the plunge in oil prices: causes and consequences … plunge in oil prices: causes and consequences...

© 2014 IHS

Global Economics & Country Risk Conference

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IHS

The plunge in oil prices: Causes and consequences for the global economy

Nariman Behravesh, Chief Economist, HIS, +1 781 301 9101, [email protected] Farid Abolfathi, Senior Director, IHS Risk Center, +1 202 481 9224, [email protected] Sara Johnson, Senior Research Director, Global Economics, +1 781 301 9115, [email protected] Jeff Meyer, Associate Director, Global Crude Oil Markers, +1 202 510 0988, [email protected] John Mothersole, Research Director, Pricing & Purchasing, +1 202 481 9227, [email protected]

12 November 2014

mailto:[email protected]





© 2014 IHS

Agenda

Chair: Nariman Behravesh, Chief Economist, IHS

9:45 – 9:50 Introduction

9:50 – 10:05 Global crude oil price outlook Jeff Meyer, Associate Director, Global Crude Oil Markets, IHS Energy

10:05-10:15 Industrial commodity price outlook John Mothersole, Research Director, Pricing & Purchasing, IHS Operational Excellence & Risk Mitigation

10:15-10:40 Global economic impacts: Winners and losers Sara Johnson, Senior Research Director, IHS Economics Farid Abolfathi, Senior Director, IHS Risk Center

10:40-11:00 Discussion, questions & answers

2

Global Economics & Country Risk Conference / November 2014

© 2014 IHS 3

Presenters Global Economics & Country Risk Conference / November 2014

Nariman Behravesh Chief Economist, IHS + 1 781 301 9101 – [email protected]

Farid Abolfathi Senior Director, IHS Risk Center + 1 202 481 9224 – [email protected]

Sara Johnson Senior Research Director, Global Economics, IHS Economics + 1 781 301 9115 – [email protected]

Jeff Meyer Associate Director, Global Crude Oil Markets, IHS Energy + 1 202 510 0988 – [email protected]

John Mothersole Research Director, Pricing & Purchasing, IHS Operational Excellence & Risk Mitigation + 1 202 481 9227 – [email protected]






© 2014 IHS 4

Global crude oil price outlook

Jeff Meyer, Associate Director, Global Crude Oil Markers, +1 202 510 0988, [email protected]



© 2014 IHS

Key global oil market messages

5


Softening demand-supply fundamentals have pushed oil prices sharply lower since June

• Return of Libyan production • Weaker demand growth, especially in Asia • Strong non-OPEC supply growth

Dated Brent expected to remain below $90/barrel in the near-term (2014-16)

• Non-OPEC supply growth to outpace world liquids demand growth again in 2015

• OPEC strategy, dynamics of tight oil production, and Libyan output are key variables

In the long term, higher oil prices will likely be needed as an incentive to develop higher-cost supplies.

• Non-OPEC supply growth will slow after 2020 • New supplies will be needed to offset field declines

and meet demand growth • A real Dated Brent price of about $120/barrel will

ultimately be needed to send a strong enough signal to investors to develop higher-cost oil

© 2014 IHS

Global oil prices have plunged from $115 in June to below $85 in early November

6


70

80

90

100

110

120

130

140

Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014

Daily Dated Brent crude oil price (2011-14)

Source: Platts, IHS © 2014 IHS

Dol

lars

per

bar

rel

Prices spike as Libyan output is lost

IEA stock release

Supply anxiety returns as Iran

conflict intensifies

Eurozone crisis intensifies; oil

demand concerns

Iran exports reduced; Syrian conflict

intensifies

Fear of Greek exit from eurozone; Saudi Arabia ramps up production

Economic optimism sends crude to

"overheated" territory

Diplomatic overtures with Iran

Libyan production collapses; US

threatens Syria

Economic worries resurface, especially in

emerging markets

Ukraine crisis erupts

ISIL lightening advance in northern Iraq heightens fears

of Iraqi supply disruptions

Libya output recovers; world demand growth weakens; and US

production continues to rise rapidly

© 2014 IHS

Exceptional US supply growth has managed to offset global production outages since 2008

7

3.5

1.2

0.7

-3.4 -4

-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012 2013 2014

Change in crude oil production since 2008

Source: IHS Energy

Mill

ion

barr

els

per d

ay

United States

Canada

Saudi Arabia

Rest of world


© 2014 IHS

2014 growth in non-OPEC liquids supply on track to be biggest since 1978

8


0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012 2013 2014 2015 2016

World oil demand Non-OPEC liquids supply

World liquids demand and non-OPEC supply

Notes: Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products (including blended biofuels and synthetic fuels), as well as liquefied petroleum gases (LPGs) and ethane. Source: IHS © 2014 IHS

Cha

nge,

mill

ion

barr

els/

day

© 2014 IHS

Dated Brent expected to average under $90 in 2015-16—well below levels earlier in the decade

9


$70

$80

$90

$100

$110

$120

$130

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

Dated Brent LLS WTI

Crude oil prices, quarterly averages

USD

per

bar

rel

Notes: LLS = Louisiana Light Sweet. WTI = West Texas Intermediate. Disclaimer: Historical oil price data are extracted or derived by IHS from Platts. All rights reserved. All liability for errors and omissions is hereby excluded by Platts and its sources. No representations or warranties are made by Platts or its sources concerning the data or any conclusions to be drawn from it. Source: IHS; Platts, ©2014 by the McGraw-Hill Companies, Inc. (historical) © 2014 IHS

Outlook

© 2014 IHS

Libyan production: Key variable that could push prices up or down

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

1Q 2010 1Q 2011 1Q 2012 1Q 2013 1Q 2014

Libyan crude oil production

Source: IHS Energy

Mill

ion

barr

els

per d

ay

September 2014 production: 800,000 b/d

10


© 2014 IHS

Most US tight oil production has a breakeven price of $50 to $69/barrel in terms of WTI

11


0.0

0.5

1.0

1.5

2.0

2.5

$50-$59 $60-$69 $70-$79 $80+

Breakeven WTI prices for 2014 US tight oil production

Note: Breakeven WTI prices cover capital and operating costs and generate a 10% return. Source: IHS Energy © 2014 IHS

Mill

ion

barr

els

per d

ay

© 2014 IHS

World oil demand expected to grow by more than 15 MMb/d to 2040

12

0

20

40

60

80

100

120

1990 2000 2010 2020 2030 2040

World oil demand

Note: Oil demand in this chart and table includes refined products, including biofuels blended into refined products and liquid fuel products derived from gas and coal. Liquefied petroleum gases (LPGs) from refineries are also included. LPGs from gas plants are not included. Source: IHS Energy

Mill

ion

barr

els

per d

ay


© 2014 IHS

The world needs about 57 MMb/d of new crude oil production by 2040 to offset field declines and meet demand growth

13

0

20

40

60

80

100

2005 2010 2015 2020 2025 2030 2035 2040

Segregated Condensate FIP FUD FUA YTF Tight Oil

World crude and condensate production outlook

Source: IHS Energy

Mill

ion

barr

els

per d

ay

FIP = Fields in production; FUD = Fields under development; FUA= Fields under appraisal; YTF = Fields yet to be found

57 million new barrels per day needed by 2040


© 2014 IHS 14

Rising costs, tightening balances, and increased geopolitical risks keep long-term prices high


0

50

100

150

200

250

2000 2005 2010 2015 2020 2025 2030 2035 2040

Nominal Real (2013$)

Annual Dated Brent crude oil price

Source: IHS Energy © 2014 IHS

Dol

lars

per

bar

rel

© 2014 IHS 15

Industrial commodity price outlook

John Mothersole, Research Director, Pricing & Purchasing, +1 202 481 9227, [email protected]



© 2014 IHS

From supercycle to an era of abundance?

• The “adjustment” in commodity markets still has a way to go

• Non-oil demand growth will not match the rates of increase seen last decade

• Slower Chinese growth and the changing character of its growth signal less resource-intensive demand growth in the future

• On the supply-side, investments made during the height of the “supercycle” are now coming in – capacity looks ample in many industries (steel, aluminum, rubber, shipbuilding,…)

• Policy tightening will also act as a headwind to commodity prices

16


© 2014 IHS

Commodity prices continue to look contained

17


2.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

2010 2011 2012 2013 2014 2015

2002

wee

k 1

= 1.

0

Third Quarter 2013 Forecast Third Quarter 2014 Forecast

IHS materials prices index

© 2014 IHS

Even this far into the recovery supply chains show no real tightening…

18


42

46

50

54

58

62

2010 2011 2012 2013 2014

Delivery Times Backlogs

Buyers advantage

> 50 means slower delivery times and lengthening backlogs

Sources: ISM and Markit

Global PMI diffusion indexes

© 2014 IHS

…with this lack of leverage evident in pricing

2.7

3.1

3.5

3.9

4.3

42

47

52

57

62

2010 2011 2012 2013 2014

Delivery Times, left scaleBacklogs, left scaleIHS Materials Price Index, 2002:1=1.0, right scale

Real GDP

19


© 2014 IHS

Slower Chinese growth signals weaker materials consumption growth going forward


20

4

6

8

10

12

14

16

18

20

-60

-40

-20

0

20

40

60

80

100

2004 2006 2008 2010 2012 2014 2016

IHS Materials Price Index, left Chinese Industrial Production, right

© 2014 IHS

A stronger dollar will restrain both investor and physical demand


21

0.85

0.90

0.95

1.00

1.05

1.10

1.151.5

2.0

2.5

3.0

3.5

4.0

4.5

2004 2006 2008 2010 2012 2014 2016

IHS Materials Price Index, 2002w1=1.0, leftTrade Weighted U.S. Dollar Exchange Rate,inverted, 2009=1.0, right

© 2014 IHS

Real commodities prices still look elevated

22


0.80

0.85

0.90

0.95

1.00

1.05

U.S. PPI for Industrial Commodities less Energy*Fitted Trend LineTrend plus one SETrend less one SE

*Real prices. US PPI for Industrial Commodities less Energy deflated by the chained price index for Gross Domestic Product

Real GDP

© 2014 IHS 23

Global economics impacts: Winners and losers

Sara Johnson, Senior Research Director, Global Economics, IHS Economics, +1 781 301 9114, [email protected]



© 2014 IHS

Alternative paths for Brent crude oil prices

24

0

40

80

120

160

2000 2003 2006 2009 2012 2015 2018 2021 2024

US

dolla

rs p

er b

arre

l

August Baseline Low Oil Price Scenario

24

Dated Brent crude oil price


24

© 2014 IHS

Oil price impacts in the IHS Global Link Model

Energy infrastructure

Prices & costs, competitiveness

Energy trade flows

Financial markets

Potential GDP

Impact differs in importing versus

exporting economies

Producer prices Consumer prices

Wage rates Real income Real spending

Impact varies depending on country production structure

and fuel mix

Energy exports Energy imports

Exchange rates

Impact varies with the degree of

dependence on energy trade

Public finances FDI Capital flows

Impact depends on the monetary and

fiscal policy response

25


© 2014 IHS

Low Oil Price Scenario: Impact on world real GDP

0.0

0.1

0.2

0.3

0.4

2014 2015 2016 2017 2018 2019 2020 2021Perc

ent d

iffer

ence

from

bas

elin

e

Real GDP

26


© 2014 IHS

Net importers of crude oil in 2013

Net crude oil imports

050

100150200250300350U

nite

d St

ates

Chi

na

Japa

n

Indi

a

Sou

th K

orea

Ger

man

y

Fran

ce

Sin

gapo

re

Spa

in

Italy

Taiw

an

Net

herla

nds

Aus

tralia

Thai

land

Indo

nesi

a

Bel

gium

Turk

ey

Pol

and

Mill

ion

tons

of o

il eq

uiva

lent

27


© 2014 IHS

Net exporters of crude oil in 2013

Net crude oil exports

0

100

200

300

400

500S

audi

Ara

bia

Rus

sia

Kuw

ait

UA

E

Ven

ezue

la

Can

ada

Nig

eria

Ang

ola

Iran

Qat

ar

Nor

way

Alg

eria

Mex

ico

Col

ombi

a

Mal

aysi

a

Mill

ion

tons

of o

il eq

uiva

lent

28


© 2014 IHS

Real GDP winners in the Low Oil Price Scenario, 2016

0.0

0.2

0.4

0.6

0.8

1.0

Thai

land

Spa

inC

hile

Indi

aG

reec

eP

hilip

pine

sC

olom

bia

Indo

nesi

aP

olan

dR

oman

iaTa

iwan

Turk

eyV

ietn

amC

anad

aM

alay

sia

Arg

entin

aS

outh

Afri

ca US

Ger

man

y% d

iffer

ence

from

bas

elin

e

Real GDP

29


© 2014 IHS

Real GDP losers in the Low Oil Price Scenario, 2016

-4

-3

-2

-1

0

Ven

ezue

la

Rus

sia

Kuw

ait

Sau

di A

rabi

a

Iran

Ang

ola

UA

E

Qat

ar

Nor

way

Nig

eria

Per

u

% d

iffer

ence

from

bas

elin

e

Real GDP

30


© 2014 IHS

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

NAFTA OtherAmericas

Europe Mideast-N.Africa

Sub-Sah.Africa

World

% d

iffer

ence

from

bas

elin

e

GDP Private consumption Fixed investment

31

Regional impacts of lower oil prices, 2016

Real purchases


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the plunge in oil prices: causes and consequences … plunge in oil prices: causes and consequences...

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