Oil Markets and the Global Economy Christof Rühl, Global Head of Research Abu Dhabi February 2016 1
Outline The economy: an age of stagnation and low returns? Oil price recap Why are lower oil prices not boosting economic growth? Where next for oil markets? 2
Secular Stagnation? Source: The Economist 3
Real interest rates and total factor productivity (TFP) Yield 9% Real return on 10-year Government bonds US Germany Japan TFP in Advanced Economies Average annual growth 3% 1985-1994 1995-2004 2005-2014 6% 2% 3% 2% 1% 0% 1% -3% 1983 '87 '91 '95 '99 '03 '07 '11 2015 Source: Haver 0% Source: OECD US Germany Japan 4
Where is US dollars per barrel Oil price decline 120 110 100 90 80 70 60 50 40 30 July 2014 Dated Brent 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg 5
Where is the shot in the arm? Oil price decline Revisions to GDP growth projections 2015 US dollars per barrel 120 July 2014 110 100 90 80 70 60 50 40 30 Dated Brent GDP growth 6% Jul-14 Jan-15 Jul-15 Oct-15 5% 4% 3% 2% 1% 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg Source: IMF 6 0% World US Advanced economies Emerging economies
Long term growth projections in emerging markets Share of global oil demand Revisions to 5-year GDP growth forecast Percent 55 50 China Emerging excl. China Percent 9 8-2.2pp Apr-13 Oct-15 45 7 40 35 6-1.0pp 30 5-0.5pp 25 4 20 1990 1993 1996 1999 2002 2005 2008 2011 2014 3 China Emerging World Source: BP Statistical Review Source: IMF WEO 7
Outline The economy: an age of stagnation and low returns? Oil price recap Why are lower oil prices not boosting economic growth? Where next for oil markets? 8
Oil price vs. other commodities Daily oil price Oil and industrial metals prices US dollars per barrel US Dollars per barrel Index 120 Dated Brent 140 700 110 100 High price band of 2011-2014 period 120 600 90 100 500 80 70 60 80 60 400 300 50 40 30 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg Low price band post 2015 40 20 Dated Brent (lhs) Industrial metals (rhs) 0 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Source: Bloomberg 200 100 0 9
Oil supply disruptions and US production growth Cumulative change since 4Q10, Mb/d 5 4 Libya Iran Other US Net 3 2 1 0-1 -2-3 -4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: Includes data from BP Statistical Review of World Energy and BP Energy Outlook 10
Oil supply disruptions and US production growth Cumulative change since 4Q10, Mb/d 5 4 Libya Iran Other US Net 3 2 1 0-1 -2-3 -4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: Includes data from BP Statistical Review of World Energy and BP Energy Outlook 11
Oil supply disruptions and US production growth Cumulative change since 4Q10, Mb/d 5 4 Libya Iran Other US Net 3 2 1 0-1 -2-3 -4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 Source: Includes data from BP Statistical Review of World Energy and BP Energy Outlook 12
OPEC s dilemma TO CUT PRODUCTION? YES NO OIL PRICE HIGHER OIL PRICE LOWER U.S. SHALE PRODUCTION HIGHER U.S. SHALE PRODUCTION LOWER OPEC LOSES MARKET SHARE OPEC GAINS MARKET SHARE OPEC REVENUES DECLINE OPEC REVENUES DECLINE 13
Outline The economy: an age of stagnation and low returns? Oil price recap Why are lower oil prices not boosting economic growth? Where next for oil markets? 14
(1) US Dollar is appreciating Real trade weighted US Dollar index Index, Jan 1990 = 100 125 120 115 110 105 rises for good reasons 19% real appreciation since July 2014 (26% since July 2011): Relatively strong US growth and productivity gains The end of QE in the US 100 95 90 85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Source: Bloomberg 15
(2) Households are deleveraging... Household debt as a share of GDP 100 90 US Euro area 1Q 2008 = 97.9% Change in household debt since peak: 80-19 percentage points 70 4Q 2009 = 64.6% 60-4 percentage points 50 40 1Q 99 1Q 01 1Q 03 1Q 05 1Q 07 1Q 09 1Q 11 1Q 13 1Q 15 16
while government debt hampers demand management % of GDP 110 100 90 80 70 Government debt in Advanced Economies % of GDP 26 25 24 23 22 21 20 Investment in Advanced Economies 60 2001 2003 2005 2007 2009 2011 2013 2015 19 1990 1995 2000 2005 2010 2015 Source: Haver Source: Haver 17
(3) Major importers are becoming producers Share of local consumption produced at home 90% US Brazil 80% 70% Decline in imports since 1994: - 150 Kb/d 60% - 1,940 Kb/d 50% 40% 30% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: BP Statistical Review of World Energy 18
(4) Oil intensity is in long-term decline Barrels of oil per $1,000 of GDP 1.2 1979 1.0 0.8 0.6 0.4 OECD Decline since 1979: - 47% - 49% - 57% 0.2 Non-OECD World 0.0 1965 1973 1981 1989 1997 2005 2013 Source: BP Statistical Review of World Energy 19
Outline The economy: an age of stagnation and low returns? Oil market recap Why are lower oil prices not boosting economic growth? Where next for oil markets? 20
Crude prices and term structure Weekly oil price Daily oil price and term structure $/bbl $/bbl $/bbl 140 Dated Brent 130 12M Dated Brent (rhs) 14 120 Dated Brent 12 120 110 10 100 100 8 80 60 90 80 70 60 Contango 6 4 2 0 40 50-2 20 0 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Source: Bloomberg 40 30 Backwardation 20 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 21 Source: Bloomberg -4-6 -8
(1) OECD inventories are at historic highs Million barrels of crude oil and oil products 3,100 2010-14 Inventory range 2015 2014 3,000 2,900 2,800 2,700 2,600 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: EIA 22
and so is the US strategic petroleum reserve Forward imports cover in days 160 140 120 100 80 60 Million barrels of oil per day 16 14 12 10 8 6 40 20 Strategic reserve Net imports of crude and products (rhs) 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 4 2 0 23
(2) US shale oil production finally declining YoY growth 30% US on-shore oil production (excl. Alaska) 25% 20% 15% 10% 5% 22% was the average US onshore production growth in the 2012 to end-2014 period US on-shore production declined by more than 0.6 Mb/d since peaking at 7.7 Mb/d in March 2015 0% -5% Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 24
driving overall production lower Million barrels per day (Mb/d) 10.0 9.6 9.2 8.8 8.4 8.0 7.6 7.2 6.8 Total US crude production 6.4 Lower-48 production 6.0 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: EIA 25
(3) Above-average demand growth driven by the OECD European and US demand growth OECD and Non-OECD demand growth Million barrels per day (Mb/d) 0.4 Europe US 0.3 0.2 0.1 Million barrels per day (Mb/d) 2.0 OECD Non-OECD World 1.5 1.36 Mb/d 1.27 Mb/d 1.0 0.0-0.1 0.5-0.2-0.3 0.0-0.4 Average 2011-14 2015-0.5 Average 2011-14 2015 Source: EIA Source: EIA 26
Demand slows in the non-oecd but Significant slowdown outside Asia Million barrels per day (Mb/d) 0.3 Middle East Brazil Russia 0.2 Asian demand remains robust Million barrels per day (Mb/d) 0.5 China Asia excl. China 0.4 0.1 0.3 0.0 0.2-0.1 0.6 Mb/d lower growth in 2015, compared to the average 0.1-0.2 Average 2011-14 2015 0.0 Average 2011-14 2015 Source: EIA Source: EIA 27
China worries overblown YoY growth 40% Gasoline Diesel 2015 30% 20% 10% 0% -10% -20% -30% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Source: JODI 28
(4) Saudi Arabia: FOREX reserves and forward rate Saudi Arabian FOREX reserves Saudi Riyal 12-month forward premium Million US dollars 750 Basis points (above spot rate) 1,200 700 650 600 550 $129bn decline since August 2014 1,000 800 600 400 200 500 Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Source: Bloomberg 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg 29
Selected oil market shares OPEC market share Country market shares Market share Market share 36% OPEC meeting 12% OPEC meeting 35% 11% 34% 10% 33% 9% 32% 8% 31% OPEC 30% Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Source: EIA 7% Russia Saudi Arabia 6% US crude oil Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Source: EIA 30
US and Saudi Arabia: oil market shares Market share 12% 11% 10% 9% 8% Saudi Arabia market share (crude only) US market share increased from 6.1% to 10.2% at the peak US market share (crude only) Saudi Arabian share essentially flat 7% 6% Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Source: EIA 31
Oil market shares of key OPEC producers Iran & Iraq Saudi Arabia Market share Market share 4.8% Iran Iraq 11.5% Saudi Arabia 4.4% 11.1% 4.0% 10.7% 3.6% 10.3% 3.2% 9.9% 2.8% Jan-11 Dec-11 Nov-12 Oct-13 Sep-14 Aug-15 Source: EIA 9.5% Jan-11 Dec-11 Nov-12 Oct-13 Sep-14 Aug-15 Source: EIA 32
Conclusion The economy: Multiple and volatile adjustments, but still locally driven Relationship between oil and global growth has weakened Oil markets are searching for a new equilibrium, accommodating OPEC as well as unconventional growth Expect volatility with an upward drift in prices for 2016-17 33