Crude Oil Price Forecast Update June 28, 2010
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World Crude Oil Markets: Crude Oil Price Forecast Update FirstEnergy Crude Oil Price Outlook West Texas Old NEW $62.09 $62.09
Brent Old NEW $62.67 $62.67
Q1 Q2 Q3 est. Q4 est. Average est.
$78.88 $84.10 $84.00 $85.00 $83.00
$78.88 $78.12 $84.00 $85.00 $81.50
$77.37 $83.10 $83.50 $84.50 $82.12
$77.37 $79.58 $84.50 $85.00 $81.61
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$83.00 $85.00 $89.00 $91.00 $87.00
$83.00 $85.00 $89.00 $91.00 $87.00
$82.50 $84.50 $89.00 $91.00 $86.75
$82.50 $84.50 $89.00 $91.00 $86.75
2012 Average est.
$95.00
$95.00
$96.00
$96.00
2013 Average est.
$110.00
$110.00
$112.00
$112.00
2009 2010
2011
US $/BBL Average
Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.
We have elected to slightly lower our WTI crude oil price forecast for 2010 to US $81.50 per barrel, down US $1.50 per barrel from our previous forecast. All other forecast years remain unchanged with US $87.00 per barrel and US $95.00 per barrel being anticipated for 2011 and 2012, respectively. We are still maintaining a long-term price outlook at US $120.00 per barrel post-2013. Key conclusions from this price forecast update include: • We have slightly lowered our 2010 WTI crude oil price expectations to US $81.50 per barrel, down from US $83.00 per barrel previously. • Our price outlook in all other years remains unchanged, with an eventual long-term price at US $120 per barrel post-2013. • For the crude oil minded investor, current market volatility and partial price weakness should be seen as an opportunity to remain market weight with an eventual transition to overweight in the very near future. • We see current price resiliency as a reflection of broader macroeconomic and oil demand strength emanating from the developing economies, and for the latest price pullback to be quickly reversed to above US $80 per barrel during the summer. • The market remains in a longer term trend in which steadily tightening supply will be running up against the need to allocate this supply between oil demand in the developed and developing economies. The end result will be higher prices.
June 28, 2010
• Near-term price risks may be shifting to the upside on what could be a more rapid transition to tighter physical market balances than presently anticipated. • Canadian light-heavy crude oil price spreads are expected to narrow slightly in H2 2010, but widen over the next few years on an absolute basis, but remain very tight on a percentage basis.
For the Crude Oil Minded Investor. Crude oil
markets can be fickle things. The most recent quarter is a prime example. After a steady course for prices above US $80 per barrel early in Q2 2010, the market ran into several large potholes in the road that have created a jarring ride in the past two months. Despite the bumps, crude oil prices have very much held to the very broad price range that has been in vogue for nearly 12 months (Figure 1). Figure 1: Nymex WTI Crude Oil Futures Price US $/BBL $150.00 $130.00
2008 Avg: $99.75 2009 Avg: $62.09 2010 YTD: $78.51
$120.00
(to June 25, 2010)
$140.00
$140.00 $130.00 $120.00
$110.00
$110.00
$100.00
$100.00
$90.00
$90.00
$80.00
$80.00
$70.00
$70.00
$60.00
$60.00
$50.00
$50.00 $40.00
$40.00 $30.00
2008
2009
2010
$30.00 $20.00
$20.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Source: FirstEnergy Capital Corp., Bloomberg.
This US $70 to US $85 per barrel range has held up remarkably well despite numerous events which have sent prices swinging from highs to lows in this range in the past year. The most recent example is the many iterations surrounding macroeconomic worries stemming from the European debt crisis and whether this will spill into the world economy, resulting in another round of oil demand reduction and/or destruction. Although there are other lesser issues that buffet prices from day to day, the European debt situation is the most telling example as to why one should not abandon the crude oil investment space. Rather it should be seen, as we have mentioned before, as an opportunity to buy the price dips and prepare for much better prices ahead. Unlike the systemic risk and fears that spread like wildfire through the global banking system in late 2008, we view
Analyst: Martin King
Associate: Elaine C. Williams
403-262-0625 • [email protected]
403-262-0622 • [email protected] Calgary Office • 403-262-0600
Calgary Office • 403-262-0600
$150.00
Page 1 of 6 The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. While the accuracy or completeness of the information contained in this document cannot be guaranteed by FirstEnergy Capital, it was obtained from sources believed to be reliable. FirstEnergy Capital and/or its officers, directors and employees may from time to time acquire, hold or sell positions in the securities mentioned herein as principal or agent. FirstEnergy Capital (USA) Corp., a member of the Financial Industry Regulatory Authority, is a wholly owned subsidiary of FirstEnergy Capital Holdings Corp. and operates as a Broker-Dealer in the United States.
World Crude Oil Markets: Crude Oil Price Forecast Update the issues surrounding the Euro debt crisis as more of a regional and, ultimately, contained issue for the markets. At some point, the problem will be inflated away given the general nature of the way governments behave in such circumstances and the structural decline that we and many others have been long forecasting for European oil demand, will be just as evident and just as ineffective in radically changing the path for future crude oil prices (Figure 2).
Thousand B/d 400
(151)
OECD (Figure 3). These countries are being left relatively unscathed by the Euro debt crisis and very likely will remain that way. For them, income growth, demographics and expanding energy use are all part of their future. This is the primary reason why we have left our oil demand outlook relatively unchanged for 2010 and 2011 (Figure 4). World oil demand, or at least, Non-OECD oil demand, is still very much on a road to recovery and expansion after a brief lull in late 2008 and early 2009. Figure 4: Change in World Petroleum Demand Million B/d 3.5
3.03
3.0
167
200 0
Figure 2: OECD Europe Change in Annual Petroleum Consumption
June 28, 2010
124 (48)
69
Forecast
2.5
130 16 (337) (7) (833) (390)(125)(112)
2.0
1.49
1.5 (200)
1.0
0.82
1.77 1.25
1.20 1.10 1.24
1.18
0.70 0.71
0.5
(400)
(0.36)(1.25)
0.0
(600)
Forecast (800)
(0.5) (1.0) (1.5)
(1,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
As such, we are treating the latest macroeconomic worries to beset the market as a one off event. It has created a lot of volatility and some prime selling days resulting in crude oil prices briefly touching lows below the aforementioned price range, but it has not lasted. More importantly, we expect that prices will recover back to above the US $80 per barrel threshold at some point in Q3 2010. Figure 3: Crude Oil Demand Growth by Region Million B/d 3.5 3.0
Forecast
2.5 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0)
Non-OECD
(1.5)
OECD
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., IEA.
Source: FirstEnergy Capital Corp., IEA.
(2.0) (2.5) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FirstEnergy Capital Corp., IEA.
Why? The structural declines in oil demand long forecast for Europe simply do not change the general mix of oil demand growth in 2010 or beyond. Moreover, it merely underscores what we have been saying all along: oil demand strength and future growth is not in the developed economies of the OECD (which includes most of Europe), but the developing economies of the Non-
For oil demand, the losses of 2008 and H1 2009 were already being reversed in late 2009, and will continue to be in 2010 and 2011. In fact, the recovery in oil demand after the Great Recession of 2008-09, will be completed in less than 18 months. The much greater economic downturn of 1980-1983 (despite the endless media obsession as pegging the most recent economic episode as the worst since the Great Depression), took six years to accomplish the same feat of recovering previous oil demand losses. This is why we feel, despite the many ups and downs for prices through the most recent set of economic jitters, that oil prices have demonstrated a remarkable resiliency and will continue to do so. Given the crude oil demand growth that we are forecasting, this is still a global market that has to be as forward looking as possible. This is still about allocating current and future tough-to-get-at-barrels to the end users that need them: the developing economies. Whether those barrels are for structural inventory accumulation or for immediate application, the developing economies remain the growth story for the market now and for a long way into the future. The supply growth that is going to be needed will be coming from regions of the world that are somewhat more suspect in terms of their reliability, political stability, and fiscal responsibility. Even though the latest “surge” in Non-OPEC supply in 2010 (Figure 5) has taken many by surprise, almost half of it is likely a one off gain from the nations of the Former Soviet Union. A large block of that 2010 supply gain is also coming from the United Page 2 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update
we do not see OPEC’s over production as being a serious price threat. Its many produced barrels are going where they need to go.
Figure 5: Change in Non-OPEC Petroleum Supply (Incl. FSU, Indonesia; Excl. Angola, Ecuador) Thousand B/d 1,400
1,235
1,215
1,200
901
1,000
Forecast 881
800
697 712
601
600
506 427
400 200
(172)
0
(121)
June 28, 2010
(255) (335)
(200)
Even much of the concern over relatively high inventories and days of cover in the developed economies of the OECD (Figure 7) has failed, and will continue to fail, to make much of a serious threat to oil price resiliency. These barrels, and the slow demand growth with them, do not constitute the backbone of the oil market the way they once used to. Always important to watch, but their impact on prices has waned in the past few years and will continue to do so into the future.
(400)
Figure 7: OECD Days of Forward Demand Cover
(600) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., IEA.
States on the back of numerous projects that were delayed in previous years, and which are mostly located in the deep waters of the Gulf of Mexico. There may be some more supply growth to come from the U.S. in the near-term, but even its vibrancy is being thrown into question given what is the intense political and legal fight over the impact of drilling moratoria on some future projects in the Gulf. This is a prime example of what are already tough-to-get-at barrels facing additional politically imposed roadblocks, and merely accentuating the concern over future supplies for both developed and developing economies. For OPEC, the concern has to be more about maintaining adequate capacity and inventory margins than any immediate pressing concern over short-term fluctuations in price. Although the cartel has been readily producing well above quota (Figure 6), a vast majority of their output never sees the consumer in the developed economies, but rather makes it way to the consumer and inventory holdings of the developing economies. Although these inventoried barrels are much more difficult to track and can only be estimated from larger global model balances, these form part of the needs of the developing economies for demand growth and structural inventory builds. For this reason,
Days of Cover 63 61 59
55
55
53
53 51
49
49
47
47
1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Q1 Source: FirstEnergy Capital Corp., IEA.
Beyond 2010, as Non-OPEC supplies once again fall toward stagnation and decline, and the world becomes more dependent on shaky OPEC spare capacity, which itself will deteriorate post-2011 (Figure 8), the world needs to be concerned now - and as reflected by resilient prices about how to allocate barrels to the inevitable future demand growth in the developing economies. Euro macro concerns are going to be put aside to deal with this much larger and far more challenging issue. Figure 8: OPEC Quarterly Crude Oil Wellhead Spare Capacity Forecast 7.0
31,000 30,000
29,000
29,000
5.0
28,000
28,000
4.0
27,000
27,000
26,000
26,000
25,000
25,000
22,000
Forecast
51
30,000
23,000
59 57
Thousand B/d 31,000
24,000
61
57
Million B/d 8.0
Figure 6: OPEC Production Levels Versus Quota
63
Quarterly Days of Demand Cover 4 Quarter Moving Average
OPEC 11 Quota OPEC 11 Production FCC Forecast
21,000
24,000 23,000 22,000
6.0
3.0 2.0 1.0 0.0 2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
2012 Q1
2013 Q1
2014 Q1
Source: FirstEnergy Capital Corp., IEA.
21,000
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Source: FirstEnergy Capital Corp., Bloomberg.
Page 3 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update Prices have to remain strong enough to encourage supply to come forth from where it can, limit demand growth in the developed economies while encouraging efficiencies and alternatives, and promote investment in distribution, inventory, refining, and strategic needs for crude oil in the developing economies. This is the key to crude oil price resiliency and why we see prices as eventually firming in the months ahead to above US $80 per barrel.
June 28, 2010
FirstEnergy Canadian Crude Oil Price Outlook Cdn $/BBL 2009 Average
Edmonton Light Old NEW $66.39 $66.39
Bow River Stream Old NEW $60.25 $60.25
W. Canada Select Old NEW $58.43 $58.43
2010
Q1 Q2 Q3 est. Q4 est. Average est.
$80.59 $83.39 $83.34 $84.50 $82.96
$80.59 $75.32 $83.83 $84.96 $81.17
$73.75 $74.39 $73.34 $72.50 $73.49
$73.75 $66.62 $74.83 $73.96 $72.29
$72.14 $75.24 $74.17 $73.27 $73.70
$72.14 $64.99 $73.57 $74.68 $71.34
2011
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$82.64 $84.85 $89.14 $91.38 $87.00
$83.06 $85.33 $89.66 $92.00 $87.51
$68.64 $69.85 $75.14 $75.38 $72.25
$69.06 $70.33 $75.66 $76.00 $72.76
$69.35 $70.50 $75.78 $75.93 $72.89
$69.69 $70.89 $76.21 $76.44 $73.31
For you, the crude oil minded investor, this means buying the price dips, staying market 2012 Average est. $95.85 $96.87 $79.10 $80.12 $79.57 $80.40 weight for now, and eventually transitioning in the very near future to a more overweight 2013 Average est. $111.68 $113.63 $94.93 $96.88 $95.33 $96.97 position as prices work their way back into Notes: All historical averages computed using weekday data only. the mid-US $80s per barrel. The latest Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value. downward dip in prices is not telling you that WCS price differential, will widen on an absolute basis lower prices are coming. It is telling you that the market is toward US $18 per barrel, but will hold at or well below actually incredibly resilient to many of the sovereign debt 20% in terms of the ratio of the price differential to the price issues and transient non-fundamental factors, and is of WTI. poised for renewed price strength, not renewed price weakness. Light-heavy crude oil price differentials took a rapid swing to higher (wider) levels during Q2 2010 and hit Now is the time to make the current crude oil price some of the highest points seen since 2008 (Figure 9). A weakness part of your portfolio strength by adding to your good portion of this widening, and which we see as being favourite names and setting up for the eventual move to short-lived, has more to do with operational issues market overweight from your current market weight surrounding high crude oil inventories in U.S. PADD II position. As the summer wears on, that move is likely to be (Figure 10), and the closely watched and price sensitive much sooner than later. point of Cushing, Oklahoma. Both of these locations have hit record inventory highs of late as Canadian crude oil Canadian Crude Oil Markets. We have chosen to production has ramped up in the face or a more lagging slightly widen our forecast for the WTI-WCS price increase in refinery activity in PADD II (Figure 11). differential for 2010 by about US $1 per barrel to US $12 per barrel. All other years remain unchanged with our view that the light-heavy price spread, as reflected by the WTI-
US$/BBL $50.00
FirstEnergy Crude Oil Price Differential Outlook
2009 2010
$/BBL Average
Ed Light-Bow Cdn$ NEW Old $6.14 $6.14
WTI-WCS US$ Old NEW $9.96 $9.96
Q1 Q2 Q3 est. Q4 est. Average est.
$6.84 $9.00 $10.00 $12.00 $9.46
$6.84 $8.70 $9.00 $11.00 $8.88
$9.62 $10.00 $11.00 $13.00 $10.90
$9.62 $14.55 $12.00 $12.00 $12.04
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$14.00 $15.00 $14.00 $16.00 $14.75
$14.00 $15.00 $14.00 $16.00 $14.75
$15.00 $16.00 $15.00 $17.00 $15.75
$15.00 $16.00 $15.00 $17.00 $15.75
2012 Average est.
$16.75
$16.75
$17.75
$17.75
2013 Average est.
$16.75
$16.75
$17.75
$17.75
2011
Figure 9: Canadian Crude Oil Differential WTI Versus Western Canada Select
Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.
2007
$45.00
2008
2009
$50.00
2010
$45.00
2008 Avg: $20.30 2009 Avg: $9.96 2010 Avg: $12.06
$40.00 $35.00
$40.00 $35.00
(to Jun 25, 2010)
$30.00
$30.00
$25.00
$25.00
$20.00
$20.00
$15.00
$15.00
$10.00
$10.00
$5.00
$5.00
$0.00 Jan-1
$0.00 Feb-19
Apr-9
Source: FirstEnergy Capital Corp., Bloomberg.
May-28 Jul-16 Weekly Average
Sep-3
Oct-22
Dec-10
However, we do see the price differential reversing over the course of the summer as refinery runs take up some of the slack in the system on modestly better demand, more attractive pricing of heavy barrels entices refinery purchases, and the immense need to complete linefill for two major new pipeline systems into the U.S. Midwest: Page 4 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update Figure 10: U.S. Crude Oil Inventories in PADD II Million Barrels 100
100
95.43
95
95
90
90
85
85
80
80
75
75
70
70
65
65
60
60
55
5 Yr Hi-Lo
2007
2008
2009
2010
50
55 50
Jan-1
Feb-12 Mar-26 May-7 Jun-18 Jul-30 Sep-10 Oct-22
Dec-3
Source: FirstEnergy Capital Corp, US DOE/EIA.
Figure 11: Crude Oil Input to U.S. PADD II Refineries Million B/d 3.75
3.75
3.50
3.50
3.46
3.25
3.25
3.00
3.00
2.75
2.75
5 Yr Hi-Lo
2007
2008
2009
especially) stem from a market that is transitioning into a much more amenable environment for heavy crude oil barrels on a structural basis. More pipelines (aside from Keystone and Alberta Clipper) are being constructed or reversed to move barrels from U.S. PADD II to PADD III (Gulf Coast); production declines continue, albeit unevenly, in Mexico, the next closest rival to Canada for U.S. demand of heavy barrels; and Venezuela remains beset with political and investment impediments that prevent it from returning as a serious contender to Canadian heavy crude oil in the U.S. market.
Conclusions. Crude oil prices remain volatile, as do the
forces that drive them from day to day and from week to week. However, we believe that the much larger and longer term structural forces that are pulling the crude oil market along remain very much intact with this latest forecast and consistent with several of our previous outlooks. It is these structural forces which form the basis of our steady optimism regarding the near- and long-term direction for crude oil prices (Figure 12). They also form a steady undercurrent in the latest round of market jitters and have given crude oil prices their great resiliency. Figure 12: Annual Average Price of Nymex WTI US $/BBL $120
$99.75
$100
$72.41
$80
2010
2.50
June 28, 2010
$66.25 $56.70
2.50
Jan-1 Feb-12 Mar-26 May-7 Jun-18 Jul-30 Sep-10 Oct-22 Dec-3
$60
Source: FirstEnergy Capital Corp., US DOE/EIA.
Keystone and Alberta Clipper. With combined shipping capacity of nearly 1 million B/d, both these pipes will be steadily upping their needs for linefill as supply rises out of Canada. At this stage, we see the needs for linefill and the rising supply profile as being roughly balanced. Throw in what we see as modestly better demand by refiners, and the differential should move lower from the average levels seen in Q2 2010 (for instance compare our Q3 and Q4 2010 forecast price spread with the Q2 average). Aside from these shorter term operational issues, much of the larger and longer term mosaic of our forecast for lightheavy crude oil price differentials is little changed. Going forward, we expect that price differentials will be wider as more supplies flow from the oilsands over the next few years. In addition, OPEC barrels will start becoming more heavy and sour as the cartel is forced to increase production levels once again to meet growing world demand and tap into spare capacity that is more levered to heavy production. In general, we do not expect a major blowout of price spreads akin to what happened in 2007 (and earlier years). Primarily, the reasons for expecting a better and tighter price spread than seen in the past (on a percentage basis,
$40
Forecast $95.00 $87.00 $81.50
$62.09
$41.47 $30.99 $30.26 $26.15 $25.95
$20 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., Bloomberg.
We think that part of this resiliency can be readily seen in a price spread that we like to highlight and which we discussed in our previous outlook (Figure 13). The degree of backwardation in both the Nymex and ICE forward pricing curves remains a stark and powerful reminder that ever so gradually, the physical market is becoming tighter. This is also occurring in the face of supposed high floating storage levels of crude oil and some refined products, but which we see as not being price impactful as the market feels the tug of demand in the developing economies and their eventual mopping up of excess barrels in the marketplace. Before the end of this year, we believe that the market contango that has been evident for some time as a reminder of modestly loose market balances, will be shifting to backwardation to reflect tighter balances. In some ways, this slow evolution from contango to backwardation acts Page 5 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update
Figure 15: Expectations for the Price of WTI in 2011
Figure 13: Magnitude of Backwardation or Contango in the Nymex and Brent Crude Oil Market
(As of Jun. 25, 2010 survey; Nymex value as of Jun. 25, 2010) (Consensus estimate does not include Nymex value) US $/BBL $110.00
US $/BBL $15.00
FirstEnergy
Backwardation
$10.00
June 28, 2010
$100.00
$5.00 $0.00
Consensus
$87.00 $85.44
Nymex
$90.00
$82.67
($5.00)
$80.00
($10.00) ($15.00)
Contango
Nymex M1 Less M12
($20.00)
Brent M1 Less M12
($25.00)
$70.00 $60.00
($30.00)
$50.00
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
as an anchor for those larger forces that we feel are shaping the market back to the more price bullish stance that we are forecasting. It also explains why we have generally remained more bullish (and frequently more correct) than the rest of the Street in terms of price outlooks (Figures 14 and 15). Figure 14: Expectations for the Price of WTI in 2010 (As of Jun 25, 2010 survey; Nymex value as of Jun. 25, 2010) (Consensus estimate does not include Nymex value) US $/BBL $100.00 $95.00
FirstEnergy
$90.00
Consensus
$85.00
Nymex $78.90
$80.00
$79.81
$81.50
$75.00 $70.00 $65.00 $60.00 $55.00 1
3
5
7
Source: FirstEnergy Capital Corp., Reuters.
9
1
3
5
7
Source: FirstEnergy Capital Corp., Reuters.
Source: FirstEnergy Capital Corp., Bloomberg.
11 13 15 17 19 21 23 25 27 29 31 33 Analyst
Along the way, there will undoubtedly be more convulsions in the crude oil market and prices as worries about the strength and durability of the global economic recovery wax and wane, various debt and other issues hit
9
11
13
15 17 19 Analyst
21
23
25
27
29
31
financial/equity markets, and investors’ appetites for the commodity investment space comes and goes. Through it all, we see little that can derail the enormity of the oil demand shift that is happening in the developing economies and that the readily available supply of barrels to meet that demand will be squeezed ever tighter over the next few years. Even as high inventory levels and ample OPEC spare capacity remain something that should act as a damper on crude oil prices this year and next, we cannot escape the possibility that prices may react even faster than what we already expect to the eventual tightening of market balances. Should Non-OPEC supply look to start faltering much sooner and by larger amounts than we are projecting, then it is likely that prices many start to ramp up much faster toward the US $90 per barrel range than what we are anticipating. Given that the crude oil market has been recently hit several times by what some would consider to be very bearish news related to macroeconomic issues, but seen crude oil prices effectively hold their own, it very much could be the case that the balance of price risks is already shifting more strongly to the upside and beyond our already optimistic forecast. As such, enjoy your summer. Things might just get very interesting come the fall.
Page 6 of 6
WWW.FIRSTENERGY.COM
World Crude Oil Markets: Crude Oil Price Forecast Update FirstEnergy Crude Oil Price Outlook West Texas Old NEW $62.09 $62.09
Brent Old NEW $62.67 $62.67
Q1 Q2 Q3 est. Q4 est. Average est.
$78.88 $84.10 $84.00 $85.00 $83.00
$78.88 $78.12 $84.00 $85.00 $81.50
$77.37 $83.10 $83.50 $84.50 $82.12
$77.37 $79.58 $84.50 $85.00 $81.61
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$83.00 $85.00 $89.00 $91.00 $87.00
$83.00 $85.00 $89.00 $91.00 $87.00
$82.50 $84.50 $89.00 $91.00 $86.75
$82.50 $84.50 $89.00 $91.00 $86.75
2012 Average est.
$95.00
$95.00
$96.00
$96.00
2013 Average est.
$110.00
$110.00
$112.00
$112.00
2009 2010
2011
US $/BBL Average
Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.
We have elected to slightly lower our WTI crude oil price forecast for 2010 to US $81.50 per barrel, down US $1.50 per barrel from our previous forecast. All other forecast years remain unchanged with US $87.00 per barrel and US $95.00 per barrel being anticipated for 2011 and 2012, respectively. We are still maintaining a long-term price outlook at US $120.00 per barrel post-2013. Key conclusions from this price forecast update include: • We have slightly lowered our 2010 WTI crude oil price expectations to US $81.50 per barrel, down from US $83.00 per barrel previously. • Our price outlook in all other years remains unchanged, with an eventual long-term price at US $120 per barrel post-2013. • For the crude oil minded investor, current market volatility and partial price weakness should be seen as an opportunity to remain market weight with an eventual transition to overweight in the very near future. • We see current price resiliency as a reflection of broader macroeconomic and oil demand strength emanating from the developing economies, and for the latest price pullback to be quickly reversed to above US $80 per barrel during the summer. • The market remains in a longer term trend in which steadily tightening supply will be running up against the need to allocate this supply between oil demand in the developed and developing economies. The end result will be higher prices.
June 28, 2010
• Near-term price risks may be shifting to the upside on what could be a more rapid transition to tighter physical market balances than presently anticipated. • Canadian light-heavy crude oil price spreads are expected to narrow slightly in H2 2010, but widen over the next few years on an absolute basis, but remain very tight on a percentage basis.
For the Crude Oil Minded Investor. Crude oil
markets can be fickle things. The most recent quarter is a prime example. After a steady course for prices above US $80 per barrel early in Q2 2010, the market ran into several large potholes in the road that have created a jarring ride in the past two months. Despite the bumps, crude oil prices have very much held to the very broad price range that has been in vogue for nearly 12 months (Figure 1). Figure 1: Nymex WTI Crude Oil Futures Price US $/BBL $150.00 $130.00
2008 Avg: $99.75 2009 Avg: $62.09 2010 YTD: $78.51
$120.00
(to June 25, 2010)
$140.00
$140.00 $130.00 $120.00
$110.00
$110.00
$100.00
$100.00
$90.00
$90.00
$80.00
$80.00
$70.00
$70.00
$60.00
$60.00
$50.00
$50.00 $40.00
$40.00 $30.00
2008
2009
2010
$30.00 $20.00
$20.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Source: FirstEnergy Capital Corp., Bloomberg.
This US $70 to US $85 per barrel range has held up remarkably well despite numerous events which have sent prices swinging from highs to lows in this range in the past year. The most recent example is the many iterations surrounding macroeconomic worries stemming from the European debt crisis and whether this will spill into the world economy, resulting in another round of oil demand reduction and/or destruction. Although there are other lesser issues that buffet prices from day to day, the European debt situation is the most telling example as to why one should not abandon the crude oil investment space. Rather it should be seen, as we have mentioned before, as an opportunity to buy the price dips and prepare for much better prices ahead. Unlike the systemic risk and fears that spread like wildfire through the global banking system in late 2008, we view
Analyst: Martin King
Associate: Elaine C. Williams
403-262-0625 • [email protected]
403-262-0622 • [email protected] Calgary Office • 403-262-0600
Calgary Office • 403-262-0600
$150.00
Page 1 of 6 The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. While the accuracy or completeness of the information contained in this document cannot be guaranteed by FirstEnergy Capital, it was obtained from sources believed to be reliable. FirstEnergy Capital and/or its officers, directors and employees may from time to time acquire, hold or sell positions in the securities mentioned herein as principal or agent. FirstEnergy Capital (USA) Corp., a member of the Financial Industry Regulatory Authority, is a wholly owned subsidiary of FirstEnergy Capital Holdings Corp. and operates as a Broker-Dealer in the United States.
World Crude Oil Markets: Crude Oil Price Forecast Update the issues surrounding the Euro debt crisis as more of a regional and, ultimately, contained issue for the markets. At some point, the problem will be inflated away given the general nature of the way governments behave in such circumstances and the structural decline that we and many others have been long forecasting for European oil demand, will be just as evident and just as ineffective in radically changing the path for future crude oil prices (Figure 2).
Thousand B/d 400
(151)
OECD (Figure 3). These countries are being left relatively unscathed by the Euro debt crisis and very likely will remain that way. For them, income growth, demographics and expanding energy use are all part of their future. This is the primary reason why we have left our oil demand outlook relatively unchanged for 2010 and 2011 (Figure 4). World oil demand, or at least, Non-OECD oil demand, is still very much on a road to recovery and expansion after a brief lull in late 2008 and early 2009. Figure 4: Change in World Petroleum Demand Million B/d 3.5
3.03
3.0
167
200 0
Figure 2: OECD Europe Change in Annual Petroleum Consumption
June 28, 2010
124 (48)
69
Forecast
2.5
130 16 (337) (7) (833) (390)(125)(112)
2.0
1.49
1.5 (200)
1.0
0.82
1.77 1.25
1.20 1.10 1.24
1.18
0.70 0.71
0.5
(400)
(0.36)(1.25)
0.0
(600)
Forecast (800)
(0.5) (1.0) (1.5)
(1,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
As such, we are treating the latest macroeconomic worries to beset the market as a one off event. It has created a lot of volatility and some prime selling days resulting in crude oil prices briefly touching lows below the aforementioned price range, but it has not lasted. More importantly, we expect that prices will recover back to above the US $80 per barrel threshold at some point in Q3 2010. Figure 3: Crude Oil Demand Growth by Region Million B/d 3.5 3.0
Forecast
2.5 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0)
Non-OECD
(1.5)
OECD
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., IEA.
Source: FirstEnergy Capital Corp., IEA.
(2.0) (2.5) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FirstEnergy Capital Corp., IEA.
Why? The structural declines in oil demand long forecast for Europe simply do not change the general mix of oil demand growth in 2010 or beyond. Moreover, it merely underscores what we have been saying all along: oil demand strength and future growth is not in the developed economies of the OECD (which includes most of Europe), but the developing economies of the Non-
For oil demand, the losses of 2008 and H1 2009 were already being reversed in late 2009, and will continue to be in 2010 and 2011. In fact, the recovery in oil demand after the Great Recession of 2008-09, will be completed in less than 18 months. The much greater economic downturn of 1980-1983 (despite the endless media obsession as pegging the most recent economic episode as the worst since the Great Depression), took six years to accomplish the same feat of recovering previous oil demand losses. This is why we feel, despite the many ups and downs for prices through the most recent set of economic jitters, that oil prices have demonstrated a remarkable resiliency and will continue to do so. Given the crude oil demand growth that we are forecasting, this is still a global market that has to be as forward looking as possible. This is still about allocating current and future tough-to-get-at-barrels to the end users that need them: the developing economies. Whether those barrels are for structural inventory accumulation or for immediate application, the developing economies remain the growth story for the market now and for a long way into the future. The supply growth that is going to be needed will be coming from regions of the world that are somewhat more suspect in terms of their reliability, political stability, and fiscal responsibility. Even though the latest “surge” in Non-OPEC supply in 2010 (Figure 5) has taken many by surprise, almost half of it is likely a one off gain from the nations of the Former Soviet Union. A large block of that 2010 supply gain is also coming from the United Page 2 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update
we do not see OPEC’s over production as being a serious price threat. Its many produced barrels are going where they need to go.
Figure 5: Change in Non-OPEC Petroleum Supply (Incl. FSU, Indonesia; Excl. Angola, Ecuador) Thousand B/d 1,400
1,235
1,215
1,200
901
1,000
Forecast 881
800
697 712
601
600
506 427
400 200
(172)
0
(121)
June 28, 2010
(255) (335)
(200)
Even much of the concern over relatively high inventories and days of cover in the developed economies of the OECD (Figure 7) has failed, and will continue to fail, to make much of a serious threat to oil price resiliency. These barrels, and the slow demand growth with them, do not constitute the backbone of the oil market the way they once used to. Always important to watch, but their impact on prices has waned in the past few years and will continue to do so into the future.
(400)
Figure 7: OECD Days of Forward Demand Cover
(600) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., IEA.
States on the back of numerous projects that were delayed in previous years, and which are mostly located in the deep waters of the Gulf of Mexico. There may be some more supply growth to come from the U.S. in the near-term, but even its vibrancy is being thrown into question given what is the intense political and legal fight over the impact of drilling moratoria on some future projects in the Gulf. This is a prime example of what are already tough-to-get-at barrels facing additional politically imposed roadblocks, and merely accentuating the concern over future supplies for both developed and developing economies. For OPEC, the concern has to be more about maintaining adequate capacity and inventory margins than any immediate pressing concern over short-term fluctuations in price. Although the cartel has been readily producing well above quota (Figure 6), a vast majority of their output never sees the consumer in the developed economies, but rather makes it way to the consumer and inventory holdings of the developing economies. Although these inventoried barrels are much more difficult to track and can only be estimated from larger global model balances, these form part of the needs of the developing economies for demand growth and structural inventory builds. For this reason,
Days of Cover 63 61 59
55
55
53
53 51
49
49
47
47
1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Q1 Source: FirstEnergy Capital Corp., IEA.
Beyond 2010, as Non-OPEC supplies once again fall toward stagnation and decline, and the world becomes more dependent on shaky OPEC spare capacity, which itself will deteriorate post-2011 (Figure 8), the world needs to be concerned now - and as reflected by resilient prices about how to allocate barrels to the inevitable future demand growth in the developing economies. Euro macro concerns are going to be put aside to deal with this much larger and far more challenging issue. Figure 8: OPEC Quarterly Crude Oil Wellhead Spare Capacity Forecast 7.0
31,000 30,000
29,000
29,000
5.0
28,000
28,000
4.0
27,000
27,000
26,000
26,000
25,000
25,000
22,000
Forecast
51
30,000
23,000
59 57
Thousand B/d 31,000
24,000
61
57
Million B/d 8.0
Figure 6: OPEC Production Levels Versus Quota
63
Quarterly Days of Demand Cover 4 Quarter Moving Average
OPEC 11 Quota OPEC 11 Production FCC Forecast
21,000
24,000 23,000 22,000
6.0
3.0 2.0 1.0 0.0 2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
2012 Q1
2013 Q1
2014 Q1
Source: FirstEnergy Capital Corp., IEA.
21,000
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Source: FirstEnergy Capital Corp., Bloomberg.
Page 3 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update Prices have to remain strong enough to encourage supply to come forth from where it can, limit demand growth in the developed economies while encouraging efficiencies and alternatives, and promote investment in distribution, inventory, refining, and strategic needs for crude oil in the developing economies. This is the key to crude oil price resiliency and why we see prices as eventually firming in the months ahead to above US $80 per barrel.
June 28, 2010
FirstEnergy Canadian Crude Oil Price Outlook Cdn $/BBL 2009 Average
Edmonton Light Old NEW $66.39 $66.39
Bow River Stream Old NEW $60.25 $60.25
W. Canada Select Old NEW $58.43 $58.43
2010
Q1 Q2 Q3 est. Q4 est. Average est.
$80.59 $83.39 $83.34 $84.50 $82.96
$80.59 $75.32 $83.83 $84.96 $81.17
$73.75 $74.39 $73.34 $72.50 $73.49
$73.75 $66.62 $74.83 $73.96 $72.29
$72.14 $75.24 $74.17 $73.27 $73.70
$72.14 $64.99 $73.57 $74.68 $71.34
2011
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$82.64 $84.85 $89.14 $91.38 $87.00
$83.06 $85.33 $89.66 $92.00 $87.51
$68.64 $69.85 $75.14 $75.38 $72.25
$69.06 $70.33 $75.66 $76.00 $72.76
$69.35 $70.50 $75.78 $75.93 $72.89
$69.69 $70.89 $76.21 $76.44 $73.31
For you, the crude oil minded investor, this means buying the price dips, staying market 2012 Average est. $95.85 $96.87 $79.10 $80.12 $79.57 $80.40 weight for now, and eventually transitioning in the very near future to a more overweight 2013 Average est. $111.68 $113.63 $94.93 $96.88 $95.33 $96.97 position as prices work their way back into Notes: All historical averages computed using weekday data only. the mid-US $80s per barrel. The latest Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value. downward dip in prices is not telling you that WCS price differential, will widen on an absolute basis lower prices are coming. It is telling you that the market is toward US $18 per barrel, but will hold at or well below actually incredibly resilient to many of the sovereign debt 20% in terms of the ratio of the price differential to the price issues and transient non-fundamental factors, and is of WTI. poised for renewed price strength, not renewed price weakness. Light-heavy crude oil price differentials took a rapid swing to higher (wider) levels during Q2 2010 and hit Now is the time to make the current crude oil price some of the highest points seen since 2008 (Figure 9). A weakness part of your portfolio strength by adding to your good portion of this widening, and which we see as being favourite names and setting up for the eventual move to short-lived, has more to do with operational issues market overweight from your current market weight surrounding high crude oil inventories in U.S. PADD II position. As the summer wears on, that move is likely to be (Figure 10), and the closely watched and price sensitive much sooner than later. point of Cushing, Oklahoma. Both of these locations have hit record inventory highs of late as Canadian crude oil Canadian Crude Oil Markets. We have chosen to production has ramped up in the face or a more lagging slightly widen our forecast for the WTI-WCS price increase in refinery activity in PADD II (Figure 11). differential for 2010 by about US $1 per barrel to US $12 per barrel. All other years remain unchanged with our view that the light-heavy price spread, as reflected by the WTI-
US$/BBL $50.00
FirstEnergy Crude Oil Price Differential Outlook
2009 2010
$/BBL Average
Ed Light-Bow Cdn$ NEW Old $6.14 $6.14
WTI-WCS US$ Old NEW $9.96 $9.96
Q1 Q2 Q3 est. Q4 est. Average est.
$6.84 $9.00 $10.00 $12.00 $9.46
$6.84 $8.70 $9.00 $11.00 $8.88
$9.62 $10.00 $11.00 $13.00 $10.90
$9.62 $14.55 $12.00 $12.00 $12.04
Q1 est. Q2 est. Q3 est. Q4 est. Average est.
$14.00 $15.00 $14.00 $16.00 $14.75
$14.00 $15.00 $14.00 $16.00 $14.75
$15.00 $16.00 $15.00 $17.00 $15.75
$15.00 $16.00 $15.00 $17.00 $15.75
2012 Average est.
$16.75
$16.75
$17.75
$17.75
2013 Average est.
$16.75
$16.75
$17.75
$17.75
2011
Figure 9: Canadian Crude Oil Differential WTI Versus Western Canada Select
Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.
2007
$45.00
2008
2009
$50.00
2010
$45.00
2008 Avg: $20.30 2009 Avg: $9.96 2010 Avg: $12.06
$40.00 $35.00
$40.00 $35.00
(to Jun 25, 2010)
$30.00
$30.00
$25.00
$25.00
$20.00
$20.00
$15.00
$15.00
$10.00
$10.00
$5.00
$5.00
$0.00 Jan-1
$0.00 Feb-19
Apr-9
Source: FirstEnergy Capital Corp., Bloomberg.
May-28 Jul-16 Weekly Average
Sep-3
Oct-22
Dec-10
However, we do see the price differential reversing over the course of the summer as refinery runs take up some of the slack in the system on modestly better demand, more attractive pricing of heavy barrels entices refinery purchases, and the immense need to complete linefill for two major new pipeline systems into the U.S. Midwest: Page 4 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update Figure 10: U.S. Crude Oil Inventories in PADD II Million Barrels 100
100
95.43
95
95
90
90
85
85
80
80
75
75
70
70
65
65
60
60
55
5 Yr Hi-Lo
2007
2008
2009
2010
50
55 50
Jan-1
Feb-12 Mar-26 May-7 Jun-18 Jul-30 Sep-10 Oct-22
Dec-3
Source: FirstEnergy Capital Corp, US DOE/EIA.
Figure 11: Crude Oil Input to U.S. PADD II Refineries Million B/d 3.75
3.75
3.50
3.50
3.46
3.25
3.25
3.00
3.00
2.75
2.75
5 Yr Hi-Lo
2007
2008
2009
especially) stem from a market that is transitioning into a much more amenable environment for heavy crude oil barrels on a structural basis. More pipelines (aside from Keystone and Alberta Clipper) are being constructed or reversed to move barrels from U.S. PADD II to PADD III (Gulf Coast); production declines continue, albeit unevenly, in Mexico, the next closest rival to Canada for U.S. demand of heavy barrels; and Venezuela remains beset with political and investment impediments that prevent it from returning as a serious contender to Canadian heavy crude oil in the U.S. market.
Conclusions. Crude oil prices remain volatile, as do the
forces that drive them from day to day and from week to week. However, we believe that the much larger and longer term structural forces that are pulling the crude oil market along remain very much intact with this latest forecast and consistent with several of our previous outlooks. It is these structural forces which form the basis of our steady optimism regarding the near- and long-term direction for crude oil prices (Figure 12). They also form a steady undercurrent in the latest round of market jitters and have given crude oil prices their great resiliency. Figure 12: Annual Average Price of Nymex WTI US $/BBL $120
$99.75
$100
$72.41
$80
2010
2.50
June 28, 2010
$66.25 $56.70
2.50
Jan-1 Feb-12 Mar-26 May-7 Jun-18 Jul-30 Sep-10 Oct-22 Dec-3
$60
Source: FirstEnergy Capital Corp., US DOE/EIA.
Keystone and Alberta Clipper. With combined shipping capacity of nearly 1 million B/d, both these pipes will be steadily upping their needs for linefill as supply rises out of Canada. At this stage, we see the needs for linefill and the rising supply profile as being roughly balanced. Throw in what we see as modestly better demand by refiners, and the differential should move lower from the average levels seen in Q2 2010 (for instance compare our Q3 and Q4 2010 forecast price spread with the Q2 average). Aside from these shorter term operational issues, much of the larger and longer term mosaic of our forecast for lightheavy crude oil price differentials is little changed. Going forward, we expect that price differentials will be wider as more supplies flow from the oilsands over the next few years. In addition, OPEC barrels will start becoming more heavy and sour as the cartel is forced to increase production levels once again to meet growing world demand and tap into spare capacity that is more levered to heavy production. In general, we do not expect a major blowout of price spreads akin to what happened in 2007 (and earlier years). Primarily, the reasons for expecting a better and tighter price spread than seen in the past (on a percentage basis,
$40
Forecast $95.00 $87.00 $81.50
$62.09
$41.47 $30.99 $30.26 $26.15 $25.95
$20 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FirstEnergy Capital Corp., Bloomberg.
We think that part of this resiliency can be readily seen in a price spread that we like to highlight and which we discussed in our previous outlook (Figure 13). The degree of backwardation in both the Nymex and ICE forward pricing curves remains a stark and powerful reminder that ever so gradually, the physical market is becoming tighter. This is also occurring in the face of supposed high floating storage levels of crude oil and some refined products, but which we see as not being price impactful as the market feels the tug of demand in the developing economies and their eventual mopping up of excess barrels in the marketplace. Before the end of this year, we believe that the market contango that has been evident for some time as a reminder of modestly loose market balances, will be shifting to backwardation to reflect tighter balances. In some ways, this slow evolution from contango to backwardation acts Page 5 of 6
World Crude Oil Markets: Crude Oil Price Forecast Update
Figure 15: Expectations for the Price of WTI in 2011
Figure 13: Magnitude of Backwardation or Contango in the Nymex and Brent Crude Oil Market
(As of Jun. 25, 2010 survey; Nymex value as of Jun. 25, 2010) (Consensus estimate does not include Nymex value) US $/BBL $110.00
US $/BBL $15.00
FirstEnergy
Backwardation
$10.00
June 28, 2010
$100.00
$5.00 $0.00
Consensus
$87.00 $85.44
Nymex
$90.00
$82.67
($5.00)
$80.00
($10.00) ($15.00)
Contango
Nymex M1 Less M12
($20.00)
Brent M1 Less M12
($25.00)
$70.00 $60.00
($30.00)
$50.00
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
as an anchor for those larger forces that we feel are shaping the market back to the more price bullish stance that we are forecasting. It also explains why we have generally remained more bullish (and frequently more correct) than the rest of the Street in terms of price outlooks (Figures 14 and 15). Figure 14: Expectations for the Price of WTI in 2010 (As of Jun 25, 2010 survey; Nymex value as of Jun. 25, 2010) (Consensus estimate does not include Nymex value) US $/BBL $100.00 $95.00
FirstEnergy
$90.00
Consensus
$85.00
Nymex $78.90
$80.00
$79.81
$81.50
$75.00 $70.00 $65.00 $60.00 $55.00 1
3
5
7
Source: FirstEnergy Capital Corp., Reuters.
9
1
3
5
7
Source: FirstEnergy Capital Corp., Reuters.
Source: FirstEnergy Capital Corp., Bloomberg.
11 13 15 17 19 21 23 25 27 29 31 33 Analyst
Along the way, there will undoubtedly be more convulsions in the crude oil market and prices as worries about the strength and durability of the global economic recovery wax and wane, various debt and other issues hit
9
11
13
15 17 19 Analyst
21
23
25
27
29
31
financial/equity markets, and investors’ appetites for the commodity investment space comes and goes. Through it all, we see little that can derail the enormity of the oil demand shift that is happening in the developing economies and that the readily available supply of barrels to meet that demand will be squeezed ever tighter over the next few years. Even as high inventory levels and ample OPEC spare capacity remain something that should act as a damper on crude oil prices this year and next, we cannot escape the possibility that prices may react even faster than what we already expect to the eventual tightening of market balances. Should Non-OPEC supply look to start faltering much sooner and by larger amounts than we are projecting, then it is likely that prices many start to ramp up much faster toward the US $90 per barrel range than what we are anticipating. Given that the crude oil market has been recently hit several times by what some would consider to be very bearish news related to macroeconomic issues, but seen crude oil prices effectively hold their own, it very much could be the case that the balance of price risks is already shifting more strongly to the upside and beyond our already optimistic forecast. As such, enjoy your summer. Things might just get very interesting come the fall.
Page 6 of 6
