venezuela 120 100 80 OPEC core Nigeria Iraq 60 40 20 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 Source: IHS Crude Oil Markets service UAE Kuwait Saudi Arabia Fiscal budget $/bbl Algeria Stressed members 2014 IHS
US onshore well productivity is highly skewed: many wells can be cut with little change in production US oil production is highly skewed toward a small number of very productive wells and a long tail of marginal contributors. The bottom 70% of wells produce less than 200 b/d first month; consume 40% of drilling capex; and yield only 16% of new monthly production. % Well Count by Peak Oil Category % Capex by Peak Oil Category % Peak Production by Peak Oil Category 70% of wells 0-100 barrels/day 800+ 400-800 200-400 100-200 b/d 40% of capex 16% of new production Source: IHS Energy North America services; excludes offshore, certain small Appalachian wells and wells with zero liquids production 9
MMb/d There is a wide range of production economics among and within onshore US plays US onshore crude brought online by WTI $/bbl breakeven categories 3.5 3.0 2.5 Breakeven $/bbl WTI 120+ 110-120 100-110 2.0 90-100 1.5 1.0 Volume needed to replace 2013 onshore base decline $60-$70/bbl $50-$60/bbl $40-$50/bbl 80-90 70-80 60-70 0.5 $30-$40/bbl 50-60 0.0 40-50 30-40 Source: IHS Energy In 2013, the US needed 1.45 MMb/d of new production to cover base decline, all of which could have come from wells breaking even at $60-$70/bbl 10
Markets Balanced Short-term oil markets balancing elements changing Shale oil, shift to non-oecd demand will impact market balancing High Oil Prices Global Slowdown IEA Stock Release Demand Decreases (OECD) Global Slowdown IEA Stock Release Demand Decreases (OECD) Shift to non-oecd demand (often subsidised) will slow market responses to high prices though subsidy changes do increase elasticity. Saudi Production Management Saudi Production Management Abandoned for now will new Abandoned for now balancers emerge? Elements used to bring markets back into balance as needed. Broad OPEC Cut Demand Increases/Conventional production slowdown Broad OPEC Cut Shale Oil Production Change Demand Increases/Conventional production slowdown High decline rates, low productionper-well can cause shale oil to be responsive to short-term price changes, creating interaction with OPEC production changes. Low Oil Prices Current/historic oil market balancers Future oil market balancers 11
Dated Brent price per barrel, annual average Illustrative oil price paths to 2020 IHS scenarios Potential crude oil prices paths to 2020 $150 $130 $110 Vertigo $90 $70 $50 Rivalry Autonomy $30 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IHS Energy. These outlooks are the starting point for discussion. They are subject to change pending completion of workshops. 12
Impacts on refining: Demand-pull or Supply-push? 2014 and 2015 looking like a supply market so far Dated Brent and Net Cash NWE FCC refining margins NWE FCC margins: Dollars per barrel 14 12 Financial crisis and subsequent world recession OPEC cuts production but demand lost through recession Oil supplies increase but OPEC does not act to balance market Dated Brent: Dollars per barrel 140 120 10 8 Strong China and non- OECD Asia growth and demand increase 100 80 6 4 Asia financial crisis, OPEC cuts production 60 40 2 20 0 0-2 Margin recovery hit by -20 US crude disconnect FCC Margin Dated Brent but resumes in Q114-4 -40 Jan 1995 Jan 1997 Jan 1999 Jan 2001 Jan 2003 Jan 2005 Jan 2007 Jan 2009 Jan 2011 Jan 2013 Jan 2015 Source: IHS Energy 13
Key oil market signposts for the next 18 months The responsiveness of US shale- what is the start, speed and depth of the slowdown? OPEC steadfastness- emergency meetings, pledges to cut production Venezuela stability- loan defaults, unrest, power outages KRG sales- disposition of floating cargoes, Ceyhan loadings Contango and stock levels- does it rise to levels incentivising floating storage? Libya- Central bank position in ongoing conflict, outages Iran- US congressional action, additional loadings Saudi OSPs- does Asia (and by extension, global) demand remain weak? 14
About this Presentation This presentation has been prepared for the sole benefit of attendees of the OPERA seminar Business Interruption Beyond Gross Margin, London 10 th March 2015. Neither the analysis nor any part of the analysis shall be provided to third parties without the written consent of IHS. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of IHS. Possession of the analysis does not carry with it the right of publication. IHS conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. IHS has utilized such information without verification unless specifically noted otherwise. IHS accepts no liability for errors or inaccuracies in information provided by others. 15
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