outlook for energy markets - ipaa for energy markets ... us energy landscape: what a difference five...

K. Spector - January 2014 1

Katherine SpectorHead of Commodities Strategy

CIBC World [email protected]

Outlook For Energy MarketsJanuary 2014


1. Crude Price: Rangebound with an upside bias...Ongoing supply outages versus mediocre demand growth have kept pricesrangebound, but we have more confidence in the floor than the ceiling.

2. US energy landscape: What a difference five years makes!Time to think about ‘second order’ impacts of the boom...

3. Natural gas: Rangebound again, but this time with a bearish bias...For now, both supply and demand are extremely price elastic. The marketwill really turn a corner when utility demand for gas becomes price inelastic.

Key Themes In Today’s Energy Markets


1. Rangebound Outlook for Crude Flat PriceOngoing supply outages versus mediocre demand growth


Oil Prices Reflected Fundamentals

CIBC Commodities Strategy, Petrologistics, IEA, Company and Govn’t Reports

7.0

7.5

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11.5

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Market Call on Saudi Crude (3-mo. avg)

Actual Saudi Crude Production

mbd

Pretty orderly market...

Lesson learned: AsIran sanctions hit and

SPR talk heats up,Saudi opens thepumps in 1H’12.Stocks rebuild.

In 2011, Saudi make upfor some of the Libyashortfall but not all ofit. Commerical stocks

fall and the US/IEArelease SPR.

... But genuinelytight in Aug’13


25

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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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Pre-Recession Trend

Post Recession Trend

OECD

Non-OECD

Oil Demand Growth is in the Emerging World(Before the recession, during the recession, after the recession)

CIBC Commodities Strategy, EIA, IEA, country & govn’t sources


Global Supply Outages Pile Up

CIBC Commodities Strategy, EIA

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Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

OPEC TotalNon-OPEC Total

kbd


-0.5

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1.0

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Non-OPEC OPEC

US + Saudi Bail Out Market Single-Handedly

CIBC Commodities Strategy, IEA, EIA, Petrologistics, other company and gov’t sources

August’13 Versus August’11, mbd

Saudi +Kuwait + UAE

UnitedStates

Other Non-OPEC Other OPEC


Macro Fundamentals Summary....• Status quo oil demand...not a new story, likely marginal improvement in 2013.

• Supply was the story in 2011-12, and is very much the story again in 2013thanks to a persistantly high outage rate in both OPEC and non-OPEC.

• Saudi has done a really good job of balancing the market.

• But the bullish take on this story? During a period of weak oil demand growthand unprecendented supply growth in the US, it still takes record Saudi productionfor months in a row to balance the market, and global oil prices never go muchbelow $90.

• What would that last three years have looked like without US growth?Remember... it doesn’t come cheap. What are the implications for the investmentcycle?


2. The US Energy Landscape:What A Difference Three Years Makes! Time to ThinkAbout ‘Second Order’ Implications of the Boom


-6.00

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Coal (Dry) NaturalGas

Crude + NGL Nuclear Biofuels OtherRenewables

Total Energy

quadrillion Btu

What A Difference Three Years Makes!US Energy Production & Consumption, 2012 Versus 2008

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Impact On WTI Term Structure

• The front of the WTI curve is a different story... we’ll get to that.

• Beyond the front six months though, we think spreads will stay very well bid, inlarge part because, going forward, an increasing percentage of new crudeproduction will be hedged in the forward market.

• North American producers hedge more than producers in other regions, andthat’s where virtually all incremental crude production growth is coming from.The type of companies most active in shale plays are even more inclined to bedisciplined hedgers.

• At the same time, we would argue that deferred liquidity from hedge funds andbanks has deteriorated.


CIBC Commodities Strategy, IEA, Industry Reports*Majors here include BP, CVX, COP, XOM, RDSA, TOT

Crude Growth Not From the Majors* In the US

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'06 '07 '08 '09 '10 '11 '12 '13

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35%Liquids Production By Non-Majors (left)

% US Production By Majors (right)


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'06 '07 '08 '09 '10 '11 '12 '13

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16%Liquids Production By Non-Majors (left)% Canadian Production By Majors (right)

...Or In Canada

CIBC Commodities Strategy, IEA, Industry Reports*Majors here include BP, CVX, COP, XOM, RDSA, TOT


CIBC Commodities Strategy

Long-dated WTI Spreads Outpace Flat Price$/bbl

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'09 '10 '11 '12 '13

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Mth 1 WTI (left) Mth 6 - Mth 24 Spread (right)

$/bbl


Cushing Stocks Are Falling Rapidly


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Oct'10 Apr'11 Oct'11 Apr'12 Oct'12 Apr'13 Oct'13

%

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Cushing Storage Utilization (left)Cushing Storage Volume (right)


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Nov'10 Mar'11 Jul'11 Nov'11 Mar'12 Jul'12 Nov'12 Mar'13 Jul'13

Average All Major US Grades

Light Louisiana Sweet


Cash Crude Premiums to WTI ShrinkDifferential to WTI, $/bbl


$(1.00)

$(0.50)

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Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

$/bbl

M1-M2 WTI SpreadOn Expiry


Backwardation? Not On Expiry Days


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1.4Domestic API (left) Domestic Sulphur Content (right)


US Crude Production Gets Lighter and Sweeter


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1.6API Gravity (left) Sulphur Content (right)


US Refiners Tweak Their Slate... To A Point


US Crude Production / Import Quality Shift

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Production Gets Lighter, Imports Heavier Production Gets Sweeter, Imports More SourVolume Weighted Average API Gravity

CIBC Commodities Strategy, EIA CIBC Commodities Strategy, EIA

Volume Weighted Average Sulphur Content



US Sharply Trims Light, Sweet Crude Imports

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Chg Versus 2012(YTD)

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Current From FarAbroad

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How Much Imported Light Crude To Back Out?


million bbl

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1 Cushing Other P2 3 4 5

Tank/Terminal StocksRefinery Stocks


Crude Capacity At Tanks/Terminals vs Refineries


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Non-Exclusive UseExclusive Use


Exclusive / Non-Exclusive Crude Storage Capacity


WCS Handicapped By More Than Infrastructure


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Jan'12 May'12 Sep'12 Jan'13 May'13 Sep'13

$/bbl

Bakken-LLS WCS-Mars


Just 6 US Refiners Take Half of Canada’s Exports

Top 6 offtakers of Canadian Crude: Bayway, Whiting, Joliet, Lemont, Pinebend, Wood RIverCIBC Commodities Strategy

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Refinery Capacity Offline


3. North American Natural GasDon’t Get Too Excited Yet...


Not Out Of The Woods Yet...• The US gas balance looked marginally price supportive in 2013, but in the short-run (24months) both gas supply and gas demand are still very price elastic. That meansrangebound prices.

• In the medium- to long-run, gas production will continue to be price sensitive. It is whengas demand — specifically utility demand for gas — is no longer price elastic that themarket will truly turn the corner. The 2015-16 period will be key.

• Last summer gave us a taste of what coal-to-gas substitution can do to the market.This year will pale in comparison, but eventual coal retirement will make that shift to gaspermanent. One implication is that gas prices will reflect a steeper summer pricing.• Production of gas liquids has been phenomenal, and prices have come off sharply.What will it take to see a shift back to dry gas production?

• LNG will matter at the margin, but won’t be the game changer for the US supply/demand balance. Alberta may be a different story... maybe.


Is the Liquids Subsidy At Risk...?

$/bbl

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NGL Basket - WTI

Ethane - WTI

$(160)

$(140)

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$40 $90 $140 $190WTI Price

NG

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$4 gas break evenCurrent$6 gas break evenToday's NGL Discount / $80 WTI

NGL Prices Continue Their Collapse NGL Subsidy At Risk At $90 Crude

CIBC Commodities Strategy CIBC Commodities Strategy


Natural Gas Competes With CAPP Coal


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$/MMBtuCompeting Fuels - Past 12 Months

CCGT: PRB Coal Efficiency Band

CCGT: CAPP Coal Efficiency Band

NYMEX Henry Hub


• It is not clear to us that LNG will make or break the US gas balance... Themarket will ultimately cap export volumes, not policy.

• But there will be interesting seasonal implications. The US will be theone place in the world that can both import and export LNG. The US alsohas significantly more gas storage capacity than Europe does.

• LNG will matter more for AECO, but not for a while.

LNG Now Seems Like a Reality


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Michigan / Minnesota New England / New YorkVolumes on TRP Mainline Total Net

Bcf/d


Net ‘East of Mississippi’ US Imports Of CAD Gas


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Potential Decline In US/Canadian Demand For AB Gas

Potential Growth in LNG Exports West From AB

Net


Alberta Gas Balance Looks Heavy...Until 2020** MAYBE


This communication, including any attachment(s), is confidential and has been prepared by the Macro Strategy Desk within the Fixed Income, Currencies and Commodities Group at CIBC World Markets Inc., wholly-owned subsidiary and wholesale banking arm of Canadian Imperial Bank of Commerce. The contents of this communication are based on macro and issuer-specific analysis, issuer news, market events and generalinstitutional desk discussion. The author(s) of this communication is not a Research Analyst and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construedas a Research Report. The author(s) of this communication is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the communication. 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outlook for energy markets - ipaa for energy markets ... us energy landscape: what a difference five...

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