Deutsche Bank AG Energy Markets and the Global Economic Outlook Toronto Forum for Global Cities November 2010 Adam Sieminski, Chief Energy Economist Commodities Research [email protected]USA +1 202 662 1624 Deutsche Bank AG All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Transcript
Deutsche Bank AG
Energy Markets and the Global Economic Outlook
Toronto Forum for Global Cities
November 2010
Adam Sieminski, Chief Energy Economist Commodities Research
Deutsche Bank AGAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
China 9.6 9.1 10.0 8.7 14.0Other Asia (1) 6.0 1.8 7.8 5.8 12.0Latin America 4.3 -2.7 5.5 4.1 6.0Other Non-OECD (2) 3.6 -3.8 4.5 4.0 13.0
Non-OECD 6.2% 1.9% 7.2% 6.0% 45.0
World 3.0% -1.0% 4.6% 3.8% 100.0
Outlook
Fears of a double-dip recession and the risk of deflation have risen appreciably in the US. While the Deutsche Bank global economic
team's baseline forecast does not foresee a double-dip, the downside risks have increased. The risk is heightened by two policy factors: (1) the Fed is running very low on available policy stimulus measures, and (2) fiscal policy
is scheduled to turn substantially contractionary, with at best mixed signals from Washington on the prospects for relief on that score.
World economy improving sharply in 2010 but slows a bit in 2011
Source: DB Global Markets Research
2
World GDP Could Slightly Disappoint in 2011
IMF looking for 4.2% growth in 2011
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Good News: the Next US Recession Is Not Due Soon
Relationship between Fed rate increases and following economic downturn
The duration of every US expansion since
1954 has been directly proportional
to the amount of time it takes the US
Federal Reserve to start tightening
monetary policy after a recession.
Outlook
The last recession ended in June 2009. According to our US economics team, the Fed may embark on a new monetary tightening cycle in August 2011. Based on our calculations, this implies the next US recession will begin in July 2014.
Source: Deutsche Bank,
Columbia University Center for International Business Cycle Research
0
20
40
60
80
100
120
140
0 10 20 30 40 50 60
Exp
ans
ion
len
gth
in m
onth
s
Number of months from leaving recession and the FOMC raising interest rates (Prime rate lag)
y=1.73x+16.3R²=0.84 91-01
82-90
61-69
01-07
75-80
70-73
2009-2014 Forecast
58-60
80-81
54-57 Excluding the 1991-2001expansion would raise the R² to 0.98
3
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
According to the IMF, in the long run, a 1% depreciation in the US dollar is associated with increases for gold and oil prices of more
than 1%. In the short run, the elasticity is close to 1, but higher for gold than for crude oil, says the IMF. We believe the relationship between oil prices and the US dollar is highly unstable. The EURUSD at 1.60 implies triple-digit oil.
Oil Prices and the US Dollar
What is the shifting dollar doing to commodities and oil?
4
Outlook
Source: Bloomberg Finance LP, DB Global Markets Research
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank 5
Oil Prices and the US Stock Market
Positive correlation takes hold in March 2009
The relationship between the S&P 500 and oil is usually inverse. From July 2008 to the start of March 2009, the two moved in parallel
down. From April 2009, the relationship appears to be positively correlated. The 2010 regression implies the S&P500 at 1100 equates to USD76.50/bbl oil. 1000 = USD69/bbl 1200 = USD84/bbl
Source: Bloomberg Finance LP, DB Global Markets Research
Oman 0.82 0.85 0.86Colombia 0.69 0.79 0.85Argentina 0.80 0.78 0.77
Malaysia 0.69 0.70 0.67Egypt 0.68 0.66 0.67Australia 0.59 0.60 0.57
Sudan 0.49 0.54 0.54Vietnam 0.34 0.42 0.52
Source: US DOE/EIA
6
US DOE / EIA International Energy Agency
Source: IEA OMR, October 2010
50.0
50.5
51.0
51.5
52.0
52.5
53.0
53.5
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Month IEA forecast was made
Fore
cast
non
-OPE
C s
uppl
y
2011
mmb/d
2008
2009
2010
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank 7
OPEC Crude Capacity and Spare Capacity
OPEC Spare Capacity 2009-1010
Current estimates of spare capacity differ mainly over how to account for Nigeria, Venezuela, Iran and Iraq. Future spare capacity depends on demand, non-OPEC supply, OPEC capacity decisions and quotas.
Source: Wood Mackenzie, DB Global Markets Research
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Can Oil Prices Be Too High or Too Low?
Oil’s share of World GDP (nominal oil price x demand volume / nominal GDP)
At 5-6% of global GDP, oil absorbs too much of disposable income -- and provides too much incentive for substitutes. At 1-2% of global GDP, oil demand grows rapidly and upstream investment does not. Company cash flow is insufficient to expand. The “sweet-spot” appears to be somewhere near 4% (not often achieved) The sweet spot translates into a current WTI price near $80/bbl in 2010-11… and about $100/bbl in 2015.
Outlook
Source: US DOE/EIA, IMF, DB Global Markets Research
8
$125/bbl oil in 2011 would push oil’s share over 6%
$150/bbl oil in 2011 = 7%, near the all time high of 1980-81
Using the IMF’s GDP growth forecasts, oil at $150/bbl in 2016
would imply a 6% share
0%
1%
2%
3%
4%
5%
6%
7%
8%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
5.9% Avg 1980-1985
1.9% Avg 1986-2003
5% 2008
$150 Oil6%
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Can Oil Prices Be Too High or Too Low? Part 2
Equilibrium oil prices if you assume a constant 3.5% share of GDP
Oil’s average share of global GDP over the period from 1975 to 2010 is 3.3%. A 3.5% sweet spot translates into a current WTI price near $70/bbl in 2010, $75 in 2012m and about $85/bbl in 2015. Note that actual prices can remain both above and below this definition of “equilibrium” for long periods of time.
Outlook
Source: US DOE/EIA, IMF, DB Global Markets Research
9
This does not take into account changes in the composition of GDP or of factors such as the
shifting value of the USD
0
10
20
30
40
50
60
70
80
90
100
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Equilibrium Price
Actual Price
USD/bbl
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Shale Gas… Looks Like It’s Everywhere
Major North American shale basins
10
Source: Wood Mackenzie, Deutsche Bank
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Could be nearly 10bcf/d this year- and over 30bcf/d by 2030
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Shale Gas Is Global
Major shale basins around the world that have been identified
Outlook
Development of just a small proportion of this resource could dramatically change local gas markets with implications for global gas
dynamics. Specifically, it could reduce import requirements, provide additional export sources and impact global gas pricing.
Source: Wood Mackenzie, Deutsche Bank
12
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Business-as-usual emissions rise by over 50% between 2005 and 2020
Source: McKinsey Global GHG Abatement Cost curve v2.0.
The power sector is the largest contributor to greenhouse gas emissions, and is growing faster than the average rate of 1.7%.
Transport is the second largest sector. Abatement through use of hybrid and electric vehicles would require the power sector to be low carbon.
Global abatement potential
Gt CO2e
Cleaning up the power sector is critical
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank
Natural Gas and Renewables: A Secure Low Carbon Future Energy Plan for the United States
Deutsche Bank believes in a realistic, low carbon energy pathway over the next 20 years, with a mix of natural gas, renewables, and nuclear replacing old and inefficient coal plants. This energy plan provides a credible, low risk and affordable way for America to achieve a 44% reduction in CO2 emissions from the power sector by 2030 from 2005 emissions levels.
Our key finding is that a significant switch by the US electricity sector from coal to natural gas would be the most secure, least cost approach to lower carbon emissions. (Burning natural gas creates circa half the amount of CO2 compared with coal). When combined with further renewables and nuclear use, this plan would involve a reduction in coal’s share of energy generation from 47% currently to 22% by 2030.
This would make the Obama Administration’s targets of a 17% over all economy-wide reduction in greenhouse gas emissions by 2020 and an 83% reduction by 2050, realistically achievable.
We emphasize, however, that efficient coal units, renewable and nuclear energy must remain as important components of the over all energy mix portfolio. We envisage wind and solar energy, for example, increasing to 14% of the US electricity mix by 2030 compared to just 2% today.
A large-scale switch from coal to natural gas in the US has become possible due to the major increase in supply from unconventional shale gas that is causing a long term fall in the price of natural gas, making it a far more economic fuel than in the past. We believe shale gas is environmentally sustainable with best practices. And because it is domestically abundant it also provides a high level of energy security.
Path Forward
Source: DB Climate Change Advisors
14
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank 15
Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Appendix 1: Regulatory Disclosures
Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Adam Sieminski
Adam Sieminski +1 202 662 1624 [email protected] November 2010Deutsche Bank 16
Appendix 1: Disclaimer
Global Disclaimer
Investing in and/or trading commodities involves significant risk and may not be suitable for everyone. Participants in commodities transactions may incur risks from several factors, including changes in supply and demand of the commodity that can lead to large fluctuations in price. The use of leverage magnifies this risk. Readers must make their own investing and trading decisions using their own independent advisors as they believe necessary and based upon their specific objectives and financial situation. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Deutsche Bank makes no representation as to the accuracy or completeness of the information in this report. Target prices are inherently imprecise and a product of the analyst judgement. Deutsche Bank may buy or sell proprietary positions based on information contained in this report. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof. This report is provided for information purposes only. It is not to be construed as an offer to buy or sell any financial instruments or to participate in any particular trading strategy.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.
