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But is this really how the price discovery works in real life?
Or is the long dated price more affected by price changes in
the front of the curve instead of living its own life? Could it
be that the tail is wagging the dog in the oil market?
Content
1 Executive summary the lead will now have to run the cuts
until inventories are drawn down
The Brent price did not continue to
enough to flip the whole curve to
increase as expected in Q2. Instead of
backwardation. They have no choice,
the gradual increase by quarter that
now that the platform is on fire.
we had seen since Q1-2016 prices fell.
Our supply-demand balance suggests
The key reason was large, unexpected
0.6 million b/d stock draws in 2017
growth in production from
followed by 0.3 million b/d stock draws
Libya/Nigeria and a market (myth)
in 2018 if OPEC stays disciplined.
belief that US shale growth will destroy
Demand growth has recoverd from a
the market if the Brent price climbs
weak Q1-2017 and with OPEC
above 55 $/b. The US rig count
discipline OECD stocks will draw down
increased quicker than what we had
more than consensus expect.
anticipated and this led to massive
Backwardation is achievable by year
shorting of the oil price by speculative
end for the Brent structure as long as
money. OPEC was also to blame as
Libya/Nigeria does not continue to
the cartel cut exports less than
surprise. This would represent phase 3
production by drawing down its own
of the price recovery and will send
inventory. The market instead would
Brent to 60 $/b.
have wanted to see lower exports from
CAPEX cuts in 2014-2016 will support
OPEC and stock draws in the OECD.
the market from 2020 as a
OECD stock draws will instead be
combination of field decline and
visible in 2H-2017 now that OPEC are
demand growth makes in necessary to
cutting exports more than production
see huge shale growth in 2019 and
and with the help of a large increase in
2020. Enough growth will not be
seasonal demand.
possible with Brent below 60 $/b. IMO
Many players believe that it is possible
implements a 0.5% sulphur cap for the
to calculate the correct level for the oil
global shipping industry in 2020. The
price. This seems to be more
combination of postponed projects and
theoretical than practical. In real life
the IMO spec change will make the
the long-dated Brent price looks to be
Brent price over shoot in that year,
more affected by the price discovery in
before it falls back down on increased
the front of the market instead of living
demand- and supply elasticity.
its own life based on marginal costs. A
We are launching our first take on the
lack of liquidity further out than the
Brent price in real terms for the coming
next 6 months, a lack of natural buyers
5 years. For 2018-2022 we forecast
(airliners practically stopped hedging)
the following Brent prices in $/b: 60,
and new regulations making it difficult
65, 75, 70, and 60. Electric vehicles
for oil traders to warehouse longer
are not a threat to oil prices in this time
term positions are to blame. The tail is
frame. We argue that a combination of
wagging the dog.
a belief of peak demand and the belief
Several analysts believe the OPEC
that US shale will cover all demand
deal will collapse already before year
growth is positive for oil prices in the
end. We disagree. OPEC with Saudi in
medium term.
2 Why did we miss the 2Q- has been the key head winds for the Brent
market from Q2-2017 in addition to the
2017 price decrease? Nigerian lifting of force majure on Forcados
The Brent price development since the start of exports.
2016 was positive quarter by quarter until we
reached Q2-2017. We started Q1-2016 at the
Libyan Oil Production
bottom of the cycle with Brent averaging 35 2.0
1.8
$/b, then rising to 47 $/b in Q2/Q3-2016 and
1.6
moving up to 51 $/b in Q4-2016. When 2017 1.4
Million b/d
1.2
started we thought the oil price would 1.0
0.8
continue to trend higher by the quarter 0.6
through the year. The start was good as Q1- 0.4
0.2
2017 averaged 55 $/b, 4 $/b higher than the 0.0
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
previous quarter. Then the price increases
Source: IEA
came to an unexpected end in Q2-2017 which
averaged at 51 $/b. Brent even traded below
Other head winds for the Brent price the last
45 $/b at the end of that quarter.
3-4 months has been the surprisingly strong
growth in the US oil rig count. The rig count
ICE Brent Future First Month (USD/b)
60
has increased quicker than what we had
55
anticipated, even though production has not
50
increased quicker than what we had
45
anticipated due to well completions lagging
40
massively on the rig count. Hence for the
35
fundamental supply-demand balance the US
30
oil output has not surprised us but the rig
25
count has.
Jan2016 Apr2016 Jul2016 Oct2016 Jan2017 Apr2017 Jul2017
quarter by quarter? 5
-5
The first reason why we missed the price
-10
development into Q2-2017 is that the -15
shows that the correlation between oil prices One important issue was probably clumsy
and financial positions are strongest for the communication from OPEC. OPEC should not
short positions during the past two years. have led the market to expect sizeable stock
draws in 1H-2017. Large stok draws could
Brent vs Total Non-Commercials crude exposure only never have materialized in 1H-2017 without
Weekly change in futures exposure MB
Weekly Change Long futures (mb): 26 much larger OPEC cuts. Why? Well, since
Weekly Change Short futures (mb): -30
Weekly Net Change Non-Commercials (mb): 56
OPEC ramped up production to record levels
Weekly Brent Price Change (USD/b): 1.3 in November/December 2016, these barrels
Correlations R-Square
R-Square Last 100 weeks Long positions 0.30 did of course hit the imports market into 2017
R-Square Last 100 weeks Short positions 0.52
R-Square Last 100 weeks Net positions 0.52 due to logistical issues and sailing time.
Statistical value of change in positions USD/b
Value of each 10 mb change in Long position 0.24
Everybody who follows the oil market should
Value of each 10 mb change in Short position 0.49 have been aware of this, but it did not seem
Value of each 10 mb change in Net position 0.23
Difference to last 25-weeks average MB like everybody actually expected this.
Diff to average net exposure last 25 weeks -117
Value of change back to average level (USD/b) 2.7
94
adding 200 million short positions by non-
92
commercials was worth a 10 $/b lower oil 90
price. This is excactly what we got. 88
86
2H-2012
1H-2013
1H-2012
2H-2013
1H-2014
2H-2014
1H-2015
2H-2015
1H-2016
2H-2016
1H-2017
2H-2017
800
750
was excacerbated by the extremely weak
700
demand numbers from India in Q1-2017,
650 caused by the demonetization in Q4-2016.
600 Indian oil demand actually fell in the beginning
550
of 2017 due to this effect. It was hence
Feb2017 Mar2017 Apr2017 May2017
extremely unfortunate for OPEC that the cuts
started into a period with negative seasonal
But the financial money reacts to news flow demand growth.
and fundamentals and what was it that
unleased this bearishness?
1.0
0.5
Million b/d
0.0
-0.5
-1.0
-1.5
-2.0
Production cut larger than than exports cut
-2.5
Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17
Source: US DOE
375
370
US Total Petroleum Inventories
1,400
365
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17
1,350
1,300
Source: JODI
Million barrels
1,250
1,200
to stock draws in OECD. This has so far not Min / Max Range 5y Average 2016 2017
Average US Shale Break Even Costs - $/b DOE data (you need to look at crude
(Weighed by volume in Bakken, Eagle Ford, Permian, Niobrara)
75 plus the main refined product stocks)
70 US Crude & 4 Main Products Inventories
(Mogas, Distillates, Jet, Resid)
65
1,050
60 1,000
Million barrels
55 950
900
50
850
45
J F M A M J J A S O N D 800
Min / Max Range 3y Average 2016 2017
750
700
J F M A M J J A S O N D
9.4
though the well is drilled, fracking
9.2
9.0 equipment in short supply)
8.8
8.6 9. Electric vehicles presents an imminent
8.4
8.2 risk for global oil demand (the
8.0
J F M A M J J A S O N D cumulative effect in 2017 is only 80
Min / Max Range 5y Average 2016 2017 kbd displacement and may reach 280
kbd by 2020 if electric car sales
4. Output recovery in Nigeria and Libya quadruple from 2017-2020, Raymond
risks flooding the market (there is no James calculation)
predictability in exports from these two 10. 2018 supply growth exceeding
countries) demand growth is a bearish indicator
5. OPEC production cuts are worthless (you have to look at the flow deficit
and their return will flood the market in from 2017, which means that since
late 2018 (the whole point is to work 2017 is in deficit (supply lower than
off excess inventory and Saudi was demand) you will still have stock draws
producing above its comfort zone in 2018 if non-OPEC supply grows 1.5
before the cuts) million b/d while demand grows 1.4
6. Rising global floating storage suggest million b/d, you just have a lower stock
a deteriorating supply/demand draw than in 2017)
equation (floating storage is highly
volatile and mainly the result of We tend to agree with most of these ten
logistical issues) myths and believe that the market will realise
7. Crude inventories are the only line that global oil fundamentals really are
item worth tracking in the weekly US improving during 2H-2017.
Million barrels
price. In theory the oil price should be equal to 200
The type of players that trade out on the oil on you. Hence these kinds of positions are not
forward curve has also changed after the very attractive for oil traders in banks.
financial crisis. According to an article in Risk
Magazine from January, the oil price hedging What if you are a private investor that wants
executed by Airliners has been reduced by to invest 100.000 USD in a Brent 2020
90%. This means that we have lost a large contract? Well, the calculations are a bit of the
amount of natural buyers on the oil forward same, although not as extreme as for the oil
curve. What we have gotten instead is a new trader perhaps. But the private investor would
gang of natural sellers on the curve; the shale have to either tie up money on a margin
oil producers. These players are very active account or to trade on a credit line. If you are
hedgers 6-18 months out on the forward able to set up a credit line the bank will have
curve. The Investment Grade producers to price that line according to its cost of
hedge because they want predictability for capital. It is hence much cheaper for a private
their cash flow while many of the High Yield investor to buy an exchange traded fund
producers hedge because their bank requires (ETF) on a stock exchange like any other
them to do so. High Yield players are now equity. The problem is then however that the
behind about 40% of US shale oil production ETF will only hold contracts that are in the
according to Goldman Sachs. front of the market, so you do not get to
expose yourself lets say 3 years out on the
When we then know that the volume on the curve and put the position in the drawer for a
curve is only a fraction of the volume for the while. So for private investors the forward
first 6 months and that the shale players market is basically only open for billionaires
(natural sellers) dominate the trading 6-18 and not for millionaires as we often frase it.
months out on the curve, it is no wonder that
the forward curve struggles to go past the 55- Why is the forward curve open for billionaires
60 $/b range. If it had been easier for normal and not millionaires? The answer is that for a
people to invest in oil out on the curve the billionaire it is so much cheaper to trade on
price discovery out there may have looked the curve. A billionaire will own a lot of
different. different assets like, equities, bonds, property
etc. He will always normally have a quite large
Let us look at a couple of examples. Let us amount of assets that he is not planning to
say that you are an oil trader working in a turn over or sell. He has no alternative use for
bank and you believe that a Brent price of 53- many of his assets. He can use some of these
55 $/b for 2020 is an attractive price with the assets on his margin account and hence he is
risk-reward skewed to the upside. If you were not tying up any expensive cash, like the
to take such a position into your own book millionaire would have to do.
however, you will probably be exposed to an
internal cost of capital of about 10%, in some The problem for the oil forward curve is that
banks it is even higher. So even if the 2020- there are many more millionaires than
price should increase by 30% from lets say billionaires in this world and the millionaires
53 $/b to 69 $/b by 2020 you will have made only trade in the front of the curve. There are
no money on your trade because of the hence not a lot of potential buyers out on the
capital cost requirement you bank is putting forward curve now that we have lost most of
the Airliners.
Based on the above we do not believe the same as the cost to produce the marginal
forward curve really reflects what the sum of barrel plus or minus backwardation or
players in the oil market believes the oil price contango, then you should have answered
will be 2-4 years down the road. yes to that question.
Just look at the analysts predictions from the Another example is the 2011-2014 period
last Bloomber survey as an example. The when oil prices fluctuated in a 105-125 $/b
consensus forecast for 2020 is 64-65 $/b, yet range. According to Goldman Sachs latest
the forward curve is pricing 10 $/b lower than Top Projects analysis, the range of break
that. even prices 5 years ago for the worlds top
projects spanned from 57-90 $/b. Still the spot
Bloomberg survey Brent $/b 2017 2018 2019 2020 2021 price and the forward curve priced much
Median 54 58 61 65 68
Mean 54 57 60 64 67 higher than that back then. The highest
High 64 75 84 90 90
Low 45 37 39 47 47 (marginal) break even price was 90 $/b but
Forward Market 52 53 53 54 55
still the average price for the 2011-2014
period was 110 $/b. We also saw Brent trade
If you take a look at historical forward curves
as high as 127 $/b. This was of course an
for the past 50 quarters you will see that the
argument for why prices could not stay up
forward curve has had a large tendency to just
there, way above 100 $/b for very long, but it
follow the spot price for Brent.
also shows that for meaningful periods of time
Forwards vs Realised of BRENT CRUDE FUTR Sep17
the oil price can move way above and way
153.81
143.22
below the theoretical correct price.
132.63
122.03
111.44
100.84
The theoretical oil price has now moved to a
90.25
narrower band of 52-59 $/b according to the
79.66
26.69
when it is published, normally in May every
07-Mar-06
01-May-11
13-Mar-18
19-Jun-04
24-Nov-07
12-Aug-09
17-Jan-13
06-Oct-14
24-Jun-16
30-Nov-19
18-Aug-21
People also need to be aware that the cost of majors needed oil prices above 110 $/b to
the marginal barrel is not written in stone. The break even and hence the price could not fall
cost to produce oil changes over time and the much below 100 $/b. Some said that yes
key driver to the cost development is the oil maybe costs could drop 5-10% but only
price itself. Hence, even if the break even temporarily since the lower costs would only
costs right now span from 52-59 $/b this does be cyclical. We always believed in a mix of
not mean that we will see the same range 5 cyclical and structural lower costs as the oil
years down the road. It could go up and it price dropped. Crisis makes people learn
could go down. faster and this seems to be the case this time
as well.
Break Even Development Costs Down 30%
90 Digitization of oil installations are for example
80
70
here to stay and efforts like that decreases
$/b Brent Equivalent
Million b/d
1.9
that the OPEC deal will fall apart before year
1.7
end and that is one of their key arguments to 1.5
be bearish to oil prices into 2018. The recent 1.3
5 Demand growth has The US started off very weak when it came to
oil demand growth in 2017 but has posted
recovered from the weak much stronger numbers in Q2 and the recent
first quarter weekly data shows very decent demand
growth for the US.
Our base case demand growth for 2017 calls
for a growth of 1.4 million b/d with normal
seasonal swings baked in. This means for Total US Implied Oil Demand
(4-week moving average)
example that global oil demand is estimated 21.5
93
91
89 The key weakness for oil demand growth so
87
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
far this year has been coming from India.
5 year range 5 year avg 2015 Indian demand growth even turned negative
Source: IEA, DNB Markets 2016 2017 2018
in Q1-2017 due to the demonetization that the
Indian government executed in Q4-2017.
Demand growth in 2016 was 1.6 million b/d,
Money supply (M1) collapsed as a
down from 2.1 million b/d in 2015. One of the
consequence and led to negative oil demand
interesting features has been to note how
growth. People in India to a large extent use
Europe still seems to have a decent amount
cash when paying for gasoline and diesel so
of price elasticity on the evolution of oil
the hit on oil sales should probably not have
demand. Demand for oil had started what
come as a large surprise.
seemed like a structural trend of weakening
oil demand but then the oil price collapsed
into 2015 and demand growth has been quite
decent in both 2015 and 2016. Year to date oil
demand growth in Europe for 2017 is even
stronger than in 2015 and the growth has
accelerated from Q1-2017 to Q2-2017.
0.5
Source: US DOE
Million b/d
0.0
-0.5
-1.0
-1.5
2003 2004 2005 2006 2008 2009 2010 2011 2013 2014 2015 2016
Source: IEA
Sales of motor vehicles also collapsed due to Aspects data here instead of the official
the demonetization, but have later returned. numbers since the official numbers are not
The Indian money supply has been growing capturing runs from the teapot refineries) plus
again since the start of 2017 and this has net imports of refined products plus or minus
provided positive effects on Indian demand stock changes for refined products. We then
growth in Q2-2017. We forecast Indian calculated Chinese demand growth as weaker
demand growth for 2018 to be almost as than in 2016, but quite at par with the years
strong as what we saw in 2016, when demand 2013-2015.
grew almost 0.3 million b/d. There will be very
easy year on year comps for India in Q1-2018 Chinese gasoline demand is growing decent
and this is together with slightly stronger on the back of strong car sales where still
global GDP-growth the key reason why we 97% of the vehicles sold in China are gasoline
forecast slightly stronger global oil demand powered.
growth in 2018 compared with 2017.
China Automobile SalesShare By Fuel Type
India has just implemented a federal Goods 100%
90%
and Service tax (GST) in July. The reform is 80%
70%
made to improve GDP-growth and replaces
60%
other state and federal taxes. In the transition 50%
40%
period however there are several analysts 30%
who point out that this new GST could affect 20%
10%
Indian oil demand negatively in 2H-2017. 0%
Jan2006 Jan2008 Jan2010 Jan2012 Jan2014 Jan2016
There is all the more reason then to carry a Gasoline Diesel CNG Battery and Plug in Electric
Source: China Automotive Information
stronger oil demand growth number for India
in 2018 than for 2017.
Year to date gasoline demand growth is about
Chinese oil demand growth has been decent 5%, about twice as strong as last year, but
so far in 2017. IEA assess the Chinese weaker than what we saw in the 2012-2015
demand growth at almost 0.3 million b/d for period which averaged at about 10%.
1H-2017. Based on data from the Chinese
government, the Chinese OGP and using Chinese Gasoline Demand Growth %
(Adjusted foir inventory change)
25%
refinery throughput numbers from Energy
20%
Aspects (the consultancy), we get to a
15%
demand growth number year to date for China 10%
0%
Chinese diesel demand growth is perhaps Global GDP-growth has according to IMF
even more interesting since before 2012 the fallen from 5.4% in 2010 and trended
growth in Chinese oil demand was mainly downwards to 3.1% in 2016. IMF is currently
coming from diesel. Diesel demand in China predicting that global GDP-growth in real
almost stopped growing in 2012 and even terms will improve to 3.5% in 2017 and to
went sizeably negative in 2016 on the back of 3.6% in 2018. The orange line in the graph
a weakening investment cycle. The below shows IMFs estimate for global GDP-
construction sector is behind 40% of Chinese growth.
diesel consumption and lower growth in that
sector has probably been the key reason to
diesel demand weakness since 2012. This
year we have however seen a bit of a revival
in the Chinese diesel consumption as some
demand growth is registered.
0.50
0.30
Million b/d
0.10
Historically the oil intensity vs GDP-growth
-0.10
has been about 0.5 but has trended
-0.30 somewhat lower in recent decades. If we were
-0.50
to use a sensitivity factor of 0.4 vs global
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
GDP-growth we should see oil demand
growth of 1.4% (1.35 million b/d) in 2017 and
In the big picture, global economic growth will 1.45% (1.4 million b/d) in 2018. This is very
still be the key for oil demand growth. Electric close to the numbers we are predicting for oil
vehicles will have to wait another 8-10 years demand growth in 2017 and 2018.
before it eats meangfully into oil demand. We
calculate, with aggressive electric vehicle It is also worth noting that our own inhouse
sales which increase 10 times from the DNB Markets global macro economic activity
current level in 8 years, that electric vehicles score has shown a marked improvement into
will have stolen only about 0.5 million b/d of 2017 (see graph below). This bodes well for
what would otherwise have been oil demand the global economic growth forecasts into
in 2025. 2018.
USD/b
-4
-6
-8
-10
-12
-14
J F M A M J J A S O N D
USD/b
also are a positive for the oil market. Below 0
are key margins for US, North West Europe,
-2
Mediteranian and Singapore:
-4
-6
US Gulf Coast LLS FCC Margin J F M A M J J A S O N D
2
USD/b
1.5
J F M A M J J A S O N D
1.0
Min / Max Range 3y average 2016 2017
0.5
0.0
-0.5
-1.0
2010 2011 2012 2013 2014 2015 2016 2017
1.2
1.0
Non-OPEC production is estimated to grow 0.8
0.6
significantly the next 18 months. We forecast
0.4
a non-OPEC growth of 0.6 million b/d for 2017 0.2
0.0
and 1.4 million b/d in 2018. The key growth is Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
which we estimate to grow 0.65 million b/d in Nigerian Crude Oil Production
(Not including condensate)
2017 and 1.2 million b/d in 2018. The other
2.5
large growth is coming from Canada (180 kbd 2.3
in 2017 and 220 kbd in 2018), Brazil (175 kbd 2.1
Million b/d
58.0
57.5
57.0
56.5
Million b/d
56.0
55.5
55.0
54.5
54.0
53.5
53.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
IEA define condensate production as NGLs DNB Markets World Oil Supply-Demand Balance
for OPEC countries and for non-OPEC 3.5
(Implied global stock change)
Million b/d
different numbers for particularly Nigeria 0.5
-1.5
produced 1.59 million b/d of crude in June
-2.5
according to IEA data, but if you include Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5 year range 5 year avg 2015
condensate the number was 1.97 million b/d. YTD 2017 2016 2017
Source: IEA, DNB Markets 2018
Our assumption for Nigeria is equal to an
average of 1.95 million b/d for total liquids Our supply-demand balance assumes stock
output going forward. 1.5 million b/d of this will draws of 1.0 million b/d in 2H-2017 which
be pure crude oil. equals about 180 million barrels lower oil
stocks from June to end December.
OPEC Crude Production
34.0
33.5 If we use our DNB OPEC scenario on a pure
33.0
IEA balance where we use IEAs forecasts for
32.5
Million b/d
101
99
97
Million b/d
95
93
91
89
87
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5 year range 5 year avg 2015
Source: IEA, DNB Markets 2016 2017 2018
250
One of the key myths about the oil market in
Million barrels
230
2017, which we have already mentioned, is 210
10
year. 5
-5
US Crude & 4 Main Products Inventories -10
(Mogas, Distillates, Jet, Resid)
-15
1,050
-20
1,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Million barrels
900
850
This is bullish data and the weekly data shows
800
US Crude Inventories
550
The total US petroleum stock overhang vs the
500
5-year average is reduced by almost 110
Million barrels
400
350
300
J F M A M J J A S O N D
When you look at the OECD data you will see build 1.5 days of coverage; instead there has
that they have been drawing slightly down in a been a 2.6 day draw in stock coverage for this
period where they normally build. The stock period.
draw is not large but nonetheless represents a
drawdown of 20 million barrels since January. OECD Total Oil Industry Stocks - Days of Demand
67
OECD Total Oil Industry Stocks 65
3,200 63
3,100
Days
61
3,000
Million barrels
59
2,900
57
2,800
55
2,700 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2,600 Source: IEA 5 year range 5 year avg 2015 2016 2017
2,500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
100
OECD Total Oil Industry Stocks 0
3,200 -100
3,100 -200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
3,000 5 year range
Million barrels
2015
2,900 2016
Source: IEA,
DNB Markets 2017
2,800 Forecast if 70% of global stock change happens in OECD
2,700
2,600
2,500
If we look at the JODI data to get a gauge of
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
global oil inventories, the picture is also clear,
Source: IEA 5 year range 5 year avg 2015 2016 2017
particularly when you translate global oil
stocks over to days of global demand
If you translate the OECD stocks to days of coverage. Stocks are drawing down and these
demand coverage, it is quite visible that draws will accelerate into 2H-2017.
OECD stocks are drawing in a period where
they should normally build. OECD stocks in
days of demand coverage are down from 65.5
days in January to 62.9 days in July (if we
assume that US is half of OECD stock
changes). The average for this period is to
63
62
61
60
59
58
57
56
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5 year min 5 year average 2015
Source: JODI, IEA
2016 Forecast 2017
2.5
1.5
Million b/d
0.5
-0.5
-1.5
-2.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5 year range 5 year avg 2017
Source: IEA, DNB Markets
8 We are in phase 2 of the oil The price improvement in 1H-2016 was quite
similar to what happened in 1H-2009. Prices
price recovery went up from about 30 $/b to about 50 $/b
We believe the price recovery process will be despite a market that was still over supplied.
similar to what happened after the financial We believed last autumn that this anticipation
crisis. Then the price recovery could be split phase could take market to 60 $/b, but 50-55
into three distict phases where the price $/b seems to be comparable to the 70-75 $/b
drivers are different from each other. Since that was reached in the summer of 2009. This
the price drivers change from phase to phase is probably because the market believes
this also means that a black box multiple prices above that level will unleash too much
regression model based on many input factors shale oil production from the US.
that correlate with the oil price will not work,
since you have to change the weight of each Time Spread vs Brent Flat Price
factor through time according to how 80
Phase 1 Phase 2 Phase 3
1.0
0.5
important each factor is for the price 70
0.0
formation. Brent 1st month
60
Brent 1 vs3
-0.5
50 -1.0
In the price recovery after the financial crisis, -1.5
40
the first phase took place from January to July -2.0
30
in 2009, when the price improved from -2.5
the price improve that much when the market Brent 1st Month Brent 1 vs 3 (RHS)
Brent 1 vs3
100 0
-1
market will probably not be willing to step
80
-2 much out of that range until it is clear to
60 -3
everybody that stocks are drawing down and
-4
40
-5 will not rebuild into 2018. As long as OPEC
20
Jan2008 Jul2008 Jan2009 Jul2009 Jan2010 Jul2010 Jan2011
-6
sticks to its production limiting deal and
Brent 1st Month Brent 1 vs 3 (RHS) achieve above 80% compliance, stocks will
accelerate the drawdown into 2H-2017 as
demand keeps on growing. Then we are into
100
Million barrels
50
-50
-100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: IEA,
DNB Markets 2009 2010 2011
9 CAPEX cuts how do they Total accumulated CAPEX by the Oil Majors
amount to 1.15 billion USD since January
affect the oil market? 2011.
From 2014 to 2016 we have seen a reduction
of investments in the global oil space of Oil Majors Accumulated Capex
almost 50%. According to IEAs World Energy -1,200
(Shell, BP, Total, Statoil, ENI, Exxon, Chevron, Conoco)
Billion USD
about 550 billion USD in 2014 to about 300
-600
billion USD in 2016 (down 45%).
-400
-200
0
Jan2011 Jan2013 Jan2015 Jan2017
Source: Bloomberg
22
-40
of the investments that are undertaken are
-30
only contributing to keep decline rates in
-20
check.
-10
0
Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017
Source: Bloomberg
We did see some growth in oil production The IEA reports of a year on year decrease in
from the Oil Majors as a group during the past productionof more than 3% from the group of
3 years but that growth now seems to be countries that are outside of OPEC/Russia/
behind us. For the latest couple of quarters USA/Canada/Brazil/Kasakhstan.
there has been no more year on year oil
production growth reported for this important YoY production change outside of OPEC, Russia,
group of players. USA, Brazil, Canada and Kazakhstan
(12-months mavg)
2.0%
1.0%
Oil Majors Oil Output
(Shell, BP, Total, Statoil, ENI, Exxon, Chevron, Conoco) 0.0%
1.5
-1.0%
1.0
0.5 -2.0%
0.0 -3.0%
Million b/d
-0.5
-4.0%
-1.0 2004 2006 2008 2010 2012 2014 2016 2018
-1.5 Source: IEA
-2.0
-2.5
-3.0 These countries represent about 25% of the
Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017
Source: Bloomberg
global oil market. Year on year production
from this group of countries hence fell almost
The mentioned CAPEX cuts from 2014 to 0.9 million b/d at the worst.
2016 are historically large and have already
affected the oil market. The first effect was YoY production change outside of OPEC, Russia,
USA, Brazil, Canada and Kazakhstan
that the oil companies were forced to pull the (12-month mavg)
600
emergency brakes. They had to postpone 400
The result of this reduced activity was that the The countries that saw the largest decrease in
number of countries in the world which saw barrels were China and Mexico, but as noted
falling oil production increased from about 45 above there were about 60 countries on this
to 60 countries. list.
55% 60
55
50%
50
45%
45
40%
40
35% 35
30% 30
Jun-03 Jun-05 Jun-07 Jul-09 Jun-11 Jun-13 Jun-15 Jun-17
0.0
0.50
0.40
0.30
Million b/d
0.20
0.10
0.00
-0.10
-0.20
2003 2005 2007 2009 2011 2013 2015 2017
Source: IEA
0.6
0.4
Million b/d
0.2
0.0
-0.2
-0.4
2003 2005 2007 2009 2011 2013 2015 2017
Source: IEA, DNB Markets
10 Decline rates and call on We have argued several times before that we
did not buy the story that global annual
shale decline rates are as large as 3-4 million b/d.
How much is the current oil production base Many still use those numbers. You still see
declining per year and how much new oil will statements that within the next ten years we
have to be put onto the global oil market by will have to find and develop 4 new Saudi
2020 to cover both demand growth and Arabia just to fight decline.
decline rates? And how much will US shale oil
have to provide of this requirement? These When we calculate the average decline from
are of course key questions for the oil price in the base ten years ago we calculate that the
the coming 3-4 years. base has declined 28 million b/d, which
translates to an annual decline of 2.8 million
The questions are difficult to answer. We b/d on average from the base in 2006.
would not dare to use any bottom up analysis
on decline rate studies to answer such Decline The Past Ten Years - 2.8 Million b/d Per Year
(The calculation is done by extracting all start ups of new projects since year 2006)
95
11.5
85
75
Million b/d
65
and technological developments. 2006 2008 2010 2012 2014 2016 2018
We do however believe that the lack of final trump most other factors in the oil market
investment decisions (FID or sanctions if you around 2020.
want) in 2014-2017 will come back and haunt
the market around 2020.
30
25
20
15
10
0
2013 2014 2015 2016 YTD 2017
Source: PIRA Energy
104
5.1 101.4
102
100
97.0 7.0 1.9
98
4.4
96
kbd
94
92
90
88
86
84
82
80
Global crude, Net decline rate Non-OPEC OPEC projects Required new World liquids
condensate and of 2% (half of projects under under shale oil to demand by
NGLs output in last ten years) development development balance 2017- 2020 (1.2 mbd
2016 (IEA) by 2020 (414) (Rystad (116) (Rystad 2020 pr year-2016
Energy) Energy) was 96.6 mbd)
enough? -9.0
70
You also have to remember that the shale 60
300
producer who wants to deliver his light sweet Eagle Ford North Dakota (Williston basin) Permian (RHS)
Eagle Ford Oil Rig Count vs WTI Price US Horizontal Oil Rigs Weekly Change
(Baker Hughes) 20 (Baker Hughes - 4 week moving average)
100 60
15
90
55
80 10
50
70
5
45
60
0
50 40
40 -5
35
30
30 -10
20
25 -15
10
0 20 -20
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
It only took a lag time of 3-4 weeks from the US shale producers have of course hedged a
WTI price fell below 50 $/b and until you saw large part of their output at WTI prices above
a flattening to decreasing rig count for the 50 $/b for 2017, but the rig count nonetheless
Eagle Ford. If we look at the total US seems to be very sensitive to a spot WTI price
horizontal oil rig count we saw the first below 50 $/b.
decrease in the rig count about 4 months after
the WTI price fell below 50 $/b, so the lag-
time is much larger for the total rig count than
that for Eagle Ford.
650
55
600
50
550
500
45 Source: Bloomberg Intelligence
450 40
400
35
350 Calendar 2018 is at the time of writing pricing
30
300
250
25
below 50 $/b and will probably not impose too
200 20 much of a head wind for crude prices as long
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
Horizontal Oil Rigs (LHS) WTI price (RHS) as the calendar 2018 is pricing below 55 $/b.
During Q1-2017, the WTI calendar 2018
We do think that it is really the headline mostly priced above 55 $/b but still not much
numbers that affect the oil price formation the hedging seems to have been executed at
most and since the WTI price has been below those price levels for 2018. Most of the
50 $/b for the past 3 months we may have 3 hedging seems to have been related to 2017
months ahead of us now with a flat or production.
decreasing US oil rig count.
We do however see a good argument for a
The 4-week moving average total US oil rig flattening of the WTI curve and possibly a
count has decreased from a weekly addition backwardated market in the front as the
of 11 to about zero since April. A decreasing supply-demand balance tightens in 2H-2017
rig count may hence prove to be a bullish at the same time as US oil producers increase
price catalyst during the summer months. their hedging ratio for 2018 if they can achieve
levels in the 50-60 $/b range. Compared with
one month ago we do in fact already see a
significant flattening of the WTI curve as can Yield For US High Yield Shale Players vs US 5 Year Interest Rate
(Continental Resources, Chesapeake, Sanchez, Whiting, SM Energy, QEP
Resources, Newfield, Energen)
be seen below. 5.5 41
43
5.0
3.5
51
3.0 53
30.04.2017
05.05.2017
10.05.2017
15.05.2017
20.05.2017
25.05.2017
30.05.2017
04.06.2017
09.06.2017
14.06.2017
19.06.2017
24.06.2017
29.06.2017
04.07.2017
09.07.2017
14.07.2017
19.07.2017
24.07.2017
Yield vs the US 5y interest rate WTI
-4.0
-6.0
to the 5-year US treasury increased by almost
-8.0 50%. Since many of these high yield players
-10.0
-12.0
needs a WTI equivalent price above 50 $/b for
-14.0 their CAPEX guiding to meet their free cash
-16.0
Jun2007 Jun2009 Jun2011 Jun2013 Jun2015 Jun2017 flow it is no wonder the high yield market
Source: Bloomberg
starts to close down when the WTI price
decrease towards 40 $/b. This should be quite
According to a recent report by Goldman
a potent argument for why it should not be
Sachs (published May 15th) about 2 million
possible to stay as low as 40-45 $/b Brent
b/d, or equal to 40% of the current US shale
equivalent price for very long.
oil output of 5 million b/d, belongs to
companies that are depending on the high
Now let us return to what we started out with
yield market for financing.
in this chapter. Is it possible to grow US shale
production by 5.1 million b/d by 2020 and
what kind of oil price would then be required?
Will such a ramp up of activity unleash some
bottle necks that will push break even prices
at least temporarily higher?
1000
many readers may remember; at that point in
800
time there were many who argued that since 600
0
increase from an already high level. We never Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Source: Bloomberg
Source: Conoco
We do not have access to enough timely data turned negative. This is due to the fact that
on the monthly number of completed wells for the US shale industry is able/willing to drill
the US to make a model on that, so we are more wells than what they are completing,
instead modelling based on data from EIAs evidenced by the growing numbers of drilled,
monthly Drilling Productivity Report. What you uncompleted wells (DUCs).
get there is monthly data for output, and
calculated productivity per oil rig. DUCs In Eagle Ford, Bakken, Permian, Niobrara
5,500
4,500
the contribution per average rig in the average
Total DUCs
4,000
shale play started to flatten out and drop.
3,500
Contribution per rig started to decrease after 3,000
2,000
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Contribution Per Working Oil Rig In Start Up Month Source: EIA US Drilling Productivity Report
800
Contribution per working oil rig in start up month, b/d
400
the DUCs continue to increase it is likely that
300 the reported efficiency per rig will continue to
200
decrease. If we should see higher oil prices
100
Source: DNB Markets, EIA Drilling Productivity Report for Eagle Ford, Bakken, Permian,
Contribution per working oil rig historicals in poorer acreage, this will also decrease the
Utica, Marcellus, Haynesville, Niobrara
Contribution per working oil rig going forward
5.0%
Oil Rigs In 7 Shale Regions
4.0%
Monthly improvement for a new oil rig
3.0%
1,400
2.0%
Oil rigs in 7 shale regions
1.0% 1,200
0.0%
1,000
-1.0%
800
-2.0%
600
-3.0%
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
400
Historical productivity improvement pr rig Modelled productivity improvement pr rig
Source: DNB Markets, EIA Drilling Productivity Report for Eagle Ford, Bakken, Permian,
Utica, Marcellus, Haynesville, Niobrara
200
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19
Historical Rig count 7 shale regions Modelled rig count 7 shale regions
Source: DNB Markets, EIA Drilling Productivity Report for Eagle Ford, Bakken, Permian,
Utica, Marcellus, Haynesville, Niobrara
The above shown contribution per rig and volume, but it is still not so that if the Brent
number of rigs is then combined to a model price stays above 55 $/b the volume is
that use a decline rate of 87% for the first 3 limitless. The oil producers will produce
years of a new well (70%, 40% and 30%) and significantly more shale crude if the Brent
thereafter 5% per year. This model has been price is 80 $/b compared with 55 $/b. All the
fairly accurate when it comes to historical key shale oil players have a large range of
production as can be seen in the graph below. different projects and the break even range
even for star players like EOG and Pioneer
US - Oil Production From 7 Shale Regions still spans from the low 20s to the high 90s.
Decline rate pr well: 87% the first three years (70-40-30)
10,000
9,000
Thousand barrels per day
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19
Historical US crude production from 7 shale regions
Source: DNB Markets, EIA Drilling Productivity Report for Eagle Ford, Bakken, Permian,
Utica, Marcellus, Haynesville, Niobrara Modelled US crude production from 7 shale regions
20 new rigs per month 2016 2017 2018 2019 2020 2017-2020
Average production 5,021 5,706 7,270 8,154 8,606
We do believe that at 60 $/b Brent, which is
Growth kbd -415 684 1,565 884 452 3,584
our forecasted price for 2018, there will be a
lot of new shale oil production coming on
We just argued above that we are looking for
stream. We currently forecast that US oil
a growth of US shale production of 5.1 million production will grow 100 kbd per month in
b/d in 2017-2020. The assumptions above will
2018. This will provide a year on year growth
hence not do the job. We will be short 1.4 of about 1.2 million b/d (the growth has been
million b/d even if the rig count went back quite linear so far in 2017).
above the record levels from 2014. But could
the contribution per rig start to increase again,
One should however be aware that the same
instead of continuing to decrease? It could growth rate for 2019 and 2020 would require
happen of course but that would have to imply
much higher activity or a large improvement in
a drawdown of DUCs we believe. But if DUCs
efficiency. This is due to the accelerating
are drawn down it will probably mean that rigs legacy decline rate that kicks in for the shale
are not increasing like we have built in. All in industry whenever a large chunk of new wells
all we believe a growth of 5.1 million b/d in
are starting up. If activity is high, and many
only 4 years is a stretch, even for the
new wells are completed, then legacy decline
remarkable US shale industry. accelerates. If activity is slowing down and
fewer new wells are completed, then legacy
It is important to remember that the volume
decline slows down.
that will hit the market depending on a specific
oil price is not binary. Yes the cost curve looks
pretty flat for a lot of potential shale oil
Legacy decline is the volume of new shale oil Modelled Crude Oil Production 7 Shale Regions
Decline rate pr well: 70%, 40%, 30% the first three years (87%), thereafter 5% per year
8.0
prior month. 7.0
Million b/d
6.0
5.0
Legacy production decline vs new production
4.0
600
3.0
500 2.0
1.0
400
Thousand b/d
0.0
300 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
Source: DNB Markets, EIA Drilling Productivity Report for Eagle Ford, Bakken, Permian, Utica, Marcellus, Haynesville, Niobrara
200
100
The graph above hopefully illustrates the
0
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 challenge. As you can see; the decrease in
Legacy decliine
Source: EIA US Drilling Productivity Report Production from new wells production should no more wells be
completed is much larger by the start of 2019
As you can see in the graph above, the legacy that at the start of 2017. If no more shale wells
decline fell from 345 kbd to 285 kbd as activity were to be completed after January 2019, the
was reduced into 2015. The US shale industry decline in production from US shale would
could then afford to start up 60 kbd less surpass 3 million b/d by the end of that year.
volume every month to keep output flat. But For comparison the same number by the start
when activity was increased from 2H-2016, of 2017 was 1.6 million b/d. The worlds oil
the legacy decline has increased to 369 kbd production is hence likely to be much more
per month. Now the US shale industry needs sensitive to the US oil market activity than
to start up 80 kbd more volume every month ever before. If well completions in the US for
to achieve any net growth in production some reason should suddenly cease, no other
compared with a year back in time. The US countries will be able to make up for those lost
shale industry has however increased the barrels after 2020 and demand would have to
monthly start-up of production by almost 300 be rationed instead (through a higher price).
kbd since 12 months back in time, so the net
production is then growing.
12 The 2020 bunker spec be sufficient low sulfur fuel oil available from
2020 the IMO also evaluated a supplemental
change will push Brent marine fuel availability study which concluded
higher that implementing the 0.5% sulphur limit in
2020 looks unachievable.
Excactly at the time when the cancelled
projects in 2015-2016 starts to tighten the
The IMO decision will have a large impact on
global crude oil balance, the largest change in
both the global refining industry and the
global fuel specifications ever implemented
shipping community as we believe most of the
kicks in. This is likely to support the Brent
current high sulfur fuel oil demand will have to
price in our opinion.
be replaced mainly by much higher priced
distillates, supplemented by some volumes of
On October 27th 2016 the IMO (International
lower sulphur fuels. This stands is contrast to
Marine Organization) decided on an early
the CE Delft study who assumed that bunker
implementation of the Marpol Annex VI with
fuels between 0.1% and 0.5% sulphur can
January 1st 2020 as the implementation date
easily be met by a wide range of blends.
for the new sulphur content cap of 0.5%. This
will affect marine fuels for all ships trading
Its modelling suggests these blends will
outside of the sulphur Emission Control Areas
contain various residuals, treated light cycle
(ECAs).
oils, treated light distillates and kerosene etc,
and that the refineries will timely adopt to
This decision of early implementation was a
meet the new demand. From our side we do
large surprise for most market players. The
not see that global refineries will be able to
broad expectation was for implementation in
meet the new demand without ramping up
2025. The fact that implementation now will
their throughput of crude oil. There simply
be less than three years down the road will
does not look to be enough upgrading units
create large price effects for several markets
available to remove all the sulphur that is
in our opinion.
required.
The IMO regulation is the culmination of a
The easiest way to comply is to forego any
series of standards first set in motion almost
upfront capital investments and burn a
two decades ago requiring vessels operating
compliant low sulfur fuel at a much higher
in certain costal ECAs to burn fuel with a
price. But given how low sulphur gasoil is
maximum sulphur content of 0.1% since
already priced about 250 $/mt higher than
January 2015 while permitting the use of 3.5%
high sulphur bunker fuel in 2020, and likely to
sulphur fuel outside of ECAs.
rise further, this would have a major negative
impact on the bottom-line for most shipping
The IMO based their decision on a study lead
companies.
by CE Delft that looked at whether enough
distillates could be produced by 2020 to meet
the increased demand from the maritime
sector. The decision did not consider any of
the economic consequences of such an
increase in demand for higher value products
and while CE Delft concluded that there will
700
Gasoil vs Fuel Oil 3.5% Rtdm forecast based on probably not a realistic option for an industry
fwd curve and delta correlation
currently struggling with profitability. In
600
300
200
The third alternative for shippers is investing
100
in dual engines capable of burning LNG and
0
Jan'07 Apr'08 Jul'09 Oct'10 Jan'12 Apr'13 Jul'14 Oct'15 Jan'17 Apr'18 Jul'19 Oct'20 Jan'22 liquid fuels. However these engines are
Historic DNB Forecast Forward
expensive and not commonly available and
would require a substantial investment not
It might however be the best option for older only from the shipping side but also in
vessels with limited service life after 2020 and infrastructure. Our understanding is that LNG-
the only option for companies with financial fuellled ships are only viable for newbuilds
constraints as other alternatives require and hence this alternative is not a good option
substantial investments. for the short time left before 2020.
On paper the best option is looks to be In order to fully understand the implications of
investing in scrubbers which would allow for the new IMO sulphur cap one needs to
continued burning of high sulphur bunker understand the basics of a refinery. Below is a
fuels. The total cost of scrubbers would simple refinery unit where the distillate tower
depend on the specific vessel. Factors such produces different products. The higher up
as vessel size, physical design, engine size, you move in the tower the higher the value of
retrofit or newbuilding, etc has to be taken into the product you produce and at the very
consideration. A retrofit would of course be bottom you find residual fuel. This residual
more expensive than a newbuild and some fuel, which normally price cheaper than crude
vessels might have more limited space than oil, is to a large extent consumed as bunker
others and therefore require additional fuel in the shipping industry. From a refinery
modifications, etc. But for some shippers this perspective bunker fuel is considered a waste
option will be the best choice as the huge product as it normally trades at a discount to
discount in bunker fuels relative to distillates its feedstock (crude oil) while gasoil or diesel
results in a short payback period if they can is a high value product always selling at a
afford the upfront investment costs. Recently premium to its feedstock (crude).
we have noted that bunker suppliers and
traders have offered shipping companies to
finance the scrubber if the shipping company
ties itself to a supply deal with the finance
provider.
As every refinery would try to maximize its however include price consequenses of this
profit they would seek to maximize the yield of supply shift. How will the major shift in
higher value products and lower the yield of demand affect prices for distillates and bunker
residual fuel. On the right side of the distillate fuels?
tower you can see there are some upgrading
units that would allow a refinery to upgrade Based on evaluations of current refinery
residual fuels into higher value products. capacity including known upgrading units
These upgrading units are expensive and time coming on-stream before 2020 we believe
is about to run out for new such capacity to hit there is sufficient capacity to replace the
the market by January 2020. current bunker demand with a mix of
distillates (MGO, MDO, etc) and some form of
By feeding the residual fuel into the upgrading blended low sulphur fuel, but it will come at
units the complex refineries can increase the high price.
yield of higher value products and decrease
the amount of residual fuel. The distribution of 2020 vs 2016 - All assumed capacity additions
Increased global refinery runs 3.6 mbd (0.9 mbd pr year)
Mogas/Naphtha Diesel / Gasoil
1000 1200
LSFO
400
HSFO
900
products is also dependent on the type of Additional Fluid Catalytic Cracking (FCC)
Additional Hydro Cracking
200
200
100
600 200
-300
-1000
Additional Coking 100 400 -500
crude used as feedstock. Some crude Additional distillate flux saved 100 -100
Additional Vacuume Gasoil Desulfurization (VGO HDS) 50 -50
streams have better yields of distillates while Additional Resid Fuel Oil Desulfurization (Resid HDS) 250 -250
Total supply addition 1500 2400 900 -1300
other crudes yield higher amounts of residual Demand change from the shipping sector 2100 1000 -2600
Demand change outside the shipping sector 2000 800
fuel and thats one of the key reasons why Deficit/Surplus -500 -500 1300
$/mt
600
400
In addition to the 1.2 million b/d straight run
gasoil supply, refiners also get another 1.2 200
well as a total of 0.9 million b/d of low sulphur Historic DNB Forecast Forward
resid fuel.
The forward curve for resid fuel (the red line in
The historical correlation between both fuel oil the graph below) is pricing much lower than
and gasoil to Dated Brent is very high and by what the historical relationship between crude
incorporating the futures curve of both oil and resid fuel suggest. That is fair in our
products we have modelled forecast prices opinion since the history of which the
based on our own Brent forecast. regression is based upon has not seen any
specification shifts like the one that will take
Dated Brent vs Gasoil place in 2020.
0.20
0.15
Fuel Oil 3.5% Rtdm forecast based on fwd curve
0.10 800
y = 0.8527x + 7E-05
and delta correlation
R = 0.9127 0.05
700
0.00
-0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30 600
-0.05
-0.10 500
-0.15
$/mt
400
-0.20
300
-0.25
200
-0.30
100
-0.20
situation where increased demand for diesel
-0.30 (distillate) helped push oil prices to an all time
-0.40 high of close to 150 $/b.
-0.50
-0.60
Back in 2008 Brent reached an all-time high of
147.5 $/b and today most analysts seem to
The below charts show our forecasted price agree that the price rally was driven mainly by
curves for gasoil and fuel oil compared to their a diesel-squeeze. In 1H-2008 there were an
forward curves. Based on our own Brent unprecedented strong demand growth for
forecast we believe that the current gasoil diesel from emerging markets, mainly China
curve should be 180-190 $/mt higher in 2020 but also countries like South Africa and Chile.
than what is currently priced in.
Million b/d
74.5
Million b/d
87
upgrading units are fully utilized. In 2008 all 74.0
the upgrading units in global oil refining 73.5 86
the margin to produce diesel (the diesel crack Source: IEA Global refinery runs Global oil demand
30 120
$/barrel Brent price
35
after March that year, so what do a refiner 25
-5
buy straight run fuel oil and put into the -25
-35
upgrading units anymore, because those units
-45
Jan'07 Apr'07 Jul'07 Oct'07 Jan'08 Apr'08 Jul'08 Oct'08 Jan'09 Apr'09 Jul'09 Oct'09
had no more capacity left. Notice in the graph
below how global oil demand (grey line) fell Historic Gasoil crack Historic Resid Fuel Rtdml crack
Some argued during the price spike in 2008 85%. A global increase in refinery utilization of
that it had to be a speculative bubble when 1% would currently add almost 1 million b/d to
the Brent price took off from March to July. global crude demand.
We did however not see any increase in net
length by speculative money in the period Global Refinery Utilization
when this took place. It was in fact the 88%
(1% increased utilization is worth about 1 mbd extra crude demand)
100 70%
50 1980 1985 1990 1995 2000 2005 2010 2015
0 Source: BP stats
-50
-100
-150 What kind of crudes will be in demand if this
-200
Jan2008 Mar2008 May2008 Jul2008 Sep2008 distillate squeeze materializes? Just like we
WTI Futures Long WTI Futures Short WTI Futures Net saw in 2008 it will not be heavy-sour crudes.
78
77
76
squeeze in 2008.
75
74
73
72
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
The market will in such a situation prefer US Lower 48 Crude production by gravity -
Percent
crude grades which are distillate rich. This
100%
means crudes that have a hight natural 90%
80%
content of distillate. These will be crude 70%
60%
50%
qualities that you do not need to run through 40%
30%
an upgrading unit in order to receive a decent 20%
10%
output of gasoil/diesel. Brent is such crude oil, 0%
Oct-2015
Nov-2015
Dec-2015
Oct-2016
Nov-2016
Dec-2016
Jan-2015
Apr-2015
Aug-2015
Sep-2015
Jun-2015
Jan-2016
Apr-2016
Jun-2016
Aug-2016
Sep-2016
Jan-2017
May-2015
May-2016
Feb-2015
Mar-2015
Feb-2016
Mar-2016
Feb-2017
Jul-2015
Jul-2016
but what about the US shale industry? Will the
shale barrels be able to contribute much in Light API > 35 Intermediate Heavy API<25
$/barrel
meaningful amount of oil demand growth from 2011
2012
2013
118.3
116.7
112.0
70
2014 100.8
the oil market in this 5-year perspective so 2015
2016
54.3
45.1
Price forecast 50
14 Oil demand will not peak by Total Global Primary Energy Demand
(Energy intensity vs GDP seen at 0.3 and average GDP growth assumed at 2.4%)
18,000
0.8% growth
2025 16,000
10,000
knows that energy demand is mainly driven by 8,000
4,000
growth is heavily affected by mega trends like 2,000
middle class.
If we then assume that oil will loose market
Even if trend line economic growth should fall share going forward
from 3.4% to 2.4%...
Oil Market Share In World Primary Energy Mix
6.0%
Historical average: 3.4% Forward looking: 2.4% 44%
5.0%
-0.3%
39%
4.0%
Global GDP growth
-1.5%
3.0% 34%
-2.0%
2.0% 29%
1.0%
24%
1965 1980 1995 2010 2025 2040
0.0%
1979 1989 1999 2009 2019 2029 2039 Source: BP stats, DNB Markets
1.5 4,500
Million tonnes oil equivalents
0.0 2,500
-0.5 2,000
1,500
-1.0 1965 1980 1995 2010 2025 2040
1979 1989 1999 2009 2019 2029 2039
Source: BP stats, DNB Markets
Historical Energy intensity vs GDP grpwth Forward energy intensity vs GDP growth
Source: IMF, BP stats, DNB Markets
15 Peak oil demand does not Most of the investments that are undertaken
in the global oil market are just helping to
mean peak oil price maintain the production level where it already
We do not necessarily see peak oil demand is. If investments hence fall too much, we
as a good argument for lower oil prices. The would need a very strong negative demand
reason is that the more oil becomes the new response to make up for that, and the only
tobacco, which means that people see it as way to get such a response would be through
unethical to invest in the sector; the better it is a high oil price.
for the oil price. Even if the oil market
becomes smaller and that is negative for the Last years price behavior in the coal market
large oil companies, it woul lead to lower can probably serve as a good illustration of
investments, and as such the drop in supply how the price of a commodity can suddenly
could be larger than the drop in demand. double even if that commodity is seeing a
global reduction in demand.
We would claim that the stronger the story of
stranded assets becomes, and the more Steam Coal Price (CIF ARA)
politicans scare away investments from the oil 80
75
market, the more bullish it is for the oil market 70
60
in a 5-10 year perspective we think this will be 55
45
in that time frame. Recent statements from 40
30
good example: May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16
Chief Executive Officer Ben Van Beurden An even better example is the global tobacco
says the next thing he will buy is a car that industry. UK demand for tobacco has
doesnt need either oil or gas to run. The decreased every year for at least the past 20
whole move to electrify the economy, electrify years. Yet the price of tobacco in the whole
mobility in places like northwest Europe, in the sale market has tripled in the UK since year
US, even in China, is a good thing, Van 2000.
Beurden said in an interview on Bloomberg
TV. We need to be at a much higher degree
of electric vehicle penetration-- or hydrogen
vehicles or gas vehicles -- if we want to stay
within the 2-degrees Celsius outcome.
2025 20
5
to peak oil demand already by 2020. We
-
wonder if he has really done the math here or 2015 2018 2021 2024
Displacement Of Fuel By Electrical Vehicles Norway Electric Vehicles Sales Market Share
(Includes plug-in and Battery electric)
(Assuming average global driving length for LDVs) 45%
0.6
40%
0.5 35%
Million b/d
30%
0.4
25%
0.3 20%
15%
0.2
10%
0.1 5%
0%
0.0 Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017
2015 2018 2021 2024
Source: Bloombertg Intelligence
We still however calculate a growth in fossil Norway only holds 0.2% of the global market
fuel demand in the global light duty fleet until share for new cars sold and the trend looks to
2025 with these assumptions, and by 2030 be down so we can only hope to be a signpost
the demand for fossil fuels in the global car for the markets that really matter and hope
fleet is still higher than in was in 2015, even that the rest of the world will follow in our
though the peak will be seen around 2025. footsteps.
Global Fuel Demand From LDV's Norway Global Car Sales Market Share
0.3%
27
26
Million b/d
25 0.2%
24
23
22 0.1%
21
20
0.0%
19 Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017
2015 2018 2021 2024 2027 2030 2033 2036 2039
Source: Bloombertg Intelligence
The growth in the fossil fuel driven fleet has Unfortunately subsidies seem to be a very
mainly to do with population growth and a important feature to get sales growth for
growing middle class in emerging markets, electric vehicles and nobody subsidises more
particularly in Asia. than Norway for this segment. When
Netherland reduced subsidies the sales of
People in Norway seem to be misled by the alternative vehicles dropped from 42.500 in
speed of when we can expect global oil 2015 and if we annualize the Q1-2017 sales it
demand to suffer from electrification of the will end up at 20.000 for this year. Denmark
transportation sector. This is of course due to has also reduced the subsidies for electric
the fact that almost 40% of all the new cars vehicles and annualized sales of alternative
sold in Norway are now electric (plug-in plus fuel vehicles in Denmark in Q1-2017 was only
pure battery). The thing is however that this is 1.700 vehicles compared with about 5.000 in
not the case for the markets that matter for 2015.
the oil market.
In China, the largest market in the world for Electric vehicles are winning market share in
electric cars, the market share for electric the new cars sold but is only at 1.8% vs 1.6%
vehicles is still increasing but not as fast as in 2016. This is hence so far hardly a
before the government reduced subsidies for revolution when you look at the hard facts.
electric vehicles in January this year.
China Automobile Sales Market Share By Fuel Type
100%
China YoY Increase in Market Share For
90%
200% Electric Vehicles
80%
70%
150%
60%
50%
100%
40%
30%
50% 20%
10%
0% 0%
Jan2006 Jan2008 Jan2010 Jan2012 Jan2014 Jan2016
-50% Gasoline Diesel CNG Battery and Plug in Electric
Jan2016 Apr2016 Jul2016 Oct2016 Jan2017 Apr2017 Source: China Automotive Information
4,000
3,500
sales are on track to come in at about 17
3,000 million units.
2,500
2,000
1,500 USA Total Automobile Sales
1,000 1,900
Thousand units Sold per month
500
1,700
0
Jan2005 Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017 1,500
USA Europe Asia China
Source: Bloomberg Intelligence 1,300
1,100
The US market share for Light Trucks, SUVs will hence not be a meaningful size for the
and pick up trucks which are almost only run global supply-demand balance in the oil
on gasoline, continue to increase and has market for the 5-year view that we are
reached 64% of all the new cars sold in the providing in this report. Come 2030 and the
US. situation could be very much changed but that
far out is not the scope for this report.
USA Light Truck Sales Market Share
70% Instead one could argue, like we did in
65% chapter 14, that the more people believe in
60% peak oil demand from electric vehicle
55%
penetration, the better it is for the oil price.
50%
45%
60%
50%
40%
30%
20%
10%
0%
Jan2005 Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017
17 Low unplanned outages returning from that country in the coming 6-12
months. Nigeria could bring in 100 kbd more
means the risk is now bullish but The Niger Delta Revolutionary
Many would probably agree that geopolitical Crusaders are the latest group to threaten to
risk is still high and has been high for most of resume attacks on oil infrastructure as
the year so far. The difference from the start negotiations with the federal government have
of the year and now is that right now many of so far failed to deliver economic benefits in
the unplanned outages have returned to the the country. We see no reason to expect
market. The prime examples are production stable production from Nigeria going forward.
from both Libya and Nigeria.
Colombia is struggling with militant attacks
Since we knew at the start of the year that and public opposition to the oil sector. Despite
there was limited downside risk from those ongoing peace talks, attacks on oil
two countries as they already were producing infrastructure have continued. The 0.22 million
way below capacity, we could not score b/d Cao Limn-Coveas pipeline has been
geopolitical risk bullish with a high weight offline since may 30th as a result of repeated
then. But now we can do that since both Libya bombings. The 85 kbd Transandino pipeline
and Nigeria have returned with so many was also shut by vandalism on July 15th.
barrels since April. Several municipalities in oil-producing regions
are holding referendums on whether to allow
Current global unplanned outages are now at production to continue because of
the lowest level since early 2011. environmental and economic concerns. A total
of 0.12 million b/d of production could be at
risk because of these referendums. The
4.0
Global Unplanned Supply Outages problems in Colombia serve to illustrate that
Venezuela
3.5 UAE there is still high risk to oil supplies around the
Nigeria
3.0 Neutral Zone
Libya
world.
2.5 Kuwait
Million b/d
Iraq
2.0 Iran
Gabon The largest potential unplanned supply
1.5 Ecuador
1.0
Angola
Yemen
disruption could be coming from Venezuela of
0.5
US
Thailand
course. Venezuela held a controversial
Syria
0.0 South Sudan election to appoint a constituent assembly on
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Peru
Source: Energy Aspects
Sunday the 30th of July despite domestic
opposition and the threat of US sanctions. US
This means that from here on the risk looks sanctions could divert Venezuelan oil flows.
clearly skewed to the upside. Venezuelan oil would then probably have to
travel to Asia. The US administration
In July the largest unplanned outages were in announced sanctions against President
Colombia (100 kbd), Syria (150 kbd), Yemen Maduro earlier this week but have imposed no
(140 kbd), the Neutral Zone (480 kbd), oil-related sanctions so far. Various measures
Venezuela (210 kbd) and Nigeria (100 kbd). have been under consideration, including
cutting off US exports of diluants to the
Libya is probably now at its potential for 2H- country. Venezuela needs this light oil to
2017 so we are not afraid of more barrels blend with its own heavy oil in order to make
2.4
2.2
2.0
1.8
1.6
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
Source: IEA
Historical
Real $/b DNB Markets Brent Price Forecast In Real Terms
2000 39.8 Global bunker spec change coming
150 at the same time as the effects of
2001 33.7
shelved projects from the 2015-16
2002 33.4 CAPEX cuts becomes visible
2003 37.1
130
2004 48.3 The Brent price is set to again
2005 67.9 overshoot
2006 78.7 Supply respons and
2007 84.1 110 demand elasticity to
2008 109.8 the price overshoot
sends the price down
2009 70.1
again
2010 88.4 90
$/barrel
2011 118.3
2012 116.7
2013 112.0
70
2014 100.8
2015 54.3
2016 45.1
Price forecast 50
Real $/b
Q3-2017 53
Q4-2017 60 30 OPEC "cheating" in combination
Q1-2018 60 with large US shale growth and
OPEC cuts in combination with solid still some ramp up from old investment
Q2-2018 60 demand growth sends the price to 60 $/b decisions keeps prices from rising further
2017 55 10
2018 60 Jan-2000 Jan-2004 Jan-2008 Jan-2012 Jan-2016 Jan-2020
2019 65
2020 75 Normalized range Normalized range (real terms)
2021 70 Historical Brent price real terms DNB Forecast real terms
2022 60 FWD curve real terms (2% inflation)
Non-OPEC Supply 50.2 0.0 50.2 0.6 50.8 1.4 52.2 2.3 54.5 1.4 55.9 -0.8 55.0 0.6 55.7 1.4 57.1
OPEC NGL's and non-conventional oil 5.5 0.4 5.9 0.4 6.2 0.0 6.2 0.2 6.4 0.2 6.6 0.2 6.8 0.1 6.9 0.1 7.0
Global Biofuels 1.8 0.0 1.8 0.0 1.9 0.2 2.1 0.2 2.2 0.1 2.3 0.1 2.3 0.0 2.4 0.1 2.5
Total Non-OPEC supply 57.5 0.4 57.9 0.9 58.9 1.6 60.5 2.6 63.1 1.7 64.8 -0.6 64.2 0.8 65.0 1.6 66.6
Call on OPEC crude (and stocks) 30.8 0.2 31.1 0.3 31.4 -0.1 31.2 -1.4 29.8 0.5 30.3 2.1 32.4 0.6 33.0 -0.2 32.8
OPEC Crude Oil Supply 29.7 0.6 30.2 1.5 31.7 -0.9 30.8 -0.1 30.7 1.1 31.8 1.0 32.8 -0.4 32.4 0.1 32.5
Implied World Oil Stock Change -1.2 -0.9 0.4 -0.4 0.9 1.6 0.4 -0.6 -0.3
IEA World Oil Supply-Demand Balance (July 2017): 2010 Change 2011 Change 2012 Change 2013 Change 2014 Change 2015 Change 2016 Change 2017 Change 2018
OECD Demand 47.0 -0.6 46.4 -0.5 46.0 0.1 46.1 -0.4 45.7 0.7 46.4 0.4 46.8 0.2 47.0 0.0 47.0
Non-OECD Demand 41.3 1.3 42.6 1.7 44.3 1.4 45.6 1.5 47.2 1.4 48.6 1.1 49.7 1.2 50.9 1.4 52.3
Total Demand 88.3 0.7 89.0 1.2 90.2 1.5 91.7 1.1 92.9 2.1 95.0 1.6 96.6 1.4 98.0 1.4 99.4
Non-OPEC Supply 50.2 0.0 50.2 0.6 50.8 1.4 52.2 2.3 54.5 1.4 55.9 -0.8 55.0 0.6 55.7 1.3 57.0
OPEC NGL's and non-conventional oil 5.5 0.4 5.9 0.4 6.2 0.0 6.2 0.2 6.4 0.2 6.6 0.2 6.8 0.1 6.9 0.1 7.0
Global Biofuels 1.8 0.0 1.8 0.0 1.9 0.2 2.1 0.2 2.2 0.1 2.3 0.1 2.3 0.1 2.4 0.1 2.5
Total Non-OPEC supply 57.5 0.4 57.9 0.9 58.9 1.6 60.5 2.6 63.1 1.7 64.8 -0.6 64.2 0.8 65.0 1.5 66.5
Call on OPEC crude (and stocks) 30.8 0.2 31.1 0.3 31.4 -0.1 31.2 -1.4 29.8 0.5 30.3 2.1 32.4 0.6 32.9 -0.1 32.8
OPEC Crude Oil Supply (DNB OPEC scenario) 29.7 0.6 30.2 1.5 31.7 -0.9 30.8 -0.1 30.7 1.1 31.8 1.0 32.8 -0.4 32.4 0.1 32.5
Implied World Oil Stock Change -1.2 -0.9 0.4 -0.4 0.9 1.6 0.4 -0.6 -0.4
OPEC World Oil Supply-Demand Balance (July 2017): 2010 Change 2011 Change 2012 Change 2013 Change 2014 Change 2015 Change 2016 Change 2017 Change 2018
OECD Demand 47.0 -0.6 46.4 -0.5 45.9 0.2 46.1 -0.3 45.8 0.6 46.4 0.5 46.9 0.2 47.1 0.2 47.3
Non-OECD Demand 40.3 1.5 41.8 1.4 43.2 1.8 45.0 1.2 46.2 1.1 47.3 0.9 48.2 1.1 49.3 1.0 50.3
Total Demand 87.3 0.9 88.2 0.9 89.1 2.0 91.1 0.9 92.0 1.7 93.7 1.4 95.1 1.3 96.4 1.2 97.6
Non-OPEC Supply (Incl all Biofuel) 52.4 0.0 52.4 -0.5 51.9 2.3 54.2 2.0 56.2 1.5 57.7 -0.7 57.0 0.8 57.8 1.2 59.0
OPEC NGL's and non-conventional oil 5.0 0.4 5.4 0.3 5.7 -0.1 5.6 0.3 5.9 0.1 6.0 0.1 6.1 0.2 6.3 0.2 6.5
Total Non-OPEC supply 57.4 0.4 57.8 -0.2 57.6 2.2 59.8 2.3 62.1 1.6 63.7 -0.6 63.1 1.0 64.1 1.4 65.5
Call on OPEC crude (and stocks) 29.9 0.5 30.4 1.1 31.5 -0.2 31.3 -1.4 29.9 0.1 30.0 2.0 32.0 0.3 32.3 -0.2 32.1
OPEC Crude Oil Supply (DNB OPEC scenario) 29.7 0.6 30.2 1.5 31.7 -0.9 30.5 -0.1 30.3 1.1 31.5 1.0 32.5 -0.4 32.4 0.1 32.5
Implied World Oil Stock Change -0.2 -0.2 0.2 -0.8 0.4 1.5 0.5 0.1 0.4
EIA World Oil Supply-Demand balance (July 2017): 2010 Change 2011 Change 2012 Change 2013 Change 2014 Change 2015 Change 2016 Change 2017 Change 2018
OECD Demand 46.1 -0.3 45.8 0.1 45.9 0.2 46.1 -0.3 45.8 0.7 46.4 0.4 46.9 0.3 47.2 0.4 47.5
Non-OECD Demand 41.0 1.5 42.5 0.8 43.3 1.2 44.4 2.3 46.7 1.0 47.7 2.4 50.1 1.2 51.2 1.2 52.5
Total Demand 87.1 1.2 88.3 0.9 89.2 1.3 90.5 2.0 92.4 1.6 94.1 2.9 96.9 1.5 98.4 1.6 100.0
Non-OPEC Supply (Incl all Biofuel) 51.8 0.2 52.0 0.7 52.7 1.5 54.1 2.8 56.9 0.6 57.5 0.5 57.9 1.0 58.9 1.2 60.1
OPEC NGL's and non-conventional oil 5.5 -0.3 5.3 0.5 5.8 0.4 6.1 0.1 6.3 0.3 6.6 0.0 6.6 0.4 6.9 0.2 7.1
Total Non-OPEC supply 57.3 -0.1 57.2 1.2 58.4 1.8 60.2 2.9 63.2 0.9 64.0 0.5 64.5 1.3 65.8 1.4 67.2
Call on OPEC crude (and stocks) 29.8 1.3 31.1 -0.3 30.8 -0.5 30.2 -1.0 29.3 0.8 30.0 2.4 32.4 0.1 32.6 0.2 32.8
OPEC Crude Oil Supply (DNB OPEC scenario) 29.7 0.6 30.2 1.5 31.7 -0.9 30.8 -0.1 30.7 1.1 31.8 0.8 32.6 -0.2 32.4 0.1 32.5
Implied World Oil Stock Change -0.1 -0.8 1.0 0.6 1.4 1.7 0.1 -0.2 -0.3
Scenario Oct/2016 Nov/2016 Dec/2016 Jan/2017 Feb/2017 Mar/2017 Apr/2017 May/2017 Jun/2017 Jul/2017 Aug/2017 Sep/2017 Oct/2017 Nov/2017 Dec/2017
Algeria 1130 1120 1120 1,050 1,050 1,050 1,060 1,060 1,060 1,060 1,060 1,060 1,060 1,060 1,060
Angola/Cabinda 1510 1690 1640 1,630 1,650 1,640 1,660 1,610 1,670 1,670 1,670 1,670 1,670 1,670 1,670
Ecuador 540 550 540 525 525 520 530 530 530 530 530 530 530 530 530
Equatorial Guinea 140 130 127 126 130 135 122 130 120 120 120 120 120 120 120
Gabon 220 230 210 200 200 195 200 200 200 200 200 200 200 200 200
Iran 3850 3800 3780 3,750 3,810 3,790 3,750 3,780 3,790 3,790 3,790 3,790 3,790 3,790 3,790
Iraq 4590 4650 4680 4,480 4,440 4,440 4,460 4,480 4,500 4,500 4,500 4,500 4,500 4,500 4,500
Kuwait 2930 2830 2810 2,710 2,710 2,700 2,710 2,720 2,720 2,720 2,720 2,720 2,720 2,720 2,720
Libya 510 580 620 690 670 610 550 740 820 1,000 900 800 800 800 800
Neutral Zone 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Nigeria 1450 1530 1390 1,430 1,450 1,300 1,380 1,530 1,590 1,600 1,500 1,500 1,500 1,500 1,500
Qatar 630 650 630 610 590 610 620 630 620 620 620 620 620 620 620
Saudi Arabia 10560 10640 10450 9,800 9,980 9,930 9,960 9,920 10,050 10,050 10,050 10,050 10,050 10,050 10,050
United Arab Emirates 3120 3130 3140 2,990 2,930 2,910 2,930 2,930 2,930 2,930 2,930 2,930 2,930 2,930 2,930
Abudhabi 3120 3130 3140 2,990 2,930 2,910 2,930 2,930 2,930 2,930 2,930 2,930 2,930 2,930 2,930
Dubai 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Sharjah/Ras Al Khaimah 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Venezuela 2150 2120 2100 2,050 2,050 2,030 2,020 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
OPEC 33,330 33,650 33,237 32,041 32,185 31,860 31,952 32,260 32,600 32,790 32,590 32,490 32,490 32,490 32,490
Moderate Libya 587 757 654 524 563 687 640 640
High Nigeria 1,646 1,896 1,850 1,698 1,539 1,839 1,808 1,808
Sum Libya/Nigeria: 2,233 2,653 2,504 2,222 2,102 2,526 2,448 2,448
OPEC including Libya/Nigeria 26,675 25,027 26,166 25,756 24,432 25,492 24,880 24,656
3-month moving average total OPEC 26,940 26,462 25,956 25,650 25,451 25,227 24,935 25,009
Year on Year total OPEC exports 2,539 1,348 786 64 50 -401 -698 -482
Year on Year total OPEC production (IEA) 1,104 -514 -49 -204 -510 -30 -182
Diff exports vs production -1,435 -1,862 -835 -268 -560 371 516
Saudi Arabia capacity 2017 (capacity summer 2008 less field decline 2008-2017 plus additions to capacity 2008-2017): 11,852
Saudi Araba domestic demand in 2008 2,272
Saudi Arabia domestic demand in 2016 3,190
Increase in demand 2008-2017: 918
Increase in exports capacity 2008-2017: 2,352
Calculated exports capacity increase 2009-2017: 1,434
Reported increase in crude & product exports from Saudi Arabia 2009-2017 2,300
* This was not real spare in 2008 due to the refining b ottleneck b ut should now b e included as the b ottle neck in refining is not there anymore
Europe/Africa Med & FSU -10 221 -111 65 271 148 -57 197 140 225 138 166
Middle East AG/Asia Pacific/East Africa 1,111 521 1,031 1,775 838 1,223 1,244 1,147 1,316 1,016 965 1,166
Middle East AG excl. Iran and Saudi 48 230 134 87 70 178 90 124 9 98 76 57
Iran 51 44 73 -197 -52 64 203 -6 -52 -42 27 39
Saudi Arabia 87 152 196 205 115 192 -17 227 106 -91 -10 102
Asia Pacific/East Africa excl. China and India 319 -101 319 537 164 221 327 241 338 352 370 399
China 381 124 268 1,034 373 392 599 407 762 412 339 300
India 227 72 43 108 169 175 42 153 153 286 164 269
West Africa 65 82 -16 78 40 40 76 -6 41 23 59 51
Latin America (excl. Mexico) 150 351 17 446 124 273 113 182 -62 -123 -8 37
Total Non-OECD 1,316 1,175 922 2,364 1,272 1,684 1,375 1,519 1,435 1,140 1,155 1,420
North America 180 -1,343 -848 544 -156 -425 439 15 393 132 92 0
Europe/Africa Med & FSU -274 74 -835 62 -209 -276 -291 61 445 439 319 238
Middle East AG/Asia Pacific/East Africa 1,130 213 647 1,938 885 1,597 1,162 897 1,309 1,084 915 1,084
Middle East AG 185 426 402 96 133 435 276 346 63 -35 92 198
Asia Pacific/East Africa 945 -213 245 1,843 753 1,163 886 552 1,246 1,119 823 886
West Africa 65 82 -16 78 40 40 76 -6 41 23 59 51
Latin America (excl. Mexico) 150 351 17 446 124 273 113 182 -62 -123 -8 37
Total World 1,250 -623 -1,035 3,068 685 1,209 1,498 1,149 2,126 1,556 1,377 1,410
We believe the Brent price will increase to 60 $/b before year end. It will
however struggle to take any further upward leaps in 2018 as the "Call on
OPEC" is decreasing due to large expected growth in non-OPEC supply,
Overall Outlook mainly coming from the US, Brazil and Canada. Demand growth could 60 $/b
however surprise to the upside and geopolitical risk is a bullish factor. If
OPEC discipline deteriorates and the current deal falls apart, prices will be
lower than what we currently predict.
Fundamentals
The global balance suggest that supply will be lower than demand also in 2018 if OPEC stays
Global Fundamental Balance disciplined, but the "Call on OPEC" is reduced from the average 2017 level.
NEUTRAL MEDIUM
Refinery margins have surprised to the upside in 2017 and may stay fairly strong also in 2018
since we believe crude prices will stay capped at 60 $/b. Our demand growth estimate of 1.4
Crude vs Product Balance (Margins) million b/d is conservative as global macro economic indicators look strong. Any upside surprise to
NEUTRAL MEDIUM
demand growth should benefit refinery margins.
Stock levels will have drawn down significantly by the start of 2018, but will struggle to draw much
OECD Stock levels more next year.
NEUTRAL MEDIUM
OPEC spare capacity is still low despite recent volontary production cuts. We calculate Saudi
OPEC Spare Capacity Arabia's total production capacity to be about 11.8 million b/d vs current output of about 10 million NEUTRAL MEDIUM
b/d.
US oil production is estimated to grow 1.2 million b/d in 2018, twice as fast as in 2017. We also
expect zero oil demand growth in the US for 2018 compared with 2017. The US oil balance is
US Oil Statistics - Fundamentals hence bearish for 2018 and is maybe the most important factor that makes us sceptical to further
BEARISH HIGH
price increases until we reach 2019.
Global oil demand growth is estimated to be at the average level for oil intensity vs global GDP
growth for next year (0.4). Macro economic indicators have however been solid recently and there
Global Demand Growth may be further upside to global economic growth than what is currently predicted. IMF predicts
NEUTRAL MEDIUM
global GDP growth of 3.6% in 2018, up slightly from the 3.5% predicted for 2017.
We believe OPEC will stay disciplined into 2018 and in fact cut production more if necessary to
protect oil prices. We believe Saudi Arabia would like to see oil prices at 60 $/b or higher when the
OPEC Supply planned listing of Saudi Aramco is to take place during next year. We are not a subscriber to the
BULLISH HIGH
thesis that the OPEC deal will collapse and fall apart.
Non-OPEC supply will grow significantly in 2018. We are predicting a growth of 1.4 million b/d, but
you can add another 0.2 million b/d to that if OPEC NGLs and global biofuels are included. Most of
Non-OPEC Supply the growth will be coming from US shale, but Canada/Brazil/Kasakhstan are estimated to grow 0.5
BEARISH HIGH
million b/d and makes up the other significant chunk of the supply growth story.
Political Risk
Now that Nigeria and Libya have increased production by about 0.7 million b/d since April, the risk
has turned to the downside for those two countries when assessing the future output. For
Venezuela the risk is very much on the downside for production as the country's economy is about
to collapse and there is in fact a rsik for civil war-like conditions. The "palace coup" in Saudi Arabia
Venezuela, Iraq, Iran, Saudi, Nigeria, has increased the risk for unrest there to. Much will depend on how the current head of the Saudi
National Guard, the son of the former king Abdullah, will handle the situation if king Salman tries to
BULLISH HIGH
Russia, Israel, MENA, Brazil, etc
put the control over the National Guard under the army which is controlled by his son the newly
appointed crown price Mohammad bin-Salman. Global unplanned outages are at the lowest since
early 2011 and this makes it easy to score political risk to supply as a bullish factor with high
weight.
Other Factors
It is hard to predict this factor for 2018. If OPEC succeeds to bring the structure of the forward
market into backwardation, and if the USD continue to weaken, the financial money flow can
Financial Money Flow contribute to higher oil prices in 2018. But if OPEC discipline deteriorates and the USD starts to
NEUTRAL MEDIUM
strengthen the financial money flow can provide headwinds.
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