8/3/2019 Adam Robinson Oct 12 2009
1/35
11
Oil and the Great Recession: Physical Realityor Investor Fantasy?
Adam RobinsonRBS Sempra CommoditiesOctober 2009
8/3/2019 Adam Robinson Oct 12 2009
2/35
2
Topics
The Great Recession and oil fundamentals
Oil and stagflation
Momentum trading and oil speculation
8/3/2019 Adam Robinson Oct 12 2009
3/35
3
The Great Recession has created substantial spare capacity in the
oil market, for now
8/3/2019 Adam Robinson Oct 12 2009
4/35
4
But supply does matter if theres a possibility of a storage max-out
10
15
20
25
30
35
40
26-Sep
10-Oct
24-Oct
7-Nov
21-Nov
5-Dec
19-Dec
2-Jan
16-Jan
30-Jan
13-Feb
27-Feb
13-Mar
27-Mar
10-Apr
24-Apr
8-May
22-May
5-Jun
$30
$40
$50
$60
$70
$80
$90
$100$110
$120
Cushing Crude Oil Inventories (Left Axis) WTI Prices, Weekly Avg (Right Axis)
WTI falls as Cushing
nears max storage
Mn bbls of
Inventory
WTI Prices,
weekly avg
Lower inventories let
"other factors" dominate
WTI
Inve
ntorie
s
8/3/2019 Adam Robinson Oct 12 2009
5/35
5
Since February, the glut has shifted from crude to distillate, with some
fearing that a distillate storage max-out this fall would weigh on crude
Distillate Stocks (mmb)
Source: EIA
105
115
125
135
145
155
165
175
J F M A M J J A S O N D
Prior 5 Year Range Prior 5 Year Average 2008 2009
8/3/2019 Adam Robinson Oct 12 2009
6/35
6
Moreover, distillate spreads have been lower than gasoline spreads for
so long that if possible, storage operators have put heating oil in tank
-6
-5
-4
-3
-2
-1
0
1
2
3
4
2-
Mar
16-
Mar
30-
Mar
13-
Apr
27-
Apr
11-May
25-May
8-
Jun
22-
Jun
6
-Jul
20
-Jul
3-Aug
17-Aug
31-Aug
14-Sep
28-Sep
2M-3M Heating Oil Spread 2M-3M Gasoline Spreadcents/gallon
8/3/2019 Adam Robinson Oct 12 2009
7/35
7
However, the market has been able to find an outlet on the water
for distillate, so refiners have been able to continue to produce
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
6
-Jan
20
-Jan
3
-Feb
17
-Feb
3
-Mar
17
-Mar
31
-Mar
14
-Apr
28
-Apr
12-May
26-May
9
-Jun
23
-Jun
7-Jul
21-Jul
4-Aug
18-Aug
1-Sep
15-Sep
29-Sep
2M-3M Heating Oil Spreadcents/gallon
Storing oil products on the water is economic
8/3/2019 Adam Robinson Oct 12 2009
8/35
8
But where then to put the gasoline?
Gasoline Stocks (mmb)
Source: EIA
Feb-08
236Sep-09
213
180
190
200
210
220
230
240
J F M A M J J A S O N DPrior 5 Year Range Prior 5 Year Average 2008 2009
8/3/2019 Adam Robinson Oct 12 2009
9/35
9
Conclusion: Storage economics link the present to the future
65
70
75
80
85
90
95
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Heating Oil Gasoline Crude Oil$/bbl
8/3/2019 Adam Robinson Oct 12 2009
10/35
10
So what then are investors thinking about?
25
30
35
40
45
50
55
Jan-01
Ju
l-01
Jan-02
Ju
l-02
Jan-03
Ju
l-03
Jan-04
Ju
l-04
Jan-05
Ju
l-05
Jan-06
Ju
l-06
Jan-07
Ju
l-07
Jan-08
Ju
l-08
Jan-09
Ju
l-09
Jan-10
OECD Oil Demand Non-OECD Oil DemandMn B/D
8/3/2019 Adam Robinson Oct 12 2009
11/35
11
Will cyclical factors in the economy finally start to create more oil
demand in the US? Some banks believe so
Source: Bloomberg, Morgan Stanley Commodity Research
8/3/2019 Adam Robinson Oct 12 2009
12/35
12
But even if fiscal stimulus turns to drag and the economy does the
W, will investors sell commodities?
August 2009 Update
8/3/2019 Adam Robinson Oct 12 2009
13/35
13
US fiscal deficit could be the stagflation trigger
Continued Unprecedented Rise in the US Fiscal Deficit
Interest Rates Rise
Fed does nothing
Federal borrowingcosts balloon;
interest rate rise
Higher interest ratesand fear of higher
taxes push economyback into recession
Recession hurts taxrevenues further,
pushing up deficits andinterest rates, starting
the negative cycleagain
Fed loosens policy
Monetary policy rulesin time indicate
tightening needed
If Fed maintains looserpolicy, fears of inflationare stoked, pushing upnominal interest rates
Inflation Loop: Themore loose policycreates inflation
fears, the more itsneeded to push down
nominal yields
Recession Double Dip
8/3/2019 Adam Robinson Oct 12 2009
14/35
14
Why the Fed wont take the punch bowl away for a while
Rolling 12-month volatility of US CPI
8/3/2019 Adam Robinson Oct 12 2009
15/35
15
So far, what have we concluded?
The physical market is sloppy But we have the capacity to store the glut
Curves are reshaping to make that storage economic
Investors can drive the price of oil
As long as the Fed doesnt take the punch bowl away,commodities should do well in a recovery or stagflationscenario
8/3/2019 Adam Robinson Oct 12 2009
16/35
16
All this analysis presumes that investors are buying or selling oil
based on their view of some aspect of the forward fundamentals
CTAs trade solely on price.Why? Because it works
0
20
40
60
80
100
120
140
160
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Technical Bullish Indicator Technical Bearish Indicator Price
$/bbl
8/3/2019 Adam Robinson Oct 12 2009
17/35
17
Where does momentum come from in commodities?
Inelasticity of supply and demand
Inventory trends tend to persist
Autocorrelation of inventories is above 90% for
the vast majority of commodities
Inventories also relate to pricesPrice trends, therefore, tend to persist as well
8/3/2019 Adam Robinson Oct 12 2009
18/35
18
Inventories predict prices, but prices predict prices better
Long-short portfolio of commodities sorted byinventories and sorted by prior spot returns
(1) The Fundamentals of Commodity Futures Returns. Gorton, Hayashi, and Rouwenhorst. NBER Working Paper No. 13249. Published July 2007.
13.4%
8.8%
16.0%
12.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Inventories 12-mth Spot Returns
Avg Annual Return Std Dev
8/3/2019 Adam Robinson Oct 12 2009
19/35
19
But prices predict prices even better
Inventories are difficult to observe
Past prices are more informative of futureprices than observable inventories
Inventory problems: publication delays, revisions, anddata limits in non-OECD
Which inventories should be counted? Inventories that cannot be immediately delivered?
Inventories held in raw form below ground?
8/3/2019 Adam Robinson Oct 12 2009
20/35
20
In addition to the momentum traders, banks are also positioned to
push prices toward $60 in the short run
When banks buy calls, they have to sell ina rising market
When banks sell puts, they have to sell oil
in a falling market
Currently producers have bought $60 putsand sold $80 calls to banks
8/3/2019 Adam Robinson Oct 12 2009
21/35
21
On the long side are pension investors, China and retail players
China willing to buy in size at $55 for strategicstocks
For retail players, peak oil and China provide aplausible enough long-term fundamental bull story
without any clear price target
Young/immature asset class + career risk in
bucking a trend = upward pressure on oil prices bysome index investors
8/3/2019 Adam Robinson Oct 12 2009
22/35
22
So what have we concluded, and where are prices going?
To forecast prices with any accuracy, the physicalglut is relevant but not paramount
Ultimately, either way the economy goes,commodities should outperform other risk markets
Momentum traders turned bearish in Septemberand that indeed could be the short term trend as aknee-jerk reaction to recent economic dataworsening
Banks may also have to sell the market down to$60 to hedge positions
8/3/2019 Adam Robinson Oct 12 2009
23/35
23
Ultimately, however, the bull case is intact, and if the economy
rebounds before 2015, prices could spike
Brazilian deepwater = at least a North Sea of oil
The rig market has finally responded, but first output 5 years away
Alternative energy and conservation also will play a part
Another price spike is likely before 2015 if the economy rebounds
Global Deepwater Rig Deliveries
42
03
0 1
1311
30 29
11
0
510
15
20
25
3035
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
# rigs
Source: ODS-Petrodata
8/3/2019 Adam Robinson Oct 12 2009
24/35
24
Intro to RBS Sempra Commodities
8/3/2019 Adam Robinson Oct 12 2009
25/35
25
RBS Sempra Commodities Overview
Overview
On 1 April 2008, RBS and Sempra Energy formed RBS Sempra Commodities LLP (RBS SempraCommodities).
RBS Sempra Commodities is a top tier global commodities trader whose primary activitiesinclude
Physical commodities merchant (buyer from producers, seller to consumers)
Commodity derivatives (financial trading)
Creation of risk management products and solutions (combination of financial and physical)
RBS Sempra Commodities principal commodity lines include the following Energy natural gas, power, coal, crude oil and products
Metals base metals, precious metals, plastics and steel
Other green credits, bio fuels, agricultural commodities
RBS Sempra Commodities profile Geographically diverse trading in Western Europe, CEEMEA, Asia Pacific, and the Americas
Prudent strong risk management controls have been tested during the last several commodity cycles
Sizable employs approximately 1,100 FTEs worldwide and transacts with over 2600 customers
8/3/2019 Adam Robinson Oct 12 2009
26/35
26
Global Commodities Presence
Calgary
Houston
Stamford
London
Geneva
Singapore
8/3/2019 Adam Robinson Oct 12 2009
27/35
27
Trading Capabilities
8/3/2019 Adam Robinson Oct 12 2009
28/35
28
Natural Gas
Business Overview
Worldwide natural gas RBS Sempra Commodities is an international natural gas marketer with a primary focus on the NorthAmerican (ranked #1 non-producing gas marketer in North America in Q1 2009 by Platts) and European wholesale markets as wellas the international Liquefied Natural Gas (LNG) market. RBS Sempra Commodities Natural Gas franchise offers physical trading,market making, and risk management solutions to its global customer network.
RBS Sempra Commodities natural gas services include
North American natural gas
Continental United States
Canada (western and eastern border points)
European natural gas
United Kingdom
Germany
Netherlands
Belgium
LNG trading
Gas storage Derivative and Structured Products (financial and physical)
Management of physical assets and options
Customer Types
Exploration & production
Utilities
Independent powerproducers
Industrials
Commercial
Residential (energyaggregator supply)
Municipalities andgovernment entities
Pipelines and storage
Trading companies
Financial institutions
Hedge funds
8/3/2019 Adam Robinson Oct 12 2009
29/35
29
RBS Sempra Commodities is the #1 Physical Trader amongst
bank platforms
We are not a producer affiliate.
As such, we are not limited to marketing gas from our ownaffiliated assets.
This reduces the likelihood of conflict of interest and enables usto offer more competitive pricing.
RBS Sempra is uniquely positioned to provide
extensive expertise in the physical marketcombined with a strong presence in thefinancial market.
8/3/2019 Adam Robinson Oct 12 2009
30/35
30
Oil and Oil Products
Business Overview
Worldwide crude oil and oil products RBS Sempra Commodities is a worldwide trader of oil and oil products, specializing inphysical delivery of crude oil and crude related product, storage and transportation, as well as on-shore and off-shore blendingcapabilities. RBS Sempra Commodities oil desk offers physical trading, market making, and risk management solutions to itsextensive customer network.
Worldwide oil and oil products services include
Crude (WTI, Brent and Dubai benchmark crudes)
Heavy products (high and low sulfur fuel oil, and bunker fuel)
Light products (jet, naphtha, kerosene, gasoline, distillates)
Natural Gas Liquids (NGLs)
Physical storage
Physical and OTC products for a majority of crude oil and oil products
Derivative and structured products (financial and physical)
Customer Types
Independent powerproducers
Utilities
Industrials
Commercial
Pipeline and storagecompanies
Integrated oil companies
Refiners
Financial institutions Hedge funds
Traders and marketers
8/3/2019 Adam Robinson Oct 12 2009
31/35
31
Power
Business Overview
Worldwide power RBS Sempra Commodities is an industry leading power marketer with a primary focus on the North Americanand the European wholesale markets. RBS Sempra Commodities Global Power team offers physical trading, market making and riskmanagement solutions to its extensive customer network
RBS Sempra Commodities power services include
North American power (physical trading and otc)
United States (East, West, ERCOT)
Canada
European power (physical trading and otc)
United Kingdom
Nordic Area
Continental Europe Germany, Austria, France, Netherlands, Belgium and Spain
Emerging power markets Poland, Czech Republic, Slovakia, Hungary, Croatia, Serbia, Romania,Bulgaria, Greece, Italy, Portugal
Await deregulation of markets in Asia, Latin America, CEEMEA
Structured products (financial and physical), management of physical assets and options
Customer Types
Utilities
Independent powerproducers
Commercial
Industrial
Trading and marketingcompanies
Financial institutions
Hedge funds
8/3/2019 Adam Robinson Oct 12 2009
32/35
32
Metals
Business Overview
Worldwide Metals RBS Sempra Commodities is a leading metals trading group, specialising in base metals, precious metals, steeland plastics. RBS Sempra Commodities offers market making and execution, risk management solutions, physical trading andwarehousing to its extensive customer network.
Worldwide metals services include
Physical trading
Provide liquidity and a reliable partnership to some of the industrys largest producers and consumers globally
Base Metals, Plastics & Steel - focused on trading LME-deliverable material both on-warrant and physicaland concentrates across all major world locations
Warehousing
Approved by the London Metal Exchange, the London International Financial Futures and Options Exchangeand the New York Board of Trade to store and issue exchange-traded warrants for commodities including aluminium,aluminium alloy, copper, zinc, lead, nickel, tin, plastics, steel, cocoa and coffee
Futures and structured products
The Royal Bank of Scotland plc is a ring-dealing member of the London Metal Exchange (LME)
The Royal Bank of Scotland plc is a member of the London Bullion Market Association (LBMA),
a member of the London Platinum and Palladium Market (LPPM)
Our range of hedging products includes:
Structured swaps and options
Averaging
Two asset arbitrage options
Cross commodity indexation
Customer Types
Producers
Smelters
Industrials Commercial
Financial institutions
Hedge funds
Traders and marketers
8/3/2019 Adam Robinson Oct 12 2009
33/35
33
Coal & Dry Bulk Freight
Business overview
Worldwide coal RBS Sempra Commodities is a major participant in the international physical and financial wholesalecoal and dry freight markets. RBS Sempra Commodities coal franchise offers physical trading, market making, andrisk management solutions to its extensive customer network.
RBS Sempra Commodities worldwide coal services include
Steam/thermal coal trading physical and financial Structured products (physical and financial), management of physical assets and options Producer financing
Core competencies:
Structured transactions Hedging structures Marketing Producer optimization (continental arbitrage) Directional and relative value trading
Customer Types
Coal aggregators andproducers
Utilities
Independent power
producers
Industrials
Steel producers
Trading and marketingcompanies
Financial institutions
Hedge funds
8/3/2019 Adam Robinson Oct 12 2009
34/35
34
Agricultural Products
Business overview
Agricultural products RBS Sempra Commodities agricultural products trading group has a growing business in ethanol and bio-fuels primarily focused on North America. Through its Henry Bath Warehousing division, RBS Sempra Commodities providesstorage for coffee and cocoa for London International Financial Futures and Options Exchange (LIFFE) and New York Board ofTrade. The agricultural products trading group is committed to growing its grain and oilseeds business to include financial
markets worldwide as well as physical markets.
Agricultural products services include
Ethanol Physical and financial
Risk management solutions
North American listed grain markets Corn
Wheat
Soybean
Coffee
Cocoa
Customer types
Suppliers
Industrials Commercial
Bio fuels project
Traders and marketers
8/3/2019 Adam Robinson Oct 12 2009
35/35
35
This report reflects the current views of RBS Sempra Commodities and is intended for informational purposes only. RBSSempra Commodities may make investment, hedging and trading decisions inconsistent with the views expressed in thisreport and/or based on information not reflected in this report. RBS Sempra Commodities assumes no obligation to
advise of any changes in its views and assumes no responsibility or liability for the accuracy or completeness of theinformation provided or any loss suffered. RBS Sempra Commodities does not act as a fiduciary or financial, investmentor commodity trading advisor for its customers, each of which is responsible for its own investment, hedging and tradingdecisions.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St. Andrew Square,Edinburgh EH2 2YB. The daisy device logo, Make it happen and RBS are trade marks of The Royal Bank of ScotlandGroup plc. Sempra is a trade mark of Sempra Energy.
Sempra Energy Trading LLC and Sempra Energy Solutions LLC, each a subsidiary of RBS Sempra Commodities LLP,are not the same company as the utility, SDG&E or SoCalGas, and Sempra Energy Trading LLC, Sempra EnergySolutions LLC and RBS Sempra Commodities LLP are not regulated by the California Public Utilities Commission.
Disclaimer