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Oil market volatility and the producer-consumer dialogue:Trends and questions
Aldo Flores-QuirogaSecretary General, IEF
IEF-CASS Roundtable | 19 January | 2016
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73 countries
6 continents
90% of global oil & gas markets
The IEF membership: neutrality means inclusion
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An Industry Advisory Committee of global oil and gas companies participates in the IEF
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Flow
1. Trends
2. Questions
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Flow
1. Trends
2. Questions
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Three episodes of high volatility in 35 years: 1986, 1990, 2008……..and maybe a fourth one: 2014-2015
Source: US prices are WTI from EIA (1986-2014) and WSJ (1975-1985); own calculation.
-50,0%
-40,0%
-30,0%
-20,0%
-10,0%
0,0%
10,0%
20,0%
30,0%
40,0%
Monthly oil price change and volatility, 1975-2015
%∆ (1 month) STD (5-month, centered))
Global economic recession
Supply glut Gulf war
New supply glut?
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Flow
1. Trends
2. Questions
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Question 1
Volatility: how much is too much?
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Over 60% of monthly price variations since 1975 have taken place within a small range: -5% to 5%
36--4031--3526--3021--2516--2011--156--10(-5-0--5)(6--10)(11--15)(16--20)(21--25)(26--30)(31--35)(36--40)0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
Oil price. Relative distribution of monthly variations, 1975-2015
Source: US prices are WTI from EIA (1986-2014) and WSJ (1975-1985); own calculation.
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A wider range of variation has appeared tolerable -to a point: -15% to 15%
36--4031--3526--3021--2516--2011--156--10(-5-0--5)(6--10)(11--15)(16--20)(21--25)(26--30)(31--35)(36--40)0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
Oil price. Relative distribution of monthly variations, 1975-2015
Source: US prices are WTI from EIA (1986-2014) and WSJ (1975-1985); own calculation.
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But higher ones have generated much discomfort:
36--4031--3526--3021--2516--2011--156--10(-5-0--5)(6--10)(11--15)(16--20)(21--25)(26--30)(31--35)(36--40)0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
Oil price. Relative distribution of monthly variations, 1975-2015
Gulf war
Supply glut
Economic recession
Source: US prices are WTI from EIA (1986-2014) and WSJ (1975-1985); own calculation.
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It is difficult to reach a common view of an acceptable level of volatility due to the broad range of stakeholder interests in the
oil market
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Different stakeholders have different perspectives on volatility
Governments• Distributive effects• Macroeconomic effects
Companies operating in physical markets• Long-term investment• Affordable supplies
Investors, creditors, and debtors in financial markets
• Hedging and risk allocation• Credit and risk valuation
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Stakeholders have different tolerance thresholds for volatility
36--4031--3526--3021--2516--2011--156--10(-5-0--5)(6--10)(11--15)(16--20)(21--25)(26--30)(31--35)(36--40)0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
Oil price. Relative distribution of monthly variations, 1975-2015
Gulf war
Supply glut
Economic recession
Producers’ pain
Consumers’ pain
Governments’ sweet-spot?
Traders’ sweet-spot?
Traders’ sweet-spot?
Source: US prices are WTI from EIA (1986-2014) and WSJ (1975-1985); own calculation.
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Question 2
International energy cooperation:
when and how?
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It depends on:
• Objectives
• Instruments
• Information
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What is the target?
• An oil price level?
• A range for the percentage change in the oil price?
• A range of variation around an average percentage change?
• A revenue stream?
• Supply/demand certainty?
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What are the instruments?
Physicalmarket
Supply Production quotas
Strategic reserves
Spare capacity Dialogue
and
Data
Demand Policy transparency?
Financialmarket
Policy and regulation
Price reporting
Position limits
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The IEF works to improve the quality of information available to decision-makers
Dialogue• IEF Ministerial meetings
• Analysis of the interaction between physical and financial energy markets and its implications for policy (with IEA and OPEC)
• Comparative analysis of energy outlooks (with IEA and OPEC)
Data• Promotion of market transparency through the Join
Organisations Data Initiative, or JODI (with APEC, Eurostat, IEA, GECF, OLADE, OPEC, and UNSD)
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Focus of the conversation on the interaction between physical and financial markets (IEA-IEF-OPEC Symposia)
Fundamentals and expectations about fundamentals
• Supply
• Demand
Role of regulation in promoting transparency and efficient price formation
• Price reporting
• Hedging
• Harmonization of standards
• Regulatory arbitrage
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17 mb/d
Oil consumption will depend to al large extent on economic and population growth…and on technological progress and the long-term investment framework
Efficiency gains accumulate after 2030
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The action continues to be in:
1. Asian demand
2. North American unconventional oil, but the Middle East is key for overall supply
3. Trade flows moving from the Atlantic to the Pacific
Central scenarios
(mb/d)
Supply
origin
OPEC
IEA
OPEC-IEA
OPEC
50 52 -2
Non-OPEC
62 59 +3
Total 112 111
1
OPEC sees its crude making up for the demand not covered by Non-OPEC; the IEA sees more variation in both supply sources
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Transparency: JODI involves the coordination of many actors and processes
National statistics offices collect information From oil and gas companies
National statistics offices fill the JODI questionnaires and pass this information to the JODI partner organization
JODI partner reviews the data, checks for outliers, compares with secondary sources, and sends data to IEF
IEF rechecks, integrates, and publishes the information it receives from partner organisations
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The problem and the paradox
ProblemYou can have fast data or accurate data, but not both at the same time
ParadoxEveryone wants more and better data, but not everyone is willing to provide it
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More food for thought…
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Factors behind the oil price fall
Microeconomic
Supply Greater output from the USA, Canada, Brazil, Libya (temporarily), and Iraq
OPEC decision not to cut production
Demand Weak consumption with unexpectedly large downward revisions through the second half of 2014
Macroeconomic
Exchange rate
US dollar appreciation
Interest rate
US interest rate expectations
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Demand estimates for both the IEA and OPEC were stable until June 2014, when expectations began to change
From convergence to divergence
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Supply growth estimates converged by the second half of the year
From divergence to convergence
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Oil prices are low when the dollar is strong
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Oil prices are low when interest rates are high
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