Oil fundamental outlook - the ICE · Bearish factor no. 2: turbulent times for oil demand DEMAND (1/5) Global oil demand, y/y change mb/d Global oil demand growth has slowed relative

Oil fundamental outlook June 2013

2 June 2013

Bearish factor no. 1: global macro – doom and gloom persist

MACRO (1/2)

Eurozone unemployment %

Eurozone unemployment remains high: more worryingly, German unemployment has risen for 4 consecutive months

China – total electricity consumption y/y change

The pick-up seen in the Chinese economy has stalled, as China continues to rebalance growth towards consumption

Source: Bloomberg, NEA China, Energy Aspects analysis

(20%)

0%

20%

40%

10 11 12 13

9

10

11

12

13

11 12 13

3 June 2013

But is all really that bad?

MACRO (2/2)

US consumer confidence Index

Monetary stimulus and low energy prices have started to push up US economic sentiment

Japanese GDP SA q/q, %

The new measures to boost Japanese GDP through fiscal stimulus also seems to be bearing fruit

Source: Bloomberg, Energy Aspects

40

45

50

55

60

65

70

75

80

11 12 13

(4)

(2)

0

2

4

08 09 10 11 12 13

4 June 2013

Bearish factor no. 2: turbulent times for oil demand

DEMAND (1/5)

Global oil demand, y/y change mb/d

Global oil demand growth has slowed relative to the pick up seen in Q4 last year

Global oil demand, y/y change mb/d

Chinese oil demand growth has failed to pick up substantially, still under 0.5 mb/d

Source: Energy Aspects analysis

(4)

(3)

(2)

(1)

0

1

2

3

4

5

04Q1 06Q1 08Q1 10Q1 12Q1

non-OECD

OECD

Actual F

(4)

(3)

(2)

(1)

0

1

2

3

4

09Q1 11Q1 13Q1

China non-OECD OECD

Actual F

5 June 2013

Europe remains a pain point, with the slight recovery reversing

DEMAND (2/5)

European oil demand, y/y change mb/d

The slight recovery seen late last year is fading

Eurozone manufacturing PMI Index

With austerity measures crippling growth

Source: JODI, Bloomberg, Energy Aspects analysis

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

10 11 12 13

Gasoline Fuel oil Distillates Others

Improvement in Q4 12 Improvement in Q4 12

Worsening in Q1 13 42

46

50

54

58

62

11 12 13

6 June 2013

50

65

80

95

Jan Mar May Jul Sep Nov

2013 2012 2011

Chinese oil demand is picking up, but at a much slower rate

DEMAND (3/5)

Chinese oil demand, y/y change mb/d

Chinese oil demand has started to recover, but this is a gradual process

Chinese gasoline and diesel stocks mb

Refining capacity additions have resulted in sharply higher product stocks and China is back to destocking

Source: China Customs, Energy Aspects analysis

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

07 08 09 10 11 12 13

40

45

50

55


2013 2012 2011

7 June 2013

And is non-OECD demand growth ex China stalling too?

DEMAND (4/5)

Key non-OECD oil demand growth, y/y change mb/d

Non-OECD oil demand growth outside China has also slowed in late Q1 13

Asian petrochemical prices $/tonne

With petchem prices in Asia slumping on reduced export demand to Europe

Source: ANP, JODI, PPAC, Bloomberg, Energy Aspects analysis

(0.3)

0.0

0.3

0.6

0.9

1.2

08 09 10 11 12 13

India Brazil FSU Saudi

700

900

1,100

1,300

1,500

1,700

10 11 12 13

Ethylene Korea Benzene Japan

LLDPE India

8 June 2013

But could the declines have been exaggerated?

DEMAND (5/5)

OECD Asia Pacific demand growth, y/y change %

An extremely warm winter in parts of Asian exacerbated the declines in demand

UK gasoline demand, y/y change mb/d

While the disruption to transportation in Europe has outweighed positive impact on heating from heavy snowfalls

Source: JODI, Energy Aspects analysis

(6%)

(3%)

0%

3%

6%

9%

12%

10 11 12 13

Japan Korea

`

Very warm winter

(0.08)

(0.06)

(0.04)

(0.02)

0.00

0.02

0.04

0.06

07 09 11 13

Heavy snowfall

9 June 2013

Bearish factor 3: Non-OPEC supplies: all about shale

SUPPLY (1/9)

Rest of non-OPEC oil production, y/y change mb/d

US oil production is scaling record highs, supported by shale output

US oil production, y/y change mb/d

But the rest of non-OPEC production has been very weak, declining sharply throughout 2011 and 2012 and into 2013

Source: EIA, Energy Aspects analysis

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

05 06 07 08 09 10 11 12 13

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

05 06 07 08 09 10 11 12 13

10 June 2013

But the usual centres of growth have disappointed significantly

SUPPLY (2/9)

FSU oil production, y/y change mb/d

Brazilian oil production has been extremely weak, due to high declines at old oilfields

Brazilian oil production, y/y change mb/d

FSU output, apart from Russia, has also been affected by technical problems, leading to sharp declines

Source: ANP, Socar, Bloomberg, Kazmunaigas, Energy Aspects analysis

(0.25)

(0.15)

(0.05)

0.05

0.15

0.25

06 07 08 09 10 11 12 13 (0.4)

(0.2)

0.0

0.2

0.4

0.6

0.8

09 10 11 12 13

Kazakhstan

Azerbaijan

Russia

11 June 2013

The weakness outside the US is highly visible

SUPPLY (3/9)

Angolan loadings mb/d

Russian crude exports for June are at their lowest in five years, due to rising domestic demand

Urals loadings mb/d

Nigerian loadings are also at a five year low, while Angolan exports are at their lowest in a year

Source: Bloomberg, Energy Aspects analysis

2.1

2.3

2.5

2.7

2.9

3.1

3.3


2013 2012 2011 2010

1.4

1.5

1.6

1.7

1.8

1.9


2013 2012 2010 2011

12 June 2013

And much of shale is super light crude or NGLs

SUPPLY (4/9)

Crude oils by quality characteristics mb/d

Annual US oil production growth by type mb/d


Crude oil quality of shale plays is super light With vast amounts of condensates being blended into crude

(0.4)

(0.2)

0.0

0.2

0.4

0.6

0.8

1.0

2002 2004 2006 2008 2010 2012

Crude

NGL

13 June 2013

With high costs of extraction and high decline rates

SUPPLY (5/9)

Type curve in shale basins mb/d

Price sensitivity of 2012 US drilling

Source: American oil and gas reporter, Energy Aspects analysis

Decline rates at liquid plays are extremely steep, and can range between 50-70% after the first year

Breakeven prices required by producers are above $80 per barrel; below $70 drilling programmes would be scaled back

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0 60 120 180 240 300

Eagle Ford Bakken

No of months

0

20

40

60

80

100

50 60 70 80 90

WTI price, $/barrel %

of

op

era

tors

, cu

mu

lative

14 June 2013

Worse, OPEC supply under significant pressure

SUPPLY (6/9)

Nigerian oil production mb/d

Rise in unrest is set to curtail Libyan production this year

Libyan oil production mb/d

While increasing oil theft will cap Nigerian output growth

Source: MEES, Energy Aspects analysis

1.9

2.0

2.1

2.2

2.3

2010 2011 2012 2013

Shell force majeures in 2011

from hacksaw cuts, leaks and

fires on its pipelines

Declaration of Amnesty by the

government and ceasefire by

MEND

Floods and Increase in

oil thefts

Oil theft at

three year

high, FMs

0.0

0.4

0.8

1.2

1.6

2.0

2010 2011 2012 2013

Arab Spring

Overthrow

of Gaddafi

Political skirmishes,

militant attacks,

protests on the rise

15 June 2013

Geopolitics has had direct impact on OPEC output

SUPPLY (7/9)

Iraqi oil production mb/d

Sanctions against Iran have taken the country’s output below 3 mb/d, and the pick-up in exports has faded

Iranian oil production mb/d

While Iraqi output has grown over the past year, growth is stalling due to rising sectarian violence


2.5

2.8

3.0

3.3

3.5

3.8

4.0

4.3

4.5

06 07 08 09 10 11 12 13 1.4

1.8

2.2

2.6

3.0

3.4

06 07 08 09 10 11 12 13

16 June 2013

Saudis have been the only stabilising factor, but their agenda is changing

SUPPLY (8/9)

Iraq and Saudi OSPs to Asia $/barrel

Saudi Arabian oil production has started to pick up ahead of seasonal demand, after the sharp drop

Saudi Arabian oil production mb/d

Discounted Iranian and Iraqi crude are causing the Saudis to lose market share, a problem in the longer run


7.6

8.0

8.4

8.8

9.2

9.6

10.0

10.4

06 07 08 09 10 11 12 13

(4)

(3)

(1)

1

2

4

5

09 10 11 12 13

Iraq - Basrah light Saudi - Arab Light

17 June 2013

Overall, costs of extraction are much higher today

SUPPLY (9/9)

US Gulf of Mexico decline rates %

Exploration and production costs have risen substantially over the past eight years

Ultra-deepwater rig day rates $000 per day

Decline rates have stepped up across key basins such as North Sea, Brazil, US GoM, adding further to costs

Source: Company data, MOEMRE, US Department of Interior, Energy Aspects analysis

100

200

300

400

500

600

700

00 02 04 06 08 10 12

0

20

40

60

80

100

1 2 3 4 5 6 7 8 9

2009

2008

2004

2000

1996

18 June 2013

Bearish factor 4: Refining overcapacity leading to weak margins

REFINING (1/2)

Refining capacity balance mb/d

US refinery runs mb/d

Source: IEA, EIA, Energy Aspects analysis

Global refining additions are well in excess of oil demand growth, resulting in pressurised margins

And global, particularly US, runs have been at record highs due to cheap domestic crude and stellar margins

(0.5)

0.5

1.5

2.5

3.5

2008 2009 2010 2011 2012 2013

Refining capacity additions, net

Oil demand growth

13.5

14.0

14.5

15.0

15.5

16.0

Jul Aug Oct Dec Feb Apr Jun

12/13 11/12 5yr avg. 12/13 11/12 5yr avg.

19 June 2013

But falling margins do not necessarily mean lower crude demand

REFINING (2/2)

Total refining capacity mb/d

Crude stockpiling, China mb/d

Source: BP Statistical Review of World Energy, China Customs, Energy Aspects analysis

Total refining capacity has increased steadily over the past few years and run cuts are coming from a higher base

Crude stockpiles, although rising lately, remain low, so crude imports to countries like China will remain high

80

84

88

92

96

2001 2003 2005 2007 2009 2011 2013

(0.6)

(0.2)

0.2

0.6

1.0


2013 2012 2011 5yr avg.

20 June 2013

Thus, focus on bearish headlines weighing on prices

PRICES (1/5)

Front month Brent prices $/barrel

Brent forward curve $/barrel

Source: Bloomberg, Datastream, Energy Aspects analysis

Oil prices have found a new trading range, some $10 lower than last year

The drop in front month prices has extended to the back as a sense of abundance has crept in

80

90

100

110

120

1 2 3 4 5 6 7

Current

1 year ago

2 years ago

95

100

105

110

115

120

Dec Jan Feb Mar Apr May Jun

21 June 2013

Light crude and product prices have been the worst affected, due to shale

PRICES (2/5)

US gasoline crack spreads (relative to WTI) $/barrel

Light crude prices relative to Dated Brent $/barrel


US gasoline prices and crack spreads have plummeted from the highs earlier in the year

Weakness in light ends weighing on light sweet crudes relative to their heavier counterparts

10

15

20

25

30

35

40

45

Jan Feb Mar Apr May Jun

Jul-13 Sep-13 Nov-13

(3.0)

(1.5)

0.0

1.5

3.0


Azeri Saharan Blend

Urals Rotterdam Forties

22 June 2013

Implications on other benchmarks: Disconnected US, Brent-Dubai to widen?

PRICES (3/5)

US crude oil imports mb/d

Nigerian crude oil exports to the US mb/d


The growth of shale output has backed out crude imports, primarily from the Gulf Coast

The backing out of light sweet crude imports has affected WAF the most, impacting the Atlantic basin

0.0

0.4

0.8

1.2

1.6

90 93 96 99 02 05 08 11 14

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

05 06 07 08 09 10 11 12 13

Total (LHS) Gulf Coast (RHS)

23 June 2013

As shale backed out crudes head to Asia rather than Europe

PRICES (4/5)

WAF exports to Asia mb/d

FSU crude exports mb/d

Source: Reuters, Energy Aspects analysis

But West African barrels are increasingly swinging into Asia, due to strengthening demand there

FSU crude exports have been on the downtrend due to high domestic demand; within exports, more is headed to Asia

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

06 07 08 09 10 11 12 13

5.4

5.8

6.2

6.6

7.0

09 10 11 12 13

24 June 2013

But rising exploration costs to support $100 floor

PRICES (5/5)

Major’s liquids output, CAPEX and income Index based on nominal dollars

Net income vs. oil price $/barrel

Source: EIA, Reuters, Energy Aspects analysis

As decline rates have stepped up and terrains have gotten more challenging, oil companies have failed to grow output

Net income per barrel (11.5%) has risen by far less than oil prices (16.1%) over the last 10 years due to rising costs

0

20

40

60

80

100

120

2

6

10

14

18

22

02 04 06 08 10 12

Net Income, LHS Oil Price, RHS

0

100

200

300

400

500

00 02 04 06 08 10 12

Liquids production

Capex

Net Income

25 June 2013

The weakness seems greater in Brent than other grades

SPREADS (1/7)

Brent prompt time spreads $/barrel

WAF and Med physical diffs to Dated Brent $/barrel


Prompt Brent spreads have moved from a $1 average to 20 cents

While other grades such as Nigerian, Angolan and even Urals have strengthened significantly relative to Brent

(0.1)

0.4

0.9

1.4

1.9

Dec Jan Feb Mar Apr May Jun

(3)

(2)

(1)

0

1

2

3

4


Bonny Light Girassol Urals Med

26 June 2013

Absence of Korea and improved Forties supplies weighing

SPREADS (2/7)

Forties loadings mb/d

Prompt Brent spreads $/barrel

Source: Bloomberg, Energy Aspects analysis

The South Korean government’s attempts to close a tax loophole has deterred Korean buying of Forties

Forties production is improving on stable Buzzard performance and the return of the Elgin-Franklin fields

(1)

0

1

2

3

4

5

Jul 10 Mar 11 Nov 11 Jul 12 Mar 13

1 year avg post

FTA: 0.63 1 year avg pre

FTA: -0.01

Avg July 12 -

Mar 13: 0.91

Avg

Mar -

May:

0.23

0.1

0.2

0.3

0.4

0.5

0.6

0.7


2013 2012 2011 2010

27 June 2013

And European refining margins worst hit

SPREADS (3/7)

Brent Rotterdam hydroskimming margins $/barrel

US gasoline imports from Europe mb/d


Refining margins have fallen sharply in Asia and in Europe as demand is weak but supplies keep rising

Weak US demand, higher domestic production and RINs all contributing towards lower gasoline imports from Europe

(4)

0

4

8

12


2013 2012 Average

0.0

0.1

0.2

0.3

0.4

0.5

0.6

01 02 03 04 05 06 07 08 09 10 11 12 13

28 June 2013

Brent spreads will struggle to get to $2 in Q3 this year

SPREADS (4/7)

US inventories relative to the 5-year average mb

UK oil production by quarter, y/y change mb/d

Source: EIA, DECC, Energy Aspects analysis

Product stocks around the world have risen substantially over the past year, reducing the incentive to run

Far lower field maintenance in the UK this year is likely to make the y/y declines less steep

(60)

(40)

(20)

0

20

40

60

Jul 11 Jan 12 Jul 12 Jan 13 Jul 13

Crude Products ex 'other oils'

May 2012

May 2013

(0.3)

(0.2)

(0.1)

0.0

Q1 '10 Q4 '10 Q3 '11 Q2 '12 Q1 '13 Q4 '13

F'cast

29 June 2013

And the near term outlook on spreads remains bleak, without South Korea

SPREADS (5/7)

New capacity additions in 2013 mb/d

FSU gasoil exports mb/d

Source: DECC, Energy Aspects analysis

New Middle Eastern and Indian refinery additions will provide a further significant boost to supplies in H2

FSU gasoil exports to Europe are rising fast , and together have depressed European refinery runs to below 75%

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Q1'13 Q2'13 Q3'13 Q4'13

Others Middle East Asia

0.6

0.7

0.8

0.9

1.0

1.1

1.2

09 10 11 12 13

30 June 2013

What about the arb? WTI to pick-up?

SPREADS (6/7)

Pipelines towards Gulf Coast Thousand b/d

US rail loading capacity mb/d

Source: Company reports; Energy Aspects analysis

New pipeline and rail start-ups are helping to alleviate the existing infrastructure bottlenecks

20

7

30

5

49

0

67

5

75

2

88

2

91

7

1,0

27

1,0

27

212

366

565

750 827

957 992

1,185 1,265

0

250

500

750

1,000

1,250

Pre 12

Q1 12

Q2 12

Q3 12

Q4 12

Q1 13

Q2 13

Q3 13

2014

Other

North Dakota

Name Start-up Capacity

Currently operational

Seaway reversal May-12 150

West Texas Gulf Jun-12 40

Eagle Ford condensate Jun-12 300

Eagle Ford to Houston pipeline - Phase 1 Jul-12 350

Seaway expansion Jan-13 250

Under Construction

Twinned Seaway expansion Q1 14 400

Eagle Ford to Houston pipeline - Phase 2 Mar-13 200

Eagle Ford pipelines Mar-13 350

Texas Line mid-2012 350

Permian expansion projects Late-2012 40-60

Keystone XL South leg Late 2013 700

Longhorn pipeline reversal Q1 13-mid 13 75-225

Permian Express Phase 1 Apr-13 90-150

Planned

Permian Express Phase 2 Mid-2014 200

West Texas Gulf expansion Q1-13 70

Pecos River crude pipeline May-13 150

Jones Creek extension End Q3/early Q4 200

Houston-Beaumonth Port Arthur Early 2014 200

BridgeTex Pipeline Mid 2014 300

TexStar's Eagle Ford pipeline Q3 2012 100

Houma-Houston pipeline reversal Feb-13 300

Westward Ho Q3-15 300

Double Eagle Pipeline Early 2013 100

Karnes to Corpus Christi Mid-2013 120

Trunkline conversion from NG to crude Mid 2015 400

El Paso Natural Gas System Conversion tbc 300-400

31 June 2013

Pipeline reversals to help WTI reconnect to the Gulf Coast

SPREADS (7/7)

US Midwest balances Thousand b/d


We expect WTI to narrow its gap to Brent, and despite recent refinery start-up delays pushing back sustained Cushing draws, we expect substantial draws to start in the coming weeks

Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13

Production 1,420 1,513 1,599 1,717 1,733 1,804 1,873 1,942

Foreign Imports 2,035 1,942 1,996 1,891 2,181 2,131 2,156 2,079

Inter-PADD flows (into PADD 2) 931 979 908 1,016 852 696 591 507

by pipeline 931 979 907 1,015 851 696 590 506

PADD 2+4 supply 4,387 4,433 4,503 4,624 4,766 4,632 4,619 4,528

Refinery runs 4,021 4,050 4,028 3,926 3,850 3,625 3,953 3,951

Exports 45 39 56 54 52 50 61 59

Inter-PADD flows (from PADD 2) 319 399 574 737 905 972 993 1,040

by pipeline 155 201 237 253 402 445 451 466

by trucks and barges 64 62 65 63 44 26 22 24

by rail 100 136 272 420 460 500 520 550

PADD 2+4 demand 4,385 4,488 4,658 4,717 4,806 4,647 5,007 5,050

Balance 42 (15) (55) 107 59 35 (348) (482)

32 June 2013

Price forecasts

PRICE FORECASTS

Brent WTI differential

Q1 actual 118.4 103.0 15.4

Q2 actual 108.8 93.4 15.4

Q3 actual 109.4 92.2 17.2

Q4 actual 110.1 88.2 21.9

2012 actual 111.7 94.2 17.5

Q1 actual 112.6 94.4 18.2

Q2 forecast 105 91 14



2013 forecast 109 97 12

2014 forecast 111 105 6

2015 forecast 117 107 10

Energy Aspects price forecasts (2013 - 2015) $/barrel

Source: Bloomberg (actuals), Energy Aspects analysis

Upside risk

• Supply outages spanning both OPEC and non-OPEC countries

• Geopolitical risks surrounding Iraq, Nigeria, Syria and Libya all pose significant upside risks

Downside risk

• Further weakness in Europe

• Derailment of Chinese recovery

Long-term expectations

• A fairly well balanced market persists over the next few years, but only while demand growth remains weak. Prices still remain high as the cost of exploration has increased substantially

34 June 2013

DISCLAIMER

Analyst Certification

I, Amrita Sen, hereby certify:

1. that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and;

2. no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report

Disclaimer

This publication has been prepared by Energy Aspects Ltd (‘Energy Aspects’). It is provided to our clients for information purposes only, and Energy Aspects makes no express or implied warranties as to the merchantability or fitness for a particular purpose or use with respect to any data included in this publication

Prices shown are indicative and Energy Aspects is not offering to buy or sell or soliciting offers to buy or sell any financial instrument

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Oil fundamental outlook - the ICE · Bearish factor no. 2: turbulent times for oil demand DEMAND (1/5) Global oil demand, y/y change mb/d Global oil demand growth has slowed relative

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