Global Oil Global Oil Over the River and Through the Woods Vikas Dwivedi [email protected](713) 275-66352 Macquarie Capital (USA) One Allen Center, 500 Dallas, Suite 3100, H t TX 77002 Houston, TX 77002 June 2015 Macquarie Capital (USA) In. is a registered broker – dealer and member of The Financial Industry Regulatory Authority (“FINRA”). Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc. Please read Disclaimer on Pages 28-30
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Global Oil Global Oil Over the River and Through the Woods
One Allen Center, 500 Dallas, Suite 3100, H t TX 77002Houston, TX 77002
June 2015
Macquarie Capital (USA) In. is a registered broker – dealer and member of The Financial Industry Regulatory Authority (“FINRA”). Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc.
Please read Disclaimer on Pages 28-30
WTI/Brent likely to stay tighter on diverging fundamentals
Brent fundamentals:
Global supply is growing, with little signs of rolling over
Global demand; elasticity a positive, but dollar strength and regulated fuel industry mitigates effectsindustry mitigates effects
WTI fundamentals:
US l th t d t ll d t i ifi t d li i i t US supply growth expected to roll due to a significant decline in rig count
Demand growth remains strong
C / Conclusion – tighter WTI/Brent than in previous years
Previous New Previous New Previous New Previous New2015 $74 $56 $68 $52 ($6) ($4)2016 $85 $68 $79 $62 ($6) ($6)2017 $90 $81 $84 $75 ($6) ($6)
+2017 ($6) ($5) $95 $84
Supply: US only source of timely rationalization US production growth slowing towards 0 from
1 2 million BPD but:
Demand: Regional and fuel diversification Global crude demand growth accelerating to 1.2
MM BPD from 0 9 demand growth now at1.2 million BPD, but: Production surprising to the upside from:
Russia Libya
MM BPD from 0.9 – demand growth now at average of past few years but not enough 2014 demand growth was only 700 K BPD Massive 1Q15 global demand growth rate
not sustainable Saudi Arabia North Sea Brazil
not sustainable Was high due to easy comps in the US
from last year’s polar vortex winter Better US employment data VMT data positive surprises
Source: Macquarie Capital (USA), Global Oil S&D, June 2015
Page 3
VMT data positive surprises
Crude oil markets – steady demand growth, volatile supplyMacquarie Price forecasts versus forwards and consensus
Page 6Source: Macquarie Capital (USA), Global Oil S&D, June 2015
Supply growth from key regions moving the wrong way
7
North Sea production should rise for the first time in a decade
North Sea crude oil production (million BPD) North Sea crude oil project pipeline
Estimated Start
5
6
7 Project Name Estimated Start Quarter Peak Production
Brynhild 4Q 2014 12Golden Eagle 4Q 2014 70
Kinnoull 4Q 2014 44Kvitebjorn ER 4Q 2014 52
3
4
j2014 Sub Total 177
Auk South 1Q 2015 11Boyla 1Q 2015 20
Eldfisk II 1Q 2015 60E hdh 1Q 2015 16
1
2Enochdhu 1Q 2015 16
Fram 1Q 2015 18Oseberg Delta 2 1Q 2015 7
Valemon 1Q 2015 16Knarr 2Q 2015 63
Alma Galia 3Q 2015 200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
Goliat 3Q 2015 94Solan 4Q 2014 24
Edvard Grieg 4Q 2015 95Laggan & Tormore 4Q 2015 10
2015 Sub Total 454
Page 7Source: Macquarie Capital (USA), IHS, June 2015
Supply growth from key regions moving the wrong waySaudi Arabia focusing on market share rather than balancing the market
Saudi Arabia crude oil production (million BPD) Comments from Oil Minister al-Naimi highlight the country’s desire to maintain market share11 desire to maintain market share
“… need cooperation of all producers to stabilize the market.”
“The challenge is to restore the supply demand balance10
The challenge is to restore the supply-demand balance and reach price stability. This requires the cooperation of the non-OPEC major producers, just as it did in the 1998-1999 crisis.”
9
“Some non-OPEC major producing countries said they were unable or unwilling to participate in production cuts…For this reason, OPEC decided…not to give up its market share in favor of others.”8
7Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5-Yr Range 2014 2015 5 Yr Avg
Page 8Source: Macquarie Capital (USA), IEA, Bloomberg, June 2015
Core OPEC members adding rigsSaudi Arabia, Kuwait, and UAE ramping activity while the US reels in spending
Core OPEC oil rigs and US oil rigs since YE 2013 Core OPEC gas rigs also ramping up1401,800 80
100
120
1,400
1,600
,
US Core OPEC (RHS)
60
70UAE
Kuwait
Saudi Arabia
80
100
800
1,000
1,200
40
50
Rig Change Since October 2014
Core OPEC +10
40
60
400
600
800
20
30
US -819
0
20
0
200
J-12 N-12 M-13 J-13 N-13 M-14 J-14 N-14 M-150
10
J-12 N-12 M-13 J-13 N-13 M-14 J-14 N-14 M-15
Page 9Source: Macquarie Capital (USA), Baker Hughes, June 2015
Supply growth from key regions moving the wrong wayToo much light sweet supply weighing on differentials
Western African premium to Brent remains weak as refinery maintenance limits demand
Source: Macquarie Capital (USA), Bloomberg, June 2015
2.5J F M A M J J A S O N D
Limited near-term benefit from SPR fills
China SPR Site Operator Capacity (MM bbl) Completion
Phase 2
China SPR may be fully utilized as of March
China SPR
Dushanzi, Xinjiang PetroChina 18.9 2H-11Lanzhou, Gansu PetroChina 18.9 2H-11Tianjin Sinopec 20.1 2H-13Following facilities are facing delays, expected to be completed by end of 2015:Huangdao Shandong Sinopec 18 9 2015
Only Dushanzi, Lanzhou, and Tianjin are completed and at least partially filled
Chinese officials have stated that SPR is almost fully utilized as of the end of MarchN t it ill t b il bl til l t 2015Huangdao, Shandong Sinopec 18.9 2015
Source: Macquarie Capital (USA), Bloomberg, EIA, Platts, Genscape, June 2015
Refinery runs will help storage levelsRefinery runs may hit as high as 17 million BPD this summer, which will help slow the pace of builds
US refinery runs could rise to as much as 17 million BPD during the summer
US refinery runs (million BPD)17 during the summer
Ultra high utilization rates pushing calendar day processing rates to stream day limitations
High refinery runs will mitigate very high crude oil storage levels
15
16
Maintenance levels are expected to be historically low for the balance of 2015
US d il t l l l di SPR ( illi f bbl ) US l d t d ti it ( illi BPD)
13
14
J F M A M J J A S O N D
5 Year Range 2015Average 2014
US crude oil storage levels, excluding SPR (millions of bbls) US planned turnaround activity (million BPD)
450
500
5505 Year Range2015Average2014 1 5
2.0
2.5 5 Year Range Average
2014 2015
350
400
450
0.5
1.0
1.5
Page 16
300J F M A M J J A S O N D
0.0J F M A M J J A S O N D
Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
Crude oil differentials are very tight, howeverTight differentials suggest waterborne imports should pick up in the near term
Bakken crude oil prices, relative to Brent, have strengthened significantly since the end of the first quarter
Brent vs. Bakken crude oil differential ($/bbl)25
R il C t t USEC Current levels are below the required spread to cover the cost of rail transportation
While a significant portion of crude by rail is on a term basis, we would expect spot barrels railed to the US East Coast to decline10
15
20Rail Costs to USEC
Coast to decline With lower Bakken to East Coast rail deliveries,
waterborne imports should pick up High storage levels could mitigate this effect, however
PADD I d il I t ( illi BPD)
0
5
D-13 M-14 J-14 S-14 D-14 M-15
PADD I d il t l l ( illi b l )
16
18
20 5 Year Range2015Average2014
1.5
2.0
PADD I crude oil Imports (million BPD) PADD I crude oil storage levels (million barrels)
10
12
142014
0.5
1.0
5 Year Range Average
Page 17
8J F M A M J J A S O N D
0.0J F M A M J J A S O N D
5 Year Range Average2014 2015
Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
Weak western African differentials supports imports
4
Oversupply of light sweet in Atlantic Basin weighing on high quality light crude oil
Bonny Light’s differential to Brent has narrowed considerably due to an inability of Nigeria clear its
Bonny Light differential to Dated Brent ($/bbl)
2
3loadings schedules
In spite of weak WAF differentials and tight Bakken differentials, imports of Western African crude oil remain historically low
Imports are expected to remain low in the near term only
0
1
D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15
Imports are expected to remain low in the near term – only three vessels have been fixed to sail to the US East Coast refining center, totaling only 50 thousand barrels
U S weekly imports of West African crude oil (million BPD) PADD II to PADD I crude movements by rail (thousand BPD)U.S weekly imports of West African crude oil (million BPD)
1.5
2.05 Year Range 2015Average 2014
PADD II to PADD I crude movements by rail (thousand BPD)
300
400
500 5 Year Range 20155 Year Average 2014
0.5
1.0
100
200
300
Page 18Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
0.0J F M A M J J A S O N D
0J F M A M J J A S O N D
Cushing model suggests storage concerns not over
70
Fall maintenance season and ad valorem taxes should push storage balances higher in the fourth quarter
US refinery runs are expected to hit all time highs this summer during the driving season
Cushing Storage Model (million barrels)
30
40
50
60 High refinery run rates will result in lower storage levels at Cushing, as utilization rates on Cushing to Gulf Coast pipelines increases
The fall maintenance season however, should result in lower flows on these pipelines and therefore result in
0
10
20
J F M A M J J A S O N D
5 Year Range2014Actual
lower flows on these pipelines, and therefore result in more crude oil being left at Cushing
PADD II maintenance is expected to be quite heavy this year, which could weigh on PADD II, and Cushing, balances
Seasonal flows, partly due to ad valorem taxes, should see more crude left in PADD II, rather than in the Gulf Coast
Storage levels could become another concern in the 0.6
0.8
5 Year RangeAverage
PADD II CDU Turnarounds (million BPD)
fourth quarter. While we don’t expect storage levels to breach full capacity, higher storage levels should result in a wider WTI/Brent spread
0.2
0.4
g20142015
Page 19Source: Macquarie Capital (USA), Bloomberg, IIR, EIA, June 2015
0.0J F M A M J J A S O N D
US unconventional oil growth showing signs of slowingHorizontal oil rig count fallen below necessary level to keep production flat
US horizontal oil rigs have fallen below the threshold to keep production flat
US horizontal land oil rigs by play1,200
O We expect production to roll as soon as May; while production has stalled in the weekly reports, we need to see confirmation from the EIA’s Petroleum Supply Monthly Report
We estimate about 600 700 horizontal oil rigs are
1,000
,All Others
Eagle Ford
Bakken
Permian We estimate about 600 – 700 horizontal oil rigs are
necessary to keep production flat Limited evidence of high grading although the Eagle Ford
has seen a smaller reduction in rigs
US l 48 d il d ti kl ti t (MM BPD)600
800
US lower 48 crude oil production, weekly estimates (MM BPD)
8
9
10
200
400
4
5
6
7
5 Year Range 2015 Average 2014
0
200
02/04/11 02/04/12 02/04/13 02/04/14 02/04/15
Page 20
3J F M A M J J A S O N D
5 Year Range 2015 Average 2014
Source: Macquarie Capital (USA), Bloomberg, EIA, Baker Hughes, June 2015
Production expected to slow and soon US crude oil production may be showing signs of slowing, and is expected to roll over
US major play crude oil production (million BPD)
5
Tight oil plays QoQ forecast production growth
20%
4
5
Denver
Permian
15%
20%
Bakken
P i
3
Permian
Eagle Ford
Bakken
5%
10%
Permian
Eagle Ford
2
0%
5%
0
1
10%
-5%
Page 21Source: Macquarie Capital (USA), IHS, EIA, Baker Hughes, June 2015
WTI oil price ($/bbl) versus US production growth (K BPD)0.68 MM BPD Growth leftover for rest of world (ROW)
679 K BPD Growth leftover for rest of world (ROW)
$50
$60
$70What price incentivizes approximately 679 K BPD of non-OPEC production growth
Simplifying assumption: Rest of World is just the US
Page 27
$400 200 400 600 800 1,000 1,200
S p y g assu pt o est o o d s just t e US
Source: Macquarie Capital (USA), Macquarie Global Oil S&D Model, June 2015
Important disclosures:
Recommendation definitions
Macquarie Australia/New Zealand
Volatility index definition*This is calculated from the volatility of historic price
Financial definitions
All "Adjusted" data items have had the followingMacquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark returnUnderperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
y pmovements.
Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.
High stock should be expected to move up or down
All Adjusted data items have had the following adjustments made:
Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expenseExcluded: non recurring items, asset revals, property revals appraisal value uplift preference
Macquarie – Asia/Europe
Outperform – expected return >+10%Neutral – expected return from -10% to +10%Underperform – expected <-10%
Macquarie First South - South Africa
High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.
Medium – stock should be expected to move up or down at least 30-40% in a year.
Low–medium – stock should be expected to move up or down at least 25 30% in a year
property revals, appraisal value uplift, preference dividends & minority interests
EPS = adjusted net profit /efpowa*ROA = adjusted ebit / average total assetsROA Banks/Insurance = adjusted net profit /average total assetsROE = adjusted net profit / average shareholders
Outperform – return > 10% in excess of benchmark returnNeutral – return within 10% of benchmark returnUnderperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark returnNeutral return within 5% of benchmark return
or down at least 25-30% in a year.
Low – stock should be expected to move up or down at least 15-25% in a year.
*Applicable to Australian/NZ stocks only
ROE = adjusted net profit / average shareholders fundsGross cashflow = adjusted net profit + depreciation*equivalent fully paid ordinary weighted average number of shares
All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (InternationalNeutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Recommendation – 12 months
Note: Quant recommendations may differ from Fundamental Analyst recommendations
stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 March 2015
AU/NZ Asia RSA USA CA EUR
Page 28
Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)
Company-Specific Disclosures:Vikas Dwivedi invests from time to time in oil and gas commodities and / or related derivative and futures products consistent with published views.Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
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