Mine Yucel - Monterrey 2016

The Oil Market: From Boom to Gloom

Mine Y端cel Senior Vice President and Director of Research Federal Reserve Bank of Dallas

GIC Presentation, February 1, 2016 Monterrey, Mexico

Federal Reserve Bank of Dallas

Oil prices plunge Nominal price, dollars per barrel, weekly 160

140 West Texas Intermediate oil price

120 100 80 60 40 20 0 2000

$31.35

2004

2008

NOTE: Final data point is the average of daily prices from Monday 1/25/16 to Thursday 1/28/16.

SOURCE: Energy Information Administration.

2012

2016

Federal Reserve Bank of Dallas

Current oil prices not a record low Real prices of crude oil (December 2015 dollars)

Real price, dollars per barrel 160 140 120 100 80

Refiners' acquisition cost of crude

60 40

20 0 1977

1984

1991

1998

SOURCES: Bureau of Labor Statistics; Energy Information Administration; FRB Dallas calculations.

2005

2012

Federal Reserve Bank of Dallas

Supply/demand mismatch Million barrels per day 100 Implied change in inventories

Million barrels per day 4

Petroleum consumption 95

3

Petroleum production

90

2

Forecasts

85

1

80

0

75

-1 2012

2013

SOURCE: Energy Information Administration.

2014

2015

2016

2017

Federal Reserve Bank of Dallas

U.S. and OPEC keep oil market oversupplied Growth in oil production, January 2014-October 2015 Million barrels per day 1.4 1.2

1.0 0.8

0.6

1.32 1.08

0.4 0.45

0.2

0.16 0.0 U.S.

Iraq

SOURCES: Energy Information Administration; Oil Market Report.

Saudi Arabia

Other OPEC Federal Reserve Bank of Dallas

Why the recent slide in prices?

• Iran comes into the market • U.S. output stronger than expected • Concerns about Chinese demand – The big picture from the oil data: healthy consumer, sick manufacturing

• December unusually warm – Heating degree days (HDD) in the NE US were 33% below their 10-year average in December.

• Weather forecasts adding downside risk to prices – High likelihood of warm weather in various parts of the OECD through 2016Q1.

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IMPACT ON U.S. ECONOMY

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U.S. oil production Million barrels per day 12 2015 average

10 8 6 4 2 0 1920

1930

1940

SOURCE: Energy Information Administration.

1950

1960

1970

1980

1990

2000

2010

Federal Reserve Bank of Dallas

U.S. crude oil production from shale Thousand barrels per day 4,000

Texas 3,401

3,500 3,000

2,500 2,000

1,652 Kansas Montana Utah Colorado Wyoming New Mexico

1,500 1,000

786

500

North Dakota 1,169

1,098

236

Oklahoma

0 Jan 2010

Nov 2015

SOURCE: Energy Information Administration.

Jan 2010

Nov 2015

Jan 2010

Nov 2015

Federal Reserve Bank of Dallas

Oil production levels off Rig count 2,000

Million barrels per day 9.9

1,800

9.4 8.9

1,600 Crude oil production

U.S. rig count

1,400 8.4 1,200 7.9 7.4

1,000 800

6.9 600 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 SOURCES: Baker Hughes; Energy Information Administration.

Federal Reserve Bank of Dallas

Crude oil inventories at 80-year highs Million barrels

5-year range 2015 2014 5-year average

550 500 450 400 350 300 Jan

Feb

Mar

Apr

SOURCE: Energy Information Administration.

May

Jun

Jul

Aug

Sep

Oct

Nov

Federal Reserve Bank of Dallas

Dec

Drilling investment falls with rig count Private fixed investment in mining/exploration Bln chained 2009 $

Rig count OPEC decision

160

U.S. rig count

2,200

140

2,000

120

1,800

100

1,600

80

Investment in mining/exploration

1,400

60

1,200

40

1,000

20

800

0

600 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SOURCES: Baker Hughes; Bureau of Economic Analysis.

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Impact on U.S. economy • The U.S. benefits from lower oil prices • Boosts consumer disposable income – PCE growth: 3.6% in 2Q and 3.2% in 3Q 2015 – Auto sales up 9% in 2015

• Reduces the cost of energy to firms • Reduces profitability of producing oil – Layoffs, capex declines and bankruptcies in oil patch

• A 50% fall in oil prices may lead to a 0.3% to 1.0% increase in GDP (depending on the model) • Headline inflation falls Federal Reserve Bank of Dallas

IMPACT ON STATE ECONOMIES

Federal Reserve Bank of Dallas

Low oil prices benefit most states (Effect of a 50% decline in oil prices on employment)

-2.0

-4.3

-0.7

-0.7

-2.3 -1.2

-1.6

-1.7

SOURCE: “The Shale Gas and Tight Oil Boom: U.S. States’ Economic Gains and Vulnerabilities,”

by Stephen P.A. Brown and Mine K. Yücel, Council on Foreign Relations, Energy Brief, Oct. 2013.

Federal Reserve Bank of Dallas

Energy states doing well in 2014 Percent change (Dec/Dec) 5.0 4.5 4.0

Texas

3.5 3.0 U.S.

2.5

2.0 1.5 1.0 0.5 0.0 ND FL TX GA UT NV OR CO WA CA NC SC AR AZ TN U.S. DE ID KY MA LA WY MI WI OK NY AL NM MD CT IN IA KS OH NH MN RI PA IL VT AK VA SD MO NJ NE MS MT ME HI WV

-0.5

SOURCE: Bureau of Labor Statistics.

Federal Reserve Bank of Dallas

Energy states lose jobs in 2015 Percent Change (year-to-date) 5 4 3

U.S.

2

Texas

1 0

-1 -2 -3 -4 ID SC UT FL CA WA OR HI AZ TN SD GA MA KY MD NC NV IN MI U.S. CO RI NY DE IA NJ AR VA OH MN NE ME TX CT AL MO MS WI VT PA MT NH KS NM IL AK OK LA WV WY ND

-5

SOURCE: Bureau of Labor Statistics.

Federal Reserve Bank of Dallas

Rig counts still falling Rig count, weekly 1,000

Rig count, weekly 240 Texas

900

200

800 700

160

Louisiana

Oklahoma

600

120

500 400

80

300 North Dakota

200

40

100 0

0 2012

NOTE: Last data point is January 22nd.

SOURCE: Baker Hughes.

2013

2014

2015 Federal Reserve Bank of Dallas

Initial jobless claims still high Index, Jan. 5 '13 = 100, 4 WMA 180 160 North Dakota Oklahoma

140 120 100

Texas Louisiana U.S.

80 60 40 20 0 2013 SOURCE: Bureau of Labor Statistics.

2014

2015 Federal Reserve Bank of Dallas

Some states rely heavily on oil and gas severance taxes (Share of 2014 state tax revenues)

Percent 80

72.4

70

60

53.8

50

% Taxes Collected

39.0

40

30 18.5

20

10.9

10

8.9

7.5 2.1

0.0

CO

CA

0 AK

ND

WY

NM

TX

SOURCE: U.S. Census Bureau, 2014 Annual Survey of State Government Tax Collections.

LA

OK

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WHERE DO WE GO FROM HERE?

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Y/Y change, million barrels per day 1.5

1.0

Forecast for 2016 World Consumption (+1.42)

Other Liquids Production Crude production (+0.62) (-0.4)

0.5 OPEC (+0.51) 0.0

OPEC (+0.35)

World Production (+0.22)

U.S. (+0.27)

U.S. (-0.70) -0.5

Other non-OPEC -1.0

(-0.21)

NOTE: Other liquids production growth consists primarily of production growth of natural gas liquids .

SOURCE: Energy Information Administration.

Federal Reserve Bank of Dallas

Crude price forecast Dollars per barrel 120 Historical spot price 100 80

STEO price forecast NYMEX futures price 95% NYMEX futures confidence interval

60 40 20 0 Jan-15

Jun-15

Nov-15

SOURCE: Energy Information Administration.

Apr-16

Sep-16

Feb-17

Jul-17

Dec-17

Federal Reserve Bank of Dallas

Oil price outlook very uncertain Annualized percentage points 70 60 50 40 OVX (WTI volatility)

30 20 10

VIX (equity volatility) 0 2011

2012

2013

SOURCES: Chicago Board Options Exchange; Wall Street Journal.

2014

2015

2016 Federal Reserve Bank of Dallas

2017

Outlook • • • •

“Lower for longer” outlook for oil prices Global GDP growth is expected to rise over time Uncertainties abound Oil price risks more on the downside in the short run – China, Iran, high inventories

• Energy importers such as the U.S. should continue to benefit from lower oil prices.

• Rough patch for energy-producing countries and states.

Federal Reserve Bank of Dallas

The Oil Market: From Boom to Gloom

Mine Y端cel Senior Vice President and Director of Research Federal Reserve Bank of Dallas

GIC Presentation, February 1, 2016 Monterrey, Mexico

Federal Reserve Bank of Dallas