© OECD/IEA - 2007 Oil prices: Implications for supply and demand National Energy Commission Madrid, 18 December 2007 David Martin Oil Market Analyst Oil

© OECD/IEA - 2007

Oil prices: Implications for supply and demand

National Energy Commission

Madrid, 18 December 2007

David MartinOil Market Analyst

Oil Industry and Markets DivisionInternational Energy Agency

[email protected]

Oil prices – a dynamic equilibrium of factors

2Source: IEA Oil Market Report

Oil price near $100, but why?

• Tight crude and product fundamentals push oil near $100/bbl in late-November•Resilient demand growth – driven by non-OECD regions•Concern over inventory cover ahead of winter demand •OPEC-10 production has fallen, despite rising oil prices

Crude FuturesFront Month Close

65

70

75

80

85

90

95

100

Aug 07 Sep 07 Oct 07 Nov 07 Dec 07

$/bbl

NYMEX WTI ICE Brent

Source: Platts


Close to inflation-adjusted record highs

Source: IEA Oil Market Report4

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Jan-

70

Jan-

72

Jan-

74

Jan-

76

Jan-

78

Jan-

80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

US

$/b

bl

Nominal vs. Real WTI Prices, base 2007

WTI Nominal WTI Real, 2007 base

4

Funds

Service sectorEngineeringEquipment Commodities

Investment costs

Marginal cost of supply

Geopolitics

Crude grade availability

OPEC policyCrude and product stocks

Refining capacity

Upstream capacity

Environmental regulations

Structure of demand growth

Supply growth

Demand growth

Product supply

Crude

prices

No single cause of high prices

© OECD/IEA - 2007 5Source: IEA Oil Market Report

OECD industry stock cover falls

•Total OECD industry stocks fall in October•Continues trend seen since middle of 2007•End-October OECD forward demand cover falls to 52.6 days; below the five-year average for the first time in two years.

OECD Total Oil

49

50

51

52

53

54

55

56

57

Jan Mar May Jul Sep Nov Jan

days

Range 2002-2006 5-year Average2006 2007

OECD Total Oil

2,300

2,400

2,500

2,600

2,700

2,800


mb



European product stocks drop in November

•OECD European product stocks fell by 17.4 mb in October, of which 12.6 mb in distillates.•Preliminary November data shows further EU-16 distillates drop of 11.8 mb.

Europe

57

58

59

60

61

62

63

64

65

66


days


Europe

860

880

900

920

940

960

980

1000


mb



…pushing futures structure towards backwardation

8

-6.0

0.0

6.0

-2

0

2

2000 2001 2002 2003 2004 2005 2006 2007

Days$/bbl OECD stock cover compared to average vs. Brent time spread

OECD stock cover: Diff to Rlg 5yr Av (RHS) ICE Brent M2-M1

Contango

Backwardation

Source: IEA Oil Market Report 8

The market will always balance

9

“No one is buying our crude – there must be no demand - this is speculation”

No – this is a price response, consumers are drawing on stocks to fill the gap

Monthly Balances (mb/d)

83

84

85

86

87

88

89

90

Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08

World Demand (RHS) World Supply (RHS)

If the supply is not there, prices rise to

encourage stock sales

Source: IEA Oil Market Report

Global demand growth

• World demand is now expected to average 85.7 mb/d in 2007 (+1.1% over 2006) and 87.8 mb/d in 2008 (+2.5%)•However latest economic data leave 2008 demand growth vulnerable

Global Demand Growth 2006/2007/2008 Global Demand Growth 2005/2006/2007thousand barrels per day thousand barrels per day

(mb/d)

2006 0.84 1.0%2007 0.95 1.1%2008 2.11 2.5%

Global Demand Growth

182 214161

138171

-208

286 307385

-10

124 109

North America

Latin America Africa

Middle East

EuropeFSU

841

375

571

Asia

-202

213 241

37

-275

237


11

OECD demand

OECD demand forecast Average of 49.2 mb/d in 2007 (-0.3% year-on-year), 49.8 mb/d in

2008 (+1.3%) Key assumptions: heating needs will drive increase (normal weather);

transportation demand will be subdued

OECD: Total Oil Product Demand

45.5

46.5

47.5

48.5

49.5

50.5

51.5

52.5

Jan Apr Jul Oct

mb/d

Range 2002-2006 5-year avg2006 2007


12

OECD demand – price response Mixed signals

Contradictory indications regarding current demand trends North America: resilient transportation deliveries – but is US gasoline

demand on a clear downward direction? It depends on the data source Europe: continued heating oil and residual weakness – but autumn has

been colder than average – gas substitution or German consumer caution?

Pacific: downward revisions in 3Q07 – but 4Q07 outlook stronger on the back of persistent power needs

US Weekly Motor Gasoline Demand Growth(4-week avg vs previous year)

-3.5%-2.5%-1.5%-0.5%0.5%1.5%2.5%3.5%4.5%5.5%

05-J

an-0

7

19-J

an-0

7

02-F

eb-0

7

16-F

eb-0

7

02-M

ar-0

7

16-M

ar-0

7

30-M

ar-0

7

13-A

pr-

07

27-A

pr-

07

11-M

ay-0

7

25-M

ay-0

7

08-J

un

-07

22-J

un

-07

06-J

ul-

07

20-J

ul-

07

03-A

ug

-07

17-A

ug

-07

31-A

ug

-07

14-S

ep-0

7

28-S

ep-0

7

12-O

ct-0

7

26-O

ct-0

7

09-N

ov-

07

23-N

ov-

07

SpendingPulseEIA


OECD: Demand by Driver, Y-o-Y Chg

(1.0)(0.8)(0.6)(0.4)(0.2)

-0.20.40.60.8

2005 2006 2007 2008

mb/dTransportation HeatingPower Generation OtherTotal Demand

13

OECD demandHigh prices are reducing growth

Weaker North American and European outlook Data revisions: US and Mexican demand is softening (subprime effects?),

Germany continues to delay consumer heating oil stock refilling Reassessment of economic conditions, price effects and inter-fuel

substitution Prices may be starting to bite: slowing gasoline demand in the US,

consumer backlash in EuropeSource: IEA Oil Market Report


Non-OECD demandCushioned by end-user subsidies

Non-OECD oil demand forecast Avg of 36.5 mb/d in 2007 (+3.1% year-on-year), 37.9 mb/d in 2008 (+3.6%) Key assumptions: China and the Middle East – over half of global demand

growth – will remain largely untouched by the US subprime woes and insulated from international oil prices given the prevalence of subsidies to end-user prices

But administered price regimes are raising new problems in many developing countries as international oil prices reach record levels

Non-OECD: Total Oil Product Demand

34.5

35.0

35.5

36.0

36.5

37.0

Jan Apr Jul Oct

mb/d

2006 2007

Non-OECD demandResponsive to market prices

China: Residual Fuel Oil Demand

500

600

700

800

900

1,000

1,100

1,200

Jan Apr Jul Oct

kb/d

Range 2002-2006 5-year avg2006 2007

Chinese domestic prices are capped by Government pricing policies However, fuel oil prices are not subject to pricing controls. Independent teapot refineries process straight-run fuel as feedstock for

producing poor quality gasoil Processing economics have become increasingly unattractive, leading to a

collapse in demand for fuel oil, primarily by teapot refiners This has contributed to product shortages in China in recent months


Non-OPEC supply growth


Angola included in OPEC throughoutRegional Totals exclude biofuel growth

Total Non-OPEC Supply Growth (kb/d)

2006 532 2006 1492007 513 2007 1782008 1057 2008 599

thousand barrels per day

OPEC NGLs (kb/d)

North America

Latin America

Africa

FSU

Middle EastAsia

Europe

104

-27

262

96

411132

-435 -294 -39311 -9

-191

454 490472

-102 -105 -74

51 51 143

214 257 352

Global Biofuels (kb/d)

16

2006/2007/2008

OPEC - Back in the black


OPEC-10 increased by 0.2 mb/d in October, but Angola + Iraq also higher Rising supplies in November from Saudi Arabia, Iraq, Nigeria and Angola? But potential offset from UAE maintenance OPEC reticence to increase too much ahead of winter demand. Spare

capacity remains tight

-2000

-1000

0

1000

2000

-2000

-1000

0

1000

2000

Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07

kb/d Back in the BlackOPEC Crude Output v Year-Ago

Iraq & Angola Indon,Nig,Ven OPEC core Total

17

SECTOR MATURITY

INDUSTRY CYCLE

HOST GOVERNMEN

T

FORCE MAJEUREBELOW-

GROUND

18

Above-ground risks exceed below-ground risks - currently

Net impact is the same (lower

output & higher costs)…

…but at least some above

ground risks are reversible


Industry response – raise planning assumptions

19

source: SG Equity Research, SG Commodities Research, IEA

oil-company "planning prices"

10

15

20

25

30

35

40

45

1999 2000 2001 2003 2004 2005 2006

USD/b

(Brent)

2007

IOC’s have raised capital budgeting assumptions: Shifting opportunity set – more expensive projectsRising service sector and raw material costsIncreased incentive to explore for oil


Some Big Fish Still Lurking Offshore

Recent offshore discoveries in Brazil and China Circa 10 billion barrel or reserves and 1.5 mb/d of production potential from

the combined Tupi (Brazil) and Jidang Nanpu (China) Global uptick in exploration can make a difference although, notably, these are

NOC discoveries Neither field is a quick fix; further appraisal to confirm reserves and

development may be costly


0 5 10 15 20 25 30 35

Safaniyah - remaining

Kashagan

Zakum

Cantarell - remaining

Tupi - recoverable

Azeri-Chirag-Guneshli

Nanpu - 3P (Govt)

Nanpu - 1P (Govt)

Sakhalin 2 complex

Thunder Horse (oil & gas)

Dalia

Bonga

Buzzard

Selected major offshore fields - recoverable oil, bb

Rising costs hamper projects


Cost inflation dampens investment impact

(long-term futures prices remain above $80)

22

Source: Resources to Reserves, IEA, 2005

Tight service sector causes further cost inflation - $35 to $55/barrel? Call option for speculators/OPEC? Marginal cost of non-OPEC production influential when OPEC producing flat

out When spare capacity exists, price OPEC are willing to keep spare capacity off

the market is the key


Biofuels: marginal but significant addition

Global biofuel production doubles to 1.75 mb/d by 2012 Potential supply capacity even higher: 2.9 mb/d by 2012

Biofuel Production & Capacity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011 2012

mb/d

US Ethanol OECD EUR EthanolBrazil Ethanol Asia EthanolOther Ethanol OECD EUR BiodieselOther Biodiesel Potential Capacity


Concerns over economic viability remain

We maintain our cautious stance on medium-term production

Price pressures on feedstocks (corn, sugar, soybeans, wheat, palm oil etc.)

Competition between first-generation biofuels and the food chain

Second generation technologies look promising but depend on technological breakthroughs

Ethanol Profitability

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1 2 3 4 5

Corn (US $/bushel)

Gas

olin

e p

rice

(U

S $

/gal

lon

)

2005

2006

2007

¢51/gln blending subsidy

Profitable

Unprofitable

The profitability line (net of subsidies) has been estimated to take into account the value of ethanol on an energy basis, a price premium for octane and oxygen

and a price premium for the sale of co-products.

CBOT Ethanol Crush Spread forward curve

0

50

100

150

200

250

300

350

400

Mar 05 Mar 06 Mar 07 Mar 08 Mar 09

c/gl

Forward curve from 24 Sept '07


Biofuels: Is the cure worse than the disease?

“The potential of current technologies of choice –ethanol

and biodiesel – to deliver a major contribution to the

energy demands of the transportation sector without

compromising the environment is very limited.”

Background paper produced for the OECD roundtable on Sustainable Development


Gas and Coal to Liquids : reality bites?

XTL relies on cheap gas/coal to justify low energy efficiency CO2 emissions per tonne of diesel produced is high CTL forecast to reach 145kb/d in China by 2012, but CO2 and water use may

limit further development. Potential for 600kb/d by 2020?

Project Sponsor Location Capacity Output Start-dateOryx QP/Sasol/Chevron QATAR 34,000 Diesel 2007 ?

Pearl Train 1 QP/Shell QATAR 70,000 Diesel 2011Pearl Train 2 QP/Shell QATAR 70,000 Diesel 2012

Total frim projects through to 2012 174,000

Project Sponsor Location Capacity Output Start-dateOryx 2 QP/Sasol/Chevron QATAR 66,000 Diesel 2013

Palm GTL ExxonMobil QATAR 154,000 Diesel 2015 + ? SasolChevron QATAR 130,000 Diesel 2015 + ? ConocoPhillips QATAR 80,000 Diesel 2015 + ? ConocoPhillips QATAR 80,000 Diesel 2015 + ? Marathon QATAR 120,000 Diesel 2015 +

Possible projects 630,000


Medium-Term supply-side response limited so far

Medium-Term Growth Balance

0.0

1.0

2.0

3.0

2007 2008 2009 2010 2011 2012

mb/d

Non-OP EC Growth (excl. Biofuels) Biofuels GrowthOP EC NGLs Growth OP EC Capacity GrowthWorld Demand Growth High DemandLow Demand 2

Adjusted call on OPEC/stock chg: +5 mb/d by 2012 OPEC spare capacity to fall from 2.5 ->1.5 mb/d

+/- 1% GDP


No single cause of high prices Tight crude supplies

Leading to stock draws Lack of supply-side response –so far

Both short and medium term – function escalating cost pressures OPEC spare capacity

How much is there, how much can be used?

Signs demand is moderating in response to high prices Anemic transportation fuel demand growth in OECD Non-OECD countries looking to lower subsidies?

But structural shifts not in place just yet Will take a while before car fleet becomes more efficient

Supply side response may come But considerable barriers in the way

Conclusions


Documents

© OECD/IEA - 2007 Oil prices: Implications for supply and demand National Energy Commission Madrid, 18 December 2007 David Martin Oil Market Analyst Oil