Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation...

Strategic Advisors in Global Energy

How Long Will This High Price Episode Last?

Special presentation for the IPAACarl Calabro, Director, Market Analysis

Markets Group

June 16, 2005

Markets & Countries |

Key Conclusions

The world is entering an episode of higher and more volatile

prices than anything witnessed in the past two decades.

The higher long-term prices are the result of a number of

cyclical and structural factors coming together in the last two

years.

This new price episode is likely to last few years, or until some

of the cyclical trends are impacted by higher prices.

Higher prices will change the industry as profoundly as lower

prices did after 1986.


Energy Security Re-Emerge as a Strategic Driver

In the aftermath of 9/11, security in the Middle East has reemerged as a key global concern.

The US presence in Iraq, and the avowed goal to “democratize” the region has raised the issue of the stability of a number of regimes in the Gulf.

Internal tensions, terrorist attacks in the GCC countries have heightened the perception of oil facilities being at risk.

Finally, the emergence of China as a large importer of Middle Eastern crude has added to the perception that a race to secure energy sources is emerging.

In a world dominated by security concerns rather than by globalization (pre 9/11), energy security has added a bullish factor to the perception of future prices, helping to lift the long term crude prices.

This is unlikely to change during the second Bush Administration, which remains focused on the war on terror.


Stock Depletion

Setting the Stage in 2003 and 2004Chain Reaction In The Oil Market

Tight Refining

&

Tanker Capacity

Hedge Funds

Political Instability

$HIGH PRICE

OPEC’s Stock Management

Venezuela + Iraq

Demand Growth


When Structural And Cyclical Events Collide

Exogenous ElementsExogenous Elements

Energy Energy SecuritySecurity

Hedge Hedge Funds’ RoleFunds’ Role

Oil FundamentalsOil Fundamentals

Low Supply Low Supply GrowthGrowth

Soaring Soaring Demand Demand

High High pricesprices

High High pricesprices

CyclicalCyclical

StructuralStructural



Stretched Stretched Infrastructure:Infrastructure:

RefiningRefining

TransportationTransportation

ProductionProduction

Stretched Stretched Infrastructure:Infrastructure:

RefiningRefining

TransportationTransportation

ProductionProduction


CyclicalCyclical

OPEC Spare OPEC Spare Capacity goneCapacity gone StructuralStructural


$30$35$40$45$50$55$60

O-03 F-04 J-04 O-04 F-05

High Oil Prices

Why The World Has $50 + Oil Several Factors Feeding Each Other In This New Episode

High Oil Demand

Stretch infrastructure creates bottlenecks

Low Supply Growth

Supply Anxiety

$$$ Flow

OPEC Loose Excess Capacity

Political Risks Highs

Economic cycles and impact of high oil prices


Its The Economy Stupid….The Key Cyclical Driver

Oil demand growth remains tightly correlated to economic growth. The rise of Asian economies in the 1990’s has helped re-establish this relationship.

Economy Underpins

Transportation Urbanization Industry

0.0 %

-1.0 % 1990

Global Economy Vs. Oil Demand

World GDP, %

Oil Demand % Growth

1.0 %

2.0 %

3.0 %

4.0 %

5.0 %

1992 1994 1996 1998 2000 2002 2004


Demand Strength Is The Key DriverBut Weaker Than 2004

Asia

Other

US

1.83

3.00

1.501.84

0.68

2002 2003 2004 200520012000

0.660.76

3.4 %2.4 %1.0 %0.9 %0.9 % 2.2 %

mmb/d

Europe

Other

US

Asia

2.72

6.4 million b/dHow Can The World

Cope With This Growth?

AsiaAsiaAsiaAsia

Other

Other


Drivers Of Chinese GrowthSeveral Sectors Underpinning Product Strength

Industry

Urbanization

Transportation Increasing car fleet, trucks shifting to diesel

Industrial output is booming across the board

Increased household consumption

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

1998 2000 2002 2004

Chinese Refinery Runs

kb/d

1,500 kb/d Up 36%

0

200

400

600

800

1,000

2001 2002 2003 2004 2005

China

India

Rest Of Non-OECD Asia

Asian Demand Growth

kb/d


US-Chinese Synergy Drives Up Diesel Demand The Axis Of Diesel

Diesel Demand In the United States and China

2.42.62.83.03.23.43.63.8

J-02 J-02 J-03 J-03 J-04 J-04 J-05 J-05

1.31.51.71.92.12.32.52.7US Diesel Demand (left axis)

China Diesel Demand (right Axis)

mmb/d mmb/d

More Chinese Goods Exported

To The US

200

250

300

350

400

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

2.4

2.6

2.8

3.0

3.2

3.4Loaded Incoming TEUsUS Diesel Demand (right axis)

Port of LA Incoming Cargo And Diesel Demand

forecast

Markets & Countries | 3.5

3.6

3.7

3.8

3.9

4

4.1

4.2

4.3

4.4

2000 2002 2004 2005

8.38.48.58.68.78.88.9

99.19.29.3

2000 2002 2004 2005

Gasoline demand increased 8% between 2000 and 2005

People live farther away and use bigger cars

US Distillate Demand

US Gasoline Demand

700 kb/d

600 kb/d

US Product Demand Gives a Hand Gasoline Growth Slowing, Diesel Growth Has Created Problems

Between 2000 and 2005 distillate soared with a 15% growth.

Transportation of imported goods throughout the country underpins diesel consumption.

forecast

mmb/d

mmb/d


Refinery Utilization Is Stretched FSU IS The Only Region With Significant Spare Capacity

Refinery utilization in the Asia/Pacific market is the most stretched, as refiners try to meet Chinese demand.

Next year will see the last round of significant specification changes for distillates in the US and Asia, and its impact on production should not be underestimated.

57%

60%

FSU

95%

96%

Middle East

Average Yearly Utilization Rates In Selected Regions2002 And 2004

86%

97%

Asia/Pacif

Does not include teapot capacity in China

89%

92%

US

79%

83%

EU


-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1998 1999 2000 2001 2002 2003 2004 2005

Non Opec - Non FSU Crude FSU CrudeNon-OPEC NGLs

Non OPEC Growth SluggishDecline Rates Hamper Growth

Year-on-Year Growth In Non-OPEC Crude


OPEC Has Lost Its Excess Capacity Spare Capacity Is A Luxury

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1985 1990 1995 2000 2005

Saudi Spare Capacity

Other Spare Capacity

Historical Spare Production Capacity

million b/d 0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

SaudiNon Saudi

mmb/d


OPEC’s Mostly Talks Saudi Arabia Acts

OPEC Limited To Cash In High Prices

Saudi Arabia Tries To Limit The Upside

Losing Leverage To Control Marker Prices

$30

$35

$40

$45

$50

$55

J-04 F-04 M-04 A-04 M-04 J-04 J-04 A-04 S-04 O-04 N-04 D-04 J-05 F-05 M-05

OPEC Willing To Bring Speculators To The Oil

Markets

WTI Price And OPEC’s Arguments About It

2003 – 1st Half 2004 2nd Half 2004 - 2005

OPEC Performing “Stock Management”

Strategy

“ US Gasoline Market Is to Blame”

“ It is Speculator’s Fault” “Fundamentals Are Tight”


Why Is OPEC Not Able To Respond?Not The Right Crude

64

66

68

70

72

74

76

1Q02 4Q02 3Q03 2Q04 1Q05 4Q05

11

13

15

17

19

21

23Sweet Crude Supply, Right Axis

vs.

mmb/d mmb/d

Total Crude Supply, Left Axis Discounts Of Arab Medium In Selected Markets

-$13

-$11

-$9

-$7

-$5

-$3

-$1

$1US Europe Asia

Jan-04

Jan-05

Wrong Quality Spurs Soaring Discounts


Why Hedge Funds Are Flocking In? Sliding Dollar And Low Interest Rates

$35

$40

$45

$50

2Q04 3Q04 4Q04 1Q05

0.76

0.78

0.80

0.82

0.84WTI (left axis)Euro/Dollar XR (right axis)

Falling Dollar And Rising WTI

0

5

10

15

20

25

30

35

40

45

1988 1991 1994 1997 2000 2003

0

1

2

3

4

5

6

7

8

9Nominal Crude Price

Federal Funds Rate

Interest Rates and WTI

The recent rallies of the last three months are related to pouring money into the oil futures market by all types of investors.

Investment in commodities is a great opportunity to cash in in Asian growth, but a growing problem for the stability of oil prices

$/d %


Increasing Interest In Far Out ContractsFlattening The Price Curve

Funds have been putting their money on far out WTI contracts It has pushed WTI prices well over $40/b through the end of the decade. And Flattened the entire price curve, exacerbating the front-month

contango in WTI and further weakening short-term fundamentals by encouraging further stock builds.

25

30

35

40

45

50

55

Jan-04

Mar-04

May-04

Jul-04

Sep-04

Nov-04

Jan-05

DEC-05 DEC-08DEC-06 DEC-09DEC-07

PRICE

0

10

20

30

40

50

60

70

Jan-04

Mar-04

May-04

Jul-04

Sep-04

Nov-04

Jan-05

DEC-05 DEC-08DEC-06 DEC-09DEC-07

OPEN INTEREST

Price and Open Interest For WTI Futures


Eyes Focused On The 2nd HalfLittle Downside In The Short Term

May Sep DecMar Apr

Investors willing to cash in the upside

Investors in need of hedging

The Framework : Sliding Dollar, US DeficitSupply Anxiety for 4Q

High Oil Demand

Supply Anxiety

Stretched Infrastructure


Building Stocks and Anxiety4Q Anxiety Keep Prices Strong

80.0

81.0

82.0

83.0

84.0

85.0

86.0

87.0

88.0

89.0

May Jun Jul Aug Sep Oct Nov Dec$51

$52

$52

$53

$53

$54

$54

$55Demand Contango*

2005 Oil Demand vs. Price Curve Of WTI*

*WTI Futures Prices As Of April 14, 2005

right axis; $/bleft axis: mmb/d

The World Might Have Problems To Cope With Oil

Demand In 4Q 2005


How Long Does It Take To React To High Prices? The Reaction Time Shows Asymmetric Risks

Economic Impact Of High Prices 3 – 5 years

Expensive oil may trigger investments in upstream or downstream, or may potentially affect demand in the long run.

But the only short term element able to change the outlook is a potential economic meltdown.

Key

low Impact

High Impact

Refining 30 months

10 years Upstream

1 Month Higher Risk to Economic Downturn

Economic Meltdown


The Economic Cycle Has PeakedBut What Next Is Difficult To Predict

US Growth Is Slowing

Adjustment of Imbalances is Necessary

Managed adjustment

Slowdown

Oil Demand Slowing

Asian Banks Willing To Subsidize Forever?

Growing By Borrowing

Not Sustainable

Steroids Effects Waning

Inflation driving interest rates up

trade deficit impacting $ value

No country has managed to consume and invest 6% more than it produces for long.

Crisis Triggered Adjustment

Meltdown

Strategic Advisors in Global Energy

Corporate Offices

1300 Connecticut Avenue, N.W. Suite 800Washington, DC 20036 USATel: (1 202) 872 1199 Fax: (1 202) 872 1219

3, cité Paradis75010 Paris, FranceTel: (33 1) 47 70 29 00 Fax: (33 1) 47 70 27 37

Houston, TexasTel: (1 281) 599 7099 Fax: (1 281) 599 9891

London, United KingdomTel: 44 (0) 1256 760678Fax: 44 (0) 1256 760678

[email protected] www.pfcenergy.com

Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation...

Documents

Transcript of Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation...