Oil Markets: Where next?
Christof Rühl,
Global Head of Research
Singapore
September 2016
1
Content
Oil and the economy: Recap
Why did lower oil prices not support economic growth?
OPEC vs. US – two sides to supply
Will demand growth balance the market?
2
“Secular Stagnation“ ?
3
Source: The World Bank
-2
0
2
4
6
8
10
1970 1980 1990 2000 2010
US UK
Japan Italy
France Germany
10-year moving average in percent
Real GDP growth
Yield
Source: Datastream
-2%
0%
2%
4%
6%
8%
1983 '87 '91 '95 '99 '03 '07 '11 2015
US
Germany
Japan
Real return on 10-year
Government bonds
-8
-6
-4
-2
0
2
4
6
8
10
12
14
20
30
40
50
60
70
80
90
100
110
120
130
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
12M – Dated Brent (rhs)
Dated Brent
0
20
40
60
80
100
120
140
Jan-00 Jun-05 Nov-10 Apr-16
Dated Brent
Weekly oil price
$/bbl $/bbl $/bbl
Contango
Backwardation
Daily oil price and term structure
Crude oil prices
4
Source: Bloomberg Source: Bloomberg
Source: Bloomberg
3
4
5
6
7
8
9
China Emerging World
Apr-13 Apr-16
0
2
4
6
8
10
12
2000 2004 2008 2012 2016
BOJ ECB FED
Central bank assets and global growth projections
Trillion US dollars
5
Central bank assets Revisions to 5-year GDP growth forecast
Percent
Source: IMF WEO
-1.1pp
-2.4pp
-0.7pp
20
30
40
50
60
70
80
90
100
110
120
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Dated Brent
Where is the “shot in the arm”?
Revisions to 2016 GDP growth projections
GDP growth
Source: IMF
6
Oil price decline
Source: Bloomberg
July 2014
US dollars per barrel
0%
1%
2%
3%
4%
5%
World US Advancedeconomies
Emergingeconomies
Jan-15 Jul-15 Jan-16 Jul-16
Content
Oil and the economy: Recap
Why did lower oil prices not support economic growth?
OPEC vs. US – two sides to supply
Will demand growth balance the market?
7
(1) US Dollar is appreciating
Source: Bloomberg
Real trade weighted US Dollar index…
• Relatively strong US growth and
productivity gains
• The end of QE in the US
… rises for good reasons
15% real appreciation since July
2014 (20% since July 2011):
Index, Jan 1990 = 100
85
90
95
100
105
110
115
120
125
Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15
8
(2) Households are deleveraging
Household debt as a share of GDP
Change in household
debt since peak:
- 7 percentage points
- 19 percentage points
40
50
60
70
80
90
100
1Q 99 1Q 01 1Q 03 1Q 05 1Q 07 1Q 09 1Q 11 1Q 13 1Q 15
US
Euro area
1Q 2008 = 97.9%
4Q 2009 = 63.6%
9
(3) Structural change: Importers are becoming producers
Share of local consumption produced ‘at home’
Decline in imports
since 1995:
- 470 Kb/d
- 2,710 Kb/d
10
Source: BP Statistical Review of World Energy
30%
40%
50%
60%
70%
80%
90%
1990 1994 1998 2002 2006 2010 2014
US Brazil
(4) The long decline of oil intensity
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1965 1973 1981 1989 1997 2005 2013
OECD
Non-OECD
World
Barrels of oil per $1,000 of GDP
- 42%
- 48%
- 58%
Decline
since 1979:
1979
Source: BP Statistical Review of World Energy
11
Content
Oil and the economy: Recap
Why did lower oil prices not support economic growth?
OPEC vs. US – two sides to supply
Will demand growth balance the market?
12
20
30
40
50
60
70
80
90
100
110
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16
Total US crude production US onshore crude production WTI price (rhs)
The resilience of US shale production
13
Million barrels per day
Source: EIA
Dollars per barrel
0
20
40
60
80
100
120
Eagle Ford Bakken Permian(Delaware)
Permian (Midland) Niobrara
2012 2013 2014 2015 2016
US shale break-even crude price
US dollars per barrel
Source: Rystad Energy
14
Average 2016
WTI price so far:
$41 per barrel
US E&P: Operating cash flow does not cover capex
Million $
15
(50,000)
(40,000)
(30,000)
(20,000)
(10,000)
–
10,000
20,000
30,000
40,000
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Operating CF
Capex
Free Cash Flow
8%
9%
10%
11%
12%
13%
14%
15%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Russia
Saudi Arabia
US
Global liquids production and market share
Market share
40%
41%
42%
43%
44%
45%
46%
47%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Market share
Selected countries (crude and NGLs) OPEC (crude & NGLs)
16
Source: IEA Source: IEA
November 2014 November 2014
6%
7%
8%
9%
10%
11%
12%
13%
14%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Iran Iraq
Crude oil market share within OPEC
Market share within OPEC
26%
27%
28%
29%
30%
31%
32%
33%
34%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Market share within OPEC
Iran and Iraq Saudi Arabia
17
Source: IEA Source: IEA
(1,000)
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
4Q2015
1Q2016
2Q2016
Iran Iraq
UAE KSA
Venezuela Nigeria
Net change
(1,000)
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
4Q2015
1Q2016
2Q2016
Canada
US
Mexico
Net change
Source: IEA
Cumulative supply growth since 2Q 2014
Key OPEC producers
Thousand barrels per day (kb/d)
North American producers
18
Source: IEA
Thousand barrels per day (kb/d)
OECD inventories at historic highs
19
Million barrels of crude oil and oil products
Source: EIA
2,550
2,650
2,750
2,850
2,950
3,050
3,150
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
2010-14 Range
2010-14 Average
2015
2016
Content
Oil and the economy: Recap
Why did lower oil prices not support economic growth?
OPEC vs. US – two sides to supply
Will demand growth balance the market?
20
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
Average2011-14
2015 1H 2016
Europe
US
Demand growth above long-term average
European and US demand growth
Million barrels per day (Mb/d)
Source: IEA
OECD and Non-OECD demand growth
-0.5
0.0
0.5
1.0
1.5
2.0
Average2011-14
2015 1H 2016
OECD
Non-OECD
Million barrels per day (Mb/d)
Source: IEA
1.1 Mb/d
1.6 Mb/d
21
1.5 Mb/d
Global growth
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016
North America Other FSU OPEC Global demand growth
Source: IEA
Global supply and demand
Thousand barrels per day (kb/d)
22
~400
kb/d
Incremental global supply and demand growth since 2Q 2014
Before Algiers: Where we stand
23
‘Freeze’ production?
YES NO
Decision implemented? Decision implemented?
YES NO YES NO
• Oil price supported
• Global market shares:
- OPEC down
- US up
• Market shares within
OPEC constant (Iran
up in case of a side
agreement)
• Oil price under pressure
• Global market shares
stabilizing
• Market share within OPEC:
- those who cheat are up
• Oil price under pressure
• Global market shares:
- OPEC up
- US down
• Market shares within
OPEC determined by
capacity
• Oil price supported
• Global market shares:
- OPEC down/
- US up
• Market share within OPEC:
- those who blink are down
Broken promises or OPEC ‘blinking’ – same same
OPEC blinks Broken promises
Conclusion
Oversupply (incl. inventories) to last for medium term
Price ceiling restricts room for intervention (“freeze”)
Meaningful intervention unlikely
Effect of Capex cuts will support prices – eventually
24