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

Slide 1 Labyrinth Consulting Services, Inc. artberman.com

MacroVoices Oil Discussion: OPEC Can’t Fix The Problem of Low Oil Prices

Art Berman Labyrinth Consulting Services, Inc. November 30, 2016

Slide 2 Labyrinth Consulting Services, Inc. artberman.com

Overview: OPEC Can’t Fix The Problem of Low Oil Prices

• OPEC may reach some agreement today on an oil-production cut…or not.
• In either case, execution will be more important than accord.
• There are at least 6 good reasons why a production cut can’t fix the problem of low oil prices.

Ø The Market Is Already In Balance, Ø There Is Too Much Oil In Storage, Ø Demand Growth Is Weak, Ø U.S. Production Has Started Increasing Again, Ø OPEC Is Not As Desperate For Higher Prices As Many Believe…Yet, Ø It’s The Economy Stupid.

Slide 3 Labyrinth Consulting Services, Inc. artberman.com

1.60 1.30 0.10 0.40 0.40 0.60 0.40 0.20 0.40 1.30 0.84 0.57 0.85 1.25 1.20 2.00 1.14 1.74 1.15 0.25 0.25 $0 $20 $40 $60 $80 $100 $120 $140 $160

• 2
• 1.5
• 1
• 0.5

0.5 1 1.5 2 2.5 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Brent Price (2016 Dollars Per Barrel) Market Balance (Supply Minus Demand mmb;d)

World Liquids Market Balance

Brent Price (RHS) Supply Surplus (LHS) Supply Deficit (LHS)

Source: IEA OMR & Labyrinth Consulting Services, Inc.

Reason 1: The Market Is Already In Balance

• The idea of a production cut is to bring the market into balance by reducing supply.
• But the market is already as close to balance as it ever gets.
• It has been just 0.25 mmbpd above balance for 6 months.
• Prices have not responded.
• Any price increase has been from expectation of an OPEC cut.

Slide 4 Labyrinth Consulting Services, Inc. artberman.com

Reason 2: There Is Too Much Oil In Storage

• The balance between production and consumption is only part of the story.
• Storage is part of supply.
• OECD inventories are 500 million barrels above late 2013 levels.
• That is the equivalent of almost a year of 1.5 mmbpd of surplus supply.
• Until inventories are drawn down ~350 million barrels, there is little possibility of a return

to $80 per barrel oil prices.

$0 $20 $40 $60 $80 $100 $120 $140 2.5 2.6 2.7 2.8 2.9 3 3.1 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16

Brent Price (2016 Dollars Per Barrel) Billions of Barrels of Liquids

OECD Inventories Are ~500 Million Barrels Above Late 2013 Levels Incremental Inventories (LHS) Base

U.S. stocks make up ~44% of OECD inventories

Source: EIA & Labyrinth Consulting Services, Inc.

Brent Price (RHS)

Slide 5 Labyrinth Consulting Services, Inc. artberman.com

Reason 3: Demand Growth Is Weak

2.4 3.3 3.6 3.9 1.9 0.1 0.4

• 0.1

0.8 2.1 1.6 2.3 1.3 1.8 1.6 1.0 1.7 1.0 0.9 1.3 1.5 1.9 2.5 1.3 1.4 1.3 0.9

$0 $20 $40 $60 $80 $100 $120 $140

• 0.5

0.5 1 1.5 2 2.5 3 3.5 4 4.5 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Brent Price (2016 Dollars Per Barrel) Year-Over-Year Demand Growth (Millions of Barrels Per Day)

Demand Growth Has Declined But 2016 Forecast is 1.2 mmbpd 1.81 mmbpd in 2015

Source: IEA OMR & Labyrinth Consulting Services, Inc.

YOY Demand Growth (LHS) Brent Price (RHS)

Average 1.6 mmbpd

• Demand growth is at a 2-year low of 0.9 mmb/d year-over-year.
• That is the same level as during the quarter that prices collapsed in late 2014.
• Demand growth has fallen from 2.5 mmb/d a year ago.
• The 4-year average is 1.6 mmb/d.
• That is because demand is highly price sensitive in a weak global economy.
• Higher prices will further weaken demand growth
• This in no way supports “peak demand” forecasts.

Slide 6 Labyrinth Consulting Services, Inc. artberman.com

Reason 4: U.S. Production Has Started Increasing Again

• U.S. oil production has already started increasing based on relatively stable prices in the mid-$40

range.

• U.S. incremental supply was the main reason for the over-supply that caused the price collapse

in 2014.

• Higher oil prices will accelerate U.S. production additions.
• Iraq is a secondary contributor & Iran has increased 800,000 bopd since the end of sanctions.
• Overall, however, OPEC increases and decreases have balanced since 2012 except for recent

additions by Iran.

9.63 8.74 8.60 8.63

$0 $20 $40 $60 $80 $100 $120 7.00 7.50 8.00 8.50 9.00 9.50 10.00 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 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

WTI Price ($/Barrel) Millions of Barrels of Crude Oil Per Day

U.S. Crude Oil Production Increased 30 kbpd in October

April 2015

Nov 2016

Source: EIA STEO November 2016 & Labyrinth Consulting Services, Inc.

Oct-Sept Increase +30 kbpd

Oil Production (LHS) WTI Price (RHS)

Oct 2015

52 53 54 55 56 57 58 59 60 61 62 63 64 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Millions of Incremental Barrels of Crude Oil & Condensate Per Day

U.S. Incremental Production Is The Main Cause of The Oil-Price Collapse

Iraq Iran Russia Brazil Saudi Arabia United States Canada

Kuwait UAE Angola Venezuela Mexico Algeria

Nigeria Base

Libya

Indonesia-Ecuador-Qatar-Gabon Source: EIA & Labyrinth Consulting Services, Inc. OPEC, U.S., Canada, Russia & Brazil account for 66% of world crude oil & lease condensate production

Slide 7 Labyrinth Consulting Services, Inc. artberman.com

Reason 5: OPEC Is Not As Desperate For Higher Prices As Many Believe…Yet

• The press gives the impression that Saudi Arabia and most OPEC members are desperate for

higher oil prices.

• In fact, Saudi foreign currency reserves are still above 2010 levels despite drawing down almost

$220 billion since 2014.

• Many other OPEC countries have considerable cash reserves: Algeria,Libya and Iraq are

surprisingly strong (Iran is unknown).

• Nigeria, Venezuela and Angola are certainly in trouble but because of more fundamental

problems than just low oil prices.

21 19 22 25 29 157 229 309 451 421 459 557 674 738 744 627 528

20 40 60 80 100 120 $0 $100 $200 $300 $400 $500 $600 $700 $800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

Foreign-Exchange Reserves (Billions of 2016 Dollars)

Saudi Currency Reserves Remain Above 2010 Levels

Source: World Bank & Labyrinth Consulting Services, Inc.

$0 $100 $200 $300 $400 $500 $600 $700 $800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Foreign-Exhange Reserves (Billions of 2016 Dollars)

Most OPEC Members Have Considerable Cash Reserves

Algeria Indonesia UAE Libya Iraq Nigeria Qatar Kuwait Venezuela Angola Gabon & Ecuador

Source: World Bank & Labyrinth Consulting Services, Inc.

Slide 8 Labyrinth Consulting Services, Inc. artberman.com

Reason 6: It’s The Economy, Stupid

• The reason for low oil prices is more fundamental than market balance: it’s the weak global economy.
• High oil prices from 1974-1985 structurally altered the global economy and led to increasing debt.
• U.S. debt exceeded GDP in 1986 after the first oil shocks.
• GDP growth has declined ever since.
• The U.S. is not the world but it leads all economic trends.
• Energy is the economy. Money is a call on energy. Debt is a call on future energy.
• The second oil bubble lasted from 2004-2014, only briefly interrupted by the 2008 Financial Collapse.
• U.S. debt reached 100% of GDP in 2012.
• Today’s depressed oil prices are 40% higher than 1986-2003 in 2016 dollars.
• The oil-price collapse of 2014 is about affordability.

$0 $20 $40 $60 $80 $100 $120 $0 $5 $10 $15 $20 $25 $30 $35 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

WTI Price in 2016 Dollars Per Barrel Govennment + Consumer + Non-Financial Corporate Debt (Trillions)

Increasing Energy Costs Contributed To Debt & Economic Weakness Debt GDP

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc.

Oil Price Oil Shocks 1974-85 $70 Avg Price 2004-15 $84 Avg Price 1986-2003 $34 Avg Price

U.S. Debt Exceeded GDP After Oil Shocks of 1970s & 1980s Oil prices after 2004 were 1.5 times higher than 1986- 2003

$0 $20 $40 $60 $80 $100 $120

• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 WTI 2016 Dollars Per Barrel Year-Over-Year Debt & GDP Growth

U.S. GDP Growth Peaked With First Oil Shocks & Has Declined Ever Since Debt Growth (LHS) GDP Growth (LHS)

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc.

Oil Price (RHS) 1974-85 Oil Shocks

Slide 9 Labyrinth Consulting Services, Inc. artberman.com

Conclusions

• Debt requires cash flow and zero-interest rates drive capital toward U.S. oil stock yields.
• Any increase in oil prices increases the flow of capital in a race to the bottom.
• More capital for drilling is followed by increased production.
• An OPEC cut will accelerate the self-destructive process.
• Saudi interests are focused on an Aramco IPO in a year when cash reserves may become critical.
• It has become increasingly clear that Saudi Arabia must bear a disproportional share of any

production cut.

• A deal may result from today’s OPEC meeting but I suspect that the real action will be later on

after this effort fails following an initial boost in oil prices.

$0 $10 $20 $30 $40 $50 $60 $70

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2 4 6/5/15 7/3/15 7/31/15 8/28/15 9/25/15 10/23/15 11/20/15 12/18/15 1/15/16 2/12/16 3/11/16 4/8/16 5/6/16 6/3/16 7/1/16 7/29/16 8/26/16 9/23/16 10/21/16 11/18/16 NYMEX Price ($/Barrel) Weekly Rig Count Change

Tight Oil Rig Counts Increased Dramatically Since March 2016 Eagle Ford Has Lost Momentum

Eagle Ford (LHS) Bakken (LHS)

NYMEX Price (RHS)

Source: Baker Hughes, EIA, Bloomberg & Labyrinth Consulting Services, Inc.

Permian (LHS)

March 2016

$137 $119 $115 $110 $97 $95 $94 $90 $89 $86 $82 $77 $75 $70 $69 $67 $65 $61 $55 $50 $49 $49

$0 $20 $40 $60 $80 $100 $120 $140 $160

Yemen Iran Algeria Bahrain Libya Oman OPEC Average New Oil Sands Qatar Saudi Arabia AVERAGE Deepwater Wolfcamp Tight Oil UAE Iraq Eagle Ford Tight Oil Bakken Tight Oil Permian Tight Oil Spraberry Tight Oil Existing Oil Sands Bone Spring Tight Oil Kuwait

Break-Even Price (Dollars Per Barrel)

The World Average Break-Even Oil Price Is More Than $80 Per Barrel

Source: IMF, Rystad Energy, Suncor, Cenovus, COS & Labyrinth Consulting Services, Inc. *IMF OPEC estimates include revenue to balance fiscal budgets

Average Break-Even Price Today is $82/Barrel