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Prospects for oil prices - Scottish Oil Club · Prospects for oil prices Professor Paul Stevens...
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Prospects for oil prices
Professor Paul StevensCentre for Energy, Petroleum and Mineral
Law and PolicyUniversity of Dundee
Scotland
Scottish Oil ClubNovember 9th 2006
Edinburgh
PRESENTATION OUTLINE
• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?
Why are oil prices currently high?
MONTHLY OIL PRICES - OPEC BASKET 1983- October 2006
01020304050607080
1983
1986
1989
1992
1995
1998
2001
2004
In June 2005, the basket changed its composition moving to heavier crudes
US$
per
bar
rel
IN 2004 DOLLARS THE PRICE IN 1980 AVERAGED $87.65 (Brent)
Why are oil prices high?
Unexpected demand increase
driven by exceptional GDP growth
plus constrained supply
Why are oil prices high?
Unexpected demand increase
driven by exceptional GDP growth
plus constrained supply
BUT it is not only China who got greedy. There is another culprit ??
Unexpected demand increase driven by exceptional GDP
1996-2004 total growth in demand China 3.4 Mbd USA 3.0 Mbd
Wordl Oil Demand 1995-2007
-500
0
500
1000
1500
2000
2500
3000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
thou
sand
bar
rels
per
day
CHINA USA REST AVERAGE OF 8 FORECASTS
Source: 1995 – 2005 BP Statistical Review of World Energy 2006
Unexpected demand increase driven by exceptional GDP growth plus constrained supply
In addition to increased demand for wet barrels there is also anincrease in demand for paper barrels
-Speculation from concern about geo-politics and the “Money Managers” moving into commodities
-But there is a real change in the market attitude to the future of oil prices reflected in the forward curve
Change in the market attitude to futures prices. Driven by ….
TIME CURVE
0
10
20
30
40
50
60
70
80
1 2 3 4 5 6 7
YEARS TO DELIVERY
OIL
PR
ICE
$ PE
R B
AR
RE
L
Oct-06Feb-06Nov-05SUMMER 2004THREE YEARS AGOFIVE YEARS AGO
Source: NYMEX
Unexpected demand increase plus constrained supplySupply constrained by geo-politics, hurricanes plus delays to
Non-Opec projects
Non-OPEC Production growth 1997-2007
-500
0
500
1000
1500
2000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007thou
sand
bar
rels
per
day
NON-OPEC FSU AVERAGE OF 8 FORECASTS
Source: 1997-2005 BP Statistical Review of World Energy 2006
AND there are refinery constraints increasing the price of light sweet crude
REMEMBER light-sweet crude provides the headline price – WTI/Nymex and Brent/ICE
• XXX
Crude Oil Price Differentials
25
35
45
55
65
75
85
Jan-
04 apr jul oct
Jan-
05 apr jul oct
Jan-
06 apr jul
$ Pe
r bar
rel
wtidubai
PRESENTATION OUTLINE
• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?
What are the short term prospects?
• Current inventory overhang– Role of the near term contango– What is OPEC’s price target and can they defend it?
• Immediate downside risks– Demand collapse
• Immediate upside risks– Sudden supply loss – Iran (plus Iraq); Nigeria; …..– Geo-politics and paper markets
PRESENTATION OUTLINE
• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?
What are the medium term prospects?In the past high oil prices resulted in …
• Recession reduced demand
• Improved appliance efficiency and fuel switching reduced demand
• Increased supply because of greater ability and willingness to invest by producers
• Thus less consumption plus greater supply = oversupplied market and prices fall – Markets work! But in the new world????
BUT IN THE NEW WORLD: Doubts over demand destruction?
• Range of uncertainty over 2007 – Average 1.4 mbd Range 1.0 to 1.9
• Little sign of global economic slow-down although there are concerns
• In the OECD all the easy fuel switching and improved oil efficiency has been done
• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s.
Wordl Oil Demand 1995-2007
-500
0
500
1000
1500
2000
2500
3000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
thou
sand
bar
rels
per
day
CHINA USA REST AVERAGE OF 8 FORECASTS
THE DEVELOPING COUNTRIES MISSED OUT ON THE OIL SHOCKS OF THE 1970s
Real Domestic Oil Prices in Selected Developing Countries 1970 = 100
0
100
200
300
400
500
600
1970
19
72
1974
19
76
1978
19
80
1982
19
84
1986
19
88
1990
1970
= 1
00
KOREAARGENTINABRAZILINDIAINDONESIAMALAYSIAMEXICOPAKISTANPHILIPPINESTAIWANTHAILANVENEZUELA
Source: Computed from Lawrence Berkeley Laboratories data 1989
COMMERCIALLY ENERGY INTENSITY
COMMERCIAL ENERGY INTENSITIES
00.20.40.60.8
11.21.41.6
JAPA
N
GER
MA
NY
FRA
NCE
UK
USA
BRA
ZIL
KORE
A
ARG
ENTI
NA
MA
LAYS
IA
THA
ILA
ND
PHIL
IPPI
NES
MEX
ICO
INDO
NESI
A
PAKI
STA
N
INDI
A
KENY
A
HIG
H IN
CO
ME
MID
DLE
INC
OM
E
LOW
INC
OM
E
KG
OIL
EQ
UIV
ELEN
T N
EED
ED T
O
PRO
DU
CE
$1 G
DP
Source:World Bank
BUT IN THE NEW WORLD: Doubts over demand destruction?
• Range of uncertainty over 2007 – Average 1.4 mbd Range 1.0 to 1.9
• Little sign of global economic slow-down although there are concerns
• In the OECD all the easy fuel switching and improved oil efficiency has been done
• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s. There is scope for using less oil BUT it will take time
Wordl Oil Demand 1995-2007
-500
0
500
1000
1500
2000
2500
3000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
thou
sand
bar
rels
per
day
CHINA USA REST AVERAGE OF 8 FORECASTS
BUT IN THE NEW WORLD: Will Non-OPEC supply respond?
Non-OPEC Production growth 1997-2007
-1000
-500
0
500
1000
1500
2000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
thou
sand
bar
rels
per
day
NON-OPEC FSU AVERAGE OF 8 FORECASTS
There are concerns about Russia-Political uncertainty-New fiscal system
The estimates for 2006 and 2007 are probably over stated-Remember at the start of 2005 the average of 8 forecasts estimated Non-OPEC for 2005 at 1.4 Mb/d. The outcome was only 0.04 Mb/d. Start of 2006 estimated 1.2 Mb/d now 0.9 Mb/d-Although the average for 2007 is 1.6 mbd the range is 1.0 to 1.9 mbd
BUT IN THE NEW WORLD: Non-OPEC supply is not responding because of
insufficient investment
• International oil companies– Returning money to the shareholders
• In 2005 the top six IOCs invested $54 billion BUT they bought back $40 billion of shares and declare a dividend of $31 billion.
– Managerially constrained because of “downsizing”.• Since 1981, over 70% of the workforce of the top 25 oil companies
have been laid off
– Service industry insufficient capacity because of monopsony and Ecommerce.
• In 2002-3, the lead time to hire a jack-up rig averaged around seven months. Now the delay is over two years.
BUT IN THE NEW WORLD:Supply is not responding because of insufficient investment
• International oil companies
• OPEC national oil companies have plans but face serious constraints
OPEC Plans –But there are constraints
Country Gross Increment 2005-6 (000 b/d)• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200• Venezuela 175• OPEC NGL 600• TOTAL 3170• Source IEA November 2005
OPEC Plans –But there are constraints
• Service industry constraints
• Capital access constraints because NOCs are seen as high cost and inefficient “rent seekers”
• Concern over security of demand after George W Bush’s State of the Union Address
• Growing concern over the threat of an attack of “resource curse”
• Growing resource nationalism
Country Gross Increment 2005-6 (000 b/d)• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200• Venezuela 175• OPEC NGL 600• TOTAL 3170• Source IEA November 2005
OPEC Plans –But there are constraints
• Iran and President Ahmadi-Nejad = chaos and anti-IOC and buy-backs and fear of sanctions and …..
• Venezuela – Chavez moving into election mode – PDVSA forced into social spending + fiscal squeeze
• Nigeria – Political unrest growing, tougher fiscal regime unrealistic local content clauses
• Kuwait – Project Kuwait remains a political football
• Libya- unattractive fiscal terms and delayed reforms
• Algeria – New hydrocarbon law
Country Gross Increment 2005-6 (000 b/d)• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200• Venezuela 175• OPEC NGL 600• TOTAL 3170• Source IEA November 2005
BUT IN THE NEW WORLD:Supply is not responding because of insufficient investment
• International oil companies
• OPEC national oil companies have plans but face serious constraints
• What about the national oil companies of the Asian oil importers?
Conclusions for the medium term
• Investment upstream and downstream is unlikely to be sufficient even with higher prices thus supply constraints will remain…
• “Higher” prices are here to stay for a long time. The issue is how high is “high” and how long is “long”? In the 1990’s prices averaged $19 per barrel …
PRESENTATION OUTLINE
• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?
The Peak Oil ArgumentHubbert Curve
0.000
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Prod
uctio
n (b
illion
t)
time
quantity
Hubbert Curve
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0.050
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Prod
uctio
n (b
illion
t)
time
quantity
Hartshorne, 1993
What is it?
0.000
0.050
0.100
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0.250
0.300
0.350
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0.450
0.500
0.550
0.600
1700
1725
1750
1775
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1825
1850
1875
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1925
1950
1975
2000
2025
2050
2075
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2125
2150
2175
2200
2225
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2275
2300
2325
Prod
uctio
n (b
illion
t)
What are the long term prospects?
• Eventually the market will respond– Demand in the developing countries will
fall. There is still a lot of fuel oil used under the boiler in those countries (4.9 Mb/d in 2004
– Supply will increase and there will be an increase in non-conventional liquids
• But remember that the 1986 price collapse was 13 years after 1973. This time ……..????
THANK YOU FOR YOUR ATTENTION
Professor Paul StevensCentre for Energy, Petroleum and Mineral
Law and PolicyUniversity of Dundee
Scotland