strategic advisors in global energy how long will this high price episode last? special presentation...
TRANSCRIPT
Strategic Advisors in Global Energy
How Long Will This High Price Episode Last?
Special presentation for the IPAACarl Calabro, Director, Market Analysis
Markets Group
June 16, 2005
Markets & Countries | Page 2
Key Conclusions
The world is entering an episode of higher and more volatile
prices than anything witnessed in the past two decades.
The higher long-term prices are the result of a number of
cyclical and structural factors coming together in the last two
years.
This new price episode is likely to last few years, or until some
of the cyclical trends are impacted by higher prices.
Higher prices will change the industry as profoundly as lower
prices did after 1986.
Markets & Countries | Page 3
Energy Security Re-Emerge as a Strategic Driver
In the aftermath of 9/11, security in the Middle East has reemerged as a key global concern.
The US presence in Iraq, and the avowed goal to “democratize” the region has raised the issue of the stability of a number of regimes in the Gulf.
Internal tensions, terrorist attacks in the GCC countries have heightened the perception of oil facilities being at risk.
Finally, the emergence of China as a large importer of Middle Eastern crude has added to the perception that a race to secure energy sources is emerging.
In a world dominated by security concerns rather than by globalization (pre 9/11), energy security has added a bullish factor to the perception of future prices, helping to lift the long term crude prices.
This is unlikely to change during the second Bush Administration, which remains focused on the war on terror.
Markets & Countries | Page 4
Stock Depletion
Setting the Stage in 2003 and 2004Chain Reaction In The Oil Market
Tight Refining
&
Tanker Capacity
Hedge Funds
Political Instability
$HIGH PRICE
OPEC’s Stock Management
Venezuela + Iraq
Demand Growth
Markets & Countries | Page 5
When Structural And Cyclical Events Collide
Exogenous ElementsExogenous Elements
Energy Energy SecuritySecurity
Hedge Hedge Funds’ RoleFunds’ Role
Oil FundamentalsOil Fundamentals
Low Supply Low Supply GrowthGrowth
Soaring Soaring Demand Demand
High High pricesprices
High High pricesprices
CyclicalCyclical
StructuralStructural
StructuralStructural
StructuralStructural
Stretched Stretched Infrastructure:Infrastructure:
RefiningRefining
TransportationTransportation
ProductionProduction
Stretched Stretched Infrastructure:Infrastructure:
RefiningRefining
TransportationTransportation
ProductionProduction
StructuralStructural
CyclicalCyclical
OPEC Spare OPEC Spare Capacity goneCapacity gone StructuralStructural
Markets & Countries | Page 6
$30$35$40$45$50$55$60
O-03 F-04 J-04 O-04 F-05
High Oil Prices
Why The World Has $50 + Oil Several Factors Feeding Each Other In This New Episode
High Oil Demand
Stretch infrastructure creates bottlenecks
Low Supply Growth
Supply Anxiety
$$$ Flow
OPEC Loose Excess Capacity
Political Risks Highs
Economic cycles and impact of high oil prices
Markets & Countries | Page 7
Its The Economy Stupid….The Key Cyclical Driver
Oil demand growth remains tightly correlated to economic growth. The rise of Asian economies in the 1990’s has helped re-establish this relationship.
Economy Underpins
Transportation Urbanization Industry
0.0 %
-1.0 % 1990
Global Economy Vs. Oil Demand
World GDP, %
Oil Demand % Growth
1.0 %
2.0 %
3.0 %
4.0 %
5.0 %
1992 1994 1996 1998 2000 2002 2004
Markets & Countries | Page 8
Demand Strength Is The Key DriverBut Weaker Than 2004
Asia
Other
US
1.83
3.00
1.501.84
0.68
2002 2003 2004 200520012000
0.660.76
3.4 %2.4 %1.0 %0.9 %0.9 % 2.2 %
mmb/d
Europe
Other
US
Asia
2.72
6.4 million b/dHow Can The World
Cope With This Growth?
AsiaAsiaAsiaAsia
Other
Other
Markets & Countries | Page 9
Drivers Of Chinese GrowthSeveral Sectors Underpinning Product Strength
Industry
Urbanization
Transportation Increasing car fleet, trucks shifting to diesel
Industrial output is booming across the board
Increased household consumption
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
1998 2000 2002 2004
Chinese Refinery Runs
kb/d
1,500 kb/d Up 36%
0
200
400
600
800
1,000
2001 2002 2003 2004 2005
China
India
Rest Of Non-OECD Asia
Asian Demand Growth
kb/d
Markets & Countries | Page 10
US-Chinese Synergy Drives Up Diesel Demand The Axis Of Diesel
Diesel Demand In the United States and China
2.42.62.83.03.23.43.63.8
J-02 J-02 J-03 J-03 J-04 J-04 J-05 J-05
1.31.51.71.92.12.32.52.7US Diesel Demand (left axis)
China Diesel Demand (right Axis)
mmb/d mmb/d
More Chinese Goods Exported
To The US
200
250
300
350
400
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
2.4
2.6
2.8
3.0
3.2
3.4Loaded Incoming TEUsUS Diesel Demand (right axis)
Port of LA Incoming Cargo And Diesel Demand
forecast
Markets & Countries | Page 113.5
3.6
3.7
3.8
3.9
4
4.1
4.2
4.3
4.4
2000 2002 2004 2005
8.38.48.58.68.78.88.9
99.19.29.3
2000 2002 2004 2005
Gasoline demand increased 8% between 2000 and 2005
People live farther away and use bigger cars
US Distillate Demand
US Gasoline Demand
700 kb/d
600 kb/d
US Product Demand Gives a Hand Gasoline Growth Slowing, Diesel Growth Has Created Problems
Between 2000 and 2005 distillate soared with a 15% growth.
Transportation of imported goods throughout the country underpins diesel consumption.
forecast
mmb/d
mmb/d
Markets & Countries | Page 12
Refinery Utilization Is Stretched FSU IS The Only Region With Significant Spare Capacity
Refinery utilization in the Asia/Pacific market is the most stretched, as refiners try to meet Chinese demand.
Next year will see the last round of significant specification changes for distillates in the US and Asia, and its impact on production should not be underestimated.
57%
60%
FSU
95%
96%
Middle East
Average Yearly Utilization Rates In Selected Regions2002 And 2004
86%
97%
Asia/Pacif
Does not include teapot capacity in China
89%
92%
US
79%
83%
EU
Markets & Countries | Page 13
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
1998 1999 2000 2001 2002 2003 2004 2005
Non Opec - Non FSU Crude FSU CrudeNon-OPEC NGLs
Non OPEC Growth SluggishDecline Rates Hamper Growth
Year-on-Year Growth In Non-OPEC Crude
Markets & Countries | Page 14
OPEC Has Lost Its Excess Capacity Spare Capacity Is A Luxury
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1985 1990 1995 2000 2005
Saudi Spare Capacity
Other Spare Capacity
Historical Spare Production Capacity
million b/d 0.0
0.5
1.0
1.5
2.0
2.5
3.0
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
SaudiNon Saudi
mmb/d
Markets & Countries | Page 15
OPEC’s Mostly Talks Saudi Arabia Acts
OPEC Limited To Cash In High Prices
Saudi Arabia Tries To Limit The Upside
Losing Leverage To Control Marker Prices
$30
$35
$40
$45
$50
$55
J-04 F-04 M-04 A-04 M-04 J-04 J-04 A-04 S-04 O-04 N-04 D-04 J-05 F-05 M-05
OPEC Willing To Bring Speculators To The Oil
Markets
WTI Price And OPEC’s Arguments About It
2003 – 1st Half 2004 2nd Half 2004 - 2005
OPEC Performing “Stock Management”
Strategy
“ US Gasoline Market Is to Blame”
“ It is Speculator’s Fault” “Fundamentals Are Tight”
Markets & Countries | Page 16
Why Is OPEC Not Able To Respond?Not The Right Crude
64
66
68
70
72
74
76
1Q02 4Q02 3Q03 2Q04 1Q05 4Q05
11
13
15
17
19
21
23Sweet Crude Supply, Right Axis
vs.
mmb/d mmb/d
Total Crude Supply, Left Axis Discounts Of Arab Medium In Selected Markets
-$13
-$11
-$9
-$7
-$5
-$3
-$1
$1US Europe Asia
Jan-04
Jan-05
Wrong Quality Spurs Soaring Discounts
Markets & Countries | Page 17
Why Hedge Funds Are Flocking In? Sliding Dollar And Low Interest Rates
$35
$40
$45
$50
2Q04 3Q04 4Q04 1Q05
0.76
0.78
0.80
0.82
0.84WTI (left axis)Euro/Dollar XR (right axis)
Falling Dollar And Rising WTI
0
5
10
15
20
25
30
35
40
45
1988 1991 1994 1997 2000 2003
0
1
2
3
4
5
6
7
8
9Nominal Crude Price
Federal Funds Rate
Interest Rates and WTI
The recent rallies of the last three months are related to pouring money into the oil futures market by all types of investors.
Investment in commodities is a great opportunity to cash in in Asian growth, but a growing problem for the stability of oil prices
$/d %
Markets & Countries | Page 18
Increasing Interest In Far Out ContractsFlattening The Price Curve
Funds have been putting their money on far out WTI contracts It has pushed WTI prices well over $40/b through the end of the decade. And Flattened the entire price curve, exacerbating the front-month
contango in WTI and further weakening short-term fundamentals by encouraging further stock builds.
25
30
35
40
45
50
55
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
DEC-05 DEC-08DEC-06 DEC-09DEC-07
PRICE
0
10
20
30
40
50
60
70
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
DEC-05 DEC-08DEC-06 DEC-09DEC-07
OPEN INTEREST
Price and Open Interest For WTI Futures
Markets & Countries | Page 19
Eyes Focused On The 2nd HalfLittle Downside In The Short Term
May Sep DecMar Apr
Investors willing to cash in the upside
Investors in need of hedging
The Framework : Sliding Dollar, US DeficitSupply Anxiety for 4Q
High Oil Demand
Supply Anxiety
Stretched Infrastructure
Markets & Countries | Page 20
Building Stocks and Anxiety4Q Anxiety Keep Prices Strong
80.0
81.0
82.0
83.0
84.0
85.0
86.0
87.0
88.0
89.0
May Jun Jul Aug Sep Oct Nov Dec$51
$52
$52
$53
$53
$54
$54
$55Demand Contango*
2005 Oil Demand vs. Price Curve Of WTI*
*WTI Futures Prices As Of April 14, 2005
right axis; $/bleft axis: mmb/d
The World Might Have Problems To Cope With Oil
Demand In 4Q 2005
Markets & Countries | Page 21
How Long Does It Take To React To High Prices? The Reaction Time Shows Asymmetric Risks
Economic Impact Of High Prices 3 – 5 years
Expensive oil may trigger investments in upstream or downstream, or may potentially affect demand in the long run.
But the only short term element able to change the outlook is a potential economic meltdown.
Key
low Impact
High Impact
Refining 30 months
10 years Upstream
1 Month Higher Risk to Economic Downturn
Economic Meltdown
Markets & Countries | Page 22
The Economic Cycle Has PeakedBut What Next Is Difficult To Predict
US Growth Is Slowing
Adjustment of Imbalances is Necessary
Managed adjustment
Slowdown
Oil Demand Slowing
Asian Banks Willing To Subsidize Forever?
Growing By Borrowing
Not Sustainable
Steroids Effects Waning
Inflation driving interest rates up
trade deficit impacting $ value
No country has managed to consume and invest 6% more than it produces for long.
Crisis Triggered Adjustment
Meltdown
Strategic Advisors in Global Energy
Corporate Offices
1300 Connecticut Avenue, N.W. Suite 800Washington, DC 20036 USATel: (1 202) 872 1199 Fax: (1 202) 872 1219
3, cité Paradis75010 Paris, FranceTel: (33 1) 47 70 29 00 Fax: (33 1) 47 70 27 37
Houston, TexasTel: (1 281) 599 7099 Fax: (1 281) 599 9891
London, United KingdomTel: 44 (0) 1256 760678Fax: 44 (0) 1256 760678
[email protected] www.pfcenergy.com