“Crude Oil Price Expectation Drivers”
Antonio Merino. Repsol Chief Economist
Global Interdependence Center´s Central Banking Conference Madrid, March 27
Disclaimer
The views and opinions expressed in this presentation are those of Antonio Merino and do not necessarily reflect the official policy or position of Repsol.
2
Discussion Points
Oil Price & Inflation Expectation Relationship
Oil Supply Curve and Price Expectations: OPEP and Unconventionals
Unconventional Production: Cyclical Costs and Sustainability
Conclusions
3
Discussion Points
Oil Price & Inflation Expectation Relationship
Oil Supply Curve and Price Expectations: OPEP and Unconventionals
Unconventional Production: Cyclical Costs and Sustainability
Conclusions
4
Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations
BRENT Crude Price Spot & USD Inflation Swap Forward 5Y5Y 130
3,5 USD
3,3
WTI (RHS)
110
3,1
100
2,9
90
2,7
80
2,5
70
USD/Bl
(%)
120
60
2,3
50
2,1
40 30
1,7
20 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
1,9
Source: Bloomberg and Repsol Economic Research Department
5
Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations
BRENT Crude Price & EUR Inflation Swap Forward 5Y5Y 110 EUR BRENT EUR (RHS)
100
2,4
90
2,2
80
2
70
1,8
60
1,6
50
1,4
40
1,2
30
1
20
Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
(%)
2,6
EUR/Bl
2,8
Source: Bloomberg and Repsol Economic Research Department
6
Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations
BRENT Crude Price EUR & EUR Inflation Swap Forward 5Y5Y 120
Correlation coefficient = 0,91 R² = 0.828
Jul-2010 - Feb-2017
100
Lineal (Jul-2010 - Feb-2017)
EUR/Bl
80
60
40
20
0
1.2
1.4
1.6
Source: Bloomberg and Repsol Economic Research Department
1.8
2 (%)
2.2
2.4
2.6
2.8
7
Oil Price & Inflation Expectation Relationship Crude price and the inflation expectations
BRENT Crude Price EUR & EUR Inflation Swap Forward 5Y5Y 120
Correlation coefficient = 0,91 R² = 0.828
Jul-2010 - Feb-2017
100
Lineal (Jul-2010 - Feb-2017)
EUR/Bl
80
60
40
20
0
1.2
1.4
1.6
Source: Bloomberg and Repsol Economic Research Department
1.8
2 (%)
2.2
2.4
2.6
2.8
8
Discussion Points
Oil Price & Inflation Expectation Relationship
Oil Supply Curve and Price Expectations: OPEP and Unconventionals
Unconventional Production: Cyclical Costs and Sustainability
Conclusions
9
Oil Supply Curve & Price Expectations
The traditional view is that Ligth Tight Oil acts as marginal supplier at a range between 50 and 100 US$/Bbl Production Cost Curve 120
Ultradeepwater
Artic
GTL
Production cost (2012 $/bl)
100 CO2-EOR
80
Kerogen Extra heavy & bitumen
60 Other conventional oil
40
Already produced
20
MENA
Ligth Tight Oil
CTL
Non-CO2EOR
0 0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Remaining technically recoverable oil resources (billion barrels) Source: IEA and Repsol Economic Research Department
10
Oil Supply Curve & Price Expectations
Conventional production in Non-OPEC countries has been declining during the period of high prices and high E&P investment Crude Oil Production by Region 80 70
Non-OPEC Conventional Crude Oil Production
50 40
Million Bbl/d
60
30 20 10
Source: Enerdata and Repsol Economic Research Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
11
Oil Supply Curve & Price Expectations
Conventional production in Non-OPEC countries has been declining during the period of high prices and high E&P investment Crude Oil Production by Region 80 70
Non-OPEC Conventional Crude Oil Production
50 40
Million Bbl/d
60
30 20 10
Source: Enerdata and Repsol Economic Research Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
12
Oil Supply Curve & Price Expectations
Non-OPEC unconventional production has just compensated the conventional decline in the region Crude Oil Production by Region 80
Non-OPEC Unconventional Crude oil production
70
Non-OPEC Conventional Crude Oil Production
50 40
Million Bbl/d
60
30 20 10
Source: Enerdata and Repsol Economic Research Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
13
Oil Supply Curve & Price Expectations
In the long run OPEC production will be increasingly relevant, but markets are paying more attention to unconventionals in the U.S. Crude Oil Production by Region 80
OPEC Crude Oil Production Non-OPEC Unconventional Crude oil production
70
Non-OPEC Conventional Crude Oil Production
50 40
Million Bbl/d
60
30 20 10
Source: Enerdata and Repsol Economic Research Department
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
14
Oil Supply Curve & Price Expectations
The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2016 Venezuela
-8
Iran
2005-14
-2.7
Ecuador
-1
UAE
-0.9
Iraq
0.2
Nigeria
0.5
Russia
1.7
Algeria
2
Angola
2.4
Saudi Arabia
10.7
Qatar
11.4
Kuwait
20.8
-20
-10
Source: Oxford Economics and Repsol Research Department
0
10
20
30
15
Oil Supply Curve & Price Expectations
The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2016 Venezuela
-11.5
2005-14
Iran
2016
-2.7
Ecuador
-5.9
UAE
-6.9
Iraq -18.4 Nigeria
-4.4
Russia
-3.4
Algeria -17.6 Angola
-6.1
Saudi Arabia -16.8 Qatar
-8.2
Kuwait
-7.3
-20
-10
Source: Oxford Economics and Repsol Research Department
0
10
20
30
16
Oil Supply Curve & Price Expectations
The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2026 (Brent Futures price) Venezuela
-5.5
2005-14
Iran
-2.4
Ecuador
-2.4
UAE
-0.7
Iraq
-0.7
Nigeria
2026 (Brent futures)
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
-3.9
Russia
-4.5
Algeria
-7.5
Angola
-7.8
Saudi Arabia
1.5
Qatar
Brent Price Futures 56.5 56.5 56.0 56.0 57.0 57.5 58.5 59.5 60.5 61.5
2.3
Kuwait
5.4
-20
-10
Source: Oxford Economics and Repsol Research Department
0
10
20
30
17
Oil Supply Curve & Price Expectations
The fiscal accounts are the drivers of OPEC decisions Public Balance (%GDP), average 2005-14 and 2026 (Brent IEA NP Scenario Price) Venezuela
1.0
Iran
0.9
2005-14
Ecuador
2026 (IEA NP)
-1.3
UAE
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
1.8
Iraq
9.0
Nigeria
-2.2
Russia
0.4
Algeria
-7.2
Angola
0.1
Saudi Arabia
6.1
Qatar
Brent Price IEA NP 55.4 66.3 77.6 89.3 94.7 100.2 105.9 108.0 110.5 112.8
2.3
Kuwait
8.4
-20
-10
Source: Oxford Economics and Repsol Research Department
0
10
20
30
18
Oil Supply Curve & Price Expectations
In fact OPEC production growth is the main explanation for price evolution since January 2015 OIL production increases 55,0
40,5 40,0
-0.88 MMBbl/d
54,5 54,0
Million bl/d
39,5
53,5
39,0
53,0
38,5 38,0 37,5
52,5
+2.63 MMBbl/d
37,0
OPEC
52,0 51,5
Non-OPEC
36,5
51,0
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
50,5
Fuente: International Energy Agency (IEA) y Direcciรณn de Estudios de Repsol
19
Oil Supply Curve & Price Expectations
What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Shale Crude Oil and Condensate Production vs. Break-even in Price Scenarios
Source: IHS
20
Oil Supply Curve & Price Expectations
What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Tight Oil Production Forecast by the EIA 160
7.5 AEO-17 Brent Forecast (RHS)
Source: Annual Energy Outlook (EIA) and Repsol Economic Research Department
US$/Bbl
2040
2039
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
20
2028
4.0
2027
40
2026
4.5
2025
60
2024
5.0
2023
80
2022
5.5
2021
100
2020
6.0
2019
120
2018
6.5
2017
140
2016
7.0
2015
MMBbl/d
AEO-17 Tight Oil Production (LHS)
21
Oil Supply Curve & Price Expectations
What about unconventionals? Break-evens for increasing production steadily are well above current price level U.S. Tight Oil Production and Brent Price Forecast by the EIA 160
7.5 AEO-17 Brent Forecast (RHS)
Source: Annual Energy Outlook (EIA) and Repsol Economic Research Department
US$/Bbl
2040
2039
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
20
2028
4.0
2027
40
2026
4.5
2025
60
2024
5.0
2023
80
2022
5.5
2021
100
2020
6.0
2019
120
2018
6.5
2017
140
2016
7.0
2015
MMBbl/d
AEO-17 Tight Oil Production (LHS)
22
Discussion Points
Oil Price & Inflation Expectation Relationship
Oil Supply Curve and Price Expectations: OPEP and Unconventionals
Unconventional Production: Cyclical Costs and Sustainability
Conclusions
23
Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?
Breakeven in the 3 main unconventional plays
160 140
$/bl
120 100 80 60 40 20
2012
2014 2016 Midland
2012
2014 2016 Delaware
2012
2014 2016 Eagle Ford
2012
2014 2016 Williston
2012
2014 2016 Miss. Lime
2012
2014 2016 Gulf Coast
Permian Source: RS Energy and Repsol Economic Research Department
24
Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?
Breakeven in the 3 main unconventional plays
160 140
$/bl
120 100 80 60 40 20
2012
2014 2016 Midland
2012
2014 2016 Delaware
2012
2014 2016 Eagle Ford
2012
2014 2016 Williston
2012
2014 2016 Miss. Lime
2012
2014 2016 Gulf Coast
Permian Source: RS Energy and Repsol Economic Research Department
25
Unconventional Production: Cyclical Costs and Financial Sustainability Significant break-even reduction in the last five years in the 3 main unconventional plays How much of this respond to cyclical factors and how much to structural factors?
Breakeven in the 3 main unconventional plays
160 140
$/bl
120 100 80 60 40 20
2012
2014 2016 Midland
2012
2014 2016 Delaware
2012
2014 2016 Eagle Ford
2012
2014 2016 Williston
2012
2014 2016 Miss. Lime
2012
2014 2016 Gulf Coast
Permian Source: RS Energy and Repsol Economic Research Department
26
Unconventional Production and Price: Cyclical and Structural Factors
CYCLICAL FACTORS Costs deflation (Low activity, idle capacity, low prices –cost deflates ~1/3 of price decreases-)
Costs inflation (High activity, full capacity , high prices -cost increases more than 1/3 of price increases-)
STRUCTURAL FACTORS Efficiency gains related to technology advances and new operational practices (Drilling location high-grading, reduced drill times, propant quality, advanced fracture stages performance, etc.)
27
Unconventional Production: Cyclical Costs and Financial Sustainability
E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160
Downward Cycle
140
96 → 98 00 → 01 08 → 09
100
WTI Spot
Cost -18% -17% -21%
-71%
14 → 16
140 120 100
-33%
* From max to min of each serie
80
Source: Thomson Reuters and Repsol Economic Research Department
Jan-17
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
0 Jan-03
0 Jan-02
20
Jan-01
20
Jan-00
40
Jan-99
40
Jan-98
60
Jan-97
60
Jan-96
December 2012=100
120
80
Price -55% -44% -71%
160
PPI Drilling oil and gas wells
28
Unconventional Production: Cyclical Costs and Financial Sustainability
Productivity per well could be considered an STRUCTURAL BEHAVIOUR related to technology advance Monthly Rate of Change - Maximum Production per New Oil Horizontal Well in Main Shale Oil Plays 10%
8%
Bakken + Eagle Ford + Permian Horizontal Well weighted average
Rate of change
DI / Repsol: Oil Production per Well 6%
12 Month MA
4%
?
2%
0%
Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16
-2%
Source: Drilling Info and Repsol Economic Research Department
29
Unconventional Production: Cyclical Costs and Financial Sustainability
Productivity per well could be considered an STRUCTURAL BEHAVIOUR related to technology advance Monthly Rate of Change - Maximum Production per New Oil Horizontal Well in Main Shale Oil Plays 10%
8%
Bakken + Eagle Ford + Permian Horizontal Well weighted average
Rate of change
DI / Repsol: Oil Production per Well 6%
12 Month MA
4%
Cost deflation High grading
?
2%
0%
Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16
-2%
Source: Drilling Info and Repsol Economic Research Department
30
Unconventional Production: Cyclical Costs and Financial Sustainability
E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160
Upward Cycle
140
94 → 97 99 → 00 01 → 08 10 → 14
100
16 → ?
WTI Spot
Cost +54% +40% +200% +48%
+76%
140 120 100
+9%
* From min to max of each serie
80
80
Source: Thomson Reuters and Repsol Economic Research Department
Jan-17
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
0 Jan-03
0 Jan-02
20
Jan-01
20
Jan-00
40
Jan-99
40
Jan-98
60
Jan-97
60
Jan-96
December 2012=100
120
Price +75% +25% +500% +52%
160
PPI Drilling oil and gas wells
31
Unconventional Production: Cyclical Costs and Financial Sustainability
E&P costs and oil prices co-move. And some of the reduction in costs should be considered CYCLICAL not STRUCTURAL Monthly Crude Oil Price and PPI Drilling Oil and Gas Wells 160
Upward Cycle
140
94 → 97 99 → 00 01 → 08 10 → 14
100
16 → ?
WTI Spot
Cost +54% +40% +200% +48%
+76%
140 120 100
+9%
* From min to max of each serie
80
80
Source: Thomson Reuters and Repsol Economic Research Department
Jan-17
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
0 Jan-03
0 Jan-02
20
Jan-01
20
Jan-00
40
Jan-99
40
Jan-98
60
Jan-97
60
Jan-96
December 2012=100
120
Price +75% +25% +500% +52%
160
PPI Drilling oil and gas wells
32
Unconventional Production: Cyclical Costs and Financial Sustainability
To come back to past production growth, due to cost reduction we will need other prices. The rate of growth in productivity per well remains stable…. Production of U.S. crude and WTI Price 145 Production 130
WTI Price (RHS)
Source: Bloomberg and Repsol Economic Research Department
3Q 2020
1Q 2020
3Q 2019
1Q 2019
3Q 2018
1Q 2018
3Q 2017
1Q 2017
25
3Q 2016
5,5
1Q 2016
40
3Q 2015
6,0
1Q 2015
55
3Q 2014
6,5
1Q 2014
70
3Q 2013
7,0
1Q 2013
85
3Q 2012
7,5
1Q 2012
100
3Q 2011
8,0
1Q 2011
115
3Q 2010
8,5
usd/barrel
9,0
1Q 2010
millions of barrels of oil equivalent per day
9,5
33
Unconventional Production: Cyclical Costs and Financial Sustainability
To come back to past production growth, due to cost reduction we will need other prices. The rate of growth in productivity per well remains stable…. Production of U.S. crude and WTI Price 145 Production 130
WTI Price (RHS)
Source: Bloomberg and Repsol Economic Research Department
3Q 2020
1Q 2020
3Q 2019
1Q 2019
3Q 2018
1Q 2018
3Q 2017
1Q 2017
25
3Q 2016
5,5
1Q 2016
40
3Q 2015
6,0
1Q 2015
55
3Q 2014
6,5
1Q 2014
70
3Q 2013
7,0
1Q 2013
85
3Q 2012
7,5
1Q 2012
100
3Q 2011
8,0
1Q 2011
115
3Q 2010
8,5
usd/barrel
9,0
1Q 2010
millions of barrels of oil equivalent per day
9,5
34
Discussion Points
Oil Price & Inflation Expectation Relationship
Oil Supply Curve and Price Expectations: OPEP and Unconventionals
Unconventional Production: Cyclical Costs and Sustainability
Conclusions
35
Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional
Resources is not the question but production/break-even relationship
STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)
2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Increase in activity → Ciclical Cost inflation → Price increase
Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 36
Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional
Resources is not the question but production/break-even relationship
STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)
2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Increase in activity → Ciclical Cost inflation → Price increase
Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 37
Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional
Resources is not the question but production/break-even relationship
STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)
2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Cyclical Cost inflation → Price increase needed and more declining prod.
Demand elasticity to prices higher than expected. Demand growth exceding Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 38
Conclusions Supply actors: OPEC ↔ Non-OPEC Conventional ↔ Non-OPEC Unconventional
Resources is not the question but production/break-even relationship
STRUCTURAL COMPONENT OF LONG TERM PRICE Efficiency gains (relatively constant growth) CYCLICAL COMPONENT OF LONG TERM PRICE Costs (~1/3 of price fall but >1/3 of price increase)
2010-2014 Production increase: Highly related to high price (>100 $/Bbl) 2014-2016 Production decrease: Price falling → lower investment and production→Cost deflation 2016-? Production increase: Cyclical Cost inflation → Price increase needed and more declining prod.
Demand elasticity to prices higher than expected. Demand growth overpass Non OPEC growth at these prices. Therefore OPEC is key for glut and price expectations but everybody talk about shale response 39
Thank you
Š Economic Research Department