1. The Oil Price Outlook Through 2004
Graham Loveland:
Principal
Global Energy Group
27 January 2004

2. Outline of Presentation
Brief summary of the message
The current market & why have we been wrong?
Economic outlook
Oil demand
Non-OPEC production
Inventories
OPEC production, options and politics
Price scenarios
Factors to watch through 2004
5/5/2019

3. Brief Summary of the Message
Price forecasts low because demand high
GI still expects a price fall in Q2, because…
The reduced call on OPEC crude is too great for OPEC to be able to agree suitable cuts
But the base WTI forecast is now higher, $26/bbl
Clean products markets are tight. Gasoline prices likely to be high this year
Major uncertainties: demand, stocks, OPEC cohesion
5/5/2019

4. Current Unusual Market Features
Very high crude prices whilst OPEC openly frets about a price fall and analysts expect one
More worries about US gasoline stocks than distillate stocks
US spec changes  complex gasoline market
Iraq production rising but security? bottlenecks?
Record high European product price spreads to crude for the time of year
Uncertainty about Russian export intentions
Uncertainty about Chinese import intentions
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5. Undershooting the Price
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6. Most Analysts Expect a Price Fall (Or Did in Late December)
Source: Argus Global Markets
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7. Why Did We Get It Wrong? Economic recovery stronger than expected
Total demand stronger than anticipated
January estimate of Q4 1.2 mb/d higher than July
OECD “bottom up” stocks have not risen as expected
Reflecting stronger demand now apparent
So US crude stocks have remained low, due to
US refinery runs have been very high…
Chinese imports have surged and pre-empted supplies
Prices in backwardation – little incentive to build stocks
Continuing SPR fill (average 160 kb/d in Q4, 275 kb/d in Dec)
US gasoline stocks have caused concern, due to
Very strong US autumn gasoline demand
Refiners maximising distillates earlier in 2003
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8. OPEC’s Saviour in 2003: Demand
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9. But 2004 Call Not Rising So Much
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10. The Price-Stock Relationship (1)
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11. The Price-Stock Relationship (2)
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12. High U.S. Crude and Gasoline Use…
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13. Result in Low Stocks
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14. GDP Growth Rates
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15. Global Demand Growth
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16. Chinese Demand Growth
Source: IEA
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17. Reasons for Chinese Demand Growth
Rapid growth in car ownership plus road building
Recovery in flying after SARS
Warm summer 2003 increased AC demand
Strong industrial demand due to export-led growth
Construction boom increasing demand for energy intensive building products (steel, cement etc.)
Rapid growth in electricity consumption which remains heavily reliant on oil
Consumer stock building in anticipation of a price increase – how large?
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18. What Is Chinese Demand, Really?
No demand statistics are published
Thus “demand” is actually “apparent demand”
Derived from reported production plus net imports
But trade statistics are notoriously inaccurate
“Apparent demand” includes stock changes
All that is certain is that demand is rising rapidly!
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19. Non-OPEC Is Increasing
Non-OPEC year on year growth mb/d
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20. Iraq Is Increasing
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21. OPEC Capacity Is Increasing
Saudi Arabia Increases may just offset losses
UAE But will probably support cuts
Iraq Infrastructure an issue but rising
Iran Wants to keep ahead of Iraq
Qatar Traditionally a “quota cheat”
Libya Will probably “cheat”
Algeria Wants bigger quota. A “quota cheat”
Nigeria Wants bigger quota. A “quota cheat”
Venezuela Need to make up for 2003 losses
5/5/2019

22. But the Call on OPEC Is Falling…
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23. The Outlook in 2004
Rising non-OPEC production will cover rising demand
OPEC usable spare capacity has recently been less than 1 mb/d
OPEC capacity is rising, possibly by 2-3 mb/d
Members will want to utilise new capacity if possible
But the annual call on OPEC is falling by around 0.7 mb/d and…
The cut needed for Q2 could be close to 4 mb/d
Traditional quota non-compliers are unlikely to agree to (or make) large cuts
Hence Saudi Arabia (with Kuwait and UAE?) may have to make larger than proportionate cuts
We do not expect OPEC to be able to make this scale of cut
But how much does SA want to support prices?
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24. OPEC’s Price Targets
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25. Prices Generally Miss Targets
Even the $18/bbl target of the late 1980s was only moderately successful
Prices virtually never reached the $21/bbl target
Prices within the $22-28/bbl price band are due to special factors:
Low non-OPEC investment following 1998/99 collapse
Diminishing spare capacity in OPEC due to lack of investment and mothballing of spare capacity
Production losses in Venezuela, Nigeria, Iraq
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26. Stocks (Days Cover) and Price
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27. Price Scenarios for 2004
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28. Factors to watch in 2004 (1) Demand Supply Stocks
Impact of economic recovery on demand
Chinese demand – will it slow down/be slowed by Gov’t action?
Supply
Russia/Caspian/W. Africa– how fast will they rise?
Iraq– will it hit an infrastructure bottleneck?
Nigeria – how much and when?
Stocks
US crude stocks – how low is low? Industry view (unconcerned) vs. market view (concerned)
Gasoline – can stocks build in time for the driving season?
Where is all the oil going??
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29. Factors to Watch in 2004 (2) OPEC Outcome of 4 February meeting?
Price versus market share? (logic vs. emotion)
Dollar versus Euro for valuing revenue?
The future of the $22-28/bbl price band?
Reactions to a falling price?
Bottlenecks in rise of Iraq exports?
How to reintegrate Iraq?
How to reallocate quotas?
How to handle likely flagrant over-production from possibly several members?
How important is price support to SA if it means a large cut?
5/5/2019