Recent Trends for Crude OilIncreasing Supply & Declining Prices

Joint Lead Commissioner Workshop on Inputsand Assumptions for

Transportation Energy Demand Forecasts

March 19, 2015

Gordon SchrempEnergy Assessments Division

California Energy CommissionGordon.schremp@energy.ca.gov

California Energy Commission

Purpose

• Show the extent of the recent collapse in crude oil prices• Provide an explanation of the factors that may have

contributed to the rapid decline• Illustrate some of the impacts in the United States that are a

consequence of declining oil prices• Provide a description of additional factors that could have an

impact oil prices during the remainder of 2015

3/19/2015 2California Energy Commission

Crude Oil Prices

• Crude oil is an international commodity

• Prices “benchmarked” to specific crude oil types– U.S. – West Texas Intermediate or

WTI– North Sea – Dated Brent or Brent– Middle East – Dubai/Oman

• Adjustments made for:– Sulfur content– Density (API gravity)– Other properties

• Prices steady for several years, through June 2014

3/19/2015 3California Energy Commission

0

20

40

60

80

100

120

140

Jan

Feb

Mar

Ap

r

May

Jun

e

July

Au

g

Sep

t

Oct

No

v

Dec

Dol

lars

Per

Bar

rel

2011 2012

2013 2014

2015

47.2 percent lower than same time last year.

Daily Brent Crude Oil Prices (2011 – 3/12/15)

California Energy Commission

Source: Energy Information Administration & OPIS.

3/19/2015 4

Crude oil prices were remarkably stable between 2011 and June of 2014

30

40

50

60

70

80

90

100

110

120

3/12

/201

4

3/26

/201

4

4/9/

2014

4/23

/201

4

5/7/

2014

5/21

/201

4

6/4/

2014

6/18

/201

4

7/2/

2014

7/16

/201

4

7/30

/201

4

8/13

/201

4

8/27

/201

4

9/10

/201

4

9/24

/201

4

10/8

/201

4

10/2

2/20

14

11/5

/201

4

11/1

9/20

14

12/3

/201

4

12/1

7/20

14

12/3

1/20

14

1/14

/201

5

1/28

/201

5

2/11

/201

5

2/25

/201

5

3/11

/201

5

Dol

lars

Per

Bar

rel

Alaska North Slope Brent North Sea

West Texas Intermediate San Joaquin Valley

Sources: ANS - Alaska Department of Revenue, SJV & Brent - OPIS, WTI - EIA.

Crude Oil Prices – West Coast, Brent & WTI

California Energy Commission3/19/2015 5

Steep Price Decline

• Crude oil prices peaked during June of 2014– June 19, 2014 – Brent - $115.06 per barrel– June 20, 2014 – Alaska North Slope (ANS) - $114.51 per barrel– June 20, 2014 – WTI - $107.95 per barrel– June 24, 2014 – San Joaquin Valley (SJV) - $99.65 per barrel

• Prices dropped at least 50 percent within 7 months– Brent down 59.5 percent to $46.59 on 1/13/15– ANS down 60.6 percent to $45.10 on 1/28/15– WTI down 59.2 percent to $44.08 on 1/28/15– SJV down 68.7 percent to $31.14 on 1/21/15

• Prices have since rebounded a bit before easing back down

3/19/2015 6California Energy Commission

Factors Associated with Oil Price Collapse

• Less robust global demand growth• Rising domestic & global production• Growing crude oil supply imbalance• OPEC cannot agree to cut output• Export restrictions• Inventory levels rise• Currency markets

3/19/2015 7California Energy Commission

Changing Outlook for Global Oil Demand

• International Energy Agency– Publishes monthly crude oil near-term demand outlooks

• May 2014 Oil Market Report– Forecast third quarter 2014 – 93.55 million barrels per day (BPD)– Forecast fourth quarter 2014 – 94.04 million BPD

• February 2015 Oil Market Report– Actual third quarter 2014 – 93.05 million barrels per day (BPD)– Actual fourth quarter 2014 – 93.53 million BPD

• Actual demand for crude oil during last half of 2014 significantly lower than near-term outlook from May 2014– Between 500 and 510 thousand barrels per day

• 2014 demand growth 630 thousand BPD lower than 2013

3/19/2015 8California Energy Commission

California Energy Commission

Slower Global Demand Growth

Source: International Energy Agency (IEA) – Oil Market Report – February 10, 2015.

3/19/2015 9

2015 outlook 93.37 MB/D vs. 92.46 MB/D in 2014 (up 0.98%).

Latin America

North America

Africa

Europe FSU

Asia

Middle East

480

0140

540 560 680160 190 180

210 150 110

130 110

-210

50 100 170

-120-250-80

2013 vs. 2012 1,2702014 vs. 2013 6402015 vs. 2014 910

Thous. Bbls/Day

1,314,727

1,715,878

1,929,450

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

Barr

els

Per D

ay

Bakken Eagle FordPermian

Source: EIA Drilling Productivity Report

U.S. Tight Oil Production – Jan. ’07-Feb. ‘15

California Energy Commission3/19/2015 10

Ghawar (Saudi Arabia) – Peak 5.0 MM BPD in 2005, now 4.5 MM BPD Samotlor (Russia) – Peak 3.0 MM BPD in 1980, now 0.84 MM BPD Burgan (Kuwait) – Peak 2.4 MM BPD in 1972, now 1.7 MM BPD Cantarell (Mexico) – Peak 2.1 MM BPD in 2003, now 0.41 MM BPD Rumaila (Iraq) – Peak 1.6 MM BPD in 1980, now 1.3 MM BPD Safaniya (Saudi Arabia) – Peak 1.5 MM BPD in 1990s, now 1.2 MM BPD Kirkuk (Iraq) – Peak 1.2 MM BPD in 1980, now 0.23 MM BPD Daqing (China) – Peak 1.1 MM BPD in 1997, now 0.75 MM BPD

3 U.S. fields each exceed 1 million barrels per dayCombined 4.96 million barrels per day.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jan-

1981

Dec

-198

1

Nov

-198

2

Oct

-198

3

Sep-

1984

Aug-

1985

Jul-1

986

Jun-

1987

May

-198

8

Apr-

1989

Mar

-199

0

Feb-

1991

Jan-

1992

Dec

-199

2

Nov

-199

3

Oct

-199

4

Sep-

1995

Aug-

1996

Jul-1

997

Jun-

1998

May

-199

9

Apr-

2000

Mar

-200

1

Feb-

2002

Jan-

2003

Dec

-200

3

Nov

-200

4

Oct

-200

5

Sep-

2006

Aug-

2007

Jul-2

008

Jun-

2009

May

-201

0

Apr-

2011

Mar

-201

2

Feb-

2013

Jan-

2014

Dec

-201

4

Thou

sand

s of

Bar

rels

Per

Day

US Crude Oil Production Alaska

North Dakota Texas

California + OCS Rest of US

Source: Energy Information Administration (EIA)

9.226 million barrels per dayHighest since May of 1973

3.447 million barrels per dayHighest since 1972 annual average

Chart peak of 9.173 million barrels per day - Feb. 1986All-time peak of 10.044 million barrels per day - Nov. 1970

1.187 million barrels per day

U.S. Crude Oil Production – Jan. ‘81-Dec. ‘14

California Energy Commission3/19/2015 11

2,349

991

608

-5 -120

-500

0

500

1,000

1,500

2,000

2,500

Texas North Dakota Rest of U.S. California Alaska

Thou

sand

s of

Bar

rels

Per

Day

Change in Crude Oil ProductionJanuary 2010 vs. December 2014

Source: Energy Information Administration (EIA)

U.S. crude oil production has increased from 5.403 million barrels per day in January 2010 to 9.226 million barrels per day during December 2014

California Energy Commission3/19/2015 12

California Energy Commission3/19/2015 13

863 838

3,220

-838

366

-599

741

-291

621

341

-629

713

209

-395 -100

219

-832-689

259

546

-123

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Saud

i Ara

bia

Russ

ian

Fede

ratio

n US

Iran

Chin

a

Vene

zuel

a

Cana

da

Mex

ico

Uni

ted

Arab

Em

irat

es

Kuw

ait

Nor

way

Iraq

Nig

eria

Alge

ria

Ango

la

Braz

il

Liby

a

Uni

ted

King

dom

Kaza

khst

an

Qat

ar

Indo

nesi

a

Thou

sand

s of

Bar

rels

Per

Day

Sources: 2014 BP Statistical Review and Energy Commission Analysis

Global Crude Oil Production Change2013 vs. 2008

U.S. increase greater than combined production growth from Saudi Arabia, Russia, Canada and Iraq.

-0.05 -0.07

-0.76

-0.94

0.34

1.24

0.85

0.77

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

88

89

90

91

92

93

94

95

1Q 2

013

2Q 2

013

3Q 2

013

4Q 2

013

1Q 2

014

2Q 2

014

3Q 2

014

4Q 2

014

Mill

ions

of B

arre

ls P

er D

ay

Mill

ions

of B

arre

ls P

er D

ay

Axis Title

Supply

Demand

Supply Imbalance

Source: California Energy Commission analysis of IEA data.

California Energy Commission3/19/2015 14

Growing Global Crude Supply ImbalanceExcess global crude oil supplies during all of 2014.

OPEC Cannot Agree to Cut Output

• Organization of Petroleum Exporting Countries met on November 27, 2014

• No consensus on reducing country-specific production quotas

• Saudi Arabia unwilling to disproportionately lose market share so other member countries benefit from firming prices

• OPEC unable to convince other non-OPEC exporting countries to cooperate, such as Russia

3/19/2015 15California Energy Commission

Source: David Butler, Boston Globe.

Source: Heinz- Peter Bader, Reuters.

Crude Oil – Export Restrictions

3/19/2015 16California Energy Commission

• Domestically produced crude oil exports to foreign destinations allowed ‐under specific "license exceptions" identified under federal statute - primary exceptions include:

• Alaska crude oil shipped on the Trans Alaska Pipeline System (TAPS) and ‐exported via a Jones Act vessel directly from Valdez Harbor

• California heavy crude oil production with API gravity of 20.0 degrees or lower, limit of no more than 25,000 barrels per day

• First export license for California heavy crude oil was granted on December 9, 1991 – no heavy crude oil exports for several years

• Exports of domestic crude oil to Canada for processing by Canadian refineries• Exports in connection with refining or exchange of Strategic Petroleum

Reserve crude oil• Companies can also apply to the federal Bureau of Industry and Security

(BIS) for an export license that basically requires Presidential approval

Recent export licenses for “processed” condensate approved.

California Energy Commission

Crude Oil – Inventory Rising

U.S. crude oil inventories at 448.9 million barrels as of 3/6/15 • Highest level since November of 1930

• 78.9 million barrels more than same time last year

• Record level of 545.186 million barrels during October 1929

3/19/2015 17

Source: Energy Information Administration, This Week in Petroleum.

Crude Oil Futures Outlook

• Crude oil futures markets are now in contango, rising over time

• Price rise could be sufficient to cover expense of temporarily storing crude oil, an incentive for elevated stock levels

3/19/2015 18California Energy Commission

Source: Howard Weil Weekly Refinery Update 3/11/15.

California Energy Commission

Crude Oil & Currency Markets

• Declining US dollar would increase purchasing power for non-dollar importers – Japan and India – increasing demand & oil price

• Strengthening dollar would have the opposite impact – declining demand & lower oil price

• Negative correlation between crude oil prices & US Dollar exchange rate– Dollar strengthens, crude oil prices

decline– Dollar weakens, crude oil prices rise

• But this relationship only a recent phenomenon– Little to no correlation prior to 2001

• What might be at work?

3/19/2015 19

California Energy Commission

Crude Oil & Currency Markets

• Likely that the relationship between the US Dollar and crude oil prices is more complicated

• Recent working paper offers insight into deeper interactions– Monetary policies– Balance of trade– Importance of other commodity

markets

• Crude oil price behavior could be more akin to a financial asset

3/19/2015 20

Impacts of Increased U.S. Crude Oil Output & Declining Global Prices

• U.S. crude oil imports drop off• Drilling activity for crude oil declines

3/19/2015 21California Energy Commission

3,696

2,678

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

Mill

ions

of B

arre

ls

Source: Energy Information Administration.

U.S. Imports of Crude Oil Decline

California Energy Commission3/19/2015 22

Source: Energy Information Administration, This Week in Petroleum.

2014 oil imports 2.79 million BPD lower than 2005 peak of 10.13 million BPD.

179

1,609

866

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

7/17

/198

73/

18/1

988

11/1

8/19

887/

21/1

989

3/23

/199

011

/23/

1990

7/26

/199

13/

27/1

992

11/2

7/19

927/

30/1

993

3/31

/199

412

/02/

1994

8/04

/199

54/

05/1

996

12/0

6/19

968/

08/1

997

4/10

/199

812

/11/

1998

8/13

/199

94/

08/2

000

12/1

5/20

008/

17/2

001

4/19

/200

212

/20/

2002

8/22

/200

34/

23/2

004

12/2

3/20

048/

26/2

005

4/28

/200

612

/29/

2006

8/31

/200

75/

02/2

008

1/02

/200

99/

04/2

009

5/07

/201

01/

07/2

011

9/09

/201

15/

11/2

012

1/11

/201

39/

13/2

013

5/16

/201

41/

16/2

015

Drill Rig Deployment Declines with Price

California Energy Commission3/19/2015 23

Source: Baker Hughes data – through March 13, 2015.

Number of rigs deployed specifically for U.S. oil drilling 46.2 percent lower than the peak level on October 10, 2014

Gradual impact on oil production likely to manifest itself over the next several months

Biggest drops in Permian (-255), Williston (-90), and Eagle Ford (-75) basins

Other Factors that Could Impact Near-term Oil Prices

• Seasonal increase for global crude oil demand• Increased exports from countries experiencing difficulties

– Libyan violence has reduced oil export capability

• U.S. crude oil storage capacity has limits

3/19/2015 24California Energy Commission

90.691.3

92.6 92.891.7 91.6

93.193.5

92.6 92.5

94.094.5

83.985.2

86.4 86.1 85.5

88.389.1

90.691.8

92.593.4

75

80

85

90

95

100

1Q 2

013

2Q 2

013

3Q 2

013

4Q 2

013

1Q 2

014

2Q 2

014

3Q 2

014

4Q 2

014

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Mill

ions

of B

arre

ls P

er D

ay

Quarterly Oil Demand - World

California Energy Commission

Source: IEA – Oil Market Report – February 10, 2015.

3/19/2015 25

Near-term Factors – Seasonal Demand

• Crude oil demand is seasonal• Demand normally rises during

last two quarters of each year– 1st Q refinery maintenance– 4th Q global heating demand

• IEA forecast for 2015– Global demand for crude oil forecast

to increase by 2.0 million barrels per day between 2nd and 4th quarters of 2015

• Normal seasonal trend will likely put upward pressure on oil prices during last half of 2015

23.123.2

23.7 23.7

23.223.0

23.6

23.9

23.523.3

23.723.9

25.5 25.4 25.5

24.2

23.3

23.523.3

23.0

23.4 23.423.6

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

1Q 2

013

2Q 2

013

3Q 2

013

4Q 2

013

1Q 2

014

2Q 2

014

3Q 2

014

4Q 2

014

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Mill

ions

of B

arre

ls P

er D

ayQuarterly Oil Demand - North America

United States 19.21

California Energy Commission

Source: IEA – Oil Market Report – February 10, 2015.

3/19/2015 26

About 31 percent of this seasonal rise will come from North America – 620 thousand barrels per day.

Violence Curtails Libyan Oil Exports• Exports had been as high as 1.4 million BPD during 2013• Dropped to 450 thousand BPD during December 2014• Continued attacks have decreased production to an estimated 250

thousand barrels per day during February 2015• A resumption of stable & sustained exports could place downward

pressure on global prices

3/19/2015 27California Energy Commission

U.S. Crude Oil Storage Has Limits

• Spare working storage capacity for crude oil estimated to be:– 54.0 percent for end of September 2014 – 40.0 percent for the week ending February 20, 2015 (see chart above)– 37.2 percent for the week ending March 6, 2015

• Decreasing spare storage capacity could place downward pressure on crude oil prices

3/19/2015 28California Energy Commission

Additional Q & A

California Energy Commission3/19/2015 29