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TRANSCRIPT
Seventh Multi-year Expert Meeting on Commodities and Development
15-16 April 2015 Geneva
Near-Term Oil Outlook - 2015
By
Abhishek Deshpande Lead Oil Markets Analyst, Economic Research
Natixis
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
15 April 2015, UNCTAD, Geneva
Dr Abhishek Deshpande
Lead Oil Markets Analyst
Economic Research
Near-Term Oil Outlook - 2015
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Dec-13 Apr-14 Aug-14 Dec-14
BFOE ($/bbl)
Source: Bloomberg
2
Oil in 2014-15
Libyan output above 800,000b/d
Libyan supply back online
Russia-Ukraine crisis/July/August
Iraq-ISIS conflict intensifies in June
OPEC producing significantly more than call-on-OPEC after demand was revised downwards and after the return of Libyan oil
Libyan port deal and signs US crude exports
OPEC decided to keep total production cap unchanged at 30mn b/d
Iran & P5+1 nuclear talks extended
Physical balances had started to weaken slowly in the first half of 2014, however prices were supported by geopolitical tensions.
Supply-demand fundaments weakened further with the unprecedented increase in non-OPEC supply, further weakness in
Chinese and European demand and the paradigm shift in OPEC policy.
Large Capex cuts and fall in rig count announced Improved demand from Asia and US
4/13/2015
3
Supply disruptions
0
500
1000
1500
2000
2500
2010 2011 2012 2013 2014 2015
Supply Disruption (1000b/d)
Iraq
Iran
Libya
Source: PIRA
4/13/2015
4
Weak fundamentals
Since the start of 2014, the fundamentals in the global oil industry have deteriorated markedly.
0
0.4
0.8
1.2
1.6
2
0
0.4
0.8
1.2
1.6
2
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Monthly estimates of global demand growth vs non-OPEC supply growth in 2014 (mn b/d)
Demand growth
Non-OPEC Supply growth
Sources: Natixis, IEA
4/13/2015
OPEC policy results in increase in inventories!
• Crude and NGL inventories were on average 1.1% higher in 2014 than 2013-IEA • Crude inventory expected to be up 7.3%yoy in Feb15 - PIRA
OPEC’s (mainly GCC allies) refusal to cut production and let markets balance by itself - a paradigm shift in policy to maintain
market share and put pressure on marginal producers worldwide. Result: increase in crude inventories.
4/13/2015 5
0
100
200
300
400
500
600
700
800
900
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
US, Europe & Japan Crude Stocks (mn bbls)
Spare
Japan
Europe
USA
931
Source: PIRA
Tank Capacity 931mn bbl Tank Capacity 931mn bbl
New era in oil market or just a temporary phase?
6
• Will demand pick up and will the growth be similar to the one seen in the last decade?
• What about global crude oil supply growth? Will it continue to outpace growth in demand
• Is US becoming the new marginal producer?
• If so then what happens to OPEC? Will OPEC continue to maintain its output over 30mn b/d or will it be the first to blink?
OIL DEMAND
4/13/2015 7
8
Lower oil prices are positive for global growth
• Similar to 2009, lower oil prices should help to boost global growth
• Oil consuming nations will benefit from a rise in household disposable income and/or improving government finances • Improvement of terms of trade means improvement in current balances and currencies
• Falling income in oil producing countries will reduce saving more than it cuts consumption
• A slightly positive-sum game for global growth (Keynesian balanced budget multiplier effect)
• Over time, the resultant boost to global growth should stimulate demand for oil, even where price elasticity of demand appears to be low
• IMF estimates that a 10-20% fall in oil lifts world GDP by 0.05%
0%
2%
4%
6%
8%
10%
12%
0%
2%
4%
6%
8%
10%
12%
1999 2001 2003 2005 2007 2009 2011 2013 2015
"Oil burden" - oil costs as % GDP with Brent crude averaging $64.50/bbl in 2015
Germany US
Japan China
India
Sources : Bloomberg, BP, Natixis
4/13/2015
9
Natixis near term oil demand forecasts
Note: Numbers above do not add up as the total includes other regions
Consumption of oil grew by around 700,000b/d in 2014. Demand is expected to increase by around 1mn b/d in 2015, boosted by low oil prices.
4/13/2015 9
Region OPEC IEA Natixis
Other Asia (Incl. India) +250 +430 +360
Source: Natixis, IEA, OPEC
Demand (yoy growth, 1000 b/d) - 2015
OECD +20
China +280 +280
-10 +20
+310
South America (excl. Chile) +110 +130
Middle East +180 +200
+200
+280
+1170 +990 +1000Net growth
Non-OPEC OIL SUPPLY
4/13/2015 10
11
Non-OPEC oil supply: near-term drivers
On the upside:
• US oil production is expected to rise by close to 0.74mn b/d in 2015. Output growth is expected to be greatly affected by low oil prices in 2015, given the steep decline in rig count as producers are idling rigs and capex cuts. But oil production could easily bounce back given the declining break-evens in the US.
• US NGL output is expected to rise to more than 3.8mn b/d by 2020 from current 3.07mn b/d, although growth is likely to be impacted
• Brazilian oil output expected to rise by up to 100k b/d in 2015 due to ramp up at pre-salt fields
On the downside:
• Russian oil output is expected to fall by 100k-110k b/d in 2015 due to sanctions and limited investments • Kashagan will not restart until 2016
• Lower output is expected from Middle East (Yemen) and Africa (especially Egypt, Ghana and Sudan) in 2015 • Mexican oil output is expected to decline further in 2015 by 160kb/d
Low oil prices will reduce investment in North Sea, Brazil, Canada, US and Asia, with the impact on output/growth felt as
early as second half of 2015 in some regions. We are expecting most of the non-OPEC reductions to come from North American unconventional oil supply. This supply,
unlike conventional supply, also has the ability to spring back very quickly if prices are above the required break-evens.
4/13/2015 11
12
Global Capex
• Total global Capex cuts identified in excess of $135bn
Source: Various
4/13/2015 12
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13
Natixis non-OPEC supply forecasts
Note: Numbers above do not add up as the total includes other regions
Non-OPEC supply of oil grew by 1.9mn b/d in 2014. Non-OPEC supply is expected to increase by around 760,000 b/d in 2015.
4/13/2015 13
Region OPEC IEA Natixis
Africa 0 -10 0
Source: Natixis, IEA, OPEC
Non-OPEC Supply (yoy growth, 1000 b/d) - 2015
North America +700+720+860
OECD Europe 0 +20
South America (excl. Chile) +60 +100
-40
+60
FSU -70 -110
+850 +740 +760
-130
Net growth
14
The “Key Equation”
Global demand
– non-OPEC supply
=
Implicit call on daily OPEC production
The Key Equation:
4/13/2015 14
15
Uncertainty in physical balances
With the outlook for fundamentals discussed earlier we could very well see growth in global demand exceeding growth in non-
OPEC supply by the end of 2015. However this could easily change if US output were to bounce back on high oil prices and lower
break-evens.
4/13/2015 15
0.4
0.8
1.2
1.6
0.4
0.8
1.2
1.6
Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
Monthly estimates of global demand growth vs non-OPEC supply growth in 2015 (mn b/d)
Demand growth
Non-OPEC Supply growth
Sources: Natixis, IEASources: Natixis, IEA
0
0.4
0.8
1.2
1.6
2
0
0.4
0.8
1.2
1.6
2
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Monthly estimates of global demand growth vs non-OPEC supply growth in 2014 (mn b/d)
Demand growth
Non-OPEC Supply growth
Sources: Natixis, IEA
16
OPEC production > call-on-OPEC
With global demand expected to grow at a faster pace than non-OPEC supply , we expect the average call-on-OPEC to remain
broadly unchanged at 29.4mn b/d in 2015, as compared to 2014.
OPEC and IEA estimates for the 2015 call-on-OPEC (reported in Mar15 monthly reports) are around 0.6-0.8mn b/d below
expected average OPEC crude production for 2015. As demand exhibits seasonal weakness in 2015H1, this gap could be as high
as 1.5-2mn b/d and as low as -0.4mn b/d in 4Q15.
Call-on-OPEC (mn b/d)
2014 2015
OPEC 29.36 29.19
IEA 29.5 29.62
EIA 29.3 29.13
Sources: IEA, OPEC, EIA, Feb data
4/13/2015 16
28
29
30
31
28
29
30
31
Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
OPEC: 2015 expected daily call (mn b/d)
OPEC expected daily output (OPEC)
OPEC expected daily output (IEA)
Output
Sources : Bloomberg, OPEC, IEA
17
Fiscal break-evens and “reasonable” oil price
• Our estimate for Saudi Arabia’s fiscal break-even oil price stands at around $90/bbl for 2014 and is expected to be higher in 2015. Surpluses prior to 2014 are therefore shifting to deficits.
• Saudi Arabia has acknowledged the possibility of fiscal deficits as it contemplates a period of lower output and restrained oil prices due to increased non-OPEC supply.
• To reduce fiscal break-evens would require key OPEC countries to reduce expenditure (hence subsidies)
• Middle Eastern crude exporting countries have been revising their budgetary expenditures to help them adapt in a lower cost environment. Despite these reductions all but Kuwait will be feeling pressure with current low oil prices based on recent data provided by IMF
• Further price war possible with return of Iranian oil
40
50
60
70
80
90
100
110
40
50
60
70
80
90
100
110
2009 2010 2011 2012 2013 2014 2015 2016
Weighted average oil fiscal breakevens ($/bbl)
Sources: Natixis, IMFNote: weighted average breakevens of Algeria, Iran, Iraq, Kuwait,Libya, Qatar, Saudi Arabia, UAE
0
50
100
150
200
250
-20
20
60
100
140
180
2009 2010 2011 2012 2013 2014 2015 2016
Oil fiscal breakevens ($/bbl)
Algeria Bahrain Iran
Iraq Kuwait Oman
Qatar Saudi Arabia UAE
Libya (rhs)
Sources: IMF
4/13/2015 17
NATIXIS OIL PRICE FORECAST
4/13/2015 18
19
Possible scenarios
There are four plausible scenarios for the global oil market. Each would have a materially different outcome:
• No change in OPEC production. Low oil prices reduce investment in future output, but have relatively little effect on near term volumes supplied. Oil market remains oversupplied. Prices remain low.
• Low oil prices lead to reduced investments worldwide in oil production which has a significant impact on near term oil production growth. Prices are supported depending on the volume of global production affected.
• Saudi Arabia and its OPEC allies begin to cut output in response to an actual or perceived slowdown in oil production. Prices recover in response, drifting up towards new OPEC target.
• One or more major defaults result in a material slowdown in oil production, eg as civil unrest damages infrastructure. Oil prices begin to recover, but without OPEC action result remains unclear.
In the first two quarters, we have taken scenario 1 but third and fourth quarter we are looking at either scenario 2 OR 3.
Return of Iranian oil, if sanctions are lifted, could keep oil prices low for next couple of years especially if OPEC does not agree on any production cuts. In which case scenario 1 will become our central scenario for next two years.
4/13/2015 19
20
Oil price outlook
• Volatility in oil prices to remain high in 2015
• Our forecasts assume increased demand due to lower oil prices, higher seasonal demand in 2015H2, SPR demand from China
and India and a cut in oil production from OPEC or a higher than expected reduction in non-OPEC oil output growth.
• Return of Iranian oil (in the absence of OPEC cuts), would keep pressure on oil prices for longer.
• If fundamentals remain weak, we would expect oil in storage to test storage capacities - even in the US. Oil prices would come
under pressure if stocks worldwide continue to rise at current pace. Prices will have to fall further to price in floating storage.
• The more oil goes into the storage, the longer it might take for oil prices to recover.
4/13/2015 20
40
60
80
100
120
40
60
80
100
120
Apr-12 Aug-13 Jan-15 May-16
Brent price outlook - futures vs Natixis forecast ($/bbl)
Market
Natixis central scenario
Low case scenario
High case scenario
Sources : Bloomberg, Natixis
New era in oil market or just a temporary phase?
21
• Near term: Growth in global demand for oil expected to rise due to low oil prices.
• Non-OPEC supply growth will depend largely on the “new marginal producer” US supply growth. Although the
current idling of rigs suggest that US oil output is likely to reduce by end of 2015, but given the reduced break-
evens and quick turn around if prices are supported could see a rebound in US supply and hence putting a cap on
prices.
• OPEC’s paradigm shift in policy in maintaining their output at around 30mn bbl is likely to stay in place at least for
first half of this year as Saudi Arabia is looking for a sustainable solution to the over supply in the market which
would require a non-OPEC and OPEC coordination as per their latest statements.
• Medium-Long term: Growth in global demand for oil expected to rise but increase could be limited thanks to
regulations, efficiency gains and diversification.
• Reduced capex is likely to reduce supply growth in fields outside of US.
• Markets likely to be more balanced and OPEC could once again regain its position as the marginal producer
HOT MONEY NET FLOWS
4/13/2015 22
23
Hot money net flows
Speculative length has increased in Brent since February.
After cutting bullish positions for WTI, thanks to rising inventoriess in the US, net long positions have once again increased for the light crude contract.
4/13/2015 23
-20000
30000
80000
130000
180000
230000
280000
-20000
30000
80000
130000
180000
230000
280000
01Dec14 23Dec14 14Jan15 05Feb15 27Feb15 21Mar15
Total net-long non commercials
WTI (incl. other reportables)
Brent (incl. other reportables)
Managed Money (WTI net-long)
Managed Money (Brent net-long)
Sources: Natixis, CFTC
4/13/2015
24
Analyst Biography
Dr Abhishek Deshpande leads the oil and oil products research at Natixis, providing oil
strategies, price forecasts and analysis of developments across the global oil and oil product
markets. Abhishek has a doctorate in Chemical Engineering from Cambridge University and
holds Chartered Engineer status with the Institute of Engineers, UK. While pursuing his
degree, he spent time working for Indian Oil Corporation Limited.
Abhishek has appeared on BBC, CNBC, Bloomberg TV, presented at Oil & Gas
conferences and is quoted regularly by financial media globally. He has also published
articles in financial journals such as Petroleum Economics and O&G Journal. He is invited
regularly to talk at international conferences.
24 4/13/2015
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