the plunge in oil prices: causes and consequences … plunge in oil prices: causes and consequences...
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© 2014 IHS
Global Economics & Country Risk Conference
ihs.com
IHS
The plunge in oil prices: Causes and consequences for the global economy
Nariman Behravesh, Chief Economist, HIS, +1 781 301 9101, [email protected] Farid Abolfathi, Senior Director, IHS Risk Center, +1 202 481 9224, [email protected] Sara Johnson, Senior Research Director, Global Economics, +1 781 301 9115, [email protected] Jeff Meyer, Associate Director, Global Crude Oil Markers, +1 202 510 0988, [email protected] John Mothersole, Research Director, Pricing & Purchasing, +1 202 481 9227, [email protected]
12 November 2014
© 2014 IHS
Agenda
Chair: Nariman Behravesh, Chief Economist, IHS
9:45 – 9:50 Introduction
9:50 – 10:05 Global crude oil price outlook Jeff Meyer, Associate Director, Global Crude Oil Markets, IHS Energy
10:05-10:15 Industrial commodity price outlook John Mothersole, Research Director, Pricing & Purchasing, IHS Operational Excellence & Risk Mitigation
10:15-10:40 Global economic impacts: Winners and losers Sara Johnson, Senior Research Director, IHS Economics Farid Abolfathi, Senior Director, IHS Risk Center
10:40-11:00 Discussion, questions & answers
2
Global Economics & Country Risk Conference / November 2014
© 2014 IHS 3
Presenters Global Economics & Country Risk Conference / November 2014
Nariman Behravesh Chief Economist, IHS + 1 781 301 9101 – [email protected]
Farid Abolfathi Senior Director, IHS Risk Center + 1 202 481 9224 – [email protected]
Sara Johnson Senior Research Director, Global Economics, IHS Economics + 1 781 301 9115 – [email protected]
Jeff Meyer Associate Director, Global Crude Oil Markets, IHS Energy + 1 202 510 0988 – [email protected]
John Mothersole Research Director, Pricing & Purchasing, IHS Operational Excellence & Risk Mitigation + 1 202 481 9227 – [email protected]
© 2014 IHS 4
Global crude oil price outlook
Jeff Meyer, Associate Director, Global Crude Oil Markers, +1 202 510 0988, [email protected]
Global Economics & Country Risk Conference / November 2014
© 2014 IHS
Key global oil market messages
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Softening demand-supply fundamentals have pushed oil prices sharply lower since June
• Return of Libyan production • Weaker demand growth, especially in Asia • Strong non-OPEC supply growth
Dated Brent expected to remain below $90/barrel in the near-term (2014-16)
• Non-OPEC supply growth to outpace world liquids demand growth again in 2015
• OPEC strategy, dynamics of tight oil production, and Libyan output are key variables
In the long term, higher oil prices will likely be needed as an incentive to develop higher-cost supplies.
• Non-OPEC supply growth will slow after 2020 • New supplies will be needed to offset field declines
and meet demand growth • A real Dated Brent price of about $120/barrel will
ultimately be needed to send a strong enough signal to investors to develop higher-cost oil
© 2014 IHS
Global oil prices have plunged from $115 in June to below $85 in early November
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70
80
90
100
110
120
130
140
Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014
Daily Dated Brent crude oil price (2011-14)
Source: Platts, IHS © 2014 IHS
Dol
lars
per
bar
rel
Prices spike as Libyan output is lost
IEA stock release
Supply anxiety returns as Iran
conflict intensifies
Eurozone crisis intensifies; oil
demand concerns
Iran exports reduced; Syrian conflict
intensifies
Fear of Greek exit from eurozone; Saudi Arabia ramps up production
Economic optimism sends crude to
"overheated" territory
Diplomatic overtures with Iran
Libyan production collapses; US
threatens Syria
Economic worries resurface, especially in
emerging markets
Ukraine crisis erupts
ISIL lightening advance in northern Iraq heightens fears
of Iraqi supply disruptions
Libya output recovers; world demand growth weakens; and US
production continues to rise rapidly
© 2014 IHS
Exceptional US supply growth has managed to offset global production outages since 2008
7
3.5
1.2
0.7
-3.4 -4
-3
-2
-1
0
1
2
3
4
2009 2010 2011 2012 2013 2014
Change in crude oil production since 2008
Source: IHS Energy
Mill
ion
barr
els
per d
ay
United States
Canada
Saudi Arabia
Rest of world
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© 2014 IHS
2014 growth in non-OPEC liquids supply on track to be biggest since 1978
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
2010 2011 2012 2013 2014 2015 2016
World oil demand Non-OPEC liquids supply
World liquids demand and non-OPEC supply
Notes: Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products (including blended biofuels and synthetic fuels), as well as liquefied petroleum gases (LPGs) and ethane. Source: IHS © 2014 IHS
Cha
nge,
mill
ion
barr
els/
day
© 2014 IHS
Dated Brent expected to average under $90 in 2015-16—well below levels earlier in the decade
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$70
$80
$90
$100
$110
$120
$130
1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16
Dated Brent LLS WTI
Crude oil prices, quarterly averages
USD
per
bar
rel
Notes: LLS = Louisiana Light Sweet. WTI = West Texas Intermediate. Disclaimer: Historical oil price data are extracted or derived by IHS from Platts. All rights reserved. All liability for errors and omissions is hereby excluded by Platts and its sources. No representations or warranties are made by Platts or its sources concerning the data or any conclusions to be drawn from it. Source: IHS; Platts, ©2014 by the McGraw-Hill Companies, Inc. (historical) © 2014 IHS
Outlook
© 2014 IHS
Libyan production: Key variable that could push prices up or down
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
1Q 2010 1Q 2011 1Q 2012 1Q 2013 1Q 2014
Libyan crude oil production
Source: IHS Energy
Mill
ion
barr
els
per d
ay
September 2014 production: 800,000 b/d
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Most US tight oil production has a breakeven price of $50 to $69/barrel in terms of WTI
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Global Economics & Country Risk Conference / November 2014
0.0
0.5
1.0
1.5
2.0
2.5
$50-$59 $60-$69 $70-$79 $80+
Breakeven WTI prices for 2014 US tight oil production
Note: Breakeven WTI prices cover capital and operating costs and generate a 10% return. Source: IHS Energy © 2014 IHS
Mill
ion
barr
els
per d
ay
© 2014 IHS
World oil demand expected to grow by more than 15 MMb/d to 2040
12
0
20
40
60
80
100
120
1990 2000 2010 2020 2030 2040
World oil demand
Note: Oil demand in this chart and table includes refined products, including biofuels blended into refined products and liquid fuel products derived from gas and coal. Liquefied petroleum gases (LPGs) from refineries are also included. LPGs from gas plants are not included. Source: IHS Energy
Mill
ion
barr
els
per d
ay
Global Economics & Country Risk Conference / November 2014
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The world needs about 57 MMb/d of new crude oil production by 2040 to offset field declines and meet demand growth
13
0
20
40
60
80
100
2005 2010 2015 2020 2025 2030 2035 2040
Segregated Condensate FIP FUD FUA YTF Tight Oil
World crude and condensate production outlook
Source: IHS Energy
Mill
ion
barr
els
per d
ay
FIP = Fields in production; FUD = Fields under development; FUA= Fields under appraisal; YTF = Fields yet to be found
57 million new barrels per day needed by 2040
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Rising costs, tightening balances, and increased geopolitical risks keep long-term prices high
Global Economics & Country Risk Conference / November 2014
0
50
100
150
200
250
2000 2005 2010 2015 2020 2025 2030 2035 2040
Nominal Real (2013$)
Annual Dated Brent crude oil price
Source: IHS Energy © 2014 IHS
Dol
lars
per
bar
rel
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Industrial commodity price outlook
John Mothersole, Research Director, Pricing & Purchasing, +1 202 481 9227, [email protected]
Global Economics & Country Risk Conference / November 2014
© 2014 IHS
From supercycle to an era of abundance?
• The “adjustment” in commodity markets still has a way to go
• Non-oil demand growth will not match the rates of increase seen last decade
• Slower Chinese growth and the changing character of its growth signal less resource-intensive demand growth in the future
• On the supply-side, investments made during the height of the “supercycle” are now coming in – capacity looks ample in many industries (steel, aluminum, rubber, shipbuilding,…)
• Policy tightening will also act as a headwind to commodity prices
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Commodity prices continue to look contained
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2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
2010 2011 2012 2013 2014 2015
2002
wee
k 1
= 1.
0
Third Quarter 2013 Forecast Third Quarter 2014 Forecast
IHS materials prices index
© 2014 IHS
Even this far into the recovery supply chains show no real tightening…
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42
46
50
54
58
62
2010 2011 2012 2013 2014
Delivery Times Backlogs
Buyers advantage
> 50 means slower delivery times and lengthening backlogs
Sources: ISM and Markit
Global PMI diffusion indexes
© 2014 IHS
…with this lack of leverage evident in pricing
2.7
3.1
3.5
3.9
4.3
42
47
52
57
62
2010 2011 2012 2013 2014
Delivery Times, left scaleBacklogs, left scaleIHS Materials Price Index, 2002:1=1.0, right scale
Real GDP
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Slower Chinese growth signals weaker materials consumption growth going forward
Global Economics & Country Risk Conference / November 2014
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4
6
8
10
12
14
16
18
20
-60
-40
-20
0
20
40
60
80
100
2004 2006 2008 2010 2012 2014 2016
IHS Materials Price Index, left Chinese Industrial Production, right
© 2014 IHS
A stronger dollar will restrain both investor and physical demand
Global Economics & Country Risk Conference / November 2014
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0.85
0.90
0.95
1.00
1.05
1.10
1.151.5
2.0
2.5
3.0
3.5
4.0
4.5
2004 2006 2008 2010 2012 2014 2016
IHS Materials Price Index, 2002w1=1.0, leftTrade Weighted U.S. Dollar Exchange Rate,inverted, 2009=1.0, right
© 2014 IHS
Real commodities prices still look elevated
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0.80
0.85
0.90
0.95
1.00
1.05
U.S. PPI for Industrial Commodities less Energy*Fitted Trend LineTrend plus one SETrend less one SE
*Real prices. US PPI for Industrial Commodities less Energy deflated by the chained price index for Gross Domestic Product
Real GDP
© 2014 IHS 23
Global economics impacts: Winners and losers
Sara Johnson, Senior Research Director, Global Economics, IHS Economics, +1 781 301 9114, [email protected]
Global Economics & Country Risk Conference / November 2014
© 2014 IHS
Alternative paths for Brent crude oil prices
24
0
40
80
120
160
2000 2003 2006 2009 2012 2015 2018 2021 2024
US
dolla
rs p
er b
arre
l
August Baseline Low Oil Price Scenario
24
Dated Brent crude oil price
Global Economics & Country Risk Conference / November 2014
24
© 2014 IHS
Oil price impacts in the IHS Global Link Model
Energy infrastructure
Prices & costs, competitiveness
Energy trade flows
Financial markets
Potential GDP
Impact differs in importing versus
exporting economies
Producer prices Consumer prices
Wage rates Real income Real spending
Impact varies depending on country production structure
and fuel mix
Energy exports Energy imports
Exchange rates
Impact varies with the degree of
dependence on energy trade
Public finances FDI Capital flows
Impact depends on the monetary and
fiscal policy response
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Low Oil Price Scenario: Impact on world real GDP
0.0
0.1
0.2
0.3
0.4
2014 2015 2016 2017 2018 2019 2020 2021Perc
ent d
iffer
ence
from
bas
elin
e
Real GDP
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Net importers of crude oil in 2013
Net crude oil imports
050
100150200250300350U
nite
d St
ates
Chi
na
Japa
n
Indi
a
Sou
th K
orea
Ger
man
y
Fran
ce
Sin
gapo
re
Spa
in
Italy
Taiw
an
Net
herla
nds
Aus
tralia
Thai
land
Indo
nesi
a
Bel
gium
Turk
ey
Pol
and
Mill
ion
tons
of o
il eq
uiva
lent
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Net exporters of crude oil in 2013
Net crude oil exports
0
100
200
300
400
500S
audi
Ara
bia
Rus
sia
Kuw
ait
UA
E
Ven
ezue
la
Can
ada
Nig
eria
Ang
ola
Iran
Qat
ar
Nor
way
Alg
eria
Mex
ico
Col
ombi
a
Mal
aysi
a
Mill
ion
tons
of o
il eq
uiva
lent
28
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Real GDP winners in the Low Oil Price Scenario, 2016
0.0
0.2
0.4
0.6
0.8
1.0
Thai
land
Spa
inC
hile
Indi
aG
reec
eP
hilip
pine
sC
olom
bia
Indo
nesi
aP
olan
dR
oman
iaTa
iwan
Turk
eyV
ietn
amC
anad
aM
alay
sia
Arg
entin
aS
outh
Afri
ca US
Ger
man
y% d
iffer
ence
from
bas
elin
e
Real GDP
29
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Real GDP losers in the Low Oil Price Scenario, 2016
-4
-3
-2
-1
0
Ven
ezue
la
Rus
sia
Kuw
ait
Sau
di A
rabi
a
Iran
Ang
ola
UA
E
Qat
ar
Nor
way
Nig
eria
Per
u
% d
iffer
ence
from
bas
elin
e
Real GDP
30
Global Economics & Country Risk Conference / November 2014
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-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
NAFTA OtherAmericas
Europe Mideast-N.Africa
Sub-Sah.Africa
World
% d
iffer
ence
from
bas
elin
e
GDP Private consumption Fixed investment
31
Regional impacts of lower oil prices, 2016
Real purchases
Global Economics & Country Risk Conference / November 2014
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