© OECD/IEA 2011

Presented in Washington DC21 June 2011

David.fyfe@iea.org

© OECD/IEA 2011

PART 1: OIL

Recent Correction, but Oil Prices Remain High

• Futures prices oscillating around $112/bbl Brent and $95/bbl WTI

• Libyan outage, MENA supply risks, resilient non-OECD economy, buoyant financial markets are still counteracting…

• …fears on economic impact of high prices, demand destruction, and an (albeit diminishing) degree of supply flexibility

• Despite cross-commodity sell off on 5 May, bullish pressures remain

600

800

1000

1200

1400

1600

30

50

70

90

110

130

150

Jan 08 Oct 08 Jul 09 Apr 10 Jan 11

IndexUS$/bblNYMEX WTI vs S&P 500

NYMEX WTI S&P 500 (RHS)

Source: NYMEX60

70

80

90

100

110

120

130

May 10 Aug 10 Nov 10 Feb 11 May 11

$/bbl Crude FuturesFront Month Close

NYMEX WTI ICE Brent

Source: ICE, NYMEX

Tightening Fundamentals Since Mid-2010

OECD Total Oil Stocks

Relative to Five-Year Average

-50

0

50

100

150

200

Apr 09 Oct 09 Apr 10 Oct 10 Apr 11

mb

Pacific North America Europe

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

83

84

85

86

87

88

89

90

1Q07 1Q08 1Q09 1Q10 1Q11

mb/dmb/dPrice Surge Kick-Started by Tighter

2H10 Fundamentals

Implied Stock Ch.&Misc to Bal (RHS)Oil DemandOil Supply

• Data lags mean the extent of physical market tightening in second-half 2010 wasn’t immediately apparent

• Demand exceeded supply by average 1.1 mb/d in 2H10

• 2010 demand growth of 2.8 mb/d not far off 2004’s surge, as global economy rebounded by 4.8%

• +4.3% GDP now equates to +1.3 mb/d for 2011 (non-OECD)

• China continuing to generate~35% of total growth (incl 1Q middle distillate stock builds) and gasoil/diesel 40%

• OECD stocks have tightened, overhang now largely US crude

Key Assumptions for the Outlook

• Volatility in WTI/Brent differentials sees switch to Brent futures strip as price underpinning for MTOGM

• Current assumption for 2011-2016 nominal IEA crude import price is circa $103/bbl, around $20/bbl higher than used in 2010

'IEA Average Import Price' Assumption

(nominal)

57.54

75.75

81.04 83.48 84.48 85.06 85.85

60.40

78.12

105.79

105.17102.81

101.28 100.69 100.88

50

60

70

80

90

100

110

120

2009 2010 2011 2012 2013 2014 2015 2016

$ /bbl

April 2010 (WTI) December 2010 (WTI)

April 2011 (Brent)

• Ongoing economic uncertainty, so two GDP scenarios retained

• Base case sees 4.5% GDP growth twinned with 3% pa reduction in oil intensity

• Low GDP case equates annual 3.3% GDP and 2% intensity reduction

Oil Demand Sensitivity: Avg. Intensity

Change vs. Demand, 2010-16

-3.5%, 92.3

-4.0%, 89.6

-4.5%, 87.0

-2.5%, 90.1

-3.0%, 87.5

-3.0%, 95.3 -1.5%, 95.8

-2.0%, 92.8

86

88

90

92

94

96

98

-5.0%-4.0%-3.0%-2.0%-1.0%

Oil Intensity (%)

Oil D

em

an

d (

mb

/d) Base Case

Lower

Case

Lower GDP Base GDP

Myth or Reality? The $, Volatility & Speculation

• US dollar weakness frequently cited as a cause of high oil prices

• Granger tests - causality from price to exchange rate, but reverse also possible, due to demand or inflation hedge

• In reality, price and ER may be jointly determined

• Commodities inherently volatile, notably price-inelastic oil

• 2008/9 volatility was temporary, & less extreme than early-90s

• But new financial players & rise in non-commercials raises ‘excessive speculation’ concerns

• Recent speculative levels similar to other commodity markets, & lower than in 2008, relative to risk hedging appetite

• So fundamentals may remain more important than many think

-0.8

-0.6

-0.4

-0.2

0

0.2

2000 2002 2004 2006 2008 2010

Correlation Between Oil Price and Effective Exchange Rate

Dynamic Conditional Correlation

One-year Moving Average Correlation

Source: NYMEX and FRB

0.00

0.02

0.04

0.06

0.08

0.10

0.12

1990 1994 1998 2002 2006 2010

Volatility: Conditional standard deviation GARCH(1,1)

1

1.1

1.2

1.3

1.4

1.5

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

WTI Crude Oil Speculative Index

Average Global Oil Demand Growth 1998-2004/2004-2010/2010-2016 Average Global Oil Demand Growth 2001-2006/2006-2011/2011-2016thousand barrels per day thousand barrels per day

(mb/d)

1998-2004 1.43 1.8%

2004-2010 0.81 1.0%

2010-2016 1.21 1.3%

Avg Global Demand Growth

19

-184-110

4213

66

202 176

23

391

-257-100

187

312 294

77 100 103

North America

Latin America Africa

Middle East

Europe FSU

722

576

801

Asia

Emerging Markets Underpin Demand Growth

• Crucially, since non-OECD income growth will remain the primary demand driver, higher international oil prices are likely to have a minor effect…

• …except in the OECD, compounding market saturation, efficiency gains, behavioural changes and interfuel substitution

Income Growth & Efficiency Key Demand Drivers

• Base case oil demand rises 1.2 mb/d per year, to 95.3 mb/d in 2016

– +4.5% yearly GDP & oil intensity falls 3% per year, near recent trends

– Income growth outstrips the price impact of average $103/bbl oil

• Lower GDP case generates slower growth, near +0.8 mb/d yearly

– GDP growth 25% lower, and oil intensity falls a lesser 2% annually

– In this case, 2016 global demand is 2.4 mb/d lower, at 92.8 mb/d

• In both cases, non-OECD generates all the growth, with China, Asia & the Middle East accounting for up to 94% of the increment

• Illustrates the importance of better non-OECD data

• Subsidies mean oil demand can grow, despite $100/bbl crude

Global Oil Demand:

GDP & Efficiency Sensitivity

84

88

92

96

2008 2009 2010 2011 2012 2013 2014 2015 2016

mb/d

Base GDP & 3% Avg. Yearly Efficiency Gains

Lower GDP & 2% Avg. Yearly Efficiency Gains

OECD vs. non OECD Oil Demand

25

30

35

40

45

50

55

1996 1999 2002 2005 2008 2011 2014

mb/d

OECD Non-OECD

Transport & Gasoil Underpin Demand Growth

• Transport fuel use generates 65% of total oil growth, even though some will derive from biofuels and NGLs

• Oil has fewer short-to-medium term competitors in transport

• 40% of growth, 30% of total demand by 2016 will be gasoil/diesel

• Engine efficiency, all-round flexibility, make gasoil ‘ fuel of choice’

• Bunker sulphur quality changes and ever-present fuel switching possibilities add further lustre to gasoil’s rising star

• Bunker fuels rise from 4.3 mb/d to 5 mb/d, with residual fuel oil’s 75% share diminishing

World: Total Bunkers Demand

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2001 2003 2005 2007 2009 2011 2013 2015

mb/d

Gasoil

Fuel Oil

World: Gasoil Demand

25.5%

26.5%

27.5%

28.5%

29.5%

30.5%

1996 2000 2004 2008 2012 2016

-80%

-40%

0%

40%

80%

120%

As % of Total Demand As % of Total Growth

Petrochemicals Another Growth Driver

• A further analytical step: modelling the medium-term global ethylene balance to assess its implications for petrochemical-based oil demand

• We estimate that oil-based feedstocks averaged 9.2 mb/d in 2010, rising to 10.9 mb/d in 2016

150

165

180

2010 2012 2014 2016

Etylene Capacity, mt/y

North America Europe

Pacific Asia

China FSU

Latin America Middle East

Other Regions0

30

60

90

120

150

800

1,000

1,200

1,400

1,600

1,800

2009 2010 2011 2012 2013 2014 2015 2016

kb/dChina: Oil Product Demand vs.

Effective Ethylene Capacity

Demand Capacity @ 95% Utilisation

500

600

700

800

900

2009 2010 2011 2012 2013 2014 2015 2016

kb/dSaudi Arabia: Oil Product Demand vs.

Effective Ethylene Capacity

Demand Capacity @ 91% Utilisation

• New integrated LPG/ethane-oriented Middle East and naphtha-based Asian petrochemical/refining complexes are currently being built

• Will put pressure upon older, smaller and less integrated petrochemical facilities in the OECD and elsewhere

‘Hidden’ Crude Demand - Strategic & Commercial Oil Storage Capacity Additions in Asia

• Why Asia?

– Asia accounts for 2/3 of incremental oil demand in 2011-16

– Import-dependent region

– Crude imports predominantly long haul

– Logistical and security challenges of rising import dependence

Country Type Fuel Additions Completion

China SPR-I Crude Oil 103.2 2008

SPR-II Crude Oil 169.0 2013

SPR-III Crude Oil 227.8 2016

Commercial Crude Oil & Products 235.0 2012/2015

India SPR-I Crude Oil 39.1 2013

Commercial Crude Oil & Products 24.1 2013

South Korea Commercial Crude Oil & Products 36.9 2016

Malaysia Commercial Crude Oil & Products 13.5 2014

Singapore Commercial Crude Oil & Products 11.1 2014

Indonesia Commercial Oil Products 2.4 2015

Total Strategic Additions (India + China) SPR Crude Oil 435.9 2016

Estimated fill (kb/d) 238.9 2012-2016

Largest Commercial Additions Commercial Crude Oil & Products 323.0 2016

Estimated fill (kb/d) 177.0 2012-2016

Largest Strategic and Commercial Oil Storage Capacity Additions in Asia

million barrels per day

Oil Production Capacity Growth Now More Robust, but Challenges Remain

• Global oil supply capacity rises to 100.6 mb/d in 2016, growing around +1.1 mb/d per year (2015 outlook now 2 mb/d higher)

• Growth split evenly --non-OPEC oil, OPEC crude & OPEC NGLs

• Higher non-OPEC – new projects & modest easing in decline rates

• Industry still confronts 3-to-1 relationship between replacing mature output (-3 mb/d pa) and meeting demand growth

• High prices bring new supply...

• ...but downside risks remain: MENA; infrastructure; resource nationalism; rising costs & project delays

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2011 2012 2013 2014 2015 2016

mb/d World Oil Supply Capacity Growth

OPEC Crude Capacity Growth OPEC NGLs GrowthGlobal Biofuels Growth Non-OPEC Growth (ex Biofuels)Total Net Change

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

OPEC* Non-OPEC Total

mb/d

Components of Global Liquids Growth 2010-16

Crude NGLs Non-Conv

* OPEC crude is capacity additionsGlobal Refinery processing gains included in Non-OPEC

Non-OPEC Supply Adjusted HigherBy as much as 1.1 mb/d in 2015

• Non-OPEC uplift in large part Americas-based, with US light tight oil, or shale oil, now generating 1 mb/d of growth

• Brazil, Canada, US, Colombia, Kazakhstan plus NGLs, biofuels and processing gains also rise strongly

• Sustained high prices see stronger late-forecast slate of new field start-ups...

• ...but higher prices are also helping to stem decline, which for non-OPEC slipped below 5% per year during 2008-2010

52.5

53.0

53.5

54.0

54.5

55.0

55.5

2010 2011 2012 2013 2014 2015 2016

mb/d Total Non-OPEC Supply

Jun 2011 MTOGM

Dec 2010 MTOGM

-5.8%

-7.3%

-5.1%

-6.4%

-4.6%

-6.0%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Crude & NGLs Crude only

Non-OPEC Supply: Implied Decline Rates over Forecast Period

Jun 09 Jun 10 Jun 11

Focus on US Supply Prospects

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2009 2010 2011 2012 2013 2014 2015 2016

mb/d US Gulf of Mexico Crude Oil Supply Forecasts: Before and after Macondo

Jul 09 May 10 Jun 11

0

1

2

3

4

5

6

7

8

9

2010 2011 2012 2013 2014 2015 2016

mb/d US Total Oil Production by Source

Other Crude Light Tight Oil NGL Other

• Total oil production rises 550 kb/d to 8.35 mb/d

• Light tight oil from shale formations adds 1 mb/d by 2016, on high oil prices, oil-gas prices, technology transfer from gas revolution

• Bakken formation provides over half of total volume by 2016. Potential also in Eagle Ford (S.Texas), Niobrara (Wyo/Col )

• Gulf of Mexico still struggling with new project permitting delays

• Nonetheless, global deepwater development continuing, and output rises from 6 mb/d in 2010 to 8.7 mb/d by 2016.

Biofuels’ Star Wanes Slightly

• Global biofuels production rises from 1.8 mb/d in 2010 to 2.3 mb/d in 2016 (1.3 to 1.7 mb/d on energy content basis)

• Ethanol meets 24% of global gasoline growth and biodiesel 4% of gasoil growth

• Outlook shaved 100 kb/d lower than last year on tenuous economics, notably for Brazil, Europe and Asia

• US uncertainties also, on financial incentives and feasibility of advance biofuels mandate. But still grows 160 kb/d to 1.04 mb/d

• Global advanced capacity may rise from 20 kb/d to 130 kb/d

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2010 2020 2030 2040 2050

$/lgeBiofuels Production Costs

Low Cost Scenario

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2010 2020 2030 2040 2050

$/lgeBiofuels Production Costs

High Cost Scenario

Gasoline

Ethanol -conventional

Ethanol -cane

Ethanol -cellulosic

Biodiesel -conventional

Biodiesel -Advanced

(BtL)

Source: IEA, Technology Roadmap: Biofuels for Transport, 2011 lge = litres per gasoline equivalent

OPEC Adds 4 mb/d Productive Capacity by 2016

• Iraq, Angola and UAE drive a 2.1 mb/d OPEC crude capacity expansion (to 37.9 mb/d), with Iraq assumed at 4.1 mb/d by 2016

• OPEC also in midst of an NGL & condensate boom, supplies rising by 1.9 mb/d to 7.1 mb/d in 2016 (UAE, Qatar, Iran, Saudi Arabia)

• Expansion based on burgeoning local gas growth (re-injection, power, desalination) plus LNG exports

• Iranian growth (+340 kb/d) contrasts with crude oil picture, as long-running gas projects reach completion

-1.0 -0.6 -0.2 0.2 0.6 1.0 1.4

Iran

Saudi Arabia

Ecuador

Qatar

Algeria

Kuwait

Venezuela

Libya

Nigeria

UAE

Angola

Iraq

mb/d

Incremental OPEC Crude Production

Capacity 2010-16

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016

mb/d OPEC NGL & Condensate Production

Saudi Arabia Qatar Iran

Algeria UAE Other OPEC

Iraq to the Fore in Expanding Crude Capability

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015 2016

mb/d Libya Crude Oil Capacity

Previous Current

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 2016

mb/d Iraq Crude Oil Capacity

Previous Current

• Iraq’s crude capacity assumed at 4.1 mb/d by 2016 amid progress on several of the 12 joint venture projects with IOCs

• Logistical constraints at southern ports cap production increases until early-2012, but exports rise thereafter

• Saudi Arabia’s capacity to remain constrained in 11.5-12.0 mb/d range, but Kingdom fast-forwarding Manifa & publicly resurrected a list of potential further ~ 2.76 mb/d in new projects

• Libyan outages seen long lasting, and pre-crisis capacity only regained in 2015 - waxy crude, uncertain IOC return

• Re-basing Venezuelan supply adds 0.3 mb/d to 2005-2011, and suggests capacity circa 2.6 mb/d, reaching 2.8 mb/d by 2016

Inter-Regional Crude Trade to Reach 35.8 mb/d by 2016

• Global trade to increase by 1 mb/d over 2010-2016, largely on rising volumes to Asia

• Less than envisaged last year, as producer refinery expansions absorb crude exports, but likely increase in product trade

• Middle East remains key swing supplier, Asian sales up 1.7 mb/d

• African exports also rise 1.6 mb/d

• Non-OECD imports rise while OECD volumes decline

• Despite rising long haul trade, tanker markets to stay relatively weak on strong fleet growth

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2010 2011 2012 2013 2014 2015 2016

mb/dRegional Crude Exports:

Yearly Change

China Other Asia Africa Latin Am

Mid East FSU OECD Pac OECD Eur

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

ME - ChinaAFR - China

AFR -Oth AsiaAFR-OECD Eur

ME - Oth AsiaAFR -OECD Pac

FSU - Oth AsiaLATAM - OECD Nam

ME- OECD EurME-OECD Pacific

mb/d

Inter-Regional Export Growth2010-2016

Refinery Crude Feedstock Lighter/Sourer by 2016 but in 3 distinct phases

• 2011 volumes become heavier & sourer on lost Libyan supplies

• 2012-2014 lighter & sourer with increased African, Latin American and Middle Eastern supplies

• 2015-2016 output to become heavier & sourer as Canadian bitumen production is ramped up

Middle East

Latin America

FSU

North America

Europe

Asia-Pacific

AfricaWorld

-1.40

-1.00

-0.60

-0.20

0.20

0.60

1.00

1.40

-0.20-0.100.000.100.20

API

Sulphur %

Changes in Quality 2010-2016

1.13

1.14

1.15

1.16

1.17

1.18

32.2

32.3

32.4

32.5

2010 2011 2012 2013 2014 2015 2016

Sulphur (%)

API degrees

Global Crude Quality2010-2016

API Sulphur (RHS)

Global Refinery Runs Recovered in 2010 Improvement in Refinery Margins More Muted

• Global refinery runs recovered in 2010, in line with strong demand rebound from recessionary lows

• Growth centered in the Non-OECD, which surpassed OECD

• Refinery margins saw limited improvement, with cracking margins relatively stable and simple margins very weak

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

1Q08 1Q09 1Q10 1Q11

mb/d Global Throughputs vs. DemandAnnual growth

Runs Demand

-5

0

5

10

15

Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

$/bbl Refinery Cracking Margins

Med Urals NWE UralsNWE Brent USGC MarsSingapore Dubai

Source: Purvin & Gertz Inc.

30.0

32.0

34.0

36.0

38.0

40.0

42.0

1Q04 1Q06 1Q08 1Q10

mb/d OECD vs. Non-OECD Crude Runs

OECD Non-OECD

Capacity Additions in 09-10 kept Utilisation Low A Further 9.6 mb/d Crude Distillation Planned for 11-16

• New capacity completed in 2009-2010 kept a check on global utilisation rates - fell from 83% in 2006-2008 to 80% in 2009-2010

• OECD rates fell more sharply, in line with demand growth patterns, and are expected to remain weaker in the medium term

• A further 9.6 mb/d of crude distillation additions are planned by 2016, exceeding expected demand growth

• NB only 70% of demand growth to be met by refineries – rest met by NGLs, direct crude, biofuels, processing gain etc

• Upgrading, desulphurisation add 6.9 mb/d & 7.3 mb/d respectively

70%

75%

80%

85%

90%

1Q06 1Q08 1Q10 1Q12 1Q14 1Q16

Refinery Utilisation Rates

OECD Non-OECD World

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2009 2011 2013 2015

mb/d Global Refinery Capacity Additions

Crude Distillation Upgrading Desulphurisation

95 % of Expansions Planned in the Non-OECD

• Non-OECD Asia account for almost 50% of all refinery additions

• China alone could add 3.3 mb/d of distillation capacity by 2016

• Investments in the Middle East and Latin America also significant, not always purely economically motivated

• OECD refinery closures since 2009 now amount to 1.8 mb/d

• Firm closures for the 2011-2016 period fail to offset additions in the US, Mexico, Spain and Turkey, leaving a net 0.5 mb/d increase

• OECD refining under pressure from new capacity, although some silver lining via middle distillates and potential IOC purchases

OECD6%

China34% Other

Asia

13%

Latin America

11%

Middle East

24%

Other12%

Regional Share of CDU Expansions

-1.0

0.0

1.0

2.0

3.0

2011 2012 2013 2014 2015 2016

mb/d Crude Distillation Additions

OECD ChinaOther Asia Middle EastLatin America Other Non-OECD

Which Way Ahead for Oil Market Fundamentals?

• Squeezed spare capacity in 2011

• Impact of Libyan crisis & lull in OPEC new capacity

• 2010-2012 market tighter than previous outlook..

• But higher prices unlocking new supplies..

• ..so market easing in 2013-2016

• Lower GDP case -temporary relief from rising prices?

• But only if upstream investment sustained

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mb/dmb/d Medium-Term Oil Market Balance (Base Case)

Effective OPEC Spare Capacity (RHS) World Demand Growth World Supply Capacity Growth

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

mb/dmb/d Medium-Term Oil Market Balance (Lower GDP Case)

Effective OPEC Spare Capacity (RHS) World Demand Growth World Supply Capacity Growth

Key Takeaways for Oil

• Price assumption is $20/bbl higher this year, with tighter 2010-2012 fundamentals

• Market fundamentals remain the key to price direction

• High crude prices and strong economic/oil demand growth can co-exist - for a while – as oil remains inelastic short term

• But economic risks skewed to the downside with $100-plus oil, which will also spur efficiency gains

• Oil demand is an Asia/Mid.East, transport & gasoil/diesel story

• Income growth trumps prices in emerging markets with subsidies

• Higher prices are also bringing forth new oil supplies and helping stem mature field decline

• The Americas are the focus of non-OPEC growth, with Iraq and NGLs major contributors from OPEC

• OECD refining will remain a challenging business amid major capacity additions in emerging markets

• Market will find a new equilibrium, but where depends partly on today’s investment in new capacity and end-use efficiency