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© OECD/IEA - 2007
Oil prices: Implications for supply and demand
National Energy Commission
Madrid, 18 December 2007
David MartinOil Market Analyst
Oil Industry and Markets DivisionInternational Energy Agency
Oil prices – a dynamic equilibrium of factors
2Source: IEA Oil Market Report
Oil price near $100, but why?
• Tight crude and product fundamentals push oil near $100/bbl in late-November•Resilient demand growth – driven by non-OECD regions•Concern over inventory cover ahead of winter demand •OPEC-10 production has fallen, despite rising oil prices
Crude FuturesFront Month Close
65
70
75
80
85
90
95
100
Aug 07 Sep 07 Oct 07 Nov 07 Dec 07
$/bbl
NYMEX WTI ICE Brent
Source: Platts
3Source: IEA Oil Market Report
Close to inflation-adjusted record highs
Source: IEA Oil Market Report4
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
Jan-
70
Jan-
72
Jan-
74
Jan-
76
Jan-
78
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
US
$/b
bl
Nominal vs. Real WTI Prices, base 2007
WTI Nominal WTI Real, 2007 base
4
Funds
Service sectorEngineeringEquipment Commodities
Investment costs
Marginal cost of supply
Geopolitics
Crude grade availability
OPEC policyCrude and product stocks
Refining capacity
Upstream capacity
Environmental regulations
Structure of demand growth
Supply growth
Demand growth
Product supply
Crude
prices
No single cause of high prices
© OECD/IEA - 2007 5Source: IEA Oil Market Report
OECD industry stock cover falls
•Total OECD industry stocks fall in October•Continues trend seen since middle of 2007•End-October OECD forward demand cover falls to 52.6 days; below the five-year average for the first time in two years.
OECD Total Oil
49
50
51
52
53
54
55
56
57
Jan Mar May Jul Sep Nov Jan
days
Range 2002-2006 5-year Average2006 2007
OECD Total Oil
2,300
2,400
2,500
2,600
2,700
2,800
Jan Mar May Jul Sep Nov Jan
mb
Range 2002-2006 5-year Average2006 2007
6Source: IEA Oil Market Report
European product stocks drop in November
•OECD European product stocks fell by 17.4 mb in October, of which 12.6 mb in distillates.•Preliminary November data shows further EU-16 distillates drop of 11.8 mb.
Europe
57
58
59
60
61
62
63
64
65
66
Jan Mar May Jul Sep Nov Jan
days
Range 2002-2006 5-year Average2006 2007
Europe
860
880
900
920
940
960
980
1000
Jan Mar May Jul Sep Nov Jan
mb
Range 2002-2006 5-year Average2006 2007
7Source: IEA Oil Market Report
…pushing futures structure towards backwardation
8
-6.0
0.0
6.0
-2
0
2
2000 2001 2002 2003 2004 2005 2006 2007
Days$/bbl OECD stock cover compared to average vs. Brent time spread
OECD stock cover: Diff to Rlg 5yr Av (RHS) ICE Brent M2-M1
Contango
Backwardation
Source: IEA Oil Market Report 8
The market will always balance
9
“No one is buying our crude – there must be no demand - this is speculation”
No – this is a price response, consumers are drawing on stocks to fill the gap
Monthly Balances (mb/d)
83
84
85
86
87
88
89
90
Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08
World Demand (RHS) World Supply (RHS)
If the supply is not there, prices rise to
encourage stock sales
Source: IEA Oil Market Report
Global demand growth
• World demand is now expected to average 85.7 mb/d in 2007 (+1.1% over 2006) and 87.8 mb/d in 2008 (+2.5%)•However latest economic data leave 2008 demand growth vulnerable
Global Demand Growth 2006/2007/2008 Global Demand Growth 2005/2006/2007thousand barrels per day thousand barrels per day
(mb/d)
2006 0.84 1.0%2007 0.95 1.1%2008 2.11 2.5%
Global Demand Growth
182 214161
138171
-208
286 307385
-10
124 109
North America
Latin America Africa
Middle East
EuropeFSU
841
375
571
Asia
-202
213 241
37
-275
237
10Source: IEA Oil Market Report
11
OECD demand
OECD demand forecast Average of 49.2 mb/d in 2007 (-0.3% year-on-year), 49.8 mb/d in
2008 (+1.3%) Key assumptions: heating needs will drive increase (normal weather);
transportation demand will be subdued
OECD: Total Oil Product Demand
45.5
46.5
47.5
48.5
49.5
50.5
51.5
52.5
Jan Apr Jul Oct
mb/d
Range 2002-2006 5-year avg2006 2007
Source: IEA Oil Market Report
12
OECD demand – price response Mixed signals
Contradictory indications regarding current demand trends North America: resilient transportation deliveries – but is US gasoline
demand on a clear downward direction? It depends on the data source Europe: continued heating oil and residual weakness – but autumn has
been colder than average – gas substitution or German consumer caution?
Pacific: downward revisions in 3Q07 – but 4Q07 outlook stronger on the back of persistent power needs
US Weekly Motor Gasoline Demand Growth(4-week avg vs previous year)
-3.5%-2.5%-1.5%-0.5%0.5%1.5%2.5%3.5%4.5%5.5%
05-J
an-0
7
19-J
an-0
7
02-F
eb-0
7
16-F
eb-0
7
02-M
ar-0
7
16-M
ar-0
7
30-M
ar-0
7
13-A
pr-
07
27-A
pr-
07
11-M
ay-0
7
25-M
ay-0
7
08-J
un
-07
22-J
un
-07
06-J
ul-
07
20-J
ul-
07
03-A
ug
-07
17-A
ug
-07
31-A
ug
-07
14-S
ep-0
7
28-S
ep-0
7
12-O
ct-0
7
26-O
ct-0
7
09-N
ov-
07
23-N
ov-
07
SpendingPulseEIA
Source: IEA Oil Market Report
OECD: Demand by Driver, Y-o-Y Chg
(1.0)(0.8)(0.6)(0.4)(0.2)
-0.20.40.60.8
2005 2006 2007 2008
mb/dTransportation HeatingPower Generation OtherTotal Demand
13
OECD demandHigh prices are reducing growth
Weaker North American and European outlook Data revisions: US and Mexican demand is softening (subprime effects?),
Germany continues to delay consumer heating oil stock refilling Reassessment of economic conditions, price effects and inter-fuel
substitution Prices may be starting to bite: slowing gasoline demand in the US,
consumer backlash in EuropeSource: IEA Oil Market Report
Source: IEA Oil Market Report14
Non-OECD demandCushioned by end-user subsidies
Non-OECD oil demand forecast Avg of 36.5 mb/d in 2007 (+3.1% year-on-year), 37.9 mb/d in 2008 (+3.6%) Key assumptions: China and the Middle East – over half of global demand
growth – will remain largely untouched by the US subprime woes and insulated from international oil prices given the prevalence of subsidies to end-user prices
But administered price regimes are raising new problems in many developing countries as international oil prices reach record levels
Non-OECD: Total Oil Product Demand
34.5
35.0
35.5
36.0
36.5
37.0
Jan Apr Jul Oct
mb/d
2006 2007
Non-OECD demandResponsive to market prices
China: Residual Fuel Oil Demand
500
600
700
800
900
1,000
1,100
1,200
Jan Apr Jul Oct
kb/d
Range 2002-2006 5-year avg2006 2007
Chinese domestic prices are capped by Government pricing policies However, fuel oil prices are not subject to pricing controls. Independent teapot refineries process straight-run fuel as feedstock for
producing poor quality gasoil Processing economics have become increasingly unattractive, leading to a
collapse in demand for fuel oil, primarily by teapot refiners This has contributed to product shortages in China in recent months
15Source: IEA Oil Market Report
Non-OPEC supply growth
Source: IEA Oil Market Report
Angola included in OPEC throughoutRegional Totals exclude biofuel growth
Total Non-OPEC Supply Growth (kb/d)
2006 532 2006 1492007 513 2007 1782008 1057 2008 599
thousand barrels per day
OPEC NGLs (kb/d)
North America
Latin America
Africa
FSU
Middle EastAsia
Europe
104
-27
262
96
411132
-435 -294 -39311 -9
-191
454 490472
-102 -105 -74
51 51 143
214 257 352
Global Biofuels (kb/d)
16
2006/2007/2008
OPEC - Back in the black
Source: IEA Oil Market Report
OPEC-10 increased by 0.2 mb/d in October, but Angola + Iraq also higher Rising supplies in November from Saudi Arabia, Iraq, Nigeria and Angola? But potential offset from UAE maintenance OPEC reticence to increase too much ahead of winter demand. Spare
capacity remains tight
-2000
-1000
0
1000
2000
-2000
-1000
0
1000
2000
Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07
kb/d Back in the BlackOPEC Crude Output v Year-Ago
Iraq & Angola Indon,Nig,Ven OPEC core Total
17
SECTOR MATURITY
INDUSTRY CYCLE
HOST GOVERNMEN
T
FORCE MAJEUREBELOW-
GROUND
18
Above-ground risks exceed below-ground risks - currently
Net impact is the same (lower
output & higher costs)…
…but at least some above
ground risks are reversible
Source: IEA Oil Market Report
Industry response – raise planning assumptions
19
source: SG Equity Research, SG Commodities Research, IEA
oil-company "planning prices"
10
15
20
25
30
35
40
45
1999 2000 2001 2003 2004 2005 2006
USD/b
(Brent)
2007
IOC’s have raised capital budgeting assumptions: Shifting opportunity set – more expensive projectsRising service sector and raw material costsIncreased incentive to explore for oil
Source: IEA Oil Market Report
Some Big Fish Still Lurking Offshore
Recent offshore discoveries in Brazil and China Circa 10 billion barrel or reserves and 1.5 mb/d of production potential from
the combined Tupi (Brazil) and Jidang Nanpu (China) Global uptick in exploration can make a difference although, notably, these are
NOC discoveries Neither field is a quick fix; further appraisal to confirm reserves and
development may be costly
Source: IEA Oil Market Report20
0 5 10 15 20 25 30 35
Safaniyah - remaining
Kashagan
Zakum
Cantarell - remaining
Tupi - recoverable
Azeri-Chirag-Guneshli
Nanpu - 3P (Govt)
Nanpu - 1P (Govt)
Sakhalin 2 complex
Thunder Horse (oil & gas)
Dalia
Bonga
Buzzard
Selected major offshore fields - recoverable oil, bb
Rising costs hamper projects
21Source: IEA Oil Market Report
Cost inflation dampens investment impact
(long-term futures prices remain above $80)
22
Source: Resources to Reserves, IEA, 2005
Tight service sector causes further cost inflation - $35 to $55/barrel? Call option for speculators/OPEC? Marginal cost of non-OPEC production influential when OPEC producing flat
out When spare capacity exists, price OPEC are willing to keep spare capacity off
the market is the key
22Source: IEA Oil Market Report
Biofuels: marginal but significant addition
Global biofuel production doubles to 1.75 mb/d by 2012 Potential supply capacity even higher: 2.9 mb/d by 2012
Biofuel Production & Capacity
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011 2012
mb/d
US Ethanol OECD EUR EthanolBrazil Ethanol Asia EthanolOther Ethanol OECD EUR BiodieselOther Biodiesel Potential Capacity
23Source: IEA Oil Market Report
Concerns over economic viability remain
We maintain our cautious stance on medium-term production
Price pressures on feedstocks (corn, sugar, soybeans, wheat, palm oil etc.)
Competition between first-generation biofuels and the food chain
Second generation technologies look promising but depend on technological breakthroughs
Ethanol Profitability
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1 2 3 4 5
Corn (US $/bushel)
Gas
olin
e p
rice
(U
S $
/gal
lon
)
2005
2006
2007
¢51/gln blending subsidy
Profitable
Unprofitable
The profitability line (net of subsidies) has been estimated to take into account the value of ethanol on an energy basis, a price premium for octane and oxygen
and a price premium for the sale of co-products.
CBOT Ethanol Crush Spread forward curve
0
50
100
150
200
250
300
350
400
Mar 05 Mar 06 Mar 07 Mar 08 Mar 09
c/gl
Forward curve from 24 Sept '07
24Source: IEA Oil Market Report
Biofuels: Is the cure worse than the disease?
“The potential of current technologies of choice –ethanol
and biodiesel – to deliver a major contribution to the
energy demands of the transportation sector without
compromising the environment is very limited.”
Background paper produced for the OECD roundtable on Sustainable Development
25Source: IEA Oil Market Report
Gas and Coal to Liquids : reality bites?
XTL relies on cheap gas/coal to justify low energy efficiency CO2 emissions per tonne of diesel produced is high CTL forecast to reach 145kb/d in China by 2012, but CO2 and water use may
limit further development. Potential for 600kb/d by 2020?
Project Sponsor Location Capacity Output Start-dateOryx QP/Sasol/Chevron QATAR 34,000 Diesel 2007 ?
Pearl Train 1 QP/Shell QATAR 70,000 Diesel 2011Pearl Train 2 QP/Shell QATAR 70,000 Diesel 2012
Total frim projects through to 2012 174,000
Project Sponsor Location Capacity Output Start-dateOryx 2 QP/Sasol/Chevron QATAR 66,000 Diesel 2013
Palm GTL ExxonMobil QATAR 154,000 Diesel 2015 + ? SasolChevron QATAR 130,000 Diesel 2015 + ? ConocoPhillips QATAR 80,000 Diesel 2015 + ? ConocoPhillips QATAR 80,000 Diesel 2015 + ? Marathon QATAR 120,000 Diesel 2015 +
Possible projects 630,000
Source: IEA Oil Market Report26
Medium-Term supply-side response limited so far
Medium-Term Growth Balance
0.0
1.0
2.0
3.0
2007 2008 2009 2010 2011 2012
mb/d
Non-OP EC Growth (excl. Biofuels) Biofuels GrowthOP EC NGLs Growth OP EC Capacity GrowthWorld Demand Growth High DemandLow Demand 2
Adjusted call on OPEC/stock chg: +5 mb/d by 2012 OPEC spare capacity to fall from 2.5 ->1.5 mb/d
+/- 1% GDP
27Source: IEA Oil Market Report
No single cause of high prices Tight crude supplies
Leading to stock draws Lack of supply-side response –so far
Both short and medium term – function escalating cost pressures OPEC spare capacity
How much is there, how much can be used?
Signs demand is moderating in response to high prices Anemic transportation fuel demand growth in OECD Non-OECD countries looking to lower subsidies?
But structural shifts not in place just yet Will take a while before car fleet becomes more efficient
Supply side response may come But considerable barriers in the way
Conclusions
28Source: IEA Oil Market Report