Oil Markets into Peter Davies Chief Economist, BP plc British Institute of Energy Economics London. 24 January, 2006

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1 Oil Markets into 26 Peter Davies Chief Economist, BP plc British Institute of Energy Economics London. 24 January, 26

2 Outline Oil and energy today How did we get to here? Prospects for 26 Into the medium term 1

3 US$/bbl equiv. Ref. Margin - US$/bbl Oil and Gas: A Perspective Oil - Dated Brent US Gas - Heny Hub Refining Margins - BP GIM

4 US$/bbl Real Oil Prices 9 8 Real Oil Prices* * Brent prices deflated by US CPI (24 prices) 3

5 25: A Snapshot the 4% Year % Change Current Oil Prices ($/bbl) Brent % WTI % OPEC basket % Gas Prices Henry Hub ($/mmbtu) % 8.21 UK NBP (UKp/therm) % 55.9 Refining Margins BP GIM ($/bbl) %

6 World Fuel Shares Share of world primary energy consumption 5% Oil 4% Coal 3% 2% Gas 1% Hydro % Nuclear

7 US$/bbl Brent Oil Prices 7 Ave 25 $54.52/bbl Ave $17.8/bbl Ave 2-23 $26.7/bbl Ave 24 $38.27/bbl

8 Mb/d Million b/d Why High Oil Prices? Driven by: OPEC behaviour post 1999 Strong demand growth 24 Low spare capacity Geopolitics Energy as a financial commodity World Oil Consumption Growth 3 6 OPEC Spare Capacity 2.5 ROW FSU China Est

9 US$/bbl Brent Oil Prices Max price: 12 August - $67.35 Hurricane Katrina Hurricane Rita Jan-5 Mar-5 May-5 Jul-5 Sep-5 Nov-5 Jan-6 8

10 Oil Markets in 25 Million b/d 25 Developments Stock build Demand Growth 25 OPEC Growth 5 Non-OPEC Growth 5 Trend demand growth but with Chinese weakness Non-OPEC weakness: Hurricane disruption Russian slowdown Project delays 81 Demand 24 Supply 24 OPEC production growth led to stockbuild 8 Demand Supply 9

11 Oil Consumption in 25 GDP growth returns to trend Chinese oil consumption growth slows sharply 1

12 Hurricane Impacts net tightened crude oil market loss of refineries temporarily raised refining margins hit US gas harder than oil revealed new dimensions of energy security it is not always the Middle East and embargoes 11

13 OPEC Crude Oil Production Iraq OPEC Jan- 4 Apr- 4 Jul- 4 Oct- 4 Jan- 5 Apr- 5 Jul- 5 Oct- 5 12

14 25 Oil Markets: The Conundrum Why did market fundamentals weaken but prices still rise? 13

15 Million bbls Million bbls OECD Commercial Inventories yr average OECD Commercial Inventories Inventories relative to 5 year average Above average Below average 5 24 Jan- 4 Apr- 4 Jul- 4 Oct- 4 Jan- 5 Apr- 5 Jul- 5 Oct

16 US$/bbl Brent Contango & Backwardation M2-M1 M6-M Contango Backwardation 15

17 US$/bbl Brent Contango & Backwardation M2-M1 M6-M1 Contango Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Backwardation 16

18 US$/bbl Brent Contango & Backwardation M2-M1 M6-M1 Contango Backwardation -2 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 17

19 US$/bbl US$/bbl Brent Contango & Backwardation 25 4 M2-M1 Contango 8 3 M6-M1 Brent Backwardation Jan-5 Apr-5 Jul-5 Oct-5 Jan

20 US$/bbl Brent Forward Price Curves 7 6 Forward Price Curves on 1 st trading day of January Months Forward 19

21 25: The Explanation Inventories built in face of oversupply and enabled through flip into contango 4Q saw: Hurricane net tightening as production was slow to return Colder than average weather High gas prices stimulating resid demand Geopolitical concerns Iran Iraq Spare capacity remained low Emerging consensus on OPEC price objectives floor of $45-5 OPEC basket 2

22 Entering 26 Prices breakthrough $6 in face of rising concerns over Iran Global economic momentum and expectations of trend economic growth in 26 OPEC wait and see through the winter 21

23 Oil Markets in 25/6 Million b/d Prospects Stock build Demand Growth 25 OPEC Growth 5 Non-OPEC Growth 5 Demand Growth 26 Non-OPEC Growth 6 Trend demand growth with Chinese acceleration Non-OPEC acceleration: Hurricane restoration Project delivery Starting from a stockbuild in Demand 24 Supply 24 Demand 25 Supply 25 8 Demand Supply Demand Supply 22

24 26 supply growth outside of OPEC quotas Million b/d CA Oil Sands Brazil Angola Kazakhstan OPEC NGLs Azerbaijan US Russia Other UK Mexico FSU Growth Decline 23

25 26 Oil Price Prospects Drivers 26 call on OPEC less than current OPEC production levels OPEC capacity rising Geopolitical uncertainties Risks Economic growth Supply delays and outages Geopolitics OPEC may need to trim production to achieve price objectives but production already at historical high levels Reasonable expectation of $5-6 Brent for 26 24

26 OPEC: Spare Capacity 6 Mb/d Spare capacity should recover but OPEC likely to remain in control Recession and demand destruction Range Delays and interruptions

27 Conclusions Oil prices driven up in 24 by demand surge and low spare capacity and further in 25 despite rising inventories 26 shows further momentum but OPEC may need to trim production. $5-6 oil prices likely Spare capacity expected to build back to historic levels through 21 but call on OPEC still projected to edge upwards. Potential for prices to remain over $4. Market forces expected to respond but could take a long time to reassert. 26

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