Don’t Hold Your Breath For $70 Oil and The Demise of the Bakken Art Berman Labyrinth Consulting Services, Inc. HRC Oil & Gas Society Houston, Texas February 23, 2017 Labyrinth Consulting Services, Inc. Slide 1 artberman.com
Oil Markets In Early Recovery From The Second of Two Major Production Bubbles Current $54 Oil Price Is 60% Higher Than Jan 1986 - Jan 2004 U.S. + Canada Incremental Ouput: The Major Contributor to Low Oil Prices Average in December 2016 Dollars OPEC, U.S., Canada, Russia & Brazil account for 66% of world crude oil & lease condensate production 64 $160 2nd Bubble: 1999-2014 All Prices in Constant December 2016 Dollars 63 Canada $150 Debt-Fueled Economic Massive E&P 62 $140 Millions of Incremental Barrels of Crude Oil & Condensate Per Day Expansion & Rapid Investment 1st Bubble: 1974-1980 U.S. + Canada CPI Adjusted WTI Prices (July 2016 Dollars Per Barrel) $130 Growth in China & East (Shale, Deep 61 U.S. 4.4 mmb/d Increase Asia Water, Heavy $120 (44% of incremental Oil) 60 production in Mar $110 2015) Oil Shocks $100 59 --> Iraq $90 Massive E&P 58 Over-Supply, Demand Destruction & Investment (North $80 Price Deflation Iran Sea, Mexico, $70 57 Siberia) Russia $60 $52.50 56 $50/barrel Brazil $50 Indonesia-Ecuador-Qatar-Gabon 55 $40 Over-Supply, Demand Kuwait Saudi Arabia Libya UAE Destruction & Price $30 Angola 54 Deflation Venezuela Mexico $20 Algeria Nigeria Avg 1950-1973 53 Avg 1986-2004 $34/barrel Avg 2005-2015 $86/barrel Avg 1974-1985 $70/barrel $10 $23/barrel Base Source: EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc. Source: EIA , Labyrinth Consulting Services, Inc. & Crude Oil Peak $0 52 Jan-70 Feb-71 Mar-72 Apr-73 May-74 Jun-75 Jul-76 Aug-77 Sep-78 Oct-79 Nov-80 Dec-81 Jan-83 Feb-84 Mar-85 Apr-86 May-87 Jun-88 Jul-89 Aug-90 Sep-91 Oct-92 Nov-93 Dec-94 Jan-96 Feb-97 Mar-98 Apr-99 May-00 Jun-01 Jul-02 Aug-03 Sep-04 Oct-05 Nov-06 Dec-07 Jan-09 Feb-10 Mar-11 Apr-12 May-13 Jun-14 Jul-15 Aug-16 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 The 1st Bubble 1974-1980: oil shocks and price increase from $23 to $117/barrel led to • massive E&P investments, over-production, demand destruction & oil-price deflation until 1998. Second Bubble: 1999-2014: flat global output & growing Asian demand led to increasing oil • prices from $17 to $148/barrel by 2008. After the 2008 Financial Collapse, OPEC cut production then, declining OPEC spare capacity, • falling OECD inventories, & near-zero interest rates led to the longest period of high oil prices in history from 2011-2014. Over-investment resulted in a massive over-supply. • The bubble burst in 2014 and prices collapsed. • Labyrinth Consulting Services, Inc. Slide 2 artberman.com
The 2016 OPEC Cut Oil Prices Have Not Exceeded $54 Per Barrel Since Early 2015 Low Spare Capacity Was A Key Factor In The OPEC Output Cut $70 120 5 $160 $61 Per Barrel Ceiling 4.5 $140 $60 100 Brent Price (RHS) $54 Per Barrel Ceiling 4 Daily OPEC Surplus Crude Oil Production Capacity (mmb/d) Brent Price (October 2016 Adjusted Dollars Per Barrel) $120 $50 Futures NYMEX WTI Futures Prices ($/Barrel) 80 3.5 Price (LHS) $43 Oil-Price Volatility Index $100 OPEC Cut Sept 28 $40 $40 Agreed Nov 30 3 OPEC Doha Freeze Meeting 60 $80 Financial Failed 2.5 Collapse $30 $26 $60 OPEC "Freeze" 40 2 Proposed $20 $40 1.5 Daily Oil-Price 20 Incremental OPEC Spare Capacity $10 Volatility Index (RHS) $20 1 0.71mmb/d 0.86 mmb/d 0.92 mmb/d BASE Source: EIA, CBOE, Bloomberg & Labyrinth Consulting Services, Inc. Source: EIA and Labyrinth Consulting Services, Inc. $0 0 0.5 $0 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 First mention of a production “freeze” in February 2016 when oil prices were $26/barrel. • Expectation of OPEC action & improving fundamentals lifted prices to $43 average for 2016. • Prices dropped when a freeze agreement failed in August; failure to act in November would have • sent prices into the mid-$30 range. The cut was more about setting a price floor than about raising prices. • OPEC agreed to cut production in November partly because it was incapable of sustaining output • at 2016 levels. By July 2016, surplus production capacity was 0.92 mmb/d—the all-time low was 0.71 mmb/d in • late 2004. Announcing a cut is a good way to cover the reality that commercial reserve limits have been • reached. Low OPEC spare capacity has usually led to a major oil-price increase (e.g., 2004 & 2007). • Labyrinth Consulting Services, Inc. Slide 3 artberman.com
There Never Was An OPEC Strategy or Price War OPEC Cut Production 14 mmb/d from 1979-1985 With No Effect on World Supply Surplus or Oil Price 30 $140 World Prod 20 $120 (LHS) Millions of Barrels of Liquids Per Day Compared to 1979 OPEC 10 $100 production World Oil Price in 2015 Dollars decreased 14 mmbpd 0 $80 OPEC Prod (LHS) -10 $60 World production -20 $40 decreased 9.5 mmbpd Oil Price -30 $20 (RHS) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -40 $0 Source: BP and Labyrinth Consulting Services, inc. Analysts created a narrative that OPEC’s strategy was to hurt U.S. tight oil producers. • This story line is unfounded but widely accepted because of American hubris. • Cartel’s inaction since the 2014 price collapse reflected unwillingness to repeat the mistake • of 1979-85 when OPEC cut 14 mmb/d with no affect on over-supply, demand or oil prices. • Saudi Arabia cut 7 mmb/d 1980-1985. Cuts lowered OPEC market share and greatly reduced revenue. • “We met with non-OPEC producers, we asked ‘what are you going to do?’ They said • nothing. We said the meeting is over.” –Ali Al-Naimi, February 2016. • The 2016 OPEC cut happened because Russia participated along with rest of OPEC. Labyrinth Consulting Services, Inc. Slide 4 artberman.com
Tight Oil Is Not A Threat To OPEC Oil Sands Are Saudi Arabia's Chief Reserve Competition, Not U.S. Tight Oil 350 Oil Sands Source: EIA, Hyperdynamics and Labyrinth Consulting Services, Inc. 300 300 Billions of Barrels of Crude Oil & Lease Condensate 269 250 200 Oil Sands 171 150 158 143 100 104 98 Deep Water 80 50 60 48 Tight Oil 37 37 30 25 25 16 12 11.6 9… 8.4 8.3 0 Venezuela Russia Deep Water Saudi Arabia Canada Iran Iraq Kuwait UAE Libya Nigeria USA Kazakhstan Qatar China Brazil Algeria U.S. Tight Oil Mexico Angola Ecuador Tight oil has never been a long-term threat to OPEC because the reserves are relatively • small. EIA year-end 2015 data indicates that U.S. tight oil proven reserves are less than 12 billion • barrels. Deep water reserves are more substantial than tight oil but are still small compared with • OPEC reserves. Canada’s and Venezuela’s combined oil sands reserves exceed 350 billion barrels. • Oil sands are Saudi Arabia’s and OPEC’s chief reserve competition, not U.S. tight oil. • Labyrinth Consulting Services, Inc. Slide 5 artberman.com
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