Transcript Toronto Forum

Deutsche Bank AG
Energy Markets and the Global Economic Outlook
Toronto Forum for Global Cities
November 2010
Adam Sieminski, Chief Energy Economist
Commodities Research
[email protected] USA +1 202 662 1624
Deutsche Bank AG
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via
Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
World GDP Could Slightly Disappoint in 2011
World economy improving sharply in 2010 but slows a bit in 2011
y-o-y % change
2008
2009
2010E
2011E
Weights
US
Euro Area
Japan
Other OECD
0.4
0.6
-1.2
1.6
-2.6
-4.1
-5.2
-1.0
2.8
1.5
2.7
4.0
3.1
1.0
0.1
4.2
20.0
22.0
6.0
7.0
0.5%
-3.3%
2.4%
2.1%
55.0
9.6
6.0
4.3
3.6
9.1
1.8
-2.7
-3.8
10.0
7.8
5.5
4.5
8.7
5.8
4.1
4.0
14.0
12.0
6.0
13.0
6.2%
1.9%
7.2%
6.0%
45.0
3.0%
-1.0%
4.6%
3.8%
100.0
OECD
China
Other Asia (1)
Latin America
Other Non-OECD (2)
Non-OECD
World
IMF looking for 4.2%
growth in 2011
Source: DB Global Markets Research
Outlook
 Fears of a double-dip recession and the risk of deflation have risen appreciably in the US. While the Deutsche Bank global economic
team's baseline forecast does not foresee a double-dip, the downside risks have increased.
 The risk is heightened by two policy factors: (1) the Fed is running very low on available policy stimulus measures, and (2) fiscal policy
is scheduled to turn substantially contractionary, with at best mixed signals from Washington on the prospects for relief on that score.
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Adam Sieminski +1 202 662 1624 [email protected] November 2010
2
Good News: the Next US Recession Is Not Due Soon
Relationship between Fed rate increases and following economic downturn
140
y=1.73x+16.3
R²=0.84
Expansion length in months
120
100
91-01
2009-2014
Forecast
The duration of every
US expansion since
1954 has been
directly proportional
to the amount of time
it takes the US
Federal Reserve to
start tightening
monetary policy after
a recession.
61-69
80
82-90
60
01-07
75-80
40
54-57
58-60
20
70-73
Excluding the 1991-2001
expansion would raise
the R² to 0.98
80-81
0
0
10
20
30
40
Number of months from leaving recession and
the FOMC raising interest rates (Prime rate lag)
50
60
Source: Deutsche Bank,
Columbia University Center for International Business Cycle Research
Outlook
 The last recession ended in June 2009.
 According to our US economics team, the Fed may embark on a new monetary tightening cycle in August 2011.
 Based on our calculations, this implies the next US recession will begin in July 2014.
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3
Oil Prices and the US Dollar
What is the shifting dollar doing to commodities and oil?
1.60
EUR/USD Rate
USD/bbl
150
1.55
135
1.50
120
1.45
Stronger
US dollar
105
90
1.40
75
1.35
60
1.30
45
1.25
30
1.20
15
USD/Euro
1.15
Jan-07
Source: Bloomberg Finance LP,
DB Global Markets Research
WTI Oil Price (USD/bbl)
0
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Outlook
 According to the IMF, in the long run, a 1% depreciation in the US dollar is associated with increases for gold and oil prices of more
than 1%. In the short run, the elasticity is close to 1, but higher for gold than for crude oil, says the IMF.
 We believe the relationship between oil prices and the US dollar is highly unstable. The EURUSD at 1.60 implies triple-digit oil.
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Oil Prices and the US Stock Market
Positive correlation takes hold in March 2009
2000
S&P 500 Index
USD/bbl
WTI/stock market correlation during 2010
150
1800
135
1600
120
1400
105
1200
90
1000
75
800
60
600
45
400
30
200
S&P 500
0
Jan-07
WTI Oil Price (USD/bbl)
15
0
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
90
WTI oil price (USD/bbl)
85
80
75
y = 0.0755x - 6.6369
R2 = 0.6363
70
65
1000
1050
Jul-10
1100
1150
1200
1250
S&P 500 Index
Source: Bloomberg Finance LP, DB Global Markets Research
Outlook
 The relationship between the S&P 500 and oil is usually inverse. From July 2008 to the start of March 2009, the two moved in parallel
down. From April 2009, the relationship appears to be positively correlated.
 The 2010 regression implies the S&P500 at 1100 equates to USD76.50/bbl oil. 1000 = USD69/bbl 1200 = USD84/bbl
Deutsche Bank
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Non-OPEC Supply Estimates
Country
Russia
United States
China
Canada
Brazil
Mexico
Norway
Kazakhstan
Azerbaijan
United Kingdom
Indonesia
India
Oman
Colombia
Argentina
Malaysia
Egypt
Australia
Sudan
Vietnam
International Energy Agency
2009
9.93
9.05
3.99
3.29
2.57
3.00
2.35
1.54
1.01
1.42
1.02
0.88
0.82
0.69
0.80
0.69
0.68
0.59
0.49
0.34
2010
10.01
9.36
4.09
3.34
2.71
2.80
2.23
1.61
1.08
1.21
1.02
0.93
0.85
0.79
0.78
0.70
0.66
0.60
0.54
0.42
2011
9.85
9.35
4.15
3.40
2.84
2.56
2.07
1.67
1.21
1.07
1.03
0.96
0.86
0.85
0.77
0.67
0.67
0.57
0.54
0.52
53.5
m m b/d
2011
53.0
52.5
2010
Forecast non-OPEC supply
US DOE / EIA
52.0
2009
51.5
51.0
2008
50.5
50.0
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Month IEA forecast w as made
Source: US DOE/EIA
Deutsche Bank
Source: IEA OMR, October 2010
Adam Sieminski +1 202 662 1624 [email protected] November 2010
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OPEC Crude Capacity and Spare Capacity
OPEC Spare Capacity 2009-1010
6
OPEC Capacity to 2015
mmb/d
Iran
5
Libya
4
Angola
Qatar
3
UAE
2
Kuwait
1
Saudi
Arabia
0
2006
2007
2008
2009
2010
Source: US DOE/EIA, DB Global Markets Research
2010
2011
2012
2013
2014
2015
Algeria
Angola
Ecuador
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
UAE
Venezuela
1.29
2.13
0.45
3.94
2.60
2.68
1.82
2.37
0.93
11.65
2.80
2.13
1.29
2.12
0.43
3.93
2.85
2.68
1.84
2.39
0.94
11.70
2.83
2.03
1.26
2.14
0.37
3.92
2.99
2.69
1.86
2.41
0.97
11.60
2.89
1.95
1.23
2.12
0.34
3.91
3.32
2.70
1.89
2.46
0.96
11.70
2.98
1.90
1.16
2.07
0.31
3.90
3.84
2.70
1.92
2.50
0.89
12.04
3.07
1.89
1.13
2.08
0.30
3.90
4.38
2.72
1.93
2.55
0.82
12.20
3.12
1.85
OPEC Total Crude Oil
34.79
35.03
35.03
35.52
36.29
36.97
OPEC NGLs & Condensates
OPEC Total Liquids
5.81
40.60
6.15
41.18
6.27
41.30
6.37
41.88
6.48
42.77
6.61
43.58
Source: Wood Mackenzie, DB Global Markets Research
Outlook
 Current estimates of spare capacity differ mainly over how to account for Nigeria, Venezuela, Iran and Iraq.
 Future spare capacity depends on demand, non-OPEC supply, OPEC capacity decisions and quotas.
Deutsche Bank
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7
Can Oil Prices Be Too High or Too Low?
Oil’s share of World GDP (nominal oil price x demand volume / nominal GDP)
8%
5.9% Avg
1980-1985
7%
$150 Oil
6%
$125/bbl oil in 2011 would push
oil’s share over 6%
5%
2008
6%
$150/bbl oil in 2011 = 7%, near the
all time high of 1980-81
5%
4%
Using the IMF’s GDP growth
forecasts, oil at $150/bbl in 2016
would imply a 6% share
1.9% Avg
1986-2003
3%
2%
1%
0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: US DOE/EIA, IMF, DB Global Markets Research
Outlook




At 5-6% of global GDP, oil absorbs too much of disposable income -- and provides too much incentive for substitutes.
At 1-2% of global GDP, oil demand grows rapidly and upstream investment does not. Company cash flow is insufficient to expand.
The “sweet-spot” appears to be somewhere near 4% (not often achieved)
The sweet spot translates into a current WTI price near $80/bbl in 2010-11… and about $100/bbl in 2015.
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Can Oil Prices Be Too High or Too Low? Part 2
Equilibrium oil prices if you assume a constant 3.5% share of GDP
100
USD/bbl
This does not take into account
changes in the composition of
GDP or of factors such as the
shifting value of the USD
90
80
Equilibrium Price
70
Actual Price
60
50
40
30
20
10
0
1970
Source: US DOE/EIA, IMF, DB Global Markets Research
1975
1980
1985
1990
1995
2000
2005
2010
2015
Outlook
 Oil’s average share of global GDP over the period from 1975 to 2010 is 3.3%.
 A 3.5% sweet spot translates into a current WTI price near $70/bbl in 2010, $75 in 2012m and about $85/bbl in 2015.
 Note that actual prices can remain both above and below this definition of “equilibrium” for long periods of time.
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9
Shale Gas… Looks Like It’s Everywhere
Major North American shale basins
Source: Wood Mackenzie,
Deutsche Bank
Deutsche Bank
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Shale Gas Production in the US & Canada
Could be nearly 10bcf/d this year- and over 30bcf/d by 2030
35
bcf/d
30
Eagle Ford
2010
25
Montney
Horn River
20
Marcellus
15
Haynesville
Woodford
10
Fayetteville
5
Barnett
0
2000
2003
2006
2009
2012
2015
2018
2021
2024
2027
2030
Source: Wood Mackenzie
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Shale Gas Is Global
Major shale basins around the world that have been identified
Source: Wood Mackenzie, Deutsche Bank
Outlook
 Development of just a small proportion of this resource could dramatically change local gas markets with implications for global gas
dynamics.
 Specifically, it could reduce import requirements, provide additional export sources and impact global gas pricing.
Deutsche Bank
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12
Business-as-usual emissions rise by over 50%
between 2005 and 2020
Cleaning up the power sector is critical
Global abatement potential
 The power sector is
Gt CO2e
the largest
contributor to
greenhouse gas
emissions, and is
growing faster than
the average rate of
1.7%.
 Transport is the
second largest
sector. Abatement
through use of
hybrid and electric
vehicles would
require the power
sector to be low
carbon.
Source: McKinsey Global GHG Abatement Cost curve v2.0.
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Natural Gas and Renewables: A Secure Low Carbon Future
Energy Plan for the United States
Path Forward





Deutsche Bank believes in a realistic, low carbon energy pathway over the next 20 years, with a mix of
natural gas, renewables, and nuclear replacing old and inefficient coal plants. This energy plan provides
a credible, low risk and affordable way for America to achieve a 44% reduction in CO2 emissions from
the power sector by 2030 from 2005 emissions levels.
Our key finding is that a significant switch by the US electricity sector from coal to natural gas would be
the most secure, least cost approach to lower carbon emissions. (Burning natural gas creates circa half
the amount of CO2 compared with coal). When combined with further renewables and nuclear use, this
plan would involve a reduction in coal’s share of energy generation from 47% currently to 22% by 2030.
This would make the Obama Administration’s targets of a 17% over all economy-wide reduction in
greenhouse gas emissions by 2020 and an 83% reduction by 2050, realistically achievable.
We emphasize, however, that efficient coal units, renewable and nuclear energy must remain as
important components of the over all energy mix portfolio. We envisage wind and solar energy, for
example, increasing to 14% of the US electricity mix by 2030 compared to just 2% today.
A large-scale switch from coal to natural gas in the US has become possible due to the major increase in
supply from unconventional shale gas that is causing a long term fall in the price of natural gas, making it
a far more economic fuel than in the past. We believe shale gas is environmentally sustainable with best
practices. And because it is domestically abundant it also provides a high level of energy security.
Source: DB Climate Change Advisors
Deutsche Bank
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Appendix 1: Regulatory Disclosures
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead
analyst. In addition, the undersigned lead analyst has not and will not receive any compensation for
providing a specific recommendation or view in this report.
Adam Sieminski
Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at
http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.
Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho)
No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in
stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction
amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price
fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange
fluctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of
the New Zealand Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any
appraisal or evaluation activity requiring a license in the Russian Federation.
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Appendix 1: Disclaimer
Global Disclaimer
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