STGS Presentation 10 MAY 2016
Transcript of STGS Presentation 10 MAY 2016
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Returning To Market Balance: How Will Prices Respond? Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics
South Texas Geological Society San Antonio, Texas May 10, 2016
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AReturnToHigherOilPricesIsComplicated• Weareinthethirdoil-pricerallysincepricescollapsed—pricesare>60%higherthanin
January:$44vs.$27perbarrel.• Thisrallyissimilartotheprevioustwobutmayenddifferentlybecauseofimprovingmarket
fundamentalsandgrowingconcernaboutsupplyfromunderinvestment.• DatatodayfromEIAsuggeststhattheglobaloilmarketisreturningtobalance.• Recentworldevents—failureoftheDohaproductionfreeze,dismissalofAl-Naimi—havenot
affectedoilpriceslikeinthepast.• Theweakglobaleconomymaynotbeabletosustainmuchhigheroilprices.• Everyone’sbreak-evenpriceincludingOPEC’sishigherthancurrentprices.• TheU.S.E&Pbusinessisincriticalcondition.• Abalancedoilmarketdoesnotnecessarilymeanareturntohigheroilprices.• Becauseofaprofoundlychangedeconomyandassociatedmonetarypolicies,wehavecrossed
aboundaryandareturntohigheroilpricesiscomplicated.
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EnergyIsTheEconomy:TheContextforTheOil-PriceCollapse
• Peoplethinkthattheeconomyrunsonmoneybutitrunsonenergy–NateHagens.
• Today,oilandgasprices&theeconomymustbeviewedthroughthedebtlens.
• Theendofcheapoilandnaturalgasintheearly2000sledtofinancialdislocationsandultimately,theFinancialCollapseof2008.
• Becauseofresourcescarcity,oilpricesincreasedfromabaselineof$33/barrelinthe1990stoanaveragepriceof$99/barrelfromlate2010untilSeptember2014.
• Post-collapsemonetarypolicyfocusedonforcingconsumptionandinvestment:zerointerest&furtherexpansionofcredit.
• E&Pcompanieshadalmostunlimitedaccesstocapital.• Itisimpossibletounderstandandcriticallyevaluateshalegas
ortightoilwithoutthiscontext.
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WhatReallyControlsOilPrices?
• Futuresmarketscontroloilpricestoday.• Thesereflectacollectiveunconsciousthatincludesworldevents.• Massiveoilinventoriesskewthecontext.• Theworldeconomyisacasino.
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GlobalOilOutputandOver-Production:HowWeGotHere
• Over-productioncausedtheoil-pricecollapse:aclassicbubble.• Low-interestratesandcurrencydevaluationaftertheFinancialCollapseof2008-2008enabled
over-investmentandover-production:cheapmoneyandhighoilprices.• Higheroilpricesprovidedincentivetoproducemoreexpensive,unconventionaloil:tightoil
(shale),oilsandsanddeep-wateroil.• 7.1mmbpdincreasefrom2009-2015leadtoproductionsurplusbyFebruary2014thatpeakedin
May2015andagaininNovember2015.• Maincontributorstoover-production:U.S.+Canada,Iraq,BrazilandRussia.
60,000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ThousandsofBarrelsPerD
ay
World CrudeOil&CondensateProduction
Source:EIA&Labyrinth Consulting Services,Inc.
2003-2009ProductionPlateau~72.5mmbpd
2010-2015~7.1mmbpdincrease
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MillionsofBarrelsofCrudeOilPerDay
IncrementalCrudeOilProductionSinceJanaury2014
U.S.+Canada Iraq Brazil Russia SaudiArabia Iran
U.S.+Canada
+1.3mmbpd
Iraq+1.1mmbpd
Russia +04
mmbpd
Saudi Arabia
+0.0mmbpd
Brazil-0.1
mmbpd
Productionfromthesecountrieswas3.03
mmbpdmoreinFeb2016thaninJan2014.
1.3mmbpdfromU.S.&1.1mmbpdfromIraq:
2.4mmbpd,78%ofincrease.
Russiaadded0.36mmbpd.
Iranincreased0.4mmbpd
sinceDecember2015.
Source: EIAandLabyrinthConsulting Services,Inc.
Iran
+0.4mmbpd
*Crude oilestimatedfromliquidsproduction forBrazil, Canada&Russia
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GlobalMarketBalanceandTightOilOver-Production
• Currentglobaloilmarketisover-suppliedby~0.57millionbarrelsofliquidsperday.• Productionsurplusincreasedto>3mmbpdbyMayandNovember2015&hasdeclinedsince
then.• Themarketismovingtowardbalance.• Consumptionhasincreased.EIAnowforecasts1.4mmbpdgrowthin2016.Howmuchis
consumptionbasedonlowprices?• Theoriginsofover-supplyofoilandlowoilpricesarefound,ironically,inincreasedscarcityof
petroleumresources.• Scarcerresourcesledtohigherpricesthatpermittedproductionofunconventionaloil.• Over-investmentbecauseofhighpricesandeasycreditledtoover-production,over-supplyand
loweroilprices.
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TheEndofCheapOil
• Oilpriceshaveonlybeenmorethan$90/barrel(March2016dollars)3times:aftertheoilshocksofthe1970sandearly1980s,beforethe2008FinancialCollapse,and2010-2014.
• Forthelast15yearsofthe20thcentury,oilpricesaveraged$33/barrelandwerepartlyresponsibleforeconomicprosperityintheUnitedStates(Reagan-Bush-Clintonera).
• LowpercentofGDPspentonenergy.• DuringtheAsianFinancialcrisisin1998,oilpricesreachedlowestlevelsince1950($16.49/
barrel).• Cheapoilendedintheearly21stcentury—flatproduction&increaseddemandfrom
developingworldespeciallyChina.• Longestperiod(44months)ofhighoilpricesaftertheFinancialCollapse.
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TheCollapseofWorldOilPrices
• Marketbalanceexpressedbyrelativesupplysurplusordeficit(supplyminusdemand).• PeriodofsupplydeficitbeforetheFinancialCollapsecontributedtohighoilprices.• AsupplysurplusbecauseoflowdemandaftertheFinancialCollapse(2008-2009).• Periodofsupplydeficitmostof2011-2014becauseofsupplyinterruptionsintheMiddleEast.• Growingsupplysurplusbeginningin1stquarterof2014causedcollapseofoilprices.• Thesurplusreachedamaximuminthe2ndquarterof2015(2.2mmbpd)andhasgenerally
improvedsincethenwithfallingproductionbutremainsmorethan1.5mmbpd.
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• LargereductioninE&Pinvestmentin2015andprobablyevengreaterin2016.• Deferredinvestmentsin2015equivalentto20billionbarrelsofreserves.• GlobalE&Pestimatedcapexfor2016is44%(-$412billion)of2014.• Asubstantialsupplydeficitwillresultinthenot-too-distantfuture.• Apricespikeseemsunavoidable.
TheBigPictureOnOilPrices:Under-Investment
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TheBigPictureOnOilPrices:E&PDebt
• OilcompanieshavereliedondebtduringgoodandbadtimessincetheFinancialCollapse.
• SecondaryshareofferingsinU.S.E&PcompaniesarealreadyhigherYTD2016thanin2015.
• Pioneer$1.4billion,Devon$1.3billion.• Investorsarelookingforthebottom.• ~$140billioninjunkbonddebtcomingdueover
next7years.• Hugebankexposuretoenergydebt.• Butcompaniesarespendingmorethanthey
earnfromoperations.
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TheBigPictureOnOilPrices:MonetaryPolicy
• Interestrateshavebeenalmostzerosincethe2008FinancialCollapse.• 8yearsofzero-interestratepolicyhavedistortedinvestmentsandthe
economy.• Investorsseekyieldbecausetraditionalinvestmentshavealmostnone.• U.S.E&Pcompaniesbecameanattractiveinvestmentbecauseofhighyieldand
relativelylowrisk.
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TheBigPictureOnOilPrices:MonetaryPolicy
• AnegativecorrelationbetweenthevalueoftheU.S.dollarandworldoilprices:agloballyconnectedeconomyinwhichcountriescompeteforinvestmentbasedoninterestratesandcurrencyvaluation.
• OiltransactionsaredenominatedinU.S.dollarsastheworldreservecurrency.• HigherU.S.interestratesfavorinvestmentsintheU.S.economyovercommoditieslike
oil.Whenthedollarisstrong,oilpricesaregenerallylowerandviceversa.• Thecorrelationbetweenoilpriceandthedollarisespeciallystrongsince2015and
partlyexplainspricecycles.• ThelatestpricerallybeganaftertheFederalReserveBankindicatedthatfurther
interestrateincreasesin2016wereunlikely.
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WallStre
etJo
urnalD
ollarIndex
NYMEXW
TIPrice($/Barrel)
NYMEXWTIPrice&WSJDollarIndex
WTINYMEXPrice WSJDollarIndex
$26!Support
$36!Support
WTI!(LHS)Dollar Index!(RHS)
Source: EIA,WallStreetJournal&LabyrinthConsultingServices,Inc.
Longdollar!futures!bets!sold!on!doubts!about!Fed!rate!hikes
Declining!dollar!value
$46!Resistance
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PriceCycleTrendsandPriceVolatility
• Oilpricesincreasedfrom$26to$46perbarrelduringthecurrentJanuary–Maypricerally.• ThiswasbasedpartlyonhopeforanOPEC-plus-Russiaproductionfreezebutmostly,thecollectiveunconscious
wasfedupwithlowoilprices.• Thereweretwomajorpricecyclesin2015:March-August($44-$60-$38perbarrel)andAugust-January($38-
$49-$27perbarrel).• Bothofthesecycleslastedapproximately150days(5months).• Oil-pricevolatilitywasgenerallyhighatthebeginningsandendsofthecyclesandgenerallylowduringtheir
peaks.
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ThePresentPriceCycle
• Pricesincreasedfrom$26.55to$33.62inlateJanuaryandthendroppedto$26.21onFebruary11.• This$27“double-bottom”patternprobablytestedthesupportlevelforthegreateroil-pricecollapsethatbeganinJune
2014.• Pricesincreasedto$41.45onMarch22overaperiodof40days,thenfellto$35.70overthenext12daysbefore
peakingat$46.03onApril28.$46wastheupperresistancelevel.• The$35.70lowprobablytestedasupportlevel.• Pricesarenowfluctuatingbetween$42and$44/barrel.• Volatilitypatternsgenerallyareconsistentwithearliercyclesbutitistooearlytosayhowthesearedeveloping.• Thetotaldurationofthiscycleis109dayssofar.
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U.S.ProductionDecline
• Marchproductionfellto8.98millionbarrelsperday,100,000barrelsperdaylessthaninFebruary.
• 720,000barrelsperdaylessthanpeakproductioninApril2015.• EIAforecaststhatproductionwilldropanother880,000barrelsperdaybySeptember2016fora
totaldeclineof1.6millionbarrelsperdaycomparedtoApril2015.• AverageQ12016declinerateof60,000bpd/month.
9.34 9.45 9.65 9.69
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WTIPrice($/Barrel)
MillionsofBarrelsofCrudeO
ilPerDay
U.S.CrudeOilProduction andForecast
CrudeOilProduction WTI
720!kbpd!decline!since!April!2015(100 kbpd!since!March)
Oil!Production(LHS)
WTI!Price!(RHS)
Source:EIAMay 2016STEO&LabyrinthConsultingServices,Inc.
1.6!mmbpd!decline!forecast!by!Sept!2016
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InventoriesRemainAnObstacleToPriceRecovery
• U.S.stocksarenearrecordhighlevelsof543millionbarrels:61millionbarrelsmorethanatthistimein2015and137millionbarrelsmorethanthe5-yearaverage.
• OECDstocksarealsoatrecordlevelsof3.13billionbarrelsofliquids.• Thatis359millionbarrelsmorethanthe5-yearaveragebut54%ofthosevolumesare
U.S.stocks.
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BillionsofBarrelsofLiquids
OECDLiquids Inventories
2015 2014 2013 2012 2011 2016
2016!Inventory
359!mmb!above the!5-year!average192!mmb!(54%)!is!USA 2015
20142012
20132011
Source:EIA&LabyrinthConsultingServices,Inc.
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ComparativeInventoriesAreFalling
• Comparativeinventoryisdeterminedbycomparingcurrentstockswithamovingaverageofstocksoverthepast5years.
• Thetwopreviouspricecyclesin2015werebothcharacterizedbyfallingcomparativeinventories.WhenC.I.patternsreversed,pricesfell.
• Thecurrentpricecycleshowsadecreaseincomparativeinventories.• Front-to-backfuturesspreadstypicallyfallwithdecreasinginventoriesbecauseshort-
datedcontractsgainvaluecomparedtolonger-datedcontracts.• Thepasttwocyclesendedbecauseproducersincreaseddrillingandproductionat
higherprices.
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December-June2016FuturesP
riceSpread(DollarsPerBarrel)
ComparativeInventory(M
illionsofB
arrelsofCrudeOIl)&W
TIPrice($/Barrel)
Cushing+GulfCoastComparativeInventories
FuturesSpread WTI Comparative Inventory
Dec-June!2016!Futures!Price!Spread!(RHS)
Comparative!Inventory!(LHS)
WTI!(LHS)March!-August!2015!
Source:EIA,CME&Labyrinth Consulting Services,Inc.
August!-October!2015!Price!Cycle
March!-April 2016!Price!Rally
Falling!ComparativeInventories
Falling!ComparativeInventories
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CrudeOilInventories,OilConsumptionandWTIPrices:2016PriceRally
• Inthecurrentpricerally,consumptionhasincreasedfollowingrecordlowpricesfromDecember2015throughFebruary2016.
• Veryhighstocklevels.• Consistentproductiondeclineof~60,000barrelspermonthsinceSeptember2015.• 100,000barrelperdaydeclineinAprilislargestmonthlydropsofar.• During2015pricerally,$15perbarrel(41%)priceincreasekilledconsumption.• Incurrentrally,peakpricewasalmost$17abovebaselinewithgreaterpercentincrease(63%)
than2015.
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ilPerDay
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CrudeOilProduction WTI
720!kbpd!decline!since!April!2015(100 kbpd!since!March)
Oil!Production(LHS)
WTI!Price!(RHS)
Source:EIAMay 2016STEO&LabyrinthConsultingServices,Inc.
1.6!mmbpd!decline!forecast!by!Sept!2016
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Consumption!(RHS)
Stocks!(RHS)
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
Apr-JunPrice!Rally
Sept-OctPrice!Rally
Mar-May!Rally
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TheLong-TermPerspectiveOnOilPrices
• Averageoilprice1950-Present:$45perbarrel.• Modaloilprice:$25perbarrel.• Presentprice:$44.68perbarrel.• 1986-1999:$33perbarrel.• Theendofcheapoilinthe21stcenturyledtofinancialdislocationsand
ultimately,theFinancialCollapseof2008.
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APerspectiveOnBreak-EvenPrices
• Therehasbeenalottalkaboutlow-andhigh-costproducerssincetheoil-pricecollapseof2014.
• IMFpublishedfiscalbreak-evenpricesforOPECin2015.• Wehavedeterminedbreak-evenpricesforthecoretightoilplaysintheU.S.• Everyoneneedspriceshigherthantoday’stobreakeven.• Realistically,$70perbarrelistheminimumforthemostlower-costproducers.• MostOPECmembersneedmorethan$80tobreakeven.• U.S.tightoilplayslookprettygoodinthiscompany!
$137
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Yemen
Iran
Algeria
Bahrain
Libya
Oman
Qatar
Average
SaudiA
rabia
Perm
ianCore
UAE Iraq
EagleFordCore
BakkenCore
Kuwait
FiscalBreak-EvenPrice(DollarsPerBarrel)
IMFProjected2016FiscalBreak-Even&U.S.TightOilPrices
Source: IMF!&!Labyrinth!Consulting! Services,!Inc.
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TightOilE&PCompaniesAreFailing
• U.S.tightoilandshalegasE&Pcompaniesarefailingbasedonfirstquarter2016earningsreports.
• Allthetightoil-weightedcompanieshadnegativecashflowinQ12016exceptEPEnergyandOccidentalPetroleum.
• Onaverage,companiesspenttwiceasmuchastheyearned;manyspent>2.5x.• 15-foldincreaseindebt-to-cashflow.1992-2012averagewas1.5.Q12016was33.0.• Companiesaremanagingtheirnegativecashflowbyspendingalmostnothingand,
therefore,earningalmostnothing.• Thosewhobelievethatthingswillreturntonormalwithsomewhathigheroilpricesneed
tothinkagain.
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AReturntoHigherOilPricesIsComplicated
• Thecurrentpricecyclemayrepresentthebeginningofanoil-pricerecovery.• Theglobalmarketappearstobemovingquicklytowardbalancewithhigherconsumptiongrowth.• Comparativeinventoriesarefalling.• Chartpatternssuggestthatabottommayhavebeenestablishedat$26-$27perbarrelandat$36/barrel.• Thelikelypathforwardwillbemorepricecyclesbutthistime,withhigherratherthanlowerendingprices.• Whatisareasonablepricerecoverylevel?Historysuggests$45perbarrelbuteveryoneneedsmorenowto
breakeven.Evenwithmarketbalance,priceswillprobablynotreturnto2011-2014”normal”prices.• Aweakglobaleconomyandweakerdemandwithhigheroilpricesarethebiggestriskstooil-pricerecovery.• Wecrossedaboundaryin2014andoldrulesnolongernecessarilyapply.