Global Oil Markets and Hedging Are Trends Your Friend?

Transcription

1 Global Oil Markets and Hedging Are Trends Your Friend? Non-OPEC to painfully balance the oil market by moving from record growth in 2014 to production declines in 2016 EnerCom March 2016 Fredrik Sagen Andersen

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4 OPEC (Saudi) Will Not Protect Price In Supply Driven Downturn 5% 4% World Supply/Demand Trends vs Prior Year -12 months mavg Supply driven downturn 3% 2% 1% 0% -1% -2% Demand driven downturn -3% Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Source: IEA Global oil demand Non-OPEC Supply incl. proc.gains & biofuels 4

5 Bearish Headlines 5

6 Changes In The Supply-Demand Balance Are Happening - The price is doing its magic. If demand keeps on growing more than non-opec supply we need more and more from OPEC Million b/d Global Oil Demand Growth vs Non-OPEC Growth Source: IEA 6

7 The Long End of the Forward Curve Has Fallen Too Much $/b Historical Brent Forward Curves Historical spot price 15-Jan Jul Feb Jul Apr-11 Source: Reuters, DNB Markets 25-Jun Aug Jun Jun Feb-16 7

8 The Headline Oversupply Not Visible In Time Spreads - The graph below suggest that the last drop in oil prices is sentiment driven and not fundamentally driven Brent Price vs Structure of FWD-Curve (Brent 1-3 as leading indicator for Flat Price) $/b flat price Jan-2007 Jan-2009 Jan-2011 Jan-2013 Jan $/b time spread Real Brent Price Brent Fwd Structure Modelled Brent Price Based On Time Spread (1 vs 3) (Based on daily correlation since 2009) $/b Jan/2009 Jan/2010 Jan/2011 Jan/2012 Jan/2013 Jan/2014 Jan/2015 Jan/2016 Modeled Brent Price, 20 days rolling avg Real Brent Price 8

9 Short Sellers Have Been In Command the Last Year Non-Commercial Short Positions vs WTI Million barrels $/b Jan-15 Jul-15 Jan Source: CFTC 9

10 Growing Problem With The Data Quality Recently MBD Reported Supply vs Demand - No Match With Stock Change Q2012 1Q2013 1Q2014 1Q2015 1Q2016 Source: IEA Reported Supply vs Demand Reported OECD stock change 10

11 OECD Stocks Are High And Rising OECD Total Oil Industry Stocks Million barrels 3,000 2,950 2,900 2,850 2,800 2,750 2,700 2,650 2,600 2,550 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: IEA 5 year range 5 year avg

12 No Doubt That It Is The Supply Side That Is More Important - OPECs market share policy is leading to a swing of 3 million b/d of non-opec supply growth from 2014 to Non-OPEC Supply Growth 3 million b/d swing: 1.5 Million b/d Source: IEA 12

13 Canadian Producers Are Under Water For How Long? - How long can Canadian producers accept to lose money on their current output Western Canada Select (WCS) $/b Cash cost break even for Suncor Source: Reuters 13

14 2 mbd Of Oil Production Is Cash Negative At Brent Below 40 $/b - With Brent prices at 30 $/b, 5.3 million b/d of world oil production is cash negative 14

15 No Growth In Non-OPEC Anymore - Despite continued growth in Russia 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Year on Year Non-OPEC Supply - 3 month mavg -4.0% Source: IEA 4.0% 3.0% Year on Year Non-OPEC Supply Excluding US (3-month mavg) Million b/d Year on Year Russian Supply % Source: IEA, DNB Markets 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Source: IEA 15

16 Shale Production Has Started To Drop - And with the current rig count production is set to drop by more than 1 million b/d by the end of 2016?? Thousand b/d Legacy production decline vs new production Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Source: EIA US Drilling Productivity Report Legacy decline Start up of new wells 6 Model Oil Production Based On Current Rig Count 5 Million b/d Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Source: EIA US Drilling Productivity Report Model production at current rig count Reported production (EIA DPR) 16

17 Enormous Cuts In Global Oil Spending Will Continue in This sets the stage for lower production/lower production growth in the future 17

18 Accelerating Decline Rates In Russia - Source: IEA 18

19 How Will The Huge CAPEX-cuts Affect Decline Rates? Million b/d Net Oil Need Of 12 Million b/d Before 2020? (Assuming 3% net decline rate and oil demand growth of 1 mbd p.a) Source: DNB Markets, Rystad Energy Global output of crude, condensate and NGLs Observed decline rate Oil demand growing 1 mbd per year Decline rate 3% 12 kbd Global crude, Nonaccelerating net condensate and NGLs output in decline rate of % by vs 2020 Global Oil Balance 4.8 Non-OPEC fields under development 2.3 OPEC fields under development 3.6 Required new shale oil to balance 99.5 World liquids demand by 2020 (1 mbd pr year-2015 was 94.5 mbd) Million b/d Net Oil Need Of 17.5 Million b/d Before 2020? (Assuming 4% net decline rate and oil demand growth of 1 mbd p.a) Source: DNB Markets, Rystad Energy Global output of crude, condensate and NGLs Observed decline rate Oil demand growing 1 mbd per year Decline rate 4% 17.5 kbd Global crude, Net decline rate condensate and of 4% by 2020 NGLs output in vs 2020 Global Oil Balance 4.8 Non-OPEC fields under development 2.3 OPEC fields under development 8.7 Required new shale oil to balance 99.5 World liquids demand by 2020 (1 mbd pr year-2015 was 94.5 mbd) Source: DNB Markets, Rystad Energy 19

20 Distillate Has Been Weak, But Gasoline Strong - Gasoline is still performing in US, China and India Million b/d US Gasoline Demand 4 week mavg (Product Supplied) 8.0 Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Million b/d US Distillate Demand 4 week mavg (Product Supplied) Jan Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: US DOE Range 5 year avg Source: US DOE Range 5 year avg Million b/d Year on Year India Oil Demand (3-month mavg) Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Source: Thompson/Reuters 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Year on Year Global Oil Demand (12-month mavg) -3.0% Source: IEA 20

21 Driving Distance On The Rise As Gasoline Prices Drop - Lower oil prices are incentivizing more driving Total US Vehicle Miles Travelled - Billion Miles, 12 month mavg 6.0% Year on Year Change In US Driving Distance Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan % 2.0% 0.0% -2.0% -4.0% -6.0% Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Source: US Federal Highway Administration - Traffic volumes collected from 4000 roadside monitoring stations across the US, published with a two-month delay Source: US Federal Highway Administration - Traffic volumes collected from 4000 roadside monitoring stations across the US, published with a two-month delay 21

22 US SUV Market Share Expanding Again US Light Trucks market share and total car sales 58% 22 Light Trucks Market Share 56% 54% 52% 50% 48% 46% 44% 42% Annualized Million Cars Sold 40% Jul-08 Jul-10 Jul-12 Jul-14 8 US Light Trucks Market Share(LHS) US New Car Sales (RHS) 22

23 How to Explain Chinese Gasoline Demand - With Chinese SUV sales up 58% in 2015 it is maybe not that strange that gasoline demand is performing strongly Chinese SUV sales Thousands of SUVs sold per month Jan-05 Jan-08 Jan-11 Jan-14 Source: ThompsonReuters Datastream 23

24 The 2016 Oil Price Score Card 2016 Oil Price Scorecard Comments Oil Price Weight Overall Outlook Fundamentals The market still looks over supplied in 2016 but the call on OPEC is increasing by 1.6 million b/d according to IEA. The upside is capped by falling production costs, large US spare capacity in the form of available oil rigs/drilled uncompleted wells and OPECs market share strategy. But OPEC spare capacity is very low and non-opec supply growth will fade soon while geopolitical risk is high and rising. Average price 55 $/b Global Fundamental Balance The global supply-demand balance is still looking over supplied for 2016, but much less over supplied than in 2015 as the call on OPEC is increasing by 1.6 million b/d in the latest IEA forecast. The problem is however that OPEC looks to produce more than the call. BEARISH HIGH Crude vs Product Balance (Margins) Refinery margins will probably be weaker in 2016 than in 2015 as particularly the Middle East is bringing on new capacity and as oil demand growth will be weaker in 2016 than in For the first and last quarter of 2016 the weak diesel market may lead to refinery run cuts, but we believe margins will be strong during the gasoline season. BEARISH LOW OECD Stock levels Stock levels are record high, but we do not believe the market will run out of storage capacity BEARISH MEDIUM OPEC Spare Capacity Core OPEC spare capacity is low at only 2.3% of global oil demand according to IEA data. In reality the spare capacity is probably even lower since Saudi is probably producing close to capacity. BULLISH HIGH US Oil Statistics - Fundamentals US oil production growth which was 1.6 million b/d in 2014 and about 0.8 million b/d in 2015 is forecast to drop to negative in 2016 and US crude stocks will draw down in BULLISH HIGH Global Demand Growth Global oil demand growth is positively affected by the lower prices in 2015 but this effect is seen to fade in We have factored in weaker global demand growth for 2016, but the higher starting point of OECD oil demand next year means year on year growth will still be decent for OECD also in NEUTRAL MEDIUM OPEC Supply Non-OPEC Supply Political Risk Venezuela, Iraq, Iran, Saudi, Nigeria, Russia, Israel, MENA, Brazil, etc Other Factors Financial Money Flow OPEC (Saudi) is seen to contiunue its policy of targeting market share instead of price. And we estimate that Iran will increase its output from the current 2.9 million b/d to about 3.6 million b/d by the summer, starting the ramp up in Q BEARISH HIGH Total non-opec supply growth is seen negative in 2016, down from a record growth of 2.2 million b/d in 2014 and 1.2 million b/d in BULLISH MEDIUM Political risk is on the rise. Key risk is from countries like Venezuela, Iraq, Libya, Brazil. The Iran deal will probably bring meaningfully more OPEC barrels to the market, but generally the sunnishiite conflict and IS has increased the total risk in the Middle East and weak economic conditions in countries like Venezuela and Brazil is threatening the social stability. There is a non-negligible risk related to conflict/power struggle inside the Saudi Royal family and the escalating tension between Iran and Saudi Arabia after Saudi executed an important Shia cleric. Total financial net oil length is significantly down since the peak. There is hence room room for a rebuild of positions if the sentiment should change. Triggers could be geopolitics, a strong gasoline season, accellerating decline rates, write downs of resources from shale oil companies, etc. A stronger USD has provided headwinds for the oil price since 2014, but this effect is probaly fading for 2016 as we do not believe in a further strengthening of the USD for the coming year. BULLISH BULLISH HIGH LOW 24

25 Long Term Oil Price Forecast Current (The forecast is for the average of the rolling 1 st month ICE Brent future contract) Historical Historical Nominal $/b Real (2015) $/b Price target Forecast Nominal $/b Real (2015) $/b 3 months 45 6 months months months $/b Spot Brent History & FWD looking range gone (forever?) Source: Reuters, DNB Markets New normalized price range in 2015 USD Forecast nominal FWD (nominal) Historical 25

26 The time to repair the roof is when the sun is shining John F. Kennedy, SotU

27 100 Dollar Crude Was Appealing Companies had good hedges in place Mix of different strategies and products swaps, collars, 3-ways etc. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: 10K Hedge ratios per Dec Year 1 Year 2 Year 3 EOG Chesapeake Pioneer Whiting Continental Concho Noble Cimarex Crescent Oasis Devon 27

28 Hedge Ratios Dropped With Falling Prices Those same companies sharply reduced their hedged volume Hedge ratios lowest when hedges were needed the most? Hedge ratio % 70% 60% 50% 40% 30% 20% 10% 0% Year 1 Year 2 Year 3 Source: 10K (EOG, CHK, PXD, WLL, CLR, CXO, NBL, XEC, CPG, OAS, DVN) 28

29 The Forward Curve Doesn t Predict the Future Snapshot of willingness to provide supply and demand of forward prices Long term prices should reflect the cost of marginal barrel - They do incentivise investment (cuts) in future oil 160 WTI historical vs forward (monthly) Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: BBG Since November 2014 the forward curve has predicted a brighter future 29

30 And It s Hard to Forecast - Price expectations for 2018 now lower than outlook for 2016 was in September Jan. 2013: analysts expected 2016 price 99.7 (avg Bloomberg survey) The crowd that is the market exaggerates trends overshooting Source: Thomson Reuters Oil Poll 30

31 Tough Choices are Rewarded When Markets Decline 31

32 Opportunistic vs Apocalyptic Hedging Should not be about picking the tops and bottoms Markets are not rational, cash flow must be protected Consider risks of hedge losses in high price scenarios vs risk of bankruptcy in a weak market Cost of hedging rises considerably when it s most crucial - 40 put for 2018 is 5.5 USD/bbl now - 40 put for 2016 was 10 cents/bbl two years ago Firm strategy flexible execution Time 0-12 months months months months Hedging ratios 50-70% 30-50% 0-40% 0-30% Normal hedge ratio 60 % 40 % 25 % 15 % 32

33 Summary Trends typically overshoot in commodities prepare to outlast them Hedges aren t supposed to always be profitable Maintain financial flexibility through smoothing out revenue - Maintain capacity when times are tough - Avoid firesales - More time to adjust strategy, reorganise, negotiate with creditors - Solid hedging policy can reduce finance costs and increase debt capacity - Stability in financial ratios, rating and financing costs 33