Transcript Main Presentation Title

How Long Will This High Price
Episode Last?
Special presentation for the IPAA
Carl Calabro, Director, Market Analysis
Markets Group
Strategic Advisors
in Global Energy
June 16, 2005
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 2
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 3
Setting the Stage in 2003 and 2004
Chain Reaction In The Oil Market
Stock
Depletion
Demand
Growth
Tight
Refining
&
Tanker
Capacity
Political
Instability
Hedge
Funds
$
HIGH
PRICE
Venezuela + Iraq
OPEC’s Stock Management
Markets & Countries | Page 4
When Structural And Cyclical Events Collide
Oil Fundamentals
Soaring
Demand
Cyclical
Structural
Low Supply
Growth
OPEC Spare
Capacity gone
Cyclical
Structural
Stretched
Infrastructure:
Refining
Structural
High
prices
Transportation
Production
Energy
Security
Structural
Hedge
Funds’ Role
Structural
Exogenous Elements
Markets & Countries | Page 5
Why The World Has $50 + Oil
Several Factors Feeding Each Other In This New Episode
High Oil
Demand
Economic cycles and
impact of high oil prices
$$$ Flow
Stretch infrastructure
creates bottlenecks
$60
$55
$50
$45
$40
$35
$30
High Oil
Prices
Low Supply
Growth
O-03 F-04 J-04 O-04 F-05
OPEC Loose
Excess Capacity
Political Risks
Highs
Supply
Anxiety
Markets & Countries | Page 6
Its The Economy Stupid….
The Key Cyclical Driver
Global Economy Vs. Oil Demand
World GDP, %
Oil Demand % Growth
5.0 %
Economy
Underpins
4.0 %
3.0 %
 Transportation
 Urbanization
 Industry
2.0 %
1.0 %
0.0 %
-1.0 %
1990 1992
1994
1996
1998 2000
2002
2004
Oil demand growth remains tightly correlated to economic growth. The rise
of Asian economies in the 1990’s has helped re-establish this relationship.
Markets & Countries | Page 7
Demand Strength Is The Key Driver
But Weaker Than 2004
2000
3.00
2001
2002
2003
mmb/d
2004
2005
2.72
Other
1.84
1.50
Other
0.68
Other
Asia
0.9 %
0.66
Asia
0.9 %
1.0 %
How Can The World
Cope With This Growth?
1.83
US
Other
US
0.76
Asia
Europe
Asia
2.4 %
Asia
Asia
3.4 %
2.2 %
6.4 million b/d
Markets & Countries | Page 8
Drivers Of Chinese Growth
Several Sectors Underpinning Product Strength
Industry
Industrial output is booming across the board
Increased household consumption
Urbanization
Increasing car fleet, trucks shifting to diesel
Transportation
Asian Demand Growth
Chinese Refinery Runs
1,000
6,500
China
India
6,000
1,500 kb/d
Up 36%
5,500
800
5,000
600
4,500
400
Rest Of Non-OECD Asia
4,000
200
3,500
3,000
0
kb/d
kb/d
1998
2000
2002
2004
2001
& Countries
2002 Markets
2003
2004
| Page
9
2005
US-Chinese Synergy Drives Up Diesel Demand
The Axis Of Diesel
Diesel Demand In the United States and China
More Chinese
Goods Exported
To The US
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
US Diesel Demand (left axis)
China Diesel Demand (right Axis)
forecast
2.7
2.5
2.3
2.1
1.9
1.7
1.5
1.3
mmb/d J-02 J-02 J-03 J-03 J-04 J-04 J-05 J-05 mmb/d
Port of LA Incoming Cargo And Diesel Demand
400
Loaded Incoming TEUs
US Diesel Demand (right axis)
3.4
350
3.2
300
3.0
2.8
250
2.6
200
Jan02
2.4
Jul- Jan02
03
Jul- Jan- Jul- Jan03Markets
04& Countries
04 | Page
05 10
US Product Demand Gives a Hand
Gasoline Growth Slowing, Diesel Growth Has Created Problems
9.3
9.2
9.1
9
8.9
8.8
8.7
8.6
8.5
8.4
8.3
 Gasoline demand
increased 8% between
2000 and 2005
 People live farther away
and use bigger cars
US Distillate Demand
mmb/d
4.4
US Gasoline Demand
forecast
700 kb/d
2000
2002
2004
2005
4.3
4.2
4.1
4
600 kb/d
 Between 2000 and 2005 distillate
soared with a 15% growth.
3.9
3.8
 Transportation of imported goods
throughout the country
underpins diesel consumption.
3.7
3.6
3.5
mmb/d
2000
2002
2004
2005
Markets & Countries | Page 11
Refinery Utilization Is Stretched
FSU IS The Only Region With Significant Spare Capacity
Average Yearly Utilization Rates In Selected Regions
2002 And 2004
97%
96%
92%
95%
89%
86%
83%
60%
79%
57%
US
EU
Middle
East
Asia/Pacif
FSU
Does not include teapot
capacity in China
 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.
Markets & Countries | Page 12
Non OPEC Growth Sluggish
Decline Rates Hamper Growth
Year-on-Year Growth In Non-OPEC Crude
Non Opec - Non FSU Crude
Non-OPEC NGLs
1,600
FSU Crude
1,400
1,200
1,000
800
600
400
200
0
-200
1998
1999
2000
2001
2002
2003
2004
2005
Markets & Countries | Page 13
OPEC Has Lost Its Excess Capacity
Spare Capacity Is A Luxury
3.0
2.5
mmb/d
Saudi
Non Saudi
2.0
1.5
1.0
Historical Spare Production Capacity
9.0
million b/d
8.0
7.0
Saudi Spare Capacity
6.0
Other Spare Capacity
0.5
0.0
Sep- Mar- Sep- Mar- Sep03
04
04
05
05
5.0
4.0
3.0
2.0
1.0
0.0
1985
1990
1995
2000
2005
Markets & Countries | Page 14
OPEC’s Mostly Talks
Saudi Arabia Acts
$55
$50
WTI Price And OPEC’s Arguments About It
“ US Gasoline
Market Is to Blame”
$45
$40
“ It is Speculator’s Fault”
$35
“Fundamentals
Are Tight”
$30
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
2003 – 1st Half 2004
OPEC Performing
“Stock Management”
Strategy
OPEC Willing To Bring
Speculators To The Oil
Markets
2nd Half 2004 - 2005
 OPEC Limited To Cash In High Prices
 Saudi Arabia Tries To Limit The Upside
 Losing Leverage To Control Marker
Prices
Markets & Countries | Page 15
Why Is OPEC Not Able To Respond?
Not The Right Crude
Total Crude Supply, Left Axis
Discounts Of Arab Medium
In Selected Markets
vs.
76
Sweet Crude Supply, Right Axis
23
74
21
72
19
US
17
68
15
66
13
Asia
$1
-$1
-$3
-$5
70
Europe
-$7
Jan-04
Jan-05
-$9
-$11
-$13
64
11
mmb/d
mmb/d
1Q02 4Q02 3Q03 2Q04 1Q05 4Q05
Wrong Quality Spurs
Soaring Discounts
Markets & Countries | Page 16
Why Hedge Funds Are Flocking In?
Sliding Dollar And Low Interest Rates
Falling Dollar And Rising WTI
$50
WTI (left axis)
Euro/Dollar XR (right axis)
Interest Rates and WTI
0.84
0.82
$45
0.80
$40
0.78
$35
0.76
2Q04 3Q04 4Q04 1Q05
45
Nominal Crude Price
Federal Funds Rate
9
40
8
35
7
30
6
25
5
20
4
15
3
10
2
5
1
0
0
$/d
1988 1991 1994 1997 2000 2003
 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
Markets & Countries | Page 17
%
Increasing Interest In Far Out Contracts
Flattening The Price Curve
Price and Open Interest For WTI Futures
PRICE
55
DEC-05
DEC-06
DEC-07
50
45
OPEN INTEREST
DEC-08
DEC-09
70
60
50
DEC-05
DEC-06
DEC-07
DEC-08
DEC-09
40
30
40
35
20
30
10
25
0
Jan04
Mar04
May04
Jul04
Sep04
Nov04
Jan05
Jan04
Mar04
May04
Jul04
Sep04
Nov04
Jan05
 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.
Markets & Countries | Page 18
Eyes Focused On The 2nd Half
Little Downside In The Short Term
The Framework : Sliding Dollar, US Deficit
Supply Anxiety for 4Q
High Oil
Demand
Supply
Anxiety
Investors in
need of
hedging
Stretched
Infrastructure
Investors
willing to cash
in the upside
Mar
Apr
May
Sep
Dec
Markets & Countries | Page 19
Building Stocks and Anxiety
4Q Anxiety Keep Prices Strong
2005 Oil Demand vs. Price Curve Of WTI*
Demand
89.0
left axis: mmb/d
Contango*
right axis; $/b
88.0
$55
$54
87.0
$54
86.0
85.0
$53
84.0
$53
83.0
The World Might Have
Problems To Cope With Oil
Demand In 4Q 2005
$52
82.0
$52
81.0
80.0
$51
May Jun Jul Aug Sep Oct Nov Dec
*WTI Futures Prices As Of April 14, 2005
Markets & Countries | Page 20
How Long Does It Take To React To High Prices?
The Reaction Time Shows Asymmetric Risks
Key
low
Impact
Refining
30 months
10 years
Upstream
Economic Impact
Of High Prices
Economic
Meltdown
High
Impact
3 – 5 years
1 Month
Higher Risk to
Economic Downturn
 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.
Markets & Countries | Page 21
The Economic Cycle Has Peaked
But What Next Is Difficult To Predict
Steroids Effects Waning
US Growth
Is Slowing
 Inflation driving
interest rates up
Growing By
Borrowing
Not
Sustainable
 trade deficit
impacting $ value
No country has managed to
consume and invest 6%
more than it produces for
long.
Asian Banks Willing To Subsidize Forever?
Adjustment of Imbalances
is Necessary
Managed
adjustment
Slowdown
Crisis Triggered
Adjustment
Meltdown
Oil Demand Slowing
Markets & Countries | Page 22
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