oil fundamental outlook - the ice · bearish factor no. 2: turbulent times for oil demand demand...
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Oil fundamental outlook June 2013
2 June 2013
Bearish factor no. 1: global macro – doom and gloom persist
MACRO (1/2)
Eurozone unemployment %
Eurozone unemployment remains high: more worryingly, German unemployment has risen for 4 consecutive months
China – total electricity consumption y/y change
The pick-up seen in the Chinese economy has stalled, as China continues to rebalance growth towards consumption
Source: Bloomberg, NEA China, Energy Aspects analysis
(20%)
0%
20%
40%
10 11 12 13
9
10
11
12
13
11 12 13
3 June 2013
But is all really that bad?
MACRO (2/2)
US consumer confidence Index
Monetary stimulus and low energy prices have started to push up US economic sentiment
Japanese GDP SA q/q, %
The new measures to boost Japanese GDP through fiscal stimulus also seems to be bearing fruit
Source: Bloomberg, Energy Aspects
40
45
50
55
60
65
70
75
80
11 12 13
(4)
(2)
0
2
4
08 09 10 11 12 13
4 June 2013
Bearish factor no. 2: turbulent times for oil demand
DEMAND (1/5)
Global oil demand, y/y change mb/d
Global oil demand growth has slowed relative to the pick up seen in Q4 last year
Global oil demand, y/y change mb/d
Chinese oil demand growth has failed to pick up substantially, still under 0.5 mb/d
Source: Energy Aspects analysis
(4)
(3)
(2)
(1)
0
1
2
3
4
5
04Q1 06Q1 08Q1 10Q1 12Q1
non-OECD
OECD
Actual F
(4)
(3)
(2)
(1)
0
1
2
3
4
09Q1 11Q1 13Q1
China non-OECD OECD
Actual F
5 June 2013
Europe remains a pain point, with the slight recovery reversing
DEMAND (2/5)
European oil demand, y/y change mb/d
The slight recovery seen late last year is fading
Eurozone manufacturing PMI Index
With austerity measures crippling growth
Source: JODI, Bloomberg, Energy Aspects analysis
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
10 11 12 13
Gasoline Fuel oil Distillates Others
Improvement in Q4 12 Improvement in Q4 12
Worsening in Q1 13 42
46
50
54
58
62
11 12 13
6 June 2013
50
65
80
95
Jan Mar May Jul Sep Nov
2013 2012 2011
Chinese oil demand is picking up, but at a much slower rate
DEMAND (3/5)
Chinese oil demand, y/y change mb/d
Chinese oil demand has started to recover, but this is a gradual process
Chinese gasoline and diesel stocks mb
Refining capacity additions have resulted in sharply higher product stocks and China is back to destocking
Source: China Customs, Energy Aspects analysis
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
07 08 09 10 11 12 13
40
45
50
55
Jan Mar May Jul Sep Nov
2013 2012 2011
7 June 2013
And is non-OECD demand growth ex China stalling too?
DEMAND (4/5)
Key non-OECD oil demand growth, y/y change mb/d
Non-OECD oil demand growth outside China has also slowed in late Q1 13
Asian petrochemical prices $/tonne
With petchem prices in Asia slumping on reduced export demand to Europe
Source: ANP, JODI, PPAC, Bloomberg, Energy Aspects analysis
(0.3)
0.0
0.3
0.6
0.9
1.2
08 09 10 11 12 13
India Brazil FSU Saudi
700
900
1,100
1,300
1,500
1,700
10 11 12 13
Ethylene Korea Benzene Japan
LLDPE India
8 June 2013
But could the declines have been exaggerated?
DEMAND (5/5)
OECD Asia Pacific demand growth, y/y change %
An extremely warm winter in parts of Asian exacerbated the declines in demand
UK gasoline demand, y/y change mb/d
While the disruption to transportation in Europe has outweighed positive impact on heating from heavy snowfalls
Source: JODI, Energy Aspects analysis
(6%)
(3%)
0%
3%
6%
9%
12%
10 11 12 13
Japan Korea
`
Very warm winter
(0.08)
(0.06)
(0.04)
(0.02)
0.00
0.02
0.04
0.06
07 09 11 13
Heavy snowfall
9 June 2013
Bearish factor 3: Non-OPEC supplies: all about shale
SUPPLY (1/9)
Rest of non-OPEC oil production, y/y change mb/d
US oil production is scaling record highs, supported by shale output
US oil production, y/y change mb/d
But the rest of non-OPEC production has been very weak, declining sharply throughout 2011 and 2012 and into 2013
Source: EIA, Energy Aspects analysis
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
05 06 07 08 09 10 11 12 13
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
05 06 07 08 09 10 11 12 13
10 June 2013
But the usual centres of growth have disappointed significantly
SUPPLY (2/9)
FSU oil production, y/y change mb/d
Brazilian oil production has been extremely weak, due to high declines at old oilfields
Brazilian oil production, y/y change mb/d
FSU output, apart from Russia, has also been affected by technical problems, leading to sharp declines
Source: ANP, Socar, Bloomberg, Kazmunaigas, Energy Aspects analysis
(0.25)
(0.15)
(0.05)
0.05
0.15
0.25
06 07 08 09 10 11 12 13 (0.4)
(0.2)
0.0
0.2
0.4
0.6
0.8
09 10 11 12 13
Kazakhstan
Azerbaijan
Russia
11 June 2013
The weakness outside the US is highly visible
SUPPLY (3/9)
Angolan loadings mb/d
Russian crude exports for June are at their lowest in five years, due to rising domestic demand
Urals loadings mb/d
Nigerian loadings are also at a five year low, while Angolan exports are at their lowest in a year
Source: Bloomberg, Energy Aspects analysis
2.1
2.3
2.5
2.7
2.9
3.1
3.3
Jan Mar May Jul Sep Nov
2013 2012 2011 2010
1.4
1.5
1.6
1.7
1.8
1.9
Jan Mar May Jul Sep Nov
2013 2012 2010 2011
12 June 2013
And much of shale is super light crude or NGLs
SUPPLY (4/9)
Crude oils by quality characteristics mb/d
Annual US oil production growth by type mb/d
Source: EIA, Energy Aspects analysis
Crude oil quality of shale plays is super light With vast amounts of condensates being blended into crude
(0.4)
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
2002 2004 2006 2008 2010 2012
Crude
NGL
13 June 2013
With high costs of extraction and high decline rates
SUPPLY (5/9)
Type curve in shale basins mb/d
Price sensitivity of 2012 US drilling
Source: American oil and gas reporter, Energy Aspects analysis
Decline rates at liquid plays are extremely steep, and can range between 50-70% after the first year
Breakeven prices required by producers are above $80 per barrel; below $70 drilling programmes would be scaled back
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0 60 120 180 240 300
Eagle Ford Bakken
No of months
0
20
40
60
80
100
50 60 70 80 90
WTI price, $/barrel %
of
op
era
tors
, cu
mu
lative
14 June 2013
Worse, OPEC supply under significant pressure
SUPPLY (6/9)
Nigerian oil production mb/d
Rise in unrest is set to curtail Libyan production this year
Libyan oil production mb/d
While increasing oil theft will cap Nigerian output growth
Source: MEES, Energy Aspects analysis
1.9
2.0
2.1
2.2
2.3
2010 2011 2012 2013
Shell force majeures in 2011
from hacksaw cuts, leaks and
fires on its pipelines
Declaration of Amnesty by the
government and ceasefire by
MEND
Floods and Increase in
oil thefts
Oil theft at
three year
high, FMs
0.0
0.4
0.8
1.2
1.6
2.0
2010 2011 2012 2013
Arab Spring
Overthrow
of Gaddafi
Political skirmishes,
militant attacks,
protests on the rise
15 June 2013
Geopolitics has had direct impact on OPEC output
SUPPLY (7/9)
Iraqi oil production mb/d
Sanctions against Iran have taken the country’s output below 3 mb/d, and the pick-up in exports has faded
Iranian oil production mb/d
While Iraqi output has grown over the past year, growth is stalling due to rising sectarian violence
Source: MEES, Energy Aspects analysis
2.5
2.8
3.0
3.3
3.5
3.8
4.0
4.3
4.5
06 07 08 09 10 11 12 13 1.4
1.8
2.2
2.6
3.0
3.4
06 07 08 09 10 11 12 13
16 June 2013
Saudis have been the only stabilising factor, but their agenda is changing
SUPPLY (8/9)
Iraq and Saudi OSPs to Asia $/barrel
Saudi Arabian oil production has started to pick up ahead of seasonal demand, after the sharp drop
Saudi Arabian oil production mb/d
Discounted Iranian and Iraqi crude are causing the Saudis to lose market share, a problem in the longer run
Source: MEES, Energy Aspects analysis
7.6
8.0
8.4
8.8
9.2
9.6
10.0
10.4
06 07 08 09 10 11 12 13
(4)
(3)
(1)
1
2
4
5
09 10 11 12 13
Iraq - Basrah light Saudi - Arab Light
17 June 2013
Overall, costs of extraction are much higher today
SUPPLY (9/9)
US Gulf of Mexico decline rates %
Exploration and production costs have risen substantially over the past eight years
Ultra-deepwater rig day rates $000 per day
Decline rates have stepped up across key basins such as North Sea, Brazil, US GoM, adding further to costs
Source: Company data, MOEMRE, US Department of Interior, Energy Aspects analysis
100
200
300
400
500
600
700
00 02 04 06 08 10 12
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9
2009
2008
2004
2000
1996
18 June 2013
Bearish factor 4: Refining overcapacity leading to weak margins
REFINING (1/2)
Refining capacity balance mb/d
US refinery runs mb/d
Source: IEA, EIA, Energy Aspects analysis
Global refining additions are well in excess of oil demand growth, resulting in pressurised margins
And global, particularly US, runs have been at record highs due to cheap domestic crude and stellar margins
(0.5)
0.5
1.5
2.5
3.5
2008 2009 2010 2011 2012 2013
Refining capacity additions, net
Oil demand growth
13.5
14.0
14.5
15.0
15.5
16.0
Jul Aug Oct Dec Feb Apr Jun
12/13 11/12 5yr avg. 12/13 11/12 5yr avg.
19 June 2013
But falling margins do not necessarily mean lower crude demand
REFINING (2/2)
Total refining capacity mb/d
Crude stockpiling, China mb/d
Source: BP Statistical Review of World Energy, China Customs, Energy Aspects analysis
Total refining capacity has increased steadily over the past few years and run cuts are coming from a higher base
Crude stockpiles, although rising lately, remain low, so crude imports to countries like China will remain high
80
84
88
92
96
2001 2003 2005 2007 2009 2011 2013
(0.6)
(0.2)
0.2
0.6
1.0
Jan Mar May Jul Sep Nov
2013 2012 2011 5yr avg.
20 June 2013
Thus, focus on bearish headlines weighing on prices
PRICES (1/5)
Front month Brent prices $/barrel
Brent forward curve $/barrel
Source: Bloomberg, Datastream, Energy Aspects analysis
Oil prices have found a new trading range, some $10 lower than last year
The drop in front month prices has extended to the back as a sense of abundance has crept in
80
90
100
110
120
1 2 3 4 5 6 7
Current
1 year ago
2 years ago
95
100
105
110
115
120
Dec Jan Feb Mar Apr May Jun
21 June 2013
Light crude and product prices have been the worst affected, due to shale
PRICES (2/5)
US gasoline crack spreads (relative to WTI) $/barrel
Light crude prices relative to Dated Brent $/barrel
Source: Bloomberg, Datastream, Energy Aspects analysis
US gasoline prices and crack spreads have plummeted from the highs earlier in the year
Weakness in light ends weighing on light sweet crudes relative to their heavier counterparts
10
15
20
25
30
35
40
45
Jan Feb Mar Apr May Jun
Jul-13 Sep-13 Nov-13
(3.0)
(1.5)
0.0
1.5
3.0
Jan Feb Mar Apr May Jun
Azeri Saharan Blend
Urals Rotterdam Forties
22 June 2013
Implications on other benchmarks: Disconnected US, Brent-Dubai to widen?
PRICES (3/5)
US crude oil imports mb/d
Nigerian crude oil exports to the US mb/d
Source: EIA, Energy Aspects analysis
The growth of shale output has backed out crude imports, primarily from the Gulf Coast
The backing out of light sweet crude imports has affected WAF the most, impacting the Atlantic basin
0.0
0.4
0.8
1.2
1.6
90 93 96 99 02 05 08 11 14
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
05 06 07 08 09 10 11 12 13
Total (LHS) Gulf Coast (RHS)
23 June 2013
As shale backed out crudes head to Asia rather than Europe
PRICES (4/5)
WAF exports to Asia mb/d
FSU crude exports mb/d
Source: Reuters, Energy Aspects analysis
But West African barrels are increasingly swinging into Asia, due to strengthening demand there
FSU crude exports have been on the downtrend due to high domestic demand; within exports, more is headed to Asia
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
06 07 08 09 10 11 12 13
5.4
5.8
6.2
6.6
7.0
09 10 11 12 13
24 June 2013
But rising exploration costs to support $100 floor
PRICES (5/5)
Major’s liquids output, CAPEX and income Index based on nominal dollars
Net income vs. oil price $/barrel
Source: EIA, Reuters, Energy Aspects analysis
As decline rates have stepped up and terrains have gotten more challenging, oil companies have failed to grow output
Net income per barrel (11.5%) has risen by far less than oil prices (16.1%) over the last 10 years due to rising costs
0
20
40
60
80
100
120
2
6
10
14
18
22
02 04 06 08 10 12
Net Income, LHS Oil Price, RHS
0
100
200
300
400
500
00 02 04 06 08 10 12
Liquids production
Capex
Net Income
25 June 2013
The weakness seems greater in Brent than other grades
SPREADS (1/7)
Brent prompt time spreads $/barrel
WAF and Med physical diffs to Dated Brent $/barrel
Source: Bloomberg, Datastream, Energy Aspects analysis
Prompt Brent spreads have moved from a $1 average to 20 cents
While other grades such as Nigerian, Angolan and even Urals have strengthened significantly relative to Brent
(0.1)
0.4
0.9
1.4
1.9
Dec Jan Feb Mar Apr May Jun
(3)
(2)
(1)
0
1
2
3
4
Jan Feb Mar Apr May Jun
Bonny Light Girassol Urals Med
26 June 2013
Absence of Korea and improved Forties supplies weighing
SPREADS (2/7)
Forties loadings mb/d
Prompt Brent spreads $/barrel
Source: Bloomberg, Energy Aspects analysis
The South Korean government’s attempts to close a tax loophole has deterred Korean buying of Forties
Forties production is improving on stable Buzzard performance and the return of the Elgin-Franklin fields
(1)
0
1
2
3
4
5
Jul 10 Mar 11 Nov 11 Jul 12 Mar 13
1 year avg post
FTA: 0.63 1 year avg pre
FTA: -0.01
Avg July 12 -
Mar 13: 0.91
Avg
Mar -
May:
0.23
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Jan Mar May Jul Sep Nov
2013 2012 2011 2010
27 June 2013
And European refining margins worst hit
SPREADS (3/7)
Brent Rotterdam hydroskimming margins $/barrel
US gasoline imports from Europe mb/d
Source: EIA, Energy Aspects analysis
Refining margins have fallen sharply in Asia and in Europe as demand is weak but supplies keep rising
Weak US demand, higher domestic production and RINs all contributing towards lower gasoline imports from Europe
(4)
0
4
8
12
Jan Mar May Jul Sep Nov
2013 2012 Average
0.0
0.1
0.2
0.3
0.4
0.5
0.6
01 02 03 04 05 06 07 08 09 10 11 12 13
28 June 2013
Brent spreads will struggle to get to $2 in Q3 this year
SPREADS (4/7)
US inventories relative to the 5-year average mb
UK oil production by quarter, y/y change mb/d
Source: EIA, DECC, Energy Aspects analysis
Product stocks around the world have risen substantially over the past year, reducing the incentive to run
Far lower field maintenance in the UK this year is likely to make the y/y declines less steep
(60)
(40)
(20)
0
20
40
60
Jul 11 Jan 12 Jul 12 Jan 13 Jul 13
Crude Products ex 'other oils'
May 2012
May 2013
(0.3)
(0.2)
(0.1)
0.0
Q1 '10 Q4 '10 Q3 '11 Q2 '12 Q1 '13 Q4 '13
F'cast
29 June 2013
And the near term outlook on spreads remains bleak, without South Korea
SPREADS (5/7)
New capacity additions in 2013 mb/d
FSU gasoil exports mb/d
Source: DECC, Energy Aspects analysis
New Middle Eastern and Indian refinery additions will provide a further significant boost to supplies in H2
FSU gasoil exports to Europe are rising fast , and together have depressed European refinery runs to below 75%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Q1'13 Q2'13 Q3'13 Q4'13
Others Middle East Asia
0.6
0.7
0.8
0.9
1.0
1.1
1.2
09 10 11 12 13
30 June 2013
What about the arb? WTI to pick-up?
SPREADS (6/7)
Pipelines towards Gulf Coast Thousand b/d
US rail loading capacity mb/d
Source: Company reports; Energy Aspects analysis
New pipeline and rail start-ups are helping to alleviate the existing infrastructure bottlenecks
20
7
30
5
49
0
67
5
75
2
88
2
91
7
1,0
27
1,0
27
212
366
565
750 827
957 992
1,185 1,265
0
250
500
750
1,000
1,250
Pre 12
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
2014
Other
North Dakota
Name Start-up Capacity
Currently operational
Seaway reversal May-12 150
West Texas Gulf Jun-12 40
Eagle Ford condensate Jun-12 300
Eagle Ford to Houston pipeline - Phase 1 Jul-12 350
Seaway expansion Jan-13 250
Under Construction
Twinned Seaway expansion Q1 14 400
Eagle Ford to Houston pipeline - Phase 2 Mar-13 200
Eagle Ford pipelines Mar-13 350
Texas Line mid-2012 350
Permian expansion projects Late-2012 40-60
Keystone XL South leg Late 2013 700
Longhorn pipeline reversal Q1 13-mid 13 75-225
Permian Express Phase 1 Apr-13 90-150
Planned
Permian Express Phase 2 Mid-2014 200
West Texas Gulf expansion Q1-13 70
Pecos River crude pipeline May-13 150
Jones Creek extension End Q3/early Q4 200
Houston-Beaumonth Port Arthur Early 2014 200
BridgeTex Pipeline Mid 2014 300
TexStar's Eagle Ford pipeline Q3 2012 100
Houma-Houston pipeline reversal Feb-13 300
Westward Ho Q3-15 300
Double Eagle Pipeline Early 2013 100
Karnes to Corpus Christi Mid-2013 120
Trunkline conversion from NG to crude Mid 2015 400
El Paso Natural Gas System Conversion tbc 300-400
31 June 2013
Pipeline reversals to help WTI reconnect to the Gulf Coast
SPREADS (7/7)
US Midwest balances Thousand b/d
Source: EIA, Energy Aspects analysis
We expect WTI to narrow its gap to Brent, and despite recent refinery start-up delays pushing back sustained Cushing draws, we expect substantial draws to start in the coming weeks
Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13
Production 1,420 1,513 1,599 1,717 1,733 1,804 1,873 1,942
Foreign Imports 2,035 1,942 1,996 1,891 2,181 2,131 2,156 2,079
Inter-PADD flows (into PADD 2) 931 979 908 1,016 852 696 591 507
by pipeline 931 979 907 1,015 851 696 590 506
PADD 2+4 supply 4,387 4,433 4,503 4,624 4,766 4,632 4,619 4,528
Refinery runs 4,021 4,050 4,028 3,926 3,850 3,625 3,953 3,951
Exports 45 39 56 54 52 50 61 59
Inter-PADD flows (from PADD 2) 319 399 574 737 905 972 993 1,040
by pipeline 155 201 237 253 402 445 451 466
by trucks and barges 64 62 65 63 44 26 22 24
by rail 100 136 272 420 460 500 520 550
PADD 2+4 demand 4,385 4,488 4,658 4,717 4,806 4,647 5,007 5,050
Balance 42 (15) (55) 107 59 35 (348) (482)
32 June 2013
Price forecasts
PRICE FORECASTS
Brent WTI differential
Q1 actual 118.4 103.0 15.4
Q2 actual 108.8 93.4 15.4
Q3 actual 109.4 92.2 17.2
Q4 actual 110.1 88.2 21.9
2012 actual 111.7 94.2 17.5
Q1 actual 112.6 94.4 18.2
Q2 forecast 105 91 14
Q3 forecast 110 101 9
Q4 forecast 108 100 8
2013 forecast 109 97 12
2014 forecast 111 105 6
2015 forecast 117 107 10
Energy Aspects price forecasts (2013 - 2015) $/barrel
Source: Bloomberg (actuals), Energy Aspects analysis
Upside risk
• Supply outages spanning both OPEC and non-OPEC countries
• Geopolitical risks surrounding Iraq, Nigeria, Syria and Libya all pose significant upside risks
Downside risk
• Further weakness in Europe
• Derailment of Chinese recovery
Long-term expectations
• A fairly well balanced market persists over the next few years, but only while demand growth remains weak. Prices still remain high as the cost of exploration has increased substantially
34 June 2013
DISCLAIMER
Analyst Certification
I, Amrita Sen, hereby certify:
1. that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and;
2. no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report
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