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Indian Petrochem 2019 Mumbai, 14 November 2019
Vandana Hari
Founder & CEO
Global Energy & Petrochemicals Outlook
©Vanda Insights
About Us
Global oil markets macro-analysis – Timely, Credible, Succinct
Insights through reports, corporate briefings, bespoke research
Views regularly featured on TV news channels, print media
1
Our Publications
©Vanda Insights
2
• Daily Asia morning report, Mon-Fri
• Succinct view of factors affecting crude price moves
• Recap of major overnight oil market developments
CRUDE IN SIGHT
Our Publications
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3
• Weekly, published on Fridays
• Insights on the week’s major oil market developments
• Explains, dissects, challenges and connects the dots
OIL VIEWSLETTER
Our Publications
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4
• Monthly and as needed
• A scorecard of bullish and bearish factors in oil market
• Quick read, easy to digest and yet comprehensive
BULLS & BEARS
…Plus Executive Briefing Notes on major breaking news
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5
Demographics, Economics and Energy Demand
©Vanda Insights
2
World population to hit 9 billion in 2040; denser urban areas
©Vanda Insights
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World population growth, 1996-2018 vs 2018-2040
China
India
Mideast & Africa
Rest of the world
OECD
India
Mideast & Africa
Rest of the world
China
OECD
Regions with fastest rates of urbanisation
China
World avg
Other Asia
Mideast & Africa
India
Source: OPEC World Oil Outlook, 2019
2018 total: 7.7 billion
2040 total: 9.2 billion
Asia to take growing share of global economy
©Vanda Insights
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Distribution of global economy: Rise of China, India
Ind
ia
Rest of the world
OECD
India
China
Source: OPEC World Oil Outlook, 2019
China Rest of the world
Oth
er A
sia
Oth
er A
sia
OEC
D A
sia
Oce
ania
OEC
D A
sia
Oce
ania
OECD Europe
OECD Europe
OECD Americas
OECD Americas
• Global economy expected to DOUBLE between 2018 and 2040
• China, India, rest of Asia expected to be biggest centres of economic growth
• Globally, 1 billion people lack access to electricity, 3 billion lack access to clean cooking fuels. Much of the energy poverty is concentrated in Asia
World primary energy demand growth by fuel type
©Vanda Insights
9
-2
0
2
4
6
8
10
12
14
Mil boe/d 2020-2030 2030-2040
Source: OPEC World Oil Outlook, 2019
Volumetric growth
• Demand growth in China, India will outpace global average of 1% per annum
• Total global primary energy demand expected to rise by 25% between 2018-2040 to 358 mil boe/day
• Gas use to grow the fastest (in volume), reaching 25% of primary energy share by 2040
OPEC sees dramatic drop in rate of oil demand growth
©Vanda Insights
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Average annual oil demand growth, 2018-2040 • Global oil demand seen rising from 101 mil b/d in 2020 to 110 mil b/d in 2040
• Annual demand growth to shrink from 1.1 mil b/d at present to just 130,000 b/d by 2040
• Main causes of decelerating demand: - Displacement by gas, renewables,
cleaner fuel alternatives - Technology-driven efficiency gains - EVs, alternative-fuelled vehicles
Source: OPEC World Oil Outlook, 2019
Petchems to underpin rise in oil demand over next 20 years
©Vanda Insights
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Oil demand growth by sector, 2018-2040
• Petrochemical sector seen as leading source of incremental oil demand to 2040 (+4 million b/d)
• Road transportation and aviation the other big contributors
• Oil demand in road transportation may plateau sometime between 2030 and 2040
2040
2040
Source: OPEC World Oil Outlook, 2019
A world of lighter, sweeter crude … but may switch again?
©Vanda Insights
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Global crude oil* quality swings, longer-term
• Consensus on global crude slate becoming lighter, sweeter on the back of US shale boom, OPEC output cuts
• But OPEC sees trend reversing again around middle of next decade
• Expected post-2025 decline in output from US, Canada, Asia-Pacific, Caspian to increase share of OPEC’s heavier, more sulphurous crude
2040
Source: OPEC World Oil Outlook, 2019
*Includes condensates, synthetic crude
◦API gravity % Sulphur
Ethane demand growth strongest among petchem feedstocks
©Vanda Insights
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Short-term changes in petchems feedstock demand • LPG, ethane to record largest demand
increase among oil products, driven by petrochemical and residential sectors
• Marks a shift from gasoil/diesel leading the pack, historically
• Naphtha is expected to remain the prime petrochemical feedstock
• New ethane-based capacity in US, but mostly naphtha-based in Asia, Middle East
2040
Source: OPEC World Oil Outlook, 2019
Oil Markets Outlook
©Vanda Insights
2
Brent range-bound around $60: Will it break out?
©Vanda Insights
15
Source: ICE, CME
30
40
50
60
70
80
90
$/bbl
Brent WTI
2019 Jan-Oct average
WTI ~$57 Brent ~$65
Brent 4-year high $86
Brent 16-month low $50
$60
2018 average
WTI ~$65 Brent ~$72
…Hinges on which way US-China trade war goes
©Vanda Insights
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Source: ICE, CME
30
40
50
60
70
80
90
$/bbl
Brent WTI
Economic gloom over trade tensions
Growing optimism over trade deal
10 May: Trade talks collapse
1 Dec: Trump, Xi agree 90-day truce
Jan 2019: Trade talks resume
29 Jun: Trump, Xi agree to resume trade talks
China signals likely rollback in tariffs
11 Oct: Plan for “phase-one” trade deal
Jul 2018: Start of tit-for-tat import tariffs
$60-70
Phased resolution
$50-60
Impasse
Demand concerns: The biggest drag on oil
©Vanda Insights
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• Global economic growth has been decelerating
• Manufacturing contraction across the globe; consumer sentiment cooling
• World trade growth to slow to 3-year low of 2.6% in 2019: IMF
0
1
2
3
4
5
IMF: 3 consecutive downgrades in global GDP growth forecast
2019 2020From global ”synchronized growth” in 2017 … to a “synchronized slowdown” in 2019.
Source: IMF. The “S” and “F” represent Spring and Fall World Economic Outlook Forecasts each year
Easy money has boosted stock markets but not crude prices
©Vanda Insights
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2300
2400
2500
2600
2700
2800
2900
3000
3100
3200
30
40
50
60
70
80
90
$/bbl S&P 500 (rhs) WTI (lhs) Brent (lhs)
Divergence since June 2019
Source: ICE, CME, Yahoo Finance
Global oil demand growth forecasts downgraded since Feb
©Vanda Insights
19
Source: International Energy Agency, OPEC, US Energy Information Administration, Vanda Insights
1.52 1.51
1.45 1.41 1.38 1.41 1.42
1.38 1.37
1.34 1.30
1.19 1.12
1.06 1.00
0.93
0.0
0.4
0.8
1.2
1.6
2.0
Mil b/d The slippery slope of oil demand: Changes in 2019 projections
IEA EIA OPEC Avg
Month of forecast
Non-OPEC oil supply growth outpaces rise in demand
©Vanda Insights
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Source: International Energy Agency
• Strong rise in non-OPEC oil supply, led by tight oil from US shale
• Continuing gap puts pressure on OPEC/non-OPEC alliance to keep tight reins on oil output
0
1
2
3
Annual growth in mil b/d
Non-OPEC output Global demand
Major areas of oil supply growth and decline
©Vanda Insights
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2019 2020 (e)
• US 1.6 1.3
• Canada 0.1 0.1
• Brazil 0.2 0.3
• Norway - 0.4
2019 2020 (e)
• Iran 1.1 ?
• Venezuela 0.5 ?
• Saudi Arabia 0.3 ?
• Mexico 0.2 0.03
Annual jump (in mil b/d)
Annual slump (in mil b/d)
Source: International Energy Agency, OPEC. Non-OPEC volumes include condensate and NGLs. OPEC volumes are only crude.
OPEC output didn’t really drop – until this year!
©Vanda Insights
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25
26
27
28
29
30
31
32
33
"Core" OPEC production in million b/d
2016 avg: 31.5 2017 avg: 31.4
2018 avg: 31.2
2019 Jan-Sep avg: 29.3
Vanda Insights analysis:
• OPEC agreed to cut output by 1.2 mil b/d from Jan 2017 and by 0.8 mil b/d from Jan 2019
• But actual reduction in 2017 and 2018 was much smaller
• First REAL CUT – of nearly 2 mil b/d on year – has happened only in 2019
Source: Vanda Insights analysis based on OPEC monthly reports
The picture of oil demand: Few bright spots
©Vanda Insights
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31
32
33
34
35
36
37 Asia-Pacific
30.5
31.0
31.5
32.0
32.5 Americas
14.5
15.0
15.5
Europe
4.0
4.5
5.0FSU
8.0
8.5
Middle East
3.5
4.0
4.5Africa
Source: International Energy Agency
China, India biggest drivers of oil demand growth
©Vanda Insights
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-0.5
0.0
0.5
1.0
1.5
Mil b/d
ROW
Middle East
India
China
IEA outlook over next 5 years
Source: International Energy Agency 2019 annual report
• Chinese economy and oil demand growth have been slowing, now amplified by trade war
• China still remains the biggest contributor to demand growth: Up 6% on year over Jan-Sep
• Indian oil demand rose 2% over Jan-Sep (vs annual growth of 4.5% for full-year 2018)
Downstream: Asia dominates refining capacity additions
©Vanda Insights
25
Distillation capacity additions from existing projects
Source: OPEC
2024: 0.4 mil b/d 2023: 0.8 mil b/d 2022: 1.4 mil b/d 2021: 1.7 mil b/d 2020: 1.6 mil b/d 2019: 2.0 mil b/d
Global total • Global capacity creep cools
off after 2021
• Asia ex-China and Middle East to surpass China in additions from 2020
• Latin America continues to lag in adding downstream capacity
OPEC worries about oil stocks, ghost of 2015-2017 glut
©Vanda Insights
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Source: International Energy Agency
• OECD oil stocks rose for the fifth straight month in August 2019
• Closing in on the 3 billion barrel figure last seen during the 2015-2017 overhang
• IEA projects >1 mil b/d build in stocks through first-half 2020
Producer alliance is girding for tough times…
©Vanda Insights
27
Non-OPEC liquids supply outlook 2018-2040
Peak in 2026
…But only till the end of next decade
• Sees non-OPEC oil supply peaking around 2026
• Sees demand for OPEC liquids (crude + NGLs) rising from 34 mil b/d in 2020 to 44 mil b/d in 2040
Source: OPEC World Oil Outlook 2019
Conventional crude
Biofuels
Other liquids (ex-Biofuels)
Tight oil (crude + NGLs)
Conventional NGLs
Trump wants US stock markets high – Implications for trade deal
©Vanda Insights
28
Speculators raising bullish bets on crude since Oct
©Vanda Insights
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Source: US Commodity Futures Trading Commission, CME, ICE
0
15
30
45
60
75
90
0
200
400
600
800
1,000
$/bbl Mil bbl Spec length in WTI (lhs)
0
15
30
45
60
75
90
-20
80
180
280
380
480
580
$/bbl Mil bbl Spec length in Brent (lhs) Brent (rhs)
Deeper OPEC+ cuts in 2020 far from certain
©Vanda Insights
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• US-China trade deal likely to support Brent above $60 psychological mark
• Russia, important non-OPEC ally, has been dovish since late 2018
• Saudi Arabia needs to manage optics around Aramco IPO with oil buyers
• Saudi Arabia cutting more than it needs to, complicating the maths
• Tough to impose deeper cuts without 100% compliance with current quotas
Is geopolitical risk underpriced in oil?
©Vanda Insights
31
US Production Surge and Uncertainties
©Vanda Insights
2
US shale boom drives crude, product exports higher
©Vanda Insights
33
Source: US Energy Information Administration
0
2
4
6
8
10
12
14
Mil b/d Crude exports Finished petroleum product exports NGLs exports Crude production
Petchem feedstocks: Cracks under pressure, ethylene volatile
©Vanda Insights
34
Source: S&P Global Platts (naphtha, ethylene, propylene, benzene), ICE (Brent)
0
200
400
600
800
1000
1200
1400
1600
1800
$/mt
Ethylene CFR NE Asia
Propylene Poly Grade CFRChina
Benzene FOB KoreaMarker
Naphtha C+F Japan
ICE Brent front-month
0
2.5
5
7.5
10
12.5
15
Big question on future trajectory of US oil output
©Vanda Insights
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OPEC outlook on US tight oil supply
Peak in 2027: 11.8 mil b/d
Source: OPEC World Oil Outlook 2019
Peak in 2032: 14.5 mil b/d
US EIA projection
Source: EIA Annual Energy Outlook 2019
Near-term uncertainty too, as shale succumbs to price pressure
©Vanda Insights
36
600
650
700
750
800
850
900
40
50
60
70
80WTI in $/bbl (lhs) Oil rig count (rhs)
300
350
400
450
500
40
50
60
70
80WTI in $/bbl (lhs) Frac fleet count (rhs)
• US shale producers have laid off 23% of oil rigs since start of 2019
• Fracturing fleet count has dropped 28% from recent high of April 2019
• Shale producers under pressure to increase cash flow, have exhausted “sweet spots”, face well interference issues, challenges of limited access to capital and credit
Source: Baker Hughes, Primary Vision, CME
8
9
10
11
12
13
US crude production in million b/d
US output growth decelerating, but by how much?
©Vanda Insights
37
2018: 10.99 mil b/d
2019: 12.26 mil b/d
2020: 13.17 mil b/d
Source: US EIA. 2019 and 2020 are the latest projections
+1.6 mil b/d
+1.3 mil b/d
+0.91 mil b/d
2017: 9.35 mil b/d
?
The future ain’t what it used to be
©Vanda Insights
38
For now it’s all about:
• Trade war
• Trade war
• Trade war
• Rising Middle East tensions
In early 2019, we were focusing on:
• US sanctions against Venezuela, implications of civil war or regime change
• US sanctions against Iran, fate of 6-month waivers granted on crude exports in Nov
• US-China trade war: Resumption of talks promising, but no guarantees
• Will US launch a trade war with Europe?
©Vanda Insights
Email: [email protected] Web: www.vandainsights.com
Twitter: @VandanaHari_SG
Thank You!