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  • 8/8/2019 Geopolitical Oil

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    Strategic Advisors in Global Energy

    Strategic Advisors in Global Energy

    Strategic Advisors in Global Energy

    Geopolitical Changes and Global OilMarkets

    Fareed Mohamedi

    Partner and Head of Markets and Country Strategies

    June 2009

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    | Markets and Country Strategies Group | Page 2

    Executive Summary

    The global economy is at a major point of transformation the old system --

    US consumes and China produces -- is unsustainable Historically, the declining power usually resists giving up control and the

    rising power usually is too cautious to assert a greater degree of control

    Oil demand will be on the defensive for a long period

    OPEC will require serious discipline to manage supplies and reduce stocks

    Energy insecurity and Chinas growth is shaping a new global oildistribution system

    The US Administrations interest in efficiency and climate change will add tothe uncertainty facing producers

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    | Markets and Country Strategies Group | Page 3

    TreasuryBonds

    China World

    MerchandiseExports

    UnitedStates

    Investment

    Commodities,Other Inputs

    The US consumes, China produces

    The US run deficits, the Rest of the worldfinances

    The Unsustainable System

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    | Markets and Country Strategies Group | Page 4

    RussiaUnited States

    India

    EU

    China

    Changing Global Balance of Power

    A declining but still powerful United States

    Other rising powers, but no superpowersyet

    Era of grand alliances is passing

    If Washington fails to repair its power losses in the next 10-15 years,then other countries will assume the leading role in global affairs

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    | Markets and Country Strategies Group | Page 5

    How Much Can Obama Change US Foreign Policy?

    Obama is attempting to act on his belief that US foreign policy under the Democratscan be strong and right, but his administration faces structural limits

    Obamas rhetoric offers a visions of change

    Go beyond post 9/11 strategyconventional policycannot deal with unconventional threats of 21st Century

    Transform the way the US deals with the worlddignityagenda:

    Pay attention how others perceive the United States and itspolicy

    Appreciate other states have own priorities

    Address perception of unfairness and problems that

    breed radicalism and prevent liberty, justice andprosperitybottom up approach

    Emphasis on the centrality of active diplomacy andmultilateralism

    International cooperation; American leadership

    Working with broad range of partners, including Russia andChina

    Forceful idealismwilling to use force to achieve specific

    ends

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    | Markets and Country Strategies Group | Page 6

    Increasingly Ineffective US Hegemon, No-one ElseWants the Job

    No major power has a sustained interest in undermining, much less replacing, UShegemony, but they may be forced to take a more overtly cooperative role

    Being a hegemon is expensive and risky. After WWII both Europe andJapan learned it was more comfortable to free ride on US hegemony.

    China has the resources to make a bid for hegemony. But so far itprefers to concentrate them on economic growth projects.

    Russia and India are growing stronger, but will not have enough powerto make a bid for hegemony in the next 20 years (at least).

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    | Markets and Country Strategies Group | Page 7

    Abundant evidence of radical

    change in behavior of USconsumers:

    Retail sales, personal consumptionare nose-diving

    Rebounding savings rate

    Household debt declined in thirdquarter 2008, first time since 1952

    This has a direct bearing onsteep falls in globalmanufacturing and exports

    Can the world economy find a

    substitute for US final demand? Can the US economy adapt to a

    radically different growth model?

    Household Debtannual % change

    0

    4

    8

    12

    16

    20

    56 60 64 68 72 76 80 84 88 92 96 00 04 08

    0%

    2%

    4%

    6%

    8%

    10%

    130

    132

    134

    136

    138

    140

    2007 2008 2009

    US: Labor Market Conditions

    TotalE mployment,mill ions Une mploymentRate,%

    Global EconomicsUS economy consumers give up

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    | Markets and Country Strategies Group | Page 8

    World Economy: Falling Off The EdgeManufacturing, exports have plunged since September

    -5 0

    -3 0

    -10

    10

    30

    50

    Jan 08 Apr Jul Oct Jan 09

    China Korea Taiwan

    Thailand M alaysia

    Asian Exports, % change year/year

    This is an inflectionpoint, unusually hard toforecast

    First half of 2009 certainto see sharp falls ingrowth rates throughoutthe world

    De-stocking partly toblamesome signs thismay be bottoming out

    Secondary impacts yet tocome, especially from joblosses

    Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health

    Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health

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    | Markets and Country Strategies Group | Page 9

    A Coordination of Policies would be Necessary toReturn Global Growth

    Current Account Balances, 2007$ billion

    Surplus Countries Deficit Countries

    Falling demand, credit squeeze are forcing adjustment of external deficits in deficitcountriesthis can happen in one of two ways:

    Declining imports and lower levels of trade

    Rising exports and relatively higher levels of trade

    Second alternative is obviously preferable, but can only happen with policy

    coordination among key countries

    Success or failure of international coordination will be the mostimportant single factor in determining severity of the recession

    Success or failure of international coordination will be the mostimportant single factor in determining severity of the recession

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    | Markets and Country Strategies Group | Page 10

    OPEC: Balancing the Risks

    Quiet confidence that OPEC is no longer chasing markets

    But economic uncertainties still loom large with risks to demandprimarily on the downside

    Current prices are at unacceptable levels, but core OPEC membersunderstand they will need lower prices in order to achieve durable,higher prices in the longer-term

    Current trading range acceptable for next two quarters, and someconfidence a $35-40/b floor has been established

    Want a products-led demand rally to lift the complex

    Want to avoid an undue tax on the stimulus programs or any other oilpressure on markets

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    | Markets and Country Strategies Group | Page 11

    -3.0

    -2.0

    -1.0

    0.0

    1.0

    2.0

    3.0

    mmb/d

    Supply-Demand Balance

    Change in Supply Change in Demand

    Unwinding the GlutActive OPEC management needed to restore balance

    Premature fearsof recession

    Premature fearsof recession

    Saudi increases asdemand withers

    Saudi increases asdemand withers

    Aggressive tighteningneeded to clear overhang

    Aggressive tighteningneeded to clear overhang

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    | Markets and Country Strategies Group | Page 12

    OPEC Implements Major Cuts

    Agreed to a total of 4.2

    mmb/d in production cutssince September

    Decision in December torebase level of cuts fromSeptember 2007 quotas toSeptember 2008 actualproduction

    De facto re-apportionment of

    output targets based onsecondary sources (includingPFC Energy)

    Bulk of cuts to come fromGulf Arab states, but heaviershare of burden of additionalcuts on Iran, Venezuela,Angola and Libya

    Initial indications suggestgood adherence to targetsbut is it enough?

    Change in Commercial Stocks

    -2.0

    -1.0

    0.0

    1.0

    2.0

    1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

    mb/d

    0

    500

    1000

    1500

    2000

    2500

    3000

    Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

    Projected Cumulative OPEC Cuts (mb/d)

    Angola

    Ecuador

    Algeria

    Libya

    Nigeria

    Venezuela

    Iran

    Qatar

    UAE

    Kuwait (w/NZ)

    Saudi Ar abia (w/NZ)

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    | Markets and Country Strategies Group | Page 13

    OPEC Threshold Prices: Not Enough For Some

    Price Needed to Balance External Accounts mid-2008

    (Imports of Goods & Services Non-oil Exports)/Total volumes of Liquids Exports

    $75/b

    WTI $/b

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    | Markets and Country Strategies Group | Page 14

    How will NOCs Respond in the Slowdown?

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    | Markets and Country Strategies Group | Page 15

    NOC Upstream Capital Spending Still Strong

    Source: NOC stated numbers or PFC Energy estimates

    Stated / Estimated increase

    CNPC

    PetrobrasPEMEX (downside risk)

    PETRONAS

    ONGC

    CNOOC

    Ecopetrol

    PTTEP

    PERTAMINA (unlikely

    No change to Capex:

    QP

    NIOC

    Stated / Estim

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