oil prices outlook 2004

8/14/2019 Oil Prices Outlook 2004

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The Outlook for Oil PricesBullish And Bearish PerspectivesSeptember 21, 2004Oil & Gas Investment ConferenceRaffles City Convention Center Singapore


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Outlook for Oil Prices: Agenda

The Big Picture

Bulls vs Bears

Role of Speculation

The Importance of Capacity

2004: What Happened??

Outlook


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3

The Big Picture

Bulls vs Bears

Role of Speculation



Outlook

Outlook for Oil Prices


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4

Outlook: a quick look back

NYMEX WTISeptember 1984-September 2004 ($/bbl)

0

10

20

30

40

50

60

9 / 1 0

/ 1 9 8

4

9 / 1 0

/ 1 9 8

5

9 / 1 0

/ 1 9 8

6

9 / 1 0

/ 1 9 8

7

9 / 1 0

/ 1 9 8

8

9 / 1 0

/ 1 9 8

9

9 / 1 0

/ 1 9 9

0

9 / 1 0

/ 1 9 9

1

9 / 1 0

/ 1 9 9

2

9 / 1 0

/ 1 9 9

3

9 / 1 0

/ 1 9 9

4

9 / 1 0

/ 1 9 9

5

9 / 1 0

/ 1 9 9

6

9 / 1 0

/ 1 9 9

7

9 / 1 0

/ 1 9 9

8

9 / 1 0

/ 1 9 9

9

9 / 1 0

/ 2 0 0

0

9 / 1 0

/ 2 0 0

1

9 / 1 0

/ 2 0 0

2

9 / 1 0

/ 2 0 0

3

9 / 1 0

/ 2 0 0

4

OPEC cuts output 20%

Iraq invades Kuwait

Asian Economic Crisis

9-11

Invasion of Iraq

Saudi Arabia "disciplines non-OPEC"

End of Gulf War I

OPEC quota cuts


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Outlook: the historical range

NYMEX WTISeptember 1984-September 2004 ($/bbl)

0

10

20

30

40

50

60

9 / 1 0

/ 1 9 8

4

9 / 1 0

/ 1 9 8

5

9 / 1 0

/ 1 9 8

6

9 / 1 0

/ 1 9 8

7

9 / 1 0

/ 1 9 8

8

9 / 1 0

/ 1 9 8

9

9 / 1 0

/ 1 9 9

0

9 / 1 0

/ 1 9 9

1

9 / 1 0

/ 1 9 9

2

9 / 1 0

/ 1 9 9

3

9 / 1 0

/ 1 9 9

4

9 / 1 0

/ 1 9 9

5

9 / 1 0

/ 1 9 9

6

9 / 1 0

/ 1 9 9

7

9 / 1 0

/ 1 9 9

8

9 / 1 0

/ 1 9 9

9

9 / 1 0

/ 2 0 0

0

9 / 1 0

/ 2 0 0

1

9 / 1 0

/ 2 0 0

2

9 / 1 0

/ 2 0 0

3

9 / 1 0

/ 2 0 0

4

$48.70/bbl on August 19, 2004

$10.42/bbl on March 31, 1986


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The Big Picture

Bulls vs Bears

Role of Speculation



Outlook



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Bulls vs Bears: Cards on the table

BULLS look to supplyshocks Oil running with less than 1%

supply cushion

Iraq crude exports alwaysvolatile Cuts anywhere, any time Refined products supply

appears tight

Demand growth assumed

BEARS favor demand slow-down High oil prices a tax on soft

economies, including US

Seasonal slow down indemand in Q2 Mean reversion fall in price

a question of when, not if Supply will rise--and

eventually overcompensate


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The Big Picture

Bulls vs Bears

Role of Speculation



Outlook



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A Word on Speculation

Speculators a popular, and soft, target for blame Widely blamed for record highs seen in 2004

Speculators adding $7 to price of oil Algeria energy minister Chakib Khelil, September 8,

Sydney (WEC) A common remark heard throughout 2004


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Role of Speculation

But US speculators have sold into 2004 rally Speculators most commonly defined as non-

Commercials for US regulatory reporting Non-Commercials have cut reported positions strongly

since end of 2003 Long crude positions down 44.7% to 27,964 contracts Long gasoline down 76% to 9,412 contracts Long heating oil down 95.4% to 463 contracts

Crude futures rose 35.27% over the same period Oil is worth whatever someone will pay for it


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The Big Picture

Bulls vs Bears

Role of Speculation



Outlook



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Spare capacity at 1% of demand

World Oil Supply/Demand Balance (mb/d)

0

10

20

30

40

50

60

70

80

90

100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

OPEC

Non-OPECDEMAND

?


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Capacity On The Margin Under Pressure

World Oil Demand-Supply Balance (mb/d)

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

1997 1998 1999 2000 2001 2002 2003 2004 2005

World Balance (All Adds)

Half OPEC Adds

No OPEC Adds

Assumes non-OPEC adds of 1.2mb/d in 2005, and total demand growthof 2% in 2005


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Spare capacity: heavy and sour

-10

-5

0

5

10

15

20

Sep 2001 Sep 2002 Sep 2003

$/bblKeroseneGasoilNaphthaFuel Oil


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Importance of Capacity: Summary

All producers (not just OPEC) swimming fast to tread water Supply and demand tightly matched Forcing bulls and bears to hedge against anticipated moves

in supply and demand

Neither supply, nor demand, are readily responsive to pricesignals

In recent years, supply has simply shown itself to be morevulnerable

Bulls have held sway


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The Big Picture

Bulls vs Bears

Role of Speculation



Outlook



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2004: Bulls were in charge

OPEC output, 18%

DOE / API Stocks,18%

Iraq, 16%

Weather, 7%Gasoline, 6%Terrorism , 6%

Refinery fires, 5%Nigeria, 5%

Funds Buying, 4%Russia, 3%Venezuela , 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

OPEC output DOE / A PI Stocks Iraq Weather / Storms GasolineTerrorism Ref inery f ires Nigeria Funds Buying RussiaHeating Oil Global Demand Venezuela Norw ay ChinaNatural Gas Israel US Dollar Iran SPR

Factors Cited By Analysts For All Price Movements (2004)


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The Big Picture

Bulls vs Bears

Role of Speculation



Outlook



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Outlook 2005: OPEC to remain in focus

OPEC no longer in the driving seat, will work hard to regaineffective control over prices

Quota and price band currently irrelevant, will continue toseriously rethink as credibility of both mechanisms remains low Market focus in 2005 will be on OPEC efforts to build spare

capacity Success (or otherwise) will be the key to 2005s landscape


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Outlook 2005: A bulls perspective

Who would bet against more supply shocks? Iraq (2-3mbd) Russia (9mbd) Nigeria (2-2.5mbd) Venezuela (2-2.5mbd) Saudi Arabia (maxed out at 9.5-10mbd) Another tough USGC hurricane season? (1mbd)


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Sweet crude running out/perceived refiningbottlenecks Most new crude capacity will be sour and heavy, doing

little to redress perceived shortfalls in gasoline Light, sweet benchmarks will stay under pressure as

long as gasoline, distillates cracks remain bullish Structural flaws in US gasoline markets will persist


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The world seems willing to shoulder $40 crude High oil having only small affect on US GDP growth Record gasoline prices were shrugged off by US

consumers until the very end of driving season Many key consuming countries shield consumers

through subsidization


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Outlook 2005: A bears perspective

Almost everyone has bought into the notion of a$8-12 risk premium Resolution to any of the key risk areas can shave $5-

10 off oil Peace in Iraq (successful elections) Major resolution to any piece of ongoing global

terrorism, especially in Saudi Arabia Resolution of Yukos power struggle

An easier year in Venezuela, Nigeria


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Outlook 2005: Worth watching out for

Several key issues have power to tilt the balance US election results in November

Bush a bullish result, Kerry a bearish result? Direct impact on foreign policy, possibly economic

performance

Taiwan PRC forcible intervention could redraw world politics

Significant appreciation of US dollar Would give bears more ammunition


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Outlook 2005: Paradigm shift?

NYMEX WTI Foward CurveSeptember 2000

20

22

24

26

28

30

32

34

36

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M

NYMEX WTI Forward Curve2000 vs 2001

20

22

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26

28

30

32

34

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11-Sep-00

10-Sep-01

NYMEX WTI Forward Curve2000, 2001, 2002

20

22

24

26

28

30

32

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11-Sep-00

10-Sep-01

10-Sep-02

NYMEX WTI Forward Curve2000, 2001, 2002, 2003

20

22

24

26

28

30

32

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11-Sep-00

10-Sep-01

10-Sep-02

10-Sep-03

NYMEX WTI Forward Curve2000, 2001, 2002, 2003, 2004

20

25

30

35

40

45

50


11-Sep-00 10-Sep-01

10-Sep-02 10-Sep-03

10-Sep-04


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Thank you

Dave Ernsberger Editorial Director, [email protected]

www.platts.com
mailto:[email protected]:[email protected]

oil prices outlook 2004

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