oil prices outlook 2004
TRANSCRIPT
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The Outlook for Oil PricesBullish And Bearish PerspectivesSeptember 21, 2004Oil & Gas Investment ConferenceRaffles City Convention Center Singapore
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Outlook for Oil Prices: Agenda
The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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Outlook: a quick look back
NYMEX WTISeptember 1984-September 2004 ($/bbl)
0
10
20
30
40
50
60
9 / 1 0
/ 1 9 8
4
9 / 1 0
/ 1 9 8
5
9 / 1 0
/ 1 9 8
6
9 / 1 0
/ 1 9 8
7
9 / 1 0
/ 1 9 8
8
9 / 1 0
/ 1 9 8
9
9 / 1 0
/ 1 9 9
0
9 / 1 0
/ 1 9 9
1
9 / 1 0
/ 1 9 9
2
9 / 1 0
/ 1 9 9
3
9 / 1 0
/ 1 9 9
4
9 / 1 0
/ 1 9 9
5
9 / 1 0
/ 1 9 9
6
9 / 1 0
/ 1 9 9
7
9 / 1 0
/ 1 9 9
8
9 / 1 0
/ 1 9 9
9
9 / 1 0
/ 2 0 0
0
9 / 1 0
/ 2 0 0
1
9 / 1 0
/ 2 0 0
2
9 / 1 0
/ 2 0 0
3
9 / 1 0
/ 2 0 0
4
OPEC cuts output 20%
Iraq invades Kuwait
Asian Economic Crisis
9-11
Invasion of Iraq
Saudi Arabia "disciplines non-OPEC"
End of Gulf War I
OPEC quota cuts
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Outlook: the historical range
NYMEX WTISeptember 1984-September 2004 ($/bbl)
0
10
20
30
40
50
60
9 / 1 0
/ 1 9 8
4
9 / 1 0
/ 1 9 8
5
9 / 1 0
/ 1 9 8
6
9 / 1 0
/ 1 9 8
7
9 / 1 0
/ 1 9 8
8
9 / 1 0
/ 1 9 8
9
9 / 1 0
/ 1 9 9
0
9 / 1 0
/ 1 9 9
1
9 / 1 0
/ 1 9 9
2
9 / 1 0
/ 1 9 9
3
9 / 1 0
/ 1 9 9
4
9 / 1 0
/ 1 9 9
5
9 / 1 0
/ 1 9 9
6
9 / 1 0
/ 1 9 9
7
9 / 1 0
/ 1 9 9
8
9 / 1 0
/ 1 9 9
9
9 / 1 0
/ 2 0 0
0
9 / 1 0
/ 2 0 0
1
9 / 1 0
/ 2 0 0
2
9 / 1 0
/ 2 0 0
3
9 / 1 0
/ 2 0 0
4
$48.70/bbl on August 19, 2004
$10.42/bbl on March 31, 1986
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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Bulls vs Bears: Cards on the table
BULLS look to supplyshocks Oil running with less than 1%
supply cushion
Iraq crude exports alwaysvolatile Cuts anywhere, any time Refined products supply
appears tight
Demand growth assumed
BEARS favor demand slow-down High oil prices a tax on soft
economies, including US
Seasonal slow down indemand in Q2 Mean reversion fall in price
a question of when, not if Supply will rise--and
eventually overcompensate
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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A Word on Speculation
Speculators a popular, and soft, target for blame Widely blamed for record highs seen in 2004
Speculators adding $7 to price of oil Algeria energy minister Chakib Khelil, September 8,
Sydney (WEC) A common remark heard throughout 2004
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Role of Speculation
But US speculators have sold into 2004 rally Speculators most commonly defined as non-
Commercials for US regulatory reporting Non-Commercials have cut reported positions strongly
since end of 2003 Long crude positions down 44.7% to 27,964 contracts Long gasoline down 76% to 9,412 contracts Long heating oil down 95.4% to 463 contracts
Crude futures rose 35.27% over the same period Oil is worth whatever someone will pay for it
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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Spare capacity at 1% of demand
World Oil Supply/Demand Balance (mb/d)
0
10
20
30
40
50
60
70
80
90
100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
OPEC
Non-OPECDEMAND
?
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Capacity On The Margin Under Pressure
World Oil Demand-Supply Balance (mb/d)
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1997 1998 1999 2000 2001 2002 2003 2004 2005
World Balance (All Adds)
Half OPEC Adds
No OPEC Adds
Assumes non-OPEC adds of 1.2mb/d in 2005, and total demand growthof 2% in 2005
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Spare capacity: heavy and sour
-10
-5
0
5
10
15
20
Sep 2001 Sep 2002 Sep 2003
$/bblKeroseneGasoilNaphthaFuel Oil
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Importance of Capacity: Summary
All producers (not just OPEC) swimming fast to tread water Supply and demand tightly matched Forcing bulls and bears to hedge against anticipated moves
in supply and demand
Neither supply, nor demand, are readily responsive to pricesignals
In recent years, supply has simply shown itself to be morevulnerable
Bulls have held sway
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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2004: Bulls were in charge
OPEC output, 18%
DOE / API Stocks,18%
Iraq, 16%
Weather, 7%Gasoline, 6%Terrorism , 6%
Refinery fires, 5%Nigeria, 5%
Funds Buying, 4%Russia, 3%Venezuela , 2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
OPEC output DOE / A PI Stocks Iraq Weather / Storms GasolineTerrorism Ref inery f ires Nigeria Funds Buying RussiaHeating Oil Global Demand Venezuela Norw ay ChinaNatural Gas Israel US Dollar Iran SPR
Factors Cited By Analysts For All Price Movements (2004)
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The Big Picture
Bulls vs Bears
Role of Speculation
The Importance of Capacity
2004: What Happened??
Outlook
Outlook for Oil Prices
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Outlook 2005: OPEC to remain in focus
OPEC no longer in the driving seat, will work hard to regaineffective control over prices
Quota and price band currently irrelevant, will continue toseriously rethink as credibility of both mechanisms remains low Market focus in 2005 will be on OPEC efforts to build spare
capacity Success (or otherwise) will be the key to 2005s landscape
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Outlook 2005: A bulls perspective
Who would bet against more supply shocks? Iraq (2-3mbd) Russia (9mbd) Nigeria (2-2.5mbd) Venezuela (2-2.5mbd) Saudi Arabia (maxed out at 9.5-10mbd) Another tough USGC hurricane season? (1mbd)
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Outlook 2005: A bulls perspective
Sweet crude running out/perceived refiningbottlenecks Most new crude capacity will be sour and heavy, doing
little to redress perceived shortfalls in gasoline Light, sweet benchmarks will stay under pressure as
long as gasoline, distillates cracks remain bullish Structural flaws in US gasoline markets will persist
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Outlook 2005: A bulls perspective
The world seems willing to shoulder $40 crude High oil having only small affect on US GDP growth Record gasoline prices were shrugged off by US
consumers until the very end of driving season Many key consuming countries shield consumers
through subsidization
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Outlook 2005: A bears perspective
Almost everyone has bought into the notion of a$8-12 risk premium Resolution to any of the key risk areas can shave $5-
10 off oil Peace in Iraq (successful elections) Major resolution to any piece of ongoing global
terrorism, especially in Saudi Arabia Resolution of Yukos power struggle
An easier year in Venezuela, Nigeria
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Outlook 2005: Worth watching out for
Several key issues have power to tilt the balance US election results in November
Bush a bullish result, Kerry a bearish result? Direct impact on foreign policy, possibly economic
performance
Taiwan PRC forcible intervention could redraw world politics
Significant appreciation of US dollar Would give bears more ammunition
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Outlook 2005: Paradigm shift?
NYMEX WTI Foward CurveSeptember 2000
20
22
24
26
28
30
32
34
36
O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
NYMEX WTI Forward Curve2000 vs 2001
20
22
24
26
28
30
32
34
36
O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
11-Sep-00
10-Sep-01
NYMEX WTI Forward Curve2000, 2001, 2002
20
22
24
26
28
30
32
34
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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
11-Sep-00
10-Sep-01
10-Sep-02
NYMEX WTI Forward Curve2000, 2001, 2002, 2003
20
22
24
26
28
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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
11-Sep-00
10-Sep-01
10-Sep-02
10-Sep-03
NYMEX WTI Forward Curve2000, 2001, 2002, 2003, 2004
20
25
30
35
40
45
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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
11-Sep-00 10-Sep-01
10-Sep-02 10-Sep-03
10-Sep-04
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Thank you
Dave Ernsberger Editorial Director, [email protected]
www.platts.com
mailto:[email protected]:[email protected]