MacroVoices Oil Discussion: OPEC Cant Fix The Problem of Low Oil - PowerPoint PPT Presentation

MacroVoices Oil Discussion: OPEC Can’t Fix The Problem of Low Oil Prices Art Berman Labyrinth Consulting Services, Inc. November 30, 2016 Labyrinth Consulting Services, Inc. Slide 1 artberman.com

Overview: OPEC Can’t Fix The Problem of Low Oil Prices OPEC may reach some agreement today on an oil-production cut…or not. • In either case, execution will be more important than accord. • There are at least 6 good reasons why a production cut can’t fix the problem of low oil prices. • Ø The Market Is Already In Balance, Ø There Is Too Much Oil In Storage, Ø Demand Growth Is Weak, Ø U.S. Production Has Started Increasing Again, Ø OPEC Is Not As Desperate For Higher Prices As Many Believe…Yet, Ø It’s The Economy Stupid. Labyrinth Consulting Services, Inc. Slide 2 artberman.com

Reason 1: The Market Is Already In Balance World Liquids Market Balance 2.5 $160 Supply Surplus (LHS) 2 $140 2.00 Brent Price (RHS) 1.74 1.5 1.60 $120 Market Balance (Supply Minus Demand mmb;d) 1.30 1.30 1.25 1.20 1.15 1 1.14 Brent Price (2016 Dollars Per Barrel) $100 0.85 0.84 0.5 0.60 0.57 0.40 0.40 0.40 0.40 $80 0.10 0.20 0.25 0.25 0 1Q08 4Q08 1Q09 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 2Q08 3Q08 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 $60 -0.5 $40 -1 Supply Deficit (LHS) $20 -1.5 -2 $0 Source: IEA OMR & Labyrinth Consulting Services, Inc. The idea of a production cut is to bring the market into balance by reducing supply. • But the market is already as close to balance as it ever gets. • It has been just 0.25 mmbpd above balance for 6 months. • Prices have not responded. • Any price increase has been from expectation of an OPEC cut. • Labyrinth Consulting Services, Inc. Slide 3 artberman.com

Reason 2: There Is Too Much Oil In Storage OECD Inventories Are ~500 Million Barrels Above Late 2013 Levels U.S. stocks make up ~44% of OECD inventories 3.1 $140 Brent Price (RHS) $120 3 $100 2.9 Brent Price (2016 Dollars Per Barrel) Billions of Barrels of Liquids Incremental $80 Inventories (LHS) 2.8 $60 2.7 $40 2.6 $20 Base Source: EIA & Labyrinth Consulting Services, Inc. 2.5 $0 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 • The balance between production and consumption is only part of the story. • Storage is part of supply. • OECD inventories are 500 million barrels above late 2013 levels. • That is the equivalent of almost a year of 1.5 mmbpd of surplus supply. • Until inventories are drawn down ~350 million barrels, there is little possibility of a return to $80 per barrel oil prices. Labyrinth Consulting Services, Inc. Slide 4 artberman.com

Reason 3: Demand Growth Is Weak Demand Growth Has Declined But 2016 Forecast is 1.2 mmbpd 1.81 mmbpd in 2015 4.5 $140 Brent Price (RHS) 4 $120 3.9 3.5 3.6 Year-Over-Year Demand Growth (Millions of Barrels Per Day) 3.3 $100 3 Brent Price (2016 Dollars Per Barrel) 2.5 2.5 $80 2.4 2.3 Average 2 2.1 1.6 mmbpd 1.9 1.9 1.8 $60 1.7 1.5 1.6 1.6 1.5 1.4 1.3 1.3 1.3 1.3 1 $40 1.0 1.0 0.9 0.9 0.8 0.5 YOY Demand Growth (LHS) 0.4 $20 0.1 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 -0.1 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 -0.5 $0 Source: IEA OMR & Labyrinth Consulting Services, Inc. Demand growth is at a 2-year low of 0.9 mmb/d year-over-year. • That is the same level as during the quarter that prices collapsed in late 2014. • Demand growth has fallen from 2.5 mmb/d a year ago. • The 4-year average is 1.6 mmb/d. • That is because demand is highly price sensitive in a weak global economy. • Higher prices will further weaken demand growth • This in no way supports “peak demand” forecasts. • Labyrinth Consulting Services, Inc. Slide 5 artberman.com

Reason 4: U.S. Production Has Started Increasing Again Nov U.S. Incremental Production Is The Main Cause of The Oil-Price Collapse U.S. Crude Oil Production Increased 30 kbpd in October 2016 OPEC, U.S., Canada, Russia & Brazil account for 66% of world crude oil & lease condensate production 64 10.00 $120 WTI Price (RHS) 63 9.63 April 2015 62 9.50 $100 Millions of Incremental Barrels of Crude Oil & Condensate Per Day United States 61 Millions of Barrels of Crude Oil Per Day Oct-Sept Increase 9.00 $80 60 Iraq +30 kbpd WTI Price ($/Barrel) 59 8.74 Iran 8.63 8.50 8.60 $60 58 Canada 57 Oct 2015 Russia 8.00 $40 56 Brazil Indonesia-Ecuador-Qatar-Gabon 55 Kuwait Saudi Arabia Libya UAE Oil Production (LHS) 7.50 $20 Angola 54 Venezuela Mexico Algeria Nigeria 53 Base Source: EIA STEO November 2016 & Labyrinth Consulting Services, Inc. 7.00 $0 Source: EIA & Labyrinth Consulting Services, Inc. Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 52 Jun-14 Jun-15 Jun-16 Jun-17 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 • U.S. oil production has already started increasing based on relatively stable prices in the mid-$40 range. • U.S. incremental supply was the main reason for the over-supply that caused the price collapse in 2014. • Higher oil prices will accelerate U.S. production additions. • Iraq is a secondary contributor & Iran has increased 800,000 bopd since the end of sanctions. • Overall, however, OPEC increases and decreases have balanced since 2012 except for recent additions by Iran. Labyrinth Consulting Services, Inc. Slide 6 artberman.com

Reason 5: OPEC Is Not As Desperate For Higher Prices As Many Believe…Yet Saudi Currency Reserves Remain Above 2010 Levels Most OPEC Members Have Considerable Cash Reserves $800 120 $800 744 738 $700 $700 Algeria 100 674 Foreign-Exchange Reserves (Billions of 2016 Dollars) 627 $600 $600 Foreign-Exhange Reserves (Billions of 2016 Dollars) 557 80 Source: World Bank & Labyrinth Consulting Services, Inc. 528 Indonesia $500 $500 459 451 UAE $400 421 60 $400 Libya $300 $300 309 40 Iraq 229 $200 $200 Qatar 157 20 Nigeria $100 $100 Kuwait Venezuela Gabon & Ecuador 21 19 22 25 29 Angola Source: World Bank & Labyrinth Consulting Services, Inc. $0 0 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 • The press gives the impression that Saudi Arabia and most OPEC members are desperate for higher oil prices. • In fact, Saudi foreign currency reserves are still above 2010 levels despite drawing down almost $220 billion since 2014. • Many other OPEC countries have considerable cash reserves: Algeria,Libya and Iraq are surprisingly strong (Iran is unknown). • Nigeria, Venezuela and Angola are certainly in trouble but because of more fundamental problems than just low oil prices. Labyrinth Consulting Services, Inc. Slide 7 artberman.com