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January 10, 2012
Energy Weekly Commodities Research
Crude oil prices strengthening on the economy, not Iran
Brent crude oil prices jumped $4.75/bbl on the first trading day of 2012, and have traded in a tight
range around $113.00/bbl so far this year. While the rise in crude oil prices has been widely
attributed to escalating tensions between Iran and the West, we find that the market remains
focused on the improving economic outlook rather than on the risk that the Iranian tension
escalates into a severe supply shortage.
There is little evidence of an “Iran premium“ in current oil prices
Net speculative positions increased only modestly through January 3,
suggesting the recent price rally was more of a rebound from the quiet
holiday market. The rise in crude oil prices has also coincided with a
decline in the implied volatility priced in the crude oil options markets. If
the market were truly focused on a potential supply shortfall, we would
expect higher volatility and a sharp call skew. While the call skew has
become less negative in the recent period, it remains negative, unlike
during the loss of Libyan oil when the call skew became sharply positive.
Confidence increasing that impact of the European debt crisis is remaining confined to Europe
The ECB’s recent aggressive action on bank funding suggests that the ECB
is and will continue to do what it takes to prevent an abrupt breakdown in
the European financial and banking system. Further, there are encouraging
signs that the United States and China are proving resilient to the troubles
in Europe, with economic data continuing to surprise to the upside.
Tension between Iran and the West has put downward pressure on oil prices, but risks are becoming more skewed to the upside
Refiners are cutting back on purchases of Iranian oil in response to new US
sanctions and the anticipation of an EU embargo, and increasingly turning
to Saudi Arabia, which is producing at its highest levels in 30 years. The
surplus of oil is putting downward pressure on prices in the physical
markets. Once the EU embargo goes into effect, we expect this downward
pressure to dissipate. We would expect European refineries to replace the
Iranian crude with Saudi barrels, clearing the current surplus, while China
absorbs the surplus of Iranian crude, in part to fill its strategic reserves.
However, OPEC spare capacity is quite low, which leaves the market very
vulnerable to further supply losses, with the potential for further losses
particularly in Iran and Nigeria.
David Greely
(212) 902-2850 [email protected] Goldman, Sachs & Co.
Stefan Wieler, CFA
(212) 357-7486 [email protected] Goldman, Sachs & Co.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 2
Hedging and trading recommendations
Petroleum
Hedging recommendations
Consumers: Despite the notable slowdown in global economic growth, we continue to
expect that oil demand will grow well in excess of production capacity growth. In our view,
it is only a matter of time before inventories and OPEC spare capacity become effectively
exhausted, requiring higher oil prices to restrain demand, keeping it in line with available
supply. Further, as tensions between Iran and the West escalate the risk to crude oil prices
is becoming increasingly skewed to the upside. Consequently, we believe that the large put
skew in the crude oil options markets that is still present due to the market’s continuing
focus on the downside risk to prices from the European debt crisis, particularly for longer-
dated maturities, presents an opportunity for commercial hedgers to add incremental
protection on top of their core hedging programs through structures such as zero-cost
collars.
Refiners: US refining margins remain relatively strong as WTI prices remain weak relative
to other crude oils such as Brent and LLS. While forward margins imply a narrowing of the
WTI-Brent spread, we continue to expect longer-dated spreads to narrow even further than
what the market has currently priced in. Consequently, we see current long-dated refinery
margins in 2012 as a selling opportunity for refinery hedgers. Further, for 2H12 and beyond,
we believe that crude will be the bottleneck in the system, rather than refining; this would
squeeze margins from the crude side through a renewed spike in backwardation,
suggesting refiners also look for potential timespread hedges. This dynamic could become
particularly severe should the tension between Iran and the West lead to a more severe
shortage of crude oil.
Producers: While we expect supply-demand balances to continue to move to critically tight
levels in 2H12, making producer hedging less attractive, the ongoing uncertainties over the
European debt situation still pose downside risks. Given the relatively large put skew in the
market, we would recommend put spread structures for oil producers, where incremental
downside protection can be obtained against the impact on crude oil prices of a moderate
slowdown in economic activity by forgoing protection against a more severe downturn.
This would be most beneficial to producers that are able to lower production in the event
of a severe decline in crude oil prices.
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 3
Current trading recommendations
Source: Goldman Sachs Global ECS Research.
Short March 2012 WTI - Brent spread, Long December 12 WTI - Brent spread
Buy March 2012 ICE Brent Crude Oil, Buy December 2012 NYMEX WTI Crude Oil,
Sell March 2012 NYMEX WTI Crude Oil, Sell December 2012 ICE Brent Crude Oil
November 22, 2011 - Energy Weekly $1.79/bbl $3.02/bbl $1.23/bbl
Long Gold
Buy December 2012 COMEX Gold October 11, 2010 - Precious Metals $1,800.5/toz $1,620.5/toz $243.9/tozRolled from a long Dec-11 COMEX Gold future position on 13-Nov-11 with a potential gain of $423.9/toz
Long Brent Crude Oil
Buy July 2012 ICE Brent Crude Oil May 23, 2011 - Energy Watch $105.16/bbl $111.79/bbl $6.63/bblRolled from a long Dec-12 ICE Brent Crude Oil future position on 1-Nov-11 with a potential loss of $1.95/bbl
Long Copper
Buy June 2012 LME Copper December 19, 2011 - Metal Detector $7,274/mt $7,746/mt $472/mt
Long Zinc
Buy December 2012 LME Zinc December 19, 2011 - Metal Detector $1,891/mt $1,981/mt $90/mt
Long UK Natural Gas
Buy Q4 2012 ICE UK NBP Natural Gas April 26, 2011 - Natural Gas Weekly 70.8 p/th 64.1 p/th (6.6 p/th)
¹As of close on January 10, 2012. Inclusive of all previous rolling profits/losses.
Current profit/(loss)1
Current trades First recommended Initial value Current Value
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 4
Price actions, volatilities and forecasts
units 09 Jan Change Implied2 Change Realized2Change 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 3m 6m 12m
Energy
3.22
4.95
0.19
0.14
-0.40
-5.81
Industrial Metals4
4
-130
450
-132
Precious Metals
-93
-3.2
Agriculture
48
57
54
4
-4
60
-0.8
0.9
-0.9
1 Monthly change is difference of close on last business day and close a month ago.
2 Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied volatility, 1-mo realized volatility).3 Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time.
4 Based on LME three month prices.
3.01 3.022.68 3.102.00 2.22 2.89 3.01-3.18 29.5 -2.9 2.17 RBOB Gasoline $/gal 2.75 35.4
127.50 Brent Crude Oil $/bbl 113.06 36.5 -1.94 28.5 4.4 79.41 76.96 120.00 120.00
85.24 94.60
87.45 105.52 116.99 112.09
Historical Prices
78.05 76.216.9 123.50102.34 89.54 113.00 115.00
Volatilities (%) and monthly changes2Prices and monthly changes1
WTI Crude Oil $/bbl
Price Forecasts3
101.56 37.0 -2.77 32.8
0.05 25.3 4.7 2.11
2.75 4.254.06 2.90
2.06 2.36 2.82 3.05 3.27 3.46
NYMEX Nat. Gas $/mmBtu 3.06 39.6
2.98 3.26 NYMEX Heating Oil $/gal 3.07 32.5
4.20 4.384.02 32.5 -13.7 4.35
-6.52 21.8 0.2 37.48
4.23 3.98
2400 24002430 2300
42.68 51.74 56.77 58.04 72.30 87.70
LME Aluminum $/mt 2069 27.3
57.03 66.20 UK NBP Nat. Gas p/th 52.87 23.3
2531 26180.60 23.0 -6.9 2122
-0.51 31.7 0.1 7042
2110 2365
19000 2100022037 18500
7278 8614 9629 9163 9000 9500
LME Nickel $/mt 18750 39.9
8993 8000 LME Copper $/mt 7580 38.4
26926 24191-0.17 36.6 -2.7 22431
-0.19 25.4 -9.2 2052
21271 23619
1840 19401704 1785
2043 2333 2414 2271 2200 2400
COMEX Gold $/troy oz 1617 22.9
2247 2050 LME Zinc $/mt 1853 37.8
1388 1508-2.89 25.0 3.7 1197
-3.14 53.9 14.5 18
1228 1370
640 590690 670
19 26 32 38 30.7 32.4
CBOT Wheat Cent/bu 625 33.3
39 29.8 COMEX Silver $/troy oz 29.4 42.4
786 7451.06 27.2 -6.2 467
0.55 19.6 0.3 957
653 707
650 550696 685
1035 1245 1379 1361 1250 1200
CBOT Corn Cent/bu 644 31.2
1356 1220 CBOT Soybean Cent/bu 1190 22.6
670 7311.46 19.9 -3.7 355
n/a 28.1 -2.1 81
422 562
200 175256 235
87 128 179 156 85 85
NYBOT Coffee Cent/bu 222 n/a
106 90 NYBOT Cotton Cent/bu 96 n/a
257 271n/a 26.5 -2.7 140
n/a 45.8 9.6 2987
174 205
22.0 22.029 22.0
2863 2856 3307 3043 2450 2450
NYBOT Sugar Cent/lb 23.3 30.3
2962 2450 NYBOT Cocoa $/mt 2028 n/a
31 240.24 40.4 8.0 16
n/a 14.6 1.4 94
20 29
95.0 95.094 95.0
95 101 111 111 125.0 130.0
CME Lean Hog Cent/lb 83.9 n/a
115 130.0 CME Live Cattle Cent/lb 120.3 n/a
80 71 86 94n/a 18.6 4.7 82
Source: Goldman Sachs Global ECS Research estimates.
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 5
Crude oil prices strengthening on the economy, not Iran
Brent crude oil prices jumped $4.75/bbl on the first trading day of 2012, and have traded in
a tight range around $113.00/bbl so far this year. While the rise in crude oil prices has been
widely attributed to escalating tensions between Iran and the West, we find that the market
remains focused on the improving economic outlook rather than on the risk that the Iranian
tension escalates into a severe supply shortage. In fact, as oil producers and refiners have
reacted to the new US sanctions against Iran and prepared for the likely implementation of
a European Union embargo of Iranian oil, the escalating tensions between Iran and the
West have likely been exerting a near-term negative influence on crude oil prices.
More specifically, there is strikingly little evidence that any meaningful “Iran premium” is
being embedded in current crude oil prices. Net speculative positions increased modestly
through January 3rd, suggesting a rebound from the low volume holiday markets to reach
levels more consistent with those of early December. Further, the level of positioning is far
below the levels associated with the loss of Libyan crude oil in 2011 (see Exhibit 1). The rise
in crude oil prices has also coincided with a decline in the implied volatility priced in the
crude oil options markets. If the market were truly focused on a potential supply shortfall,
we would expect higher volatility and a sharp call skew. While the call skew has become
less negative in the recent period, it remains negative, unlike during the loss of Libyan oil
when the call skew became sharply positive (see Exhibit 2). More tellingly, the put skew
has also declined in the recent period, suggesting that the reduction in volatility is being
driven more by reduced concerns over an economic contraction, than new concern over a
supply shortage.
Exhibit 1: The recent crude price rally has been more of a
rebound from the quiet holiday market … $/bbl (left axis); million barrels (right axis)
Exhibit 2: … with volatility declining and call skew still
negative, there is little evidence of an Iran “premium” 25-delta call (put) implied vol, 3 month (left axis) ATM implied vol, 3 month (right axis)
Source: ICE, Goldman Sachs Global ECS Research.
Source: NYMEX, Goldman Sachs Global ECS Research.
The concern over an economic contraction has lessened as the market has become more
confident that the major effects of the European debt crisis will remain confined to Europe.
Although we continue to think that economic conditions in the Eurozone will get worse in
the coming months, the ECB’s aggressive action on funding – and the large take-up of the
3-year Long-Term Refinancing Operation (LTRO) suggests that the ECB is and will continue
to do what it takes to prevent an abrupt breakdown in the European financial and banking
system. We continue to believe that if the European debt crisis does not devolve into a
150
200
250
300
350
400
450
90
95
100
105
110
115
120
125
130
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
Brent Net speculative positions0
0.1
0.2
0.3
0.4
0.5
0.6
-0.08
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
Call skew
Put skew
At -the-money volatility
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 6
second financial crisis, the impact on global economic growth and the oil market will be
limited.
There are also encouraging signs that the United States and China are proving resilient to
the troubles in Europe. In China, the PMI reading for December moved back into expansion,
coming in at 50.3 against expectations of 49.1. Further, Chinese monetary policy has been
loosening with loans and the money supply growing faster than expected. In the United
States, the economic data continues to surprise to the upside, with the ISM manufacturing
index for December extending the expansion (53.9 vs. expectations of 53.5) and US non-
farm payrolls increasing by 200 thousand in December, relative to expectations of a 155
thousand increase. The improved US economic data has led our US economics team to
raise their 1Q12 US economic growth forecast to 2.0%, from 0.5%, and gives us stronger
confidence in our forecasted upward trajectory for crude oil prices in 2012.
While the downside from the EU debit crisis has arguably lessened recently, new risks are
being created as the EU prepares to employ more sanctions against Iran, likely including an
embargo of Iranian crude oil. We see the tensions with Iran as currently putting downward
pressure on crude oil prices as refiners cut back on purchases of Iranian oil in response to
new US sanctions and Saudi maintains high production levels in order to supply refiners
and prepare for implementation of a likely EU embargo on Iranian oil. The resulting surplus
of oil in the market is putting downward pressure on prices and timespreads in the physical
markets. Once the EU embargo goes into effect, we would expect this downward pressure
to dissipate. We would expect European refineries to replace the Iranian crude with Saudi
barrels, clearing the current surplus, while China absorbs the surplus of Iranian crude, in
part to fill its strategic reserves.
Consequently, we could simply see a swap of Saudi oil for Iranian by Europe being largely
offset by China filling its strategic reserves with Iranian oil instead of Saudi. However, once
the embargo goes into effect, the risks to crude oil prices will become much more skewed
to the upside. With Saudi producing close to 10.0 mmb/d, OPEC will be operating with a
very thin layer of spare capacity, making the oil market much more vulnerable to additional
disruptions, with supplies from Nigeria being a particular concern. Further, the significant
risk remains that as tensions escalate, brinkmanship in the Persian Gulf could lead to the
closure of the Strait of Hormuz. The Strait of Hormuz, with flows of 17 million b/d is the
world’s most important oil shipping chokepoint, accounting for roughly 35% of all
seaborne traded crude. Iran has threatened to block the Strait and has announced naval
exercises in the region at the end of January.
However, we believe closing the Strait is not in anyone’s interest, including Iran’s. An
attempt to close the Strait would likely be met by a strong military response from the West
to reopen the waterway, and a release of strategic reserves to supply the market in the
interim. This is likely the reason why the crude oil market is not embedding an “Iran
premium” into the price of oil. In fact, in terms of current oil market pricing, we find it more
likely that the negative influence on near-term prices from the tensions between Iran and
the West is likely masking the more positive near-term developments from the better than
expected economic numbers in the United States and China and the reduced risk of
European contagion. Consequently, we expect prices to remain well-supported even if
tensions with Iran subside, and see the risk to oil prices increasingly skewed to the upside
in 2012.
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 7
Actions and reactions as the tensions between Iran and the West escalate
The tension between Iran and the West over Iran’s nuclear ambitions has intensified in
recent years. The United States and the EU suspect Iran’s nuclear program is aiming to
develop nuclear weapons while Iran insists that the program is for the civilian use of
nuclear power only. On September 12, 2011, Iran commissioned the Busher I reactor, its
first nuclear power plant. Iran has stated that it also operates two enrichments sites and is
capable of creating 20% enriched uranium to feed a research reactor that produces radio
isotopes for medical purposes. The International Atomic Energy Agency (IAEA) has
recently confirmed this capability, which could also be used to create nuclear weapons.
In response to Iran’s continued progress in developing its nuclear program, on December
31, 2011, President Obama signed into law a bill that imposes sanctions on foreign
financial institutions that deal with Iran’s central bank. While the US law allows exemptions
in order to ensure energy market stability, it will likely make it more difficult for Iran to sell
its crude to 3rd party countries as Iran’s central bank is the main entity for Iranian oil sales.
While the United States has not imported any Iranian crude in 20 years, the European
Union has been the largest importer of Iranian oil in recent years. Recently, however, the
European Union has begun to put together a series of sanctions in response to Iran’s
nuclear program. The EU sanctions currently include a ban on joint ventures with Iranian
companies in the oil and gas sector and a ban to export arms and equipment that could
potentially be used in uranium enrichment. According to a Reuter’s news reports, EU
diplomats also reached a preliminary agreement in the first week of January to ban
imports of Iranian crude and the issue will be on the agenda when the EU foreign ministers
meet on January 23, 2012.
In response to the discussion of these sanctions, Iran performed 10-days of naval exercises
in the Persian Gulf over the holiday period, not coincidentally when President Obama was
signing the new US sanctions into law. These exercises included testing medium-range
missiles and threatening to close the Strait of Hormuz in response to US and EU actions.
Further, on Thursday January 5, one day after headlines announced that European
ministers had agreed in principle on an embargo of Iranian oil, Iran announced it planned
another round of naval exercises on January 27, likely to coincide with the EU foreign
ministers meetings scheduled, at the time for January 30, to discuss implementation of the
sanctions. It was announced that these exercises would include drills on closing the Strait
of Hormuz. In response, the EU meeting was moved to January 23.
While tensions and rhetoric continue to escalate between Iran and the West, the closure of
the Strait of Hormuz would be a massive escalation of the current tensions, and one which
would likely provoke a military response from the West. The Strait of Hormuz is the world’s
most important oil chokepoint, connecting the Persian Gulf with the Gulf of Oman and the
Arabian Sea (see Exhibit 3). According to the DOE, almost 17 million b/d of oil passed
though the strait in 2011, roughly 35% of all seaborne crude. 75% of all the oil shipments
through the Strait of Hormuz go to Asian markets. While the strait is 21 miles wide at its
most narrow point, the shipping lanes are only 2 miles wide on each side due to the
relatively shallow depth – the average depth of the entire Persian Gulf is only 25-40 meters.
A closure of the Strait of Hormuz would require the use of longer alternative routes,
causing delays and potentially bottlenecks and adding costs. A sustained closure of the
Strait would cause a massive spike in crude oil prices. However, given the likelihood of a
Western military response, we believe that the probability Iran attempts to close the Strait
remains low. Further, in the event it is closed, we believe a rapid military response from the
West along with a release of strategic petroleum reserves would likely mitigate the near-
term impact on oil supplies.
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 8
Exhibit 3: Roughly one-third of all seaborne shipped crude pass the Strait of Hormuz,
making it the world’s most important oil chokepoint
Source: DOE.
An EU embargo would leave few buyers for displaced Iranian crude oil, but China would likely purchase much of it – under the right terms
The European Union has been the largest importer of Iranian crude oil in recent years. It
imported 600 thousand b/d of crude from Iran in 2010 but imports dropped by 65 thousand
b/d year-over-year on average in the first 9 months of 2011. Outside of Europe, Iran sells its
crude oil to a relatively small group of buyers including China, Japan, India, South Korea,
Turkey and South Africa (see Exhibit 4). Most Iranian crude oils require processing in
complex refineries as its grades have a high sulfur content and there were reports by the
IEA in May last year that Iran had problems marketing its crude due to the high-metal
content. This will likely make Iran dependent on the willingness of its current buyers to take
more of its oil in case of a European embargo. However, we believe that few will choose to
do so. While the Obama administration will likely grant waivers to Japan, Korea and
Taiwan in order to allow them to continue to buy Iranian crudes, it will likely require them
to make some reduction in purchases from Iran in return for doing so. Further, a news
report by the Financial Times from December 9, 2011, suggests that Indian refiners have
struggled to buy Iranian crude oil as payment transactions via Turkey’s state-owned
Halkbank have become difficult under tightened US financial sanctions. While Indian
refiners are reportedly (Reuters, January 6, 2012) seeking alternative payment mechanisms
through a Russian bank, India might also ask for the United States for waivers in order to
secure uninterrupted crude oil supplies to their refineries, which would likely require them
to reduce imports of Iranian crude.
This leaves China as the main potential buyer of the displaced Iranian crude. The question
therefore arises whether China is willing and able to buy more Iranian crude. We believe it
can, and ultimately will (see Exhibit 5).
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 9
Exhibit 4: Iran exports its crude oil only to a handful of
buyers outside Europe Average imports of Iranian crude, January – June 2011
Exhibit 5: China’s imports of Iranian crude continue to
increase at the expense of European imports Thousand b/d
Source: Source: Global Trade Atlas, APEX, EIA, Goldman Sachs Global ECS Research.
Source: IEA, China Customs.
We believe that the displaced Iranian crude oil will likely be purchased by China, under the right terms, and could serve to fill its expanding strategic reserves
China has become the second largest importer of Iranian oil after Europe in recent years,
and its imports exceeded those of the EU in 1H11, averaging roughly 550 thousand b/d in
the January-November 2011 period. While we believe it is unlikely that China increases its
Iranian imports at the expense of imports from other suppliers such as Saudi Arabia, we
believe that it has the means to absorb additional crude oil by importing it into its strategic
petroleum reserves (SPR). Unfortunately, the Chinese government doesn’t provide data on
its strategic stockpile program and the available information is sometimes contradictory.
The problem is aggravated by the fact that the boundaries between strategic government
stockpiles and industry inventories is often blurred as the three companies that are
building the strategic reserve capacity for the government, Petrochina, Sinopec and
CNOOC, are also building tank farms for their own use, often at the same locations.
Nevertheless, the available information provided by news reports and industry publications
suggest that Chinese SPR and commercial inventory filling will create substantial demand
in 2012.
More specifically, according to the China National Petroleum Corp (CNPC), China plans to
build at least 500 million barrels of strategic reserves by 2020, and more recent reports by
the China Economic Weekly suggest that it could be up to 621 million barrels (85 million
tonnes). The program will be built in three stages: The first phase with 102 million barrels
was completed and filled by early 2009 (see Exhibit 6). The second phase, currently under
construction, will add 170 million barrels (see Exhibit 7). However, a Reuter’s news report
(January 25, 2011) suggests that actual capacity may exceed this planned amount as local
governments have lobbied for more projects. While some sites were completed and filled
in 2010 and 2011, the bulk of these projects will either be commissioned in coming months
or have just been completed and are ready to be filled. We estimate that China can add
between 90 and 110 million barrels of oil to its strategic reserves. While there may be some
constraints on the rate of fill, this suggests that China’s strategic reserves could absorb 550
thousand b/d of Iranian crude displaced from the EU for 160-210 days. Including the need
% of Iran's exports
Total volume of
crude imported
from Iran, thousand
b/d
Iran as % of total
crude imported
European Union 18 450
Italy 7 183 13
Spain 6 137 13
France 2 49 4
Greece 1 20 14
Germany 1 17 1
UK 0 11 1
Netherlands 1 33 2
Japan 14 341 10
India 13 328 11
South Korea 10 244 10
Turkey 7 182 51
South Africa 4 98 25
Sri Lanka 2 39 100
Taiwan 1 33 4
China 22 543 11
Total 91 22580
200
400
600
800
1000
1200
2004 2005 2006 2007 2008 2009 2010 2011
European Union
China
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 10
to fill China’s new commercial storage capacity would extend the ability to absorb displace
Iranian crude oil by another 30 days.
However, China has announced that it halved its crude imports from Iran in January and
will do so again in February as the two countries remain divided over payment terms.
While according to Reuter’s (January 4, 2012) the two parties are mainly negotiating over
the length of the credit period – China insist on a 90 days payment mode while Iran is
asking for 60 days – this underlines Chinas strong negotiating position at the moment. On
net, we believe that China will likely be able to absorb a large amount of the Iranian crude if
the EU implements an import ban, but that China will likely do so only after securing very
favorable terms.
Exhibit 6: Phase I China SPR sites 2004-2009
Exhibit 7: Potential Phase II China SPR sites
Source: Goldman Sachs Global ECS Research.
Source: Reuters, OGJ, Goldman Sachs Global ECS Research.
Saudi Arabia continues to produce near 10 million b/d as Iranian shortfall looms
While China could absorb a large amount of the displaced Iranian crude oil, preventing a
surplus of Iranian crude from forming in the market and potentially pushing down prices
for crude oil, we expect refiners that are no longer able to source Iranian crude oil to turn to
Saudi Arabia for additional barrels. Saudi has been producing close to 10.0 million b/d,
which suggests that it is producing at a high level as refiners anticipate a coming EU
embargo on Iranian crude oil, and are lining up alternative suppliers.
While Saudi production could offset a near-term shortage for refiners under the embargo –
preventing a sharp increase in crude oil prices – this would require a significant loss in the
amount of OPEC spare capacity available, which would leave the market very vulnerable to
additional losses of crude oil supplies, including a further loss of Iranian crude supplies.
Iran is OPEC’s second largest producer, producing 3.7 million b/d of crude oil and 550
thousand b/d of NGLs in 2010. While Iran’s export capabilities have declined in recent years
as its domestic consumption increased sharply (see Exhibit 8), the country still exports 2.2
million b/d of crude. In addition, a large part of Iranian NGL production is exported
indirectly in the form of petrochemical products. Consequently, a complete shortfall of
Iranian petroleum exports would have a significant impact on oil prices. As for comparison,
when Libya’s exports of 1.5 million b/d of crude oil stopped in spring last year, Brent crude
oil prices increased from $100/bbl by the end of January 2011 to more than $125/bbl by the
end of April, despite the fact that the crude oil market was much better supplied. More
specifically:
Site ProvinceStrategic Storage
Commercial Storage
Total Investment
Completion date
Mln bbl Mln bbl Rmb
Zhenhai Zhejiang 32.3 19.9 5.2 Sep-06Huangdao Shandong 19.9 Dec-07Dalian Liaoning 18.7 Nov-08Zhoushan Zhejiang 31.1 37.3 4 Dec-08
Total Storage Capacity 102 57.2
Site Location Company Completion date
Size mn bbl
Comm. mn bbl
Investm. (bn Yuan)
Shanshan Phase I Xinjiang Petrochina early 2009 6.3 6500Shanshan Phase II Xinjiang Petrochina end 2010 5.0Shanshan Phase III Xinjiang Petrochina N/A 39.0Tieling Liaoning Petrochina 2010 7.3Dushanzhi Xinjiang Petrochina Sep-11 18.9 12.6 2650Lanzhou Gansu Petrochina Nov-11 18.9 6.3 2378Caofeidian Sinopec 2H2011 32.7Jinzhou Petrochina 2011-2012 18.9 2260Tianjin* Sinopec 1H2012 20.1 3500Huizhou CNOOC 2012 25.2Shangdong Qingdao Sinopec 2012-13 18.9 2200Jiangsu Jintan Petrochina 2012-13 15.7Zhangjiang Guangdong Sinopec 2012-13 44.0Hubei Yingcheng Sinopec 2012-13 18.9Yangpu Hainan Sinopec N/A 31.4Cezi Island Zhejian Sinopec Oct-11 0 9.0
* According to OGJ, Reuters reports the size of Tianjin at 40.2 milion barrels
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 11
OPEC spare capacity was around 2.6 million b/d before the Libyan war started and
due to the fact that Libyan product demand collapsed as well, OPEC spare capacity
remained well over 1 million b/d when Libyan supplies dried up. In contrast, we
believe OPEC spare capacity is currently only around 1 million b/d.
The situation is further exacerbated by the fact that global inventories are much
lower now than they were at the beginning of 2011. In January 2011, global crude
stocks remained 125 million barrels above the 10-year average. According to the
latest IEA data, inventories had dropped to 21 million barrels below the 10-year
average by October 2011.
While the return of more Libyan production could help to restore some OPEC spare
capacity over the coming months, spare capacity will remain much lower than before the
Libyan war and hence a shortfall of all Iranian exports would likely have a much more
significant impact on prices. This creates greater upside risk from current prices as we see
little evidence that a significant “Iran premium” is currently priced into the oil market. The
risks come not only from Iran. Nigeria’s production has slowed materially and Shell has
again declared force majeure on their Bonny Light production as crude theft caused a leak
in the Nembe Creek trunk line. With mass protests now taking place in Nigeria in response
to the removal of the gasoline subsidy, further losses of crude oil production are possible,
highlighting the upward risk to oil prices from operating with such a small amount of spare
production capacity, as Saudi produces at its highest levels in over 30 years (see Exhibit 9).
Exhibit 8: Iran’s ability to export has declined materially
over the past years as domestic consumption increased Thousand b/d, production (left axis); net exports (right axis)
Exhibit 9: According to their own statement, Saudi
Arabia’s output was close to all-time highs in NovemberThousand b/d
Source: IEA, Goldman Sachs Global ECS Research.
Source: IEA, BP and Goldman Sachs Global ECS Research
1500
1700
1900
2100
2300
2500
2700
2900
3000
3250
3500
3750
4000
4250
4500
1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Crude & NGL production
Net exports
0
2000
4000
6000
8000
10000
12000
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Saudi Arabia producing 10.05 milion b/d in November 2011
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 12
WTI market monitor WTI – Brent forward curve
$/bbl
The WTI-Brent spread narrowed further following the
announcement of the Seaway pipeline reversal. We expect
that more crude oil will flow from the US Midwest to Cushing
in anticipation of the reversal of the Seaway in 2Q12, leading
to a build in Cushing inventories. While near-dated
differentials are now close to the levels necessary to attract
crude back into Cushing , longer-dated differentials still
imply that large volumes of crude have to be shipped on
barges on the Mississippi by the end of 2012 which is
inconsistent with the significant pipeline and rail capacity
that will be online by then. We therefore believe that longer-
dated WTI-Brent spreads have more room to narrow towards
our 12-month target.
Source: NYMEX, ICE, GS Global ECS Research.
Crude oil price differentials
$/bbl
Historical crude oil price differentials
$/bbl
Source: NYMEX, ICE, Platts, GS Global ECS Research.
Source: NYMEX, ICE, Platts, GS Global ECS Research.
Flows from US Midwest to Midcontinent vs. spread
$/bbl (left axis); thousand b/d (right axis, inverted)
Flows from US Midwest to US Gulf Coast vs. spread
$/bbl (left axis), thousand b/d (right axis)
Source: Genscape, NYMEX, Platts, GS Global ECS Research.
Source: Genscape, NYMEX, Platts, GS Global ECS Research.
-14.00
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
1M 5M 9M 13M 17M 21M 25M 29M 33M 37M
01/09/12 01/02/12 12/10/11
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
WTI - MSW MSW - LLS LLS - BRT WTI - BRT
12/07/11 12/29/11 01/06/12
-35.00
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-1
WTI - MSW MSW - LLS LLS - BRT WTI - BRT
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
WTI - MSW (one month prior) Spearhead - Ozark
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
LLS - MSW (1 month prior) Barge Movements
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 13
US oil stocks
Million barrels
US crude oil stocks
Million barrels
Source: DOE.
Source: DOE.
US total hydrocarbon stocks
Million barrels
US distillate stocks
Million barrels
Source: DOE.
Source: DOE.
US motor gasoline stocks
Million barrels
US residual fuel stocks
Million barrels
Source: DOE.
Source: DOE.
Product 30-Dec-11 2-Dec-11 31-Dec-10 4Wk Year
Total Petrol 1044.3 1054.0 1063.7 -9.7 -19.4
Crude Oil 329.7 336.1 335.3 -6.4 -5.6
Total Product 714.6 717.9 728.4 -3.3 -13.8
Mogas 220.2 215.0 218.1 5.2 2.0
Jet Fuel 41.4 42.2 44.1 -0.7 -2.7
Distillate 143.6 141.0 162.1 2.6 -18.5
Resid 36.4 38.6 38.9 -2.2 -2.5
Other 199.9 203.5 195.7 -3.6 4.2
ChangeEnd-of-Week
260
280
300
320
340
360
380
400
Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec
2008
20092010
2011
800
850
900
950
1000
1050
1100
1150
1200
Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec
2008
2011
2009
2010
80
90
100
110
120
130
140
150
160
170
180
Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec
2008
2011
2009
2010
175
185
195
205
215
225
235
245
Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec
2008
2011
2009
2010
25
30
35
40
45
50
Jan Feb Mar Apr May Jun Jul Sep Oct Nov Dec
20112008
2009
2010
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 14
WTI forward curve
US$/bbl
WTI-Brent forward curve
US$/bbl
Source: Goldman Sachs Global ECS Research.
Source: Goldman Sachs Global ECS Research.
Historical realized WTI volatility
Percentage
Historical WTI prices
US$/bbl
Source: Goldman Sachs Global ECS Research.
Source: Goldman Sachs Global ECS Research.
321 NYMEX forward curve
US$/bbl
NYMEX heating oil crack forward curve
US$/bbl
Source: Goldman Sachs Global ECS Research.
Source: Goldman Sachs Global ECS Research.
75.00
80.00
85.00
90.00
95.00
100.00
105.00
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
06Jan12 30Dec11 07Dec11
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14
06Jan12 30Dec11 07Dec11
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
Jan 00 Apr 01 Jul 02 Oct 03 Jan 05 Apr 06 Jul 07 Oct 08 Jan 10 Apr 1115.00
35.00
55.00
75.00
95.00
115.00
135.00
155.00
Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11
0.00
5.00
10.00
15.00
20.00
25.00
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14
06Jan12 30Dec11 07Dec11
15.00
17.00
19.00
21.00
23.00
25.00
27.00
29.00
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14
06Jan12 30Dec11 07Dec11
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 15
Historical NYMEX heating oil crack prices
US$/bbl
RBOB crack forward curve
US$/bbl
Source: Goldman Sachs Global ECS Research.
Source: Goldman Sachs Global ECS Research.
Historical RBOB crack prices
US$/bbl
USGC 1.0 percent fuel oil crack forward curve
US$/bbl
Source: Goldman Sachs Global ECS Research.
Source: Goldman Sachs Global ECS Research.
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11
0.00
5.00
10.00
15.00
20.00
25.00
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
06Jan12 30Dec11 07Dec11
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
January 10, 2012
Goldman Sachs Global Economics, Commodities and Strategy Research 16
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