U of A Energy Club World Oil Markets Richard Dixon

Not for the Faint-hearted 1.How many industries are: – in such a constant state of justification to their customers? – seen by their customers as irresponsible and untrustworthy? – in such an adversarial relationship with their customers? 2.At the same time, how many industries have to deal with customers that are largely disengaged, uninterested, often energy illiterate and may even be irresponsible in usage? 3.And, paradoxically, customers who are so dependent on their products? 4.How many industries can’t reliably predict with any degree of certainty the price of their product 13 weeks out but make investment decisions on IT, infrastructure, etc. based on those predictions in $B’s?

World Primary Energy Consumption by fuel

What is traded? Over 200 grades of oil globally measured by: – Energy content (economic viewpoint also heavy-light spread) Light crude = 35 to 40 o API Medium crude = 21 to 34 Heavy crude = 16 to 20 – Higher viscosity = think need diluents (naptha) – Sulphur content Sweet = less than 0.5% sulphur – Location WTI (Cushing) = Nymex Brent (North Sea) = ICE = Brent Dated So what is WCS and how does it compare?

Annual average Brent oil price (US$/bbl)

Oil: Market Fundamentals Demand Non-OECD demand, esp. China, India & Brazil – Consumption well below 10bbls/capita average of major EU consumers Sector demand – Transportation – seasonality - climate, vehicle efficiency – Power generation, heating (see Sankey diagrams) – Non-energy uses (lubes, etc) Price Income (GDP per capita) – strong vs. weak economic growth

Supply OPEC (75% of global reserves and 40+% of production) Rise of shales (IEA’s forecast changes since 2010) Other unconventionals (deepwater – subsalts, oil sands tight oil) Oil: Market Fundamentals

Inventories & Spare Capacity Held for supply shocks by nations or trading/refining in the supply chain – SU Strategic Petroleum Reserve (SPR) Theoretically 38 days supply – average 727 mbbls Reference Japan at 580 mbbls, China at 685, EU require oil companies to have 90 days supply Oil: Market Fundamentals

Product Prices Which drives which? – Crude price drives crude product price, right? Maybe Tight refining capacity (market assumes that demand for crude will increase as companies seek to take advantage of high product prices also the reverse) Oil: Market Fundamentals

Financial Crude markets Crude financial markets (multiples larger) – Less than 1% of Nymex contracts go to actual delivery – Key Players Commercial – producers, refineries, transportation, etc. Mainstream – institutional Commodity Traders Oil: Market Fundamentals

Other Political – Middle East premium Currency fluctuations Oil: Market Fundamentals

Iraqi No noticeable impact to crude production in southern Iraq despite current turmoil. New government under PM Hussein al Abadi unlike to seriously alter oil development policy trajectory. The IEA forecast shows 870,000 bpd in incremental growth in Iraqi output by 2019 (over full-year 2014 levels), and majority of Iraqi exports are Basrah Light ( 34 degrees API). Incremental volumes of Basrah Light would not be going into the Atlantic Basin, and will need to be absorbed overwhelmingly in Asia. China largest purchaser of Iraqi exports (imports of Iraqi crudes have surged from 225,687 b/d in 2010 to 472,209 b/d in 2013, making Iraq China’s fifth largest oil supplier for that year, supplying 8.3% of total imports).