Information document
Amsterdam, February 17, 2017
2017 oil price forecast: who predicts best?
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Since 2007, Roland Berger has published a yearly overview of available oil price forecasts
Last year's results
USD 49 forecast1) for 2016
Top-3 best forecasting countries
50
50
48
Ø 49
Saudi Arabia
Nigeria
Iraq
22
20
18
Ø 20
Saudi Arabia
Nigeria
Iraq
Period 1999-2016
Average absolute year-on-year oil price forecasting1) error [%]
> Since 2007, Roland Berger has published a yearly study on the oil price forecast
> Major oil-producing countries use a forecasted value of the oil price in their annual budgets
> We have studied the forecasting track records of the ten largest oil-exporting countries from 1999 to 2016
> The budgeted oil prices of the top 3 most accurate countries are used to forecast the oil price for the year ahead
> The oil price forecast of the countries is compared to that of the major energy institutions: NYMEX, EIA and OECD
Roland Berger study of oil price forecasts, February 2017, WTI based
Source: Roland Berger
1) To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (2012-2014) and for average budget deviations (1999-2014, excluding 2001, 2009 and 2015)
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In 2016 the average price for a barrel was USD 43, lower than the USD 49 predicted by the top-3 countries
Source: EIA
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
43
49
2016 average
USD 49
Top 3
forecast
Development of monthly WTI averages [USD/bbl], Jan 2006 – Dec 2016
2015 average
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This year's study not only assesses the accuracy of last year's forecasts, but also analyzes market dynamics and future prices
1 Analysis of the accuracy of countries and institutions as forecasters of the oil price in 2016 and over past years
ACCURACY OF OIL PRICE FORECASTS
2 CHANGING
MARKET DYNAMICS
Analysis of the changing market dynamics since the US has become a major exporter of (shale) oil and analysis of the current oversupply in the global oil market
3 FUTURE OIL
PRICES Analysis of oil price forecasts of countries and institutions and underlying political and market dynamics
Elements of this year's study
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Institutions have become the better price forecasters – For 2017 they predict an average of USD 50 per barrel
Before 2009, the top oil exporting countries outperformed the institutions (NYMEX, EIA, OECD) in correctly forecasting the oil price
Since 2009 however, the institutions have forecasted the oil price significantly better than the countries
Since the start of the shale gas boom, the US has not only been one of the major producers of oil, but is also exports significant amounts of oil
Oil-producing countries – Saudi Arabia in particular – have often adapted their oil output to price levels, thereby influencing the oil price
The dynamics have changed since American shale oil entered the equation. North American shale oil is moving towards being the swing supply
After resisting production cutbacks for over a year, OPEC decided in November 2016 to reduce crude oil production by 1.8 million barrels per day. This significant drop in supply should drive up the low oil price
What will the future bring? Will the oversupply be curtailed by OPEC countries?
1
50
55
Institutions
Top-3 countries Prediction for the 2017 oil price [USD/bbl]
Accuracy of oil price forecasts
2
Changing market dynamics
3
Future oil prices
Improved performance of institutions vs. countries in the oil price forecast
Source: Roland Berger
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1. Accuracy of oil price forecasts
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Almost all countries overshot the oil price in their 2016 forecasts – Predictions from most institutions fell below a 5% margin of error
Source: Ministries of Finance; EIA; NYMEX; OECD; Press reports
2016 forecast1) 2016 forecasting error Country
Actual
3%
-11%
-2%
15%
18%
14%
15%
-1%
12%
-1%
38%
75%
47% Algeria
Iran
Iraq
Kuwait
Mexico
Nigeria
Norway
Russia
Saudi Arabia
Venezuela
NYMEX
EIA
OECD
1 Accuracy of oil price forecasts
Top-3 forecasters based on 1999-2016 – Average accuracy 14%
Average accuracy 5%
Absolute year-ahead oil price forecasting error, 2016 [%]
63
59
48
75
49
43
43
51
50
50
43
45
42
39
1) To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (2012-2014) and for average budget deviations (1999-2014, excluding 2001, 2009 and 2015)
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Since 2009, the institutions have been better forecasters than oil-producing countries
Source: Ministries of Finance; EIA; NYMEX; OECD; Press reports
1) Updated top-3: based on up to year n-1. To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (2012-2014) and for average budget deviations (1999-2014, excluding 2001, 2009 and 2015)
17
107
19
35
2124
69
151616
4
20
12 17
2008 2007 2006 2005 2004 2003 2002
Yearly absolute error, oil price forecast, institutions and top-3 countries1), 2002-2016 [%]
5
53
586
11
2
8
14
65
28
1919
10
20
48
12
28
2016 2015 2014 2013 2012 2011 2010 2009
Top-3 Countries Institutions
1 Accuracy of oil price forecasts
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The rise of the institutions as better predictors coincides with the rise of the US as a major (shale) oil producer and exporter
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
10,000
0
15,000
5,000
Source: OPEC; EIA
CRUDE OIL PRODUCTION
EXPORTS (all petroleum products)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
10,000
5,000
15,000
"Institutions predict best" "Countries predict best"
Crude oil production per country and US exports, 2007-2016 ['000 bbl/day]
Other producers US Russia Saudi Arabia
1 Accuracy of oil price forecasts
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The top-3 oil-forecasting countries all predicted the oil price within 20%
Iran
Nigeria
Iraq
Saudi Arabia
Kuwait
Norway
Algeria
Russia
Mexico
1
75
39 44
81
Ø 48
14 Ø 29
2016
15
76
21
2012
19
34
Ø 21 12 35
13 15
37Ø 37
2016
15
85
23
2012
25
1Ø 32
82
27 24 28
11Ø 37
2016
14
107
26
2012
28
Ø 59 47
77
52 55 65
242338 Ø 45
2016
18
121
2012
15
38 Ø 44
96
27 45
Source: Ministries of Finance; OPEC; Press reports
1 Accuracy of oil price forecasts
Absolute forecasting errors, 2012-2016 [%]
Venezuela
2827 26
2012
129
75
Ø 57
2016
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2. Changing market dynamics
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Since the start of 2014, the oil price has been under heavy pressure due to oversupply
Oversupply Undersupply
Source: EIA; Roland Berger
84
86
88
92
90
94
96
98
2013 2014 2016 2015 2012
2 Changing market dynamics
Global supply and demand of oil and net differential [m bbl/day]
Total global consumption Total global supply
2.6 1.7
2016
0.3
-0.5
Net change
2.0
2012
1.3
0.4
-0.7 -0.8
2013
-0.5
2.4
2015
1.5 1.6 1.6 0.8 0.8
2014
0.0
-0.7 -0.5 -0.1
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Tight oil
Since 2014, a new oil production pattern has emerged: major OPEC players have decided to win on volume using their low-cost positions
Source: Roland Berger
1) Total oil production cost estimates, including capital returns
Production cost [USD/bbl]1) vs. global oil demand [m bbl/day]
Tight oil production grew from 0 in 2011 to 5 m bbl/day in 2015. In late 2014, major OPEC players decided to win on volume using their low-cost positions
Saudi Arabia and OPEC manage production volumes to ensure that marginal demand is met by high-cost resources so that the price of oil remains in a USD 80-100/bbl range
Pre-2012 (pre-tight oil) Post-2014
Saudi Arabia High-cost resources (offshore deepwater, oil sands) Tight oil Other OPEC
Demand level Demand level
Illustrative
100 90 80 70 60
150
100
50
0
0 50 40 30 20 10 90 80 70 60 50 100
0
40 30 20 10 0
100
50
150
2 Changing market dynamics
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5560
80
US tight oil production has been resilient to lower prices thanks to improving economics and high short-run elasticity
Tight oil attributes
> Significant reserves: 130 billion barrels (50% of total US and more than 50% of Saudi Arabia)
> Near-perfect competition:
− 1,000's of independent players, many of which are small
− Limited barriers to entry and exit (USD 5-10 m to develop a typical well, 2-3 year payback on most wells)
> Highly elastic in the short-run:
− Well construction to production in less than 2 months
− Fast depletion rates relative to conventional wells
Source: Rystad; EIA; Roland Berger
1) Including capital returns
Best wells
$30
U.S. tight oil breakeven economics1) [USD/bbl]
U.S. tight oil production
[m bbl/day] 4.4 5.6 4.8
2014 2015 2016
U.S. new fracking well
oil production per rig
[bbl/day]
271 404 564
US tight oil production dynamcis
2 Changing market dynamics
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The latest drop in the oil price is due to oversupply – There is no longer a correlation between oil price changes and GDP
Source: BP statistical review; IMF; Bernstein analysis and estimates; Roland Berger
Change in oil price (real) Change in GDP
Supply shocks
Demand shock
Left axis: change in oil price Right axis: change in GDP
2 Changing market dynamics
• Most price drops are caused by a drop in demand related to stagnating GDP growth during a recession (1998 Asian financial crisis; 2001 tech bubble burst; 2009 global financial crisis, etc.)
• Today's situation is similar to 1986 – There is no recession and the price drop is driven by oversupply
• 1986 oil price shock was caused by strong production growth in OPEC countries
• Recent oil price shock mainly caused by American production, coupled with non-reduction in OPEC countries
(Real) oil price development and GDP change during previous oil price drops
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-2%
-1%
0%
1%
2%
3%
4%
5%
2016 2010 2005 2000 1995 1990 1985 1980
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Oversupply and the resilience of US tight oil have been driving the world towards a "lower for much longer" oil price environment
1
4
OPEC/Russia supply
Production of ~45 m bbl/day1)
Production of ~50 m bbl/day2)
Averag
e reinvestm
ent eco
no
mics
US
tigh
t oil [U
SD
/bb
l]
2
50 USD/bbl oil ("lower for much longer") 80 USD/bbl oil ("underinvestment")
> OPEC/Russia continue to maximize market share
> Large projects deferred in '17-'18
> Steep decline in tight oil production in the short term as wells reach maturity
> 1.2 USD/EUR FX rate
Scenario bounds
> Significant downward shift in the oil supply curve
– Continued increase in Middle East and Russia output
– Continued decrease in North America shale costs
> Low oil prices driving strong economic growth and continued strong oil consumption growth
> 1.0 USD/EUR parity
100 USD/bbl oil ("shale returns")
3
> Supply disruption in ME/LATAM creates oil price spike
> Higher costs as tight oil comes back online
> 1.3 USD/EUR FX rate
Trend
Trend
Pause in investments until the trend is confirmed
Scenario definition
Source: Roland Berger
Towards 40 Towards 60+
2 Changing market dynamics
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But this trend was interrupted in November 2016 when OPEC reached an agreement to cut production by 1.2 m bbl/day
Source: Zerohedge; Roland Berger
2 Changing market dynamics
Oil production in major OPEC countries and production cut agreements
618
522
486
26
Venezuela 2,067 1,972 95
UAE 3,013 2,874 139
Saudi Arabia 10,544 10,058
Qatar 648 30
Kuwait 2,838 131
Iraq 4,561 4,351 210
Iran 3,887 3,797 90
Ecuador 548
Angola 1,751 1,673 78
Algeria 1,089 1,039 50
2,707
Agreed production cut January 2017 level
4.6%
4.5%
4.7%
2.3%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
Other production cuts
> Russia has agreed to support the OPEC deal with a 300 thousand barrels per day production cut (~2.7%)
> Mexico, Oman, Azerbaijan and several others are cutting back another 258 thousand barrels per day
OPEC production ['000 bbl/day] Change [%]
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3. Future oil prices
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What will the future bring for oil prices? Expert opinions vary, but many of them tentatively predict higher prices
Source: Press
Future oil prices 3
Selected quotes on oil price forecasts
Lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain
11-01-2016 Ben van Beurden,
CEO, Shell
We see some firming in prices next year but nothing significantly north of what we see now
11-01-2016 Brian Gilvary,
CFO, BP
Lower Unchanged Higher
The gap between supply and demand is closing ... Our anticipation now is that it will be balanced by the first half of 2017. That will see an adjustment upwards in terms of prices
11-01-2016 Amin Nasser,
CEO, Saudi Aramco
Projections that the oil prices will range between $50 and $60 per bbl in the coming 15 months are logical and acceptable … Unless there are new developments in the major oil-producing countries, this scenario will be most likely
10-19-2016 Anas Al-Saleh,
Minister of Oil, Kuwait
Not long ago, we enjoyed — as an industry — pretty high and stable prices. But that world has changed. (...) You can’t count on rising commodity prices to bail out your business model
11-10-2016 Ryan Lance,
CEO, Conoco Philips
The balance between demand and supply in the oil market will shift earlier than previously expected due to OPEC’s output cuts, with prices heading towards $60 a barrel next year
12-06-2016 Eldar Saetre,
CEO, Statoil
U.S. shale response to OPEC deal
may cut oil prices ... Oil prices
could return to a range between
$40 and $50 a barrel, depending on
the response of the U.S. shale oil
industry
12-02-2016 Pedro Parente,
CEO, Petrobas
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1) Updated top-3: based on 1999-2016. To improve comparability, forecasts are adjusted for the ratio of local oil prices to WTI prices (2012-2014) and for average budget deviations (1999-
2014, excluding 2001 and 2009); 2) Forecasts were made before the OPEC meeting in November 2016
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The oil price is now ~USD 52 – Institutions predicted an average price of USD 41-55 and the top-3 forecasting producers USD 42-72
Source: Ministries of Finance; National banks; Press reports
Future oil prices
52
WTI oil price as of Dec 2016
55
72
52
42
Average
Saudi Arabia
Nigeria
Iraq
50
41
55
55
Average
OECD2)
EIA
NYMEX
Corrected prediction of top-3 countries
Prediction of institutions
Both countries and institutions expect the oil price to rise again
2017 WTI price forecasts1) [USD/bbl]
3
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The institutions and the countries agree that the oil price will increase, but they do not agree on how much
Future oil prices
> The oil price has slightly recovered from the major dip in late 2015/early 2016, but with an average of USD 43 per barrel in 2016 it remains low
> Institutions (NYMEX, EIA, IEA) predict only a moderate increase of the oil price (to an average of USD 50 per barrel in 2017)
> Cost developments in shale oil indicate an oil price around USD 50 per barrel as the most likely scenario
> If OPEC holds to the November 2016 agreement, this will reduce the oversupply and possibly drive up the
oil price
> This could lead to the scenario foreseen by the top-3 oil-forecasting countries of a higher oil price of USD 55 per barrel over 2017
Summary
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