The Oil Price Outlook Through 2004

1
The Oil Price Outlook Through 2004

• Graham Loveland
• Principal
• Global Energy Group
• 27 January 2004

2
Outline of Presentation

• Brief summary of the message
• The current market why have we been wrong?
• Economic outlook
• Oil demand
• Non-OPEC production
• Inventories
• OPEC production, options and politics
• Price scenarios
• Factors to watch through 2004

3
Brief Summary of the Message

• Price forecasts low because demand high
• GI still expects a price fall in Q2, because
• The reduced call on OPEC crude is too great for
  OPEC to be able to agree suitable cuts
• But the base WTI forecast is now higher, 26/bbl
• Clean products markets are tight. Gasoline
  prices likely to be high this year
• Major uncertainties demand, stocks, OPEC
  cohesion

4
Current Unusual Market Features

• Very high crude prices whilst OPEC openly frets
  about a price fall and analysts expect one
• More worries about US gasoline stocks than
  distillate stocks
• US spec changes ? complex gasoline market
• Iraq production rising but security? bottlenecks?
  
• Record high European product price spreads to
  crude for the time of year
• Uncertainty about Russian export intentions
• Uncertainty about Chinese import intentions

5
Undershooting the Price
6
Most Analysts Expect a Price Fall (Or Did in Late
December)
Source Argus Global Markets 22.12.03
7
Why Did We Get It Wrong?

• Economic recovery stronger than expected
• Total demand stronger than anticipated
• January estimate of Q4 1.2 mb/d higher than July
• OECD bottom up stocks have not risen as
  expected
• Reflecting stronger demand now apparent
• So US crude stocks have remained low, due to
• US refinery runs have been very high
• Chinese imports have surged and pre-empted
  supplies
• Prices in backwardation little incentive to
  build stocks
• Continuing SPR fill (average 160 kb/d in Q4, 275
  kb/d in Dec)
• US gasoline stocks have caused concern, due to
• Very strong US autumn gasoline demand
• Refiners maximising distillates earlier in 2003

8
OPECs Saviour in 2003 Demand
9
But 2004 Call Not Rising So Much
10
The Price-Stock Relationship (1)
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The Price-Stock Relationship (2)
12
High U.S. Crude and Gasoline Use
13
Result in Low Stocks
14
GDP Growth Rates
15
Global Demand Growth
16
Chinese Demand Growth
Source IEA
17
Reasons for Chinese Demand Growth

• Rapid growth in car ownership plus road building
• Recovery in flying after SARS
• Warm summer 2003 increased AC demand
• Strong industrial demand due to export-led growth
• Construction boom increasing demand for energy
  intensive building products (steel, cement etc.)
• Rapid growth in electricity consumption which
  remains heavily reliant on oil
• Consumer stock building in anticipation of a
  price increase how large?

18
What Is Chinese Demand, Really?

• No demand statistics are published
• Thus demand is actually apparent demand
• Derived from reported production plus net imports
• But trade statistics are notoriously inaccurate
• Apparent demand includes stock changes
• All that is certain is that demand is rising
  rapidly!

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Non-OPEC Is Increasing
Non-OPEC year on year growth mb/d
20
Iraq Is Increasing
21
OPEC Capacity Is Increasing

• Saudi Arabia Increases may just offset losses
• UAE But will probably support cuts
• Iraq Infrastructure an issue but rising
• Iran Wants to keep ahead of Iraq
• Qatar Traditionally a quota cheat
• Libya Will probably cheat
• Algeria Wants bigger quota. A quota cheat
• Nigeria Wants bigger quota. A quota cheat
• Venezuela Need to make up for 2003 losses

22
But the Call on OPEC Is Falling
23
The Outlook in 2004

• Rising non-OPEC production will cover rising
  demand
• OPEC usable spare capacity has recently been less
  than 1 mb/d
• OPEC capacity is rising, possibly by 2-3 mb/d
• Members will want to utilise new capacity if
  possible
• But the annual call on OPEC is falling by around
  0.7 mb/d and
• The cut needed for Q2 could be close to 4 mb/d
• Traditional quota non-compliers are unlikely to
  agree to (or make) large cuts
• Hence Saudi Arabia (with Kuwait and UAE?) may
  have to make larger than proportionate cuts
• We do not expect OPEC to be able to make this
  scale of cut
• But how much does SA want to support prices?

24
OPECs Price Targets
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Prices Generally Miss Targets

• Even the 18/bbl target of the late 1980s was
  only moderately successful
• Prices virtually never reached the 21/bbl target
• Prices within the 22-28/bbl price band are due
  to special factors
• Low non-OPEC investment following 1998/99
  collapse
• Diminishing spare capacity in OPEC due to lack of
  investment and mothballing of spare capacity
• Production losses in Venezuela, Nigeria, Iraq

26
Stocks (Days Cover) and Price
27
Price Scenarios for 2004
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Factors to watch in 2004 (1)

• Demand
• Impact of economic recovery on demand
• Chinese demand will it slow down/be slowed by
  Govt action?
• Supply
• Russia/Caspian/W. Africa how fast will they
  rise?
• Iraq will it hit an infrastructure bottleneck?
• Nigeria how much and when?
• Stocks
• US crude stocks how low is low? Industry view
  (unconcerned) vs. market view (concerned)
• Gasoline can stocks build in time for the
  driving season?
• Where is all the oil going??

29
Factors to Watch in 2004 (2)

• OPEC
• Outcome of 4 February meeting?
• Price versus market share? (logic vs. emotion)
• Dollar versus Euro for valuing revenue?
• The future of the 22-28/bbl price band?
• Reactions to a falling price?
• Bottlenecks in rise of Iraq exports?
• How to reintegrate Iraq?
• How to reallocate quotas?
• How to handle likely flagrant over-production
  from possibly several members?
• How important is price support to SA if it means
  a large cut?