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About Platts A division of The McGraw-Hill Companies (NYSE:
MHP) World's leading provider of energy information.
With over 10,000 customers across 150 countries, 600 employees in 17 offices around the world, and nearly a century of business experience, Platts is the most recognized and respected information company in the energy industry.
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A few observations…• Gasoline prices have been low!• …because gasoline has been the “runt
of the litter”• Structural changes may be making
that permanent• But refiners are adaptable…how fast
will they adapt?• US has become a decent-sized
exporter as a result of some of these changes
But misunderstandings linger..
• The three-headed monster: keep your eye on all three heads!
• Gasoline prices need to “catch up.” Or do they?
• “Normal” catch-up may be on a new standard.
Gasoline to crude: big change
WTI as a pct of GC gasoline2005-2006
AVERAGE: 85.73
50.00
60.00
70.00
80.00
90.00
100.00
110.00
3-Jan-05
3-Apr-05
3-Jul-05
3-Oct-05
3-Jan-06
3-Apr-06
3-Jul-06
3-Oct-06
The laggardWTI as % of GC Gasoline -- recent
Average: 95.31
80.00
90.00
100.00
110.00
1/2 2/16 4/1 5/16 6/30 8/14
Why did diesel surge?• Long-time consumption trends,
particularly in Europe• The configuration of refineries was
always to make more gasoline• The Bolivian and Argentina gas messes• New sulfur rules in the US and Europe• But companies react…ingenuity and
greed triumph, eventually
Ramping it up…Gasoline yields down, distillates up
20
25
30
35
40
45
50
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
Gasoline yield
Distillate yield
Returning to normalcy?
Gulf Coast diesel over GC gasolinects/gal
-5
15
35
55
75
The ethanol impact• Ethanol having an enormous impact on the
relative price of gasoline• Despite the controversy, mandates for it are
set to grow• Iowa: first in the nation caucus• But…McCain has never been an ethanol
backer• US tariff is simply sending Brazilian material
elsewhere…with US bearing the transportation costs.
• Currently 6.6% of US gasoline consumption• Showing up in conventional markets.
More common misunderstandings..
• The curve predicts prices• Prices are a function of percentages.• Speculators pulling out of the market
led the price down• BUT…if speculators were at fault,
where were the inventories?• More likely: the diesel-driven surge
ended because of softer demand, refiner reaction
Things you will hear this election…
“The US has no energy policy.”The US has an energy policy that has been
largely bipartisan.• Minimal taxation of gasoline• Restricted drilling.• Limits on nuclear power• Turn food into fuel• Cleaning up the fuel poolThis constitutes “a policy,” because there
are clear choices being made.
The coming gas revolutionTransformative technologies might be in hydrocarbons
The shale plays: Barnett, Haynesville, Marcellus….
Aubrey McLendon, the Pied Piper of shale natural gas:
• Retrofit 25,000 gas stations at a cost of $400,000 per station.
• Fill up at $2.50/gallon [equivalent], which is $20/Mcf. Current price: less than $9/Mcf.
More McLendon…• Told the House Select Committee on
Energy Independence and Global Warming that US gas producers could increase production by by 5% annually for the next 10 years, providing enough natural gas to fuel 10% of America's cars and generate enough power to prevent the building of any new coal-fired generation plants.
Natural gas as an alternative
• The same characteristics as oil• Lower CO2 intensity• Lower emissions on almost everything• Suddenly…an abundant supply?• And that’s without expanded offshore
drilling• Can wind/solar/biomass compete
against this?
What alternatives face, or “Why I decided to love oil as an energy
source.”• Tremendously dense• Easily stored• Easily transported• As a result: invisible to society at
large• Even at these prices, still beats all
alternates.
Could research have beaten this curve?
Inflation-adjusted crude price
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
Apr
-83
Apr
-85
Apr
-87
Apr
-89
Apr
-91
Apr
-93
Apr
-95
Apr
-97
Apr
-99
Apr
-01
Apr
-03
Apr
-05
Apr
-07
Basis+2004 CPI
The broad factors…mostly bullish
• World supply remains constrained: Mexico, Russia, and expected declines
• The return of nationalism: Chavez and Putin• Repeated failure of non-OPEC targets to be
reached: IEA projected 4Q ’08 at 51.8 last Dec; most recent, 51.3
• The controversy over Saudi Arabia/Ghawar• The rising demand giants• Commodity bull markets often run 18-20
years
Ominous warning: John Hess• "An oil crisis is coming."• When looking at the tight squeeze in
the supply/demand balance, "it's hard to see any relief in sight." Hess said in the opening session.
• Growth in oil demand is "unrelenting" and the world needs "a sense of urgency, or the consequences will be severe."
REAL demand destruction
• Late 1997: IEA estimates ’98 demand will be 75.6 million b/d
• By April ’99, IEA estimated world demand plunged to 73.8 million b/d
• Supply went from 75.6 million b/d to 75.3 million b/d 4Q ’97 to 4Q ’98
• Result: Lowest real crude price ever
Current demand destruction nowhere near as much
• Outright, no demand destruction at all• 4Q ’07: 87.2• Projected 4Q ’09: 89 million b/d…up 1.8
million b/d• Supply strains to keep up: • Non-OPEC…49.7 rising to 50.6• Asking OPEC to produce by 4Q 2009 32.3
million b/d• Latest Platts estimate: 32.77 million b/d
Shorter-term: downward pressure
• That OPEC output is higher than the “call” for both fourth quarter and first quarter 2009
• Fourth quarter call: 31.3 million b/d• First quarter call: 30.3 million b/d• OPEC meeting: “we’ll be good boys!”• Main players concerned with demand
destruction
What to watch for..• Upside potential: Non-OPEC output
continues to disappoint• Mexico’s train wreck gets even worse• Venezuela joins in on the highway to hell• The whispers about Saudi production turn
out to be true• Can Iraq save the day?• Downside potential: demand retreats
further…but that might mean the economy isn’t too hot!
What to watch for, con’t…
• Does natural gas pull down the price of oil?
• The big breakthrough: oil shale, at the Mahogany play
Questions?