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Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation for the IPAA Carl Calabro, Director, Market Analysis.

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Presentation on theme: "Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation for the IPAA Carl Calabro, Director, Market Analysis."— Presentation transcript:

1 Strategic Advisors in Global Energy How Long Will This High Price Episode Last? Special presentation for the IPAA Carl Calabro, Director, Market Analysis Markets Group June 16, 2005

2 Markets & Countries | Page 2 Key Conclusions  The world is entering an episode of higher and more volatile prices than anything witnessed in the past two decades.  The higher long-term prices are the result of a number of cyclical and structural factors coming together in the last two years.  This new price episode is likely to last few years, or until some of the cyclical trends are impacted by higher prices.  Higher prices will change the industry as profoundly as lower prices did after 1986.

3 Markets & Countries | Page 3 Energy Security Re-Emerge as a Strategic Driver  In the aftermath of 9/11, security in the Middle East has reemerged as a key global concern.  The US presence in Iraq, and the avowed goal to “democratize” the region has raised the issue of the stability of a number of regimes in the Gulf.  Internal tensions, terrorist attacks in the GCC countries have heightened the perception of oil facilities being at risk.  Finally, the emergence of China as a large importer of Middle Eastern crude has added to the perception that a race to secure energy sources is emerging.  In a world dominated by security concerns rather than by globalization (pre 9/11), energy security has added a bullish factor to the perception of future prices, helping to lift the long term crude prices.  This is unlikely to change during the second Bush Administration, which remains focused on the war on terror.

4 Markets & Countries | Page 4 Stock Depletion Setting the Stage in 2003 and 2004 Chain Reaction In The Oil Market Tight Refining & Tanker Capacity Hedge Funds Political Instability $ HIGH PRICE OPEC’s Stock Management Venezuela + Iraq Demand Growth

5 Markets & Countries | Page 5 When Structural And Cyclical Events Collide Exogenous Elements Energy Security Hedge Funds’ Role Oil Fundamentals Low Supply Growth Soaring Demand High prices Cyclical Structural Structural Structural Stretched Infrastructure: RefiningTransportationProduction RefiningTransportationProduction Structural Cyclical OPEC Spare Capacity gone Structural

6 Markets & Countries | Page 6 High Oil Prices Why The World Has $50 + Oil Several Factors Feeding Each Other In This New Episode High Oil Demand Stretch infrastructure creates bottlenecks Low Supply Growth Supply Anxiety $$$ Flow OPEC Loose Excess Capacity Political Risks Highs Economic cycles and impact of high oil prices

7 Markets & Countries | Page 7 Its The Economy Stupid…. The Key Cyclical Driver Oil demand growth remains tightly correlated to economic growth. The rise of Asian economies in the 1990’s has helped re-establish this relationship. Economy Underpins  Transportation  Urbanization  Industry 0.0 % -1.0 % 1990 Global Economy Vs. Oil Demand World GDP, % Oil Demand % Growth 1.0 % 2.0 % 3.0 % 4.0 % 5.0 % 1992199419961998200020022004

8 Markets & Countries | Page 8 Demand Strength Is The Key Driver But Weaker Than 2004 Asia Other US 1.83 3.00 1.50 1.84 0.68 200220032004200520012000 0.66 0.76 3.4 %2.4 %1.0 %0.9 % 2.2 % mmb/d Europe Other US Asia 2.72 6.4 million b/d How Can The World Cope With This Growth? Asia Other

9 Markets & Countries | Page 9 Drivers Of Chinese Growth Several Sectors Underpinning Product Strength Industry Urbanization Transportation Increasing car fleet, trucks shifting to diesel Industrial output is booming across the board Increased household consumption Chinese Refinery Runs kb/d 1,500 kb/d Up 36% Asian Demand Growth kb/d

10 Markets & Countries | Page 10 US-Chinese Synergy Drives Up Diesel Demand The Axis Of Diesel Diesel Demand In the United States and China mmb/d More Chinese Goods Exported To The US Port of LA Incoming Cargo And Diesel Demand forecast

11 Markets & Countries | Page 11  Gasoline demand increased 8% between 2000 and 2005  People live farther away and use bigger cars US Distillate Demand US Gasoline Demand 700 kb/d 600 kb/d US Product Demand Gives a Hand Gasoline Growth Slowing, Diesel Growth Has Created Problems  Between 2000 and 2005 distillate soared with a 15% growth.  Transportation of imported goods throughout the country underpins diesel consumption. forecast mmb/d

12 Markets & Countries | Page 12 Refinery Utilization Is Stretched FSU IS The Only Region With Significant Spare Capacity  Refinery utilization in the Asia/Pacific market is the most stretched, as refiners try to meet Chinese demand.  Next year will see the last round of significant specification changes for distillates in the US and Asia, and its impact on production should not be underestimated. 57% 60% FSU 95% 96% Middle East Average Yearly Utilization Rates In Selected Regions 2002 And 2004 86% 97% Asia/Pacif Does not include teapot capacity in China 89% 92% US 79% 83% EU

13 Markets & Countries | Page 13 Non OPEC Growth Sluggish Decline Rates Hamper Growth Year-on-Year Growth In Non-OPEC Crude

14 Markets & Countries | Page 14 OPEC Has Lost Its Excess Capacity Spare Capacity Is A Luxury Historical Spare Production Capacity million b/d mmb/d

15 Markets & Countries | Page 15 OPEC’s Mostly Talks Saudi Arabia Acts  OPEC Limited To Cash In High Prices  Saudi Arabia Tries To Limit The Upside  Losing Leverage To Control Marker Prices OPEC Willing To Bring Speculators To The Oil Markets WTI Price And OPEC’s Arguments About It 2003 – 1st Half 20042nd Half 2004 - 2005 OPEC Performing “Stock Management” Strategy “ US Gasoline Market Is to Blame” “ It is Speculator’s Fault” “Fundamentals Are Tight”

16 Markets & Countries | Page 16 Why Is OPEC Not Able To Respond? Not The Right Crude Sweet Crude Supply, Right Axis vs. mmb/d Total Crude Supply, Left Axis Discounts Of Arab Medium In Selected Markets Wrong Quality Spurs Soaring Discounts

17 Markets & Countries | Page 17 Why Hedge Funds Are Flocking In? Sliding Dollar And Low Interest Rates Falling Dollar And Rising WTIInterest Rates and WTI  The recent rallies of the last three months are related to pouring money into the oil futures market by all types of investors.  Investment in commodities is a great opportunity to cash in in Asian growth, but a growing problem for the stability of oil prices $/d%

18 Markets & Countries | Page 18 Increasing Interest In Far Out Contracts Flattening The Price Curve  Funds have been putting their money on far out WTI contracts  It has pushed WTI prices well over $40/b through the end of the decade.  And Flattened the entire price curve, exacerbating the front-month contango in WTI and further weakening short-term fundamentals by encouraging further stock builds. Price and Open Interest For WTI Futures

19 Markets & Countries | Page 19 Eyes Focused On The 2 nd Half Little Downside In The Short Term MaySepDecMarApr Investors willing to cash in the upside Investors in need of hedging The Framework : Sliding Dollar, US Deficit Supply Anxiety for 4Q High Oil Demand Supply Anxiety Stretched Infrastructure

20 Markets & Countries | Page 20 Building Stocks and Anxiety 4Q Anxiety Keep Prices Strong 2005 Oil Demand vs. Price Curve Of WTI* *WTI Futures Prices As Of April 14, 2005 right axis; $/b left axis: mmb/d The World Might Have Problems To Cope With Oil Demand In 4Q 2005

21 Markets & Countries | Page 21 How Long Does It Take To React To High Prices? The Reaction Time Shows Asymmetric Risks Economic Impact Of High Prices 3 – 5 years  Expensive oil may trigger investments in upstream or downstream, or may potentially affect demand in the long run.  But the only short term element able to change the outlook is a potential economic meltdown. Key low Impact High Impact Refining30 months 10 years Upstream 1 Month Higher Risk to Economic Downturn Economic Meltdown

22 Markets & Countries | Page 22 The Economic Cycle Has Peaked But What Next Is Difficult To Predict US Growth Is Slowing Adjustment of Imbalances is Necessary Managed adjustment Slowdown Oil Demand Slowing Asian Banks Willing To Subsidize Forever? Growing By Borrowing Not Sustainable Steroids Effects Waning  Inflation driving interest rates up  trade deficit impacting $ value No country has managed to consume and invest 6% more than it produces for long. Crisis Triggered Adjustment Meltdown

23 Strategic Advisors in Global Energy Corporate Offices 1300 Connecticut Avenue, N.W. Suite 800 Washington, DC 20036 USA Tel: (1 202) 872 1199 Fax: (1 202) 872 1219 3, cité Paradis 75010 Paris, France Tel: (33 1) 47 70 29 00 Fax: (33 1) 47 70 27 37 Houston, Texas Tel: (1 281) 599 7099 Fax: (1 281) 599 9891 London, United Kingdom Tel: 44 (0) 1256 760678 Fax: 44 (0) 1256 760678

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