1. Recent Trends for Crude Oil Increasing Supply & Declining Prices Joint Lead Commissioner Workshop on Inputs and Assumptions for Transportation Energy Demand Forecasts March 19, 2015 Gordon Schremp Energy Assessments Division California Energy Commission Gordon.schremp@energy.ca.gov California Energy Commission

2. Purpose Show the extent of the recent collapse in crude oil prices Provide an explanation of the factors that may have contributed to the rapid decline Illustrate some of the impacts in the United States that are a consequence of declining oil prices Provide a description of additional factors that could have an impact oil prices during the remainder of 2015 3/19/20152 California Energy Commission

3. Crude Oil Prices Crude oil is an international commodity Prices “benchmarked” to specific crude oil types – U.S. – West Texas Intermediate or WTI – North Sea – Dated Brent or Brent – Middle East – Dubai/Oman Adjustments made for: – Sulfur content – Density (API gravity) – Other properties Prices steady for several years, through June 2014 3/19/20153 California Energy Commission

4. Daily Brent Crude Oil Prices (2011 – 3/12/15) California Energy Commission Source: Energy Information Administration & OPIS. 3/19/20154 Crude oil prices were remarkably stable between 2011 and June of 2014

5. Crude Oil Prices – West Coast, Brent & WTI California Energy Commission 3/19/20155

6. Steep Price Decline Crude oil prices peaked during June of 2014 – June 19, 2014 – Brent - $115.06 per barrel – June 20, 2014 – Alaska North Slope (ANS) - $114.51 per barrel – June 20, 2014 – WTI - $107.95 per barrel – June 24, 2014 – San Joaquin Valley (SJV) - $99.65 per barrel Prices dropped at least 50 percent within 7 months – Brent down 59.5 percent to $46.59 on 1/13/15 – ANS down 60.6 percent to $45.10 on 1/28/15 – WTI down 59.2 percent to $44.08 on 1/28/15 – SJV down 68.7 percent to $31.14 on 1/21/15 Prices have since rebounded a bit before easing back down 3/19/20156 California Energy Commission

7. Factors Associated with Oil Price Collapse Less robust global demand growth Rising domestic & global production Growing crude oil supply imbalance OPEC cannot agree to cut output Export restrictions Inventory levels rise Currency markets 3/19/20157 California Energy Commission

8. Changing Outlook for Global Oil Demand International Energy Agency – Publishes monthly crude oil near-term demand outlooks May 2014 Oil Market Report – Forecast third quarter 2014 – 93.55 million barrels per day (BPD) – Forecast fourth quarter 2014 – 94.04 million BPD February 2015 Oil Market Report – Actual third quarter 2014 – 93.05 million barrels per day (BPD) – Actual fourth quarter 2014 – 93.53 million BPD Actual demand for crude oil during last half of 2014 significantly lower than near-term outlook from May 2014 – Between 500 and 510 thousand barrels per day 2014 demand growth 630 thousand BPD lower than 2013 3/19/20158 California Energy Commission

9. Slower Global Demand Growth Source: International Energy Agency (IEA) – Oil Market Report – February 10, 2015. 3/19/20159 2015 outlook 93.37 MB/D vs. 92.46 MB/D in 2014 (up 0.98%). Latin America North America Africa Europe FSU Asia Middle East

10. U.S. Tight Oil Production – Jan. ’07-Feb. ‘15 California Energy Commission 3/19/201510 3 U.S. fields each exceed 1 million barrels per day Combined 4.96 million barrels per day.

11. U.S. Crude Oil Production – Jan. ‘81-Dec. ‘14 California Energy Commission 3/19/201511

12. California Energy Commission 3/19/201512

13. California Energy Commission 3/19/201513 Global Crude Oil Production Change 2013 vs. 2008 U.S. increase greater than combined production growth from Saudi Arabia, Russia, Canada and Iraq.

14. California Energy Commission 3/19/201514 Growing Global Crude Supply Imbalance Excess global crude oil supplies during all of 2014.

15. OPEC Cannot Agree to Cut Output Organization of Petroleum Exporting Countries met on November 27, 2014 No consensus on reducing country- specific production quotas Saudi Arabia unwilling to disproportionately lose market share so other member countries benefit from firming prices OPEC unable to convince other non- OPEC exporting countries to cooperate, such as Russia 3/19/201515 California Energy Commission Source: David Butler, Boston Globe. Source: Heinz- Peter Bader, Reuters.

16. Crude Oil – Export Restrictions 3/19/201516 California Energy Commission Domestically‐produced crude oil exports to foreign destinations allowed under specific "license exceptions" identified under federal statute - primary exceptions include: Alaska crude oil shipped on the Trans‐Alaska Pipeline System (TAPS) and exported via a Jones Act vessel directly from Valdez Harbor California heavy crude oil production with API gravity of 20.0 degrees or lower, limit of no more than 25,000 barrels per day First export license for California heavy crude oil was granted on December 9, 1991 – no heavy crude oil exports for several years Exports of domestic crude oil to Canada for processing by Canadian refineries Exports in connection with refining or exchange of Strategic Petroleum Reserve crude oil Companies can also apply to the federal Bureau of Industry and Security (BIS) for an export license that basically requires Presidential approval Recent export licenses for “processed” condensate approved.

17. California Energy Commission Crude Oil – Inventory Rising U.S. crude oil inventories at 448.9 million barrels as of 3/6/15 Highest level since November of 1930 78.9 million barrels more than same time last year Record level of 545.186 million barrels during October 1929 3/19/201517 Source: Energy Information Administration, This Week in Petroleum.

18. Crude Oil Futures Outlook Crude oil futures markets are now in contango, rising over time Price rise could be sufficient to cover expense of temporarily storing crude oil, an incentive for elevated stock levels 3/19/201518 California Energy Commission Source: Howard Weil Weekly Refinery Update 3/11/15.

19. California Energy Commission Crude Oil & Currency Markets Declining US dollar would increase purchasing power for non- dollar importers – Japan and India – increasing demand & oil price Strengthening dollar would have the opposite impact – declining demand & lower oil price Negative correlation between crude oil prices & US Dollar exchange rate – Dollar strengthens, crude oil prices decline – Dollar weakens, crude oil prices rise But this relationship only a recent phenomenon – Little to no correlation prior to 2001 What might be at work? 3/19/201519

20. California Energy Commission Crude Oil & Currency Markets Likely that the relationship between the US Dollar and crude oil prices is more complicated Recent working paper offers insight into deeper interactions – Monetary policies – Balance of trade – Importance of other commodity markets Crude oil price behavior could be more akin to a financial asset 3/19/201520

21. Impacts of Increased U.S. Crude Oil Output & Declining Global Prices U.S. crude oil imports drop off Drilling activity for crude oil declines 3/19/201521 California Energy Commission

22. U.S. Imports of Crude Oil Decline California Energy Commission 3/19/201522 Source: Energy Information Administration, This Week in Petroleum. 2014 oil imports 2.79 million BPD lower than 2005 peak of 10.13 million BPD.

23. Drill Rig Deployment Declines with Price California Energy Commission 3/19/201523 Source: Baker Hughes data – through March 13, 2015. Number of rigs deployed specifically for U.S. oil drilling 46.2 percent lower than the peak level on October 10, 2014 Gradual impact on oil production likely to manifest itself over the next several months Biggest drops in Permian (-255), Williston (-90), and Eagle Ford (-75) basins

24. Other Factors that Could Impact Near-term Oil Prices Seasonal increase for global crude oil demand Increased exports from countries experiencing difficulties – Libyan violence has reduced oil export capability U.S. crude oil storage capacity has limits 3/19/201524 California Energy Commission

25. Source: IEA – Oil Market Report – February 10, 2015. 3/19/201525 Near-term Factors – Seasonal Demand Crude oil demand is seasonal Demand normally rises during last two quarters of each year – 1 st Q refinery maintenance – 4 th Q global heating demand IEA forecast for 2015 – Global demand for crude oil forecast to increase by 2.0 million barrels per day between 2 nd and 4 th quarters of 2015 Normal seasonal trend will likely put upward pressure on oil prices during last half of 2015

26. California Energy Commission Source: IEA – Oil Market Report – February 10, 2015. 3/19/201526 About 31 percent of this seasonal rise will come from North America – 620 thousand barrels per day.

27. Violence Curtails Libyan Oil Exports Exports had been as high as 1.4 million BPD during 2013 Dropped to 450 thousand BPD during December 2014 Continued attacks have decreased production to an estimated 250 thousand barrels per day during February 2015 A resumption of stable & sustained exports could place downward pressure on global prices 3/19/201527 California Energy Commission

28. U.S. Crude Oil Storage Has Limits Spare working storage capacity for crude oil estimated to be: – 54.0 percent for end of September 2014 – 40.0 percent for the week ending February 20, 2015 (see chart above) – 37.2 percent for the week ending March 6, 2015 Decreasing spare storage capacity could place downward pressure on crude oil prices 3/19/201528 California Energy Commission

29. Additional Q & A California Energy Commission 3/19/201529