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Returning To Market Balance: How High Must Prices Be To Save The Oil Industry? Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics Lafayette Geological Society Lafayette, Louisiana May 18, 2016
LabyrinthConsultingServices,Inc. artberman.com 2
HowHighMustPricesBeToSaveTheOilIndustry?• Theglobaloilmarketisreturningtobalancemorequicklythanpreviouslyexpected.• Thatshouldmeanhigheroilpricesbuthowhighmustpricesbetosavetheindustry?• ThepricerallythatbeganinlateJanuary-earlyFebruary2016seemstohavesubstance
althoughoutsizedinventoriesshouldlimitupwardpricemovement.• RecentoutagesinKuwait,Nigeria,VenezuelaandCanadahaveunderscoredthefragilityof
supplydespitetheprevailingproductionsurplus.• Theweakglobaleconomywillbeanimportantcheckonpricerecovery.• Datasuggeststhatoilproducersneedpricesinthe$70-80rangetosurvive.Thatisunlikelyin
thenextyearorso.• Ifaweakenedworldeconomycannotsupportthoseprices,wemayseesupplydwindleinafew
yearstolevelsthatcausepricespikesthatcannotbeabsorbed.• Withouttimelypricerelief,thefuturelooksgrimforanindustryonlifesupport.
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Oilmarketsaremuchclosertobalancethanpreviouslythought
• MajorEIArevisionstoworldoilconsumptiondataprovideanewperspective.• Theworldwasover-suppliedbyonly570kbpdofliquidsinAprilcomparedtoEIA’searlier
estimateforMarchof1,450kbpd.• ThatMarchestimatehasnowbeenreviseddownwardto970kbpd.• February’sover-supplyhasbeenreviseddownwardfrom1,180to240kbpd.• MarketbalancehasbeenslowlyandgenerallyimprovingsinceNovember2015.• Thebiggestconcernsforadurablepricerecoveryareoutsizedinventoriesandaweakglobal
economy.
0.58
0.20
0.81
0.50
1.05
0.81
-0.18
0.87
0.80
1.78
2.09
1.85
2.39
0.48
2.81
2.16
3.04
1.95
1.47
2.00
1.27
2.23
2.50
2.19
2.49
1.18
1.45
1.71
0.57
0.11
0.77
0.44
1.03
0.74
-0.23
0.78
0.76
1.80
2.12
1.82
2.23
0.31
2.73
1.80
2.86
1.61
1.31
1.94
1.17
2.60
3.02
1.76
2.70
0.24
0.97
0.57
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
MillionsofBarrelsofLiquidsPerDay
Comparison ofWorld Liquids Balance,AprilvsMaySTEO
April2016STEOBalance May2016STEOBalance
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
April!2016!STEO!Supply!minus!Consumption
May!2016!STEO!Supply!minus!Consumption
0.6
0.1
0.8
0.4
1.0
0.7
-0.2
0.8
0.8
1.8
2.1
1.8
2.2
0.3
2.7
1.8
2.9
1.6
1.3
1.9
1.2
2.6
3.0
1.8
2.7
0.2
1.0
0.6
1.5
1.1
0.8
1.2
0.3
1.0
0.6 0.
81.0
-0.3
0.4
0.3
1.2
0.3
-0.2
0.1
-0.7
0.2
-0.1 0.
1
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
$0
$20
$40
$60
$80
$100
$120
Jan-14
Mar-14
May-14
Jul-1
4
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-1
5
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-1
6
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-1
7
Sep-17
Nov-17
Market!Balance!(Supply!minus!Consumption!Millions!of!Barrels!of!Liquids!Per!Day)
Brent!Price!($/Barrel)
EIA!Market!Balance,!Brent!Price!&!Forecast
MarketBalance BrentPrice
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
Market!Balance
Brent!Price
Improving!market!balance
Minor!market!balancedeficit!by!mid-2017
Brent!price!below!$60/ barrelthroughend!of!2017
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Consumption&DemandGrowth
• EIAadjustedworldconsumptiongrowthfor2016upwardto1.4mmbpd.• Itsestimatefor2017isnowaverystrong1.54mmbpd.• IEAdemandestimatefor2015is1.83mmbpd—strongestdemandgrowthsince2010after
recoveryfromnegativegrowthduring2008-2009FinancialCollapse.• IEAacknowledgesstrong1.41mmbpdQ12016demandgrowthbutmaintainsis1.24
estimateforfull-year2016becauseofconcernsabouttheglobaleconomy.• Demandgrowthbecauseoflowestrealoilpricessincethe1990s.• Demandislikereserves—aquantityataprice.• IshareIEA’sconcernespeciallyathigheraverageoilprices.
1.07
1.40 1.40
1.54
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2014 2015 2016 2017
Millions!of!Barrels!of!Liquids!Per!Day!Per!Year
EIA!Annual!Consumption!Growth!and!Forecast
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
LabyrinthConsultingServices,Inc. artberman.com 5
WhatDoesMarketBalanceMeanForPrice?
• Oilmarketsareneverinbalance.Producersalwaysover-shootorunder-shootwithsupply.• Balanceissimplyazero-crossingfromonestateofdisequilibriumtothenext,fromsurplusto
deficitandbackagain.• Since2003,oilmarketwithin+/-0.25mmbpdofbalance16%ofthetime.Theaverageprice(2016
dollars)forthatnear-marketbalanceratewas$82perbarrel.• Butthatwasessentiallytheaverageoilpriceof$78perbarrelfortheentireperiod.
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WhatDoesMarketBalanceMeanForPrice?
• Marketbalanceoccurredineverymonthlyaverageoil-priceexcept$130perbarrel.• Althoughpricesabove$90perbarrelrepresent37%ofnear-marketbalancepricesfrom2003to
2016,oilpricesalsoaveragedmorethan$90perbarrel36%ofthetimeduringthat15-yearperiod.• Marketbalancereflectswhateverpricethemarketdeemsnecessarytomaintainsupplyatthe
time.• Noclearcausalrelationshipbetweenmarketbalanceandspecifichigherorloweroilprices.• Balancemerelyrepresentsthemidpointbetweenpricesoneithersideofthedisequilibriumstates
thatitdemarcates.• Wethink$90-100wasnormalbutthemarketwasindeficit.Movingtowardmarketbalanceand
beingonthedeficitsideofmarketbalancearehardlythesamething.
0%
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100%
120%
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7
$10
$20
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$40
$50
$60
$70
$80
$90
$100
$110
$120
$130
$140
More
Cumulative!Percent
Frequency
Oil-Price!Bins!($/Barrel)
Oil!Price!Histogram!at!+/ -0.!25!mmbpd!of!Market!Balance
Frequency Cumulative%
Source: EIA&LabyrinthConsulting Services,Inc.
LabyrinthConsultingServices,Inc. artberman.com 7
$137
$119$115
$110
$97 $95$90 $89 $86 $86
$77$71 $70 $69 $67 $65 $65
$50 $49
$0
$20
$40
$60
$80
$100
$120
$140
$160
Yemen
Iran
Algeria
Bahrain
Libya
Oman
New
OilSands
Qatar
Average
SaudiA
rabia
Deepw
ater
Perm
ianCore
UAE Iraq
EagleFordCore
BakkenCore
Lower-CostAvg
ExistingOilSands
Kuwait
Break-EvenPrice(DollarsPerBarrel)
Projected2016Break-EvenOilPricesforOPEC&UnconventionalPlays
Source: IMF,RystadEnergy,Suncor, Cenovus,COS&Labyrinth Consulting Services,Inc.
$70-80!Near-Term!SurvivalRange!Minimum
ThePriceProducersNeed
• Lower-costoilproducersoftheworldneed$50-80perbarrelandanaveragepriceof$65perbarreltobreakeven.
• $70-80isaminimumpricerangefornear-termsurvivalofmoreefficientproducers—somewillstilllosemoneyatthoseprices.
• ExistingCanadianoilsandsprojects,andBakkenandEagleFordShalecoreareasareamongtheverylowest-costmajorplaysintheworld.
• ForalloftheOPECrhetoricaboutthehighcostofunconventionaloil,fewOPECcountriesarecompetitivewithunconventionalplayswhenOPECfiscalbudgetarycostsareincluded.
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TightOilCompaniesonLifeSupport
• Alltightoil-weightedcompaniesthatIfollowhadnegativecashflowinthefirstquarterof2016exceptEPEnergyandOccidentalPetroleum.
• Ninecompaniesincreasedtheircapex-to-cashflowratioscomparedwithfull-year2015resultsandsixincreasedthatratiobymorethan2.5times.
• Companiesspent$1.90incapexforeverydollartheyearned.In2015,theyspent$0.60abovewhattheyearned.
• Averagedebt-to-cashflowratiofortightoilcompaniesincreasedmorethan3-foldto10,upfrom3in2015.
• Energyindustryaverage1992-2012was1.53and2.0wasastandardthresholdforbankstocallloansbasedondebt-covenantagreements.
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HowHighMightOilPricesGo?
0.6
0.1
0.8
0.4
1.0
0.7
-0.2
0.8
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1.8
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2.7
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1.6
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1.9
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2.6
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1.8
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0.6
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0.6 0.
81.0
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$0
$20
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$120
Jan-14
Mar-14
May-14
Jul-1
4
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-1
5
Sep-15
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Mar-16
May-16
Jul-1
6
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-1
7
Sep-17
Nov-17
Market!Balance!(Supply!minus!Consumption!Millions!of!Barrels!of!Liquids!Per!Day)
Brent!Price!($/Barrel)
EIA!Market!Balance,!Brent!Price!&!Forecast
MarketBalance BrentPrice
Source:!EIA&!Labyrinth!Consulting!Services,!Inc.
Market!Balance
Brent!Price
Improving!market!balance
Minor!market!balancedeficit!by!mid-2017
Brent!price!below!$60/ barrelthroughend!of!2017
• Currentpricesaround$48perbarrelabigimprovementfromJanuarywhenpriceswere<$30.• Nevertheless,allproducers–companiesandexportingcountriesalike–arefailingandprobablyneed
sustainedpricesinthe$70-80perbarrelrangetosurvive.• Thatisastretchfromthemid-upper$40’sresistancelevelofthepast10monthsorso.• EIA’sforecastdatasuggestaminorsupplydeficitbythesecondhalfof2017.• Brentforecast,however,istoremainbelow$60perbarrel.
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InventoriesRemainaSeriousObstacletoSustainedHigherPrices
• U.S.stocksarenearrecordhighlevelsof543millionbarrels:61millionbarrelsmorethanatthistimein2015and137millionbarrelsmorethanthe5-yearaverage.
• OECDstocksarealsoatrecordlevelsof3.13billionbarrelsofliquids.• CushingandGulfCoastcombinedstorageisat93%ofworkingcapacity.• Cushingcontinuestoincrease.• Itisdifficulttoimagine$70-80oilpricesuntilthisoverhanddissipatesandthatmay
takeayearassumingitisfallingnow.
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GoodNews/BadNewsAboutComparativeInventories
• Comparativeinventoryisdeterminedbycomparingcurrentstockswithamovingaverageofstocksoverthepast5years.
• Thetwopreviouspricecyclesin2015werebothcharacterizedbyfallingcomparativeinventories.WhenC.I.patternsreversed,pricesfell.
• ThecurrentpricecycleshowsadecreaseincomparativeinventoriesforcombinedCushing&GulfCoast.
• Front-to-backfuturesspreadstypicallyfallwithdecreasinginventoriesbecauseshort-datedcontractsgainvaluecomparedtolonger-datedcontracts.
• Thepasttwocyclesendedbecauseproducersincreaseddrillingandproductionathigherprices.• CushingstockstypicallycontrolWTIpriceandcomparativeinventoriesatCushingarerising.
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3/27
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4/24
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5/22
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7/31
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8/28
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9/11
/15
9/25
/15
10/9/15
10/23/15
11/6/15
11/20/15
12/4/15
12/18/15
1/1/16
1/15
/16
1/29
/16
2/12
/16
2/26
/16
3/11
/16
3/25
/16
4/8/16
4/22
/16
5/6/16
December-June2016FuturesP
riceSpread(DollarsPerBarrel)
ComparativeInventory(M
illionsofB
arrelsofCrudeOIl)&W
TIPrice($/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!-May 2016!Price!Rally
Falling!ComparativeInventories
Falling!ComparativeInventories
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80
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86
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94
$0
$10
$20
$30
$40
$50
$60
4-Jan-16
11-Jan-16
18-Jan-16
25-Jan-16
1-Feb-16
8-Feb-16
15-Feb-16
22-Feb-16
29-Feb-16
7-Mar-16
14-M
ar-16
21-M
ar-16
28-M
ar-16
4-Ap
r-16
11-Apr-16
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25-Apr-16
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9-May-16
16-M
ay-16
WallStre
etJo
urnalD
ollarIndex
NYMEXW
TIPrice($/Barrel)
NYMEXWTIPrice&WSJDollarIndex
WTINYMEXPrice WSJDollarIndex
$26!Support
$36!SupportWTI!(LHS)
Dollar Index!(RHS)
Source: EIA,WallStreetJournal&LabyrinthConsultingServices,Inc.
Longdollar!futures!bets!sold!on!doubts!about!Fed!rate!hikes
Declining!dollar!value
$48!Resistance
StrengthoftheU.S.DollarandOilPrices
• AnegativecorrelationbetweenthevalueoftheU.S.dollarandworldoilprices:agloballyconnectedeconomyinwhichcountriescompeteforinvestmentbasedoninterestratesandcurrencyvaluation.
• OiltransactionsaredenominatedinU.S.dollarsastheworldreservecurrency.• HigherU.S.interestratesfavorinvestmentsintheU.S.economyovercommoditieslikeoil.
Whenthedollarisstrong,oilpricesaregenerallylowerandviceversa.• Thecorrelationbetweenoilpriceandthedollarisespeciallystrongsince2015andpartly
explainspricecycles.• ThelatestpricerallybeganaftertheFederalReserveBankindicatedthatfurtherinterest
rateincreasesin2016wereunlikely.• Dollarhasbeenstrengtheningrecentlybutoilpricescontinuetorise.Lookforashort.
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• LargereductioninE&Pinvestmentin2015andprobablyevengreaterin2016.• Deferredinvestmentsin2015equivalentto20billionbarrelsofreserves.• GlobalE&Pestimatedcapexfor2016is44%(-$412billion)of2014.• Asubstantialsupplydeficitwillresultinthenot-too-distantfuture.• Apricespikeseemsunavoidable.
TheBigPictureOnOilPrices:Under-Investment
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• Thecurrentpricerallyseemstohavesubstancealthoughinventoriesareaconcern.• Theglobalmarketappearstobemovingquicklytowardbalancewithhigherconsumptiongrowth.• Recentoutagesunderscorefragilityofsupply.• Under-investmentduring2015and2016meansmuchhigheroilpricesinafewyears.• Anticipationoffuturesupplydeficitsaremovingpriceshigher.• Expectsimilarhighpricevolatilityandpricecyclingwithseveralupward-trending4-5monthcycles.• Pricesmusteventuallyreachthe$70to$80perbarrelrangetorestorebalancesheetsenoughthatinvestment
mayresume.Difficulttoimaginein2016or2017withoutsupplyinterruptionsoranOPECproductioncut.• Aweakglobaleconomyandweakerdemandathigheroilpricesarethebiggestriskstooil-pricerecovery.• Areturntomarketbalancedoesnotnecessarilymeanthatpriceswillreturntothe$70-80range.• Ifaweakeconomycannotsupportthoseprices,wemayseepricespikesthatcannotbeabsorbed.Thatmaybring
atraumaticendtotheAgeofOil.• Peoplewillhavetolearntogetbywithlessinafuturebasedonlowerenergy-densityfuelsandlowereconomic
growthpotentialthanoilhasprovided.
HowHighMustPricesBeToSaveTheOilIndustry?
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