Oil Markets into 2006: Oil Markets into 2006 Peter Davies Chief Economist, BP plc British Institute of Energy Economics London. 24 January, 2006


Outline: Outline Oil and energy today How did we get to here? Prospects for 2006 Into the medium term


Oil and Gas: A Perspective: Oil and Gas: A Perspective


Real Oil Prices: Real Oil Prices Real Oil Prices* * Brent prices deflated by US CPI (2004 prices)


2005: A Snapshot – “the 40% Year”: 2005: A Snapshot – “the 40% Year” 2005 2004 % Change Current Oil Prices ($/bbl) Brent 54.52 38.27 +42.5% 63.46 WTI 56.59 41.49 +36.4% 66.85 OPEC basket 50.71 36.04 +40.7% 59.42 Gas Prices Henry Hub ($/mmbtu) 8.64 6.13 +40.9% 8.21 UK NBP (UKp/therm) 40.59 24.39 +66.4% 55.90 Refining Margins BP GIM ($/bbl) 8.60 6.08 +41.4% 3.24


World Fuel Shares 1965-2004: World Fuel Shares 1965-2004 Oil Coal Gas Hydro Nuclear Share of world primary energy consumption


Brent Oil Prices: Brent Oil Prices Ave 2005 $54.52/bbl Ave 2004 $38.27/bbl Ave 2000-2003 $26.70/bbl Ave 1986-99 $17.8/bbl


Why High Oil Prices?: Why High Oil Prices? Driven by: OPEC behaviour post 1999 Strong demand growth 2004 Low spare capacity Geopolitics Energy as a financial commodity Mb/d World Oil Consumption Growth


Brent Oil Prices 2005: Brent Oil Prices 2005


Oil Markets in 2005: Oil Markets in 2005 Million b/d 2005 Developments Trend demand growth but with Chinese weakness Non-OPEC weakness: Hurricane disruption Russian slowdown Project delays OPEC production growth led to stockbuild


Oil Consumption in 2005: Oil Consumption in 2005 GDP growth returns to trend Chinese oil consumption growth slows sharply


Hurricane Impacts: Hurricane Impacts net tightened crude oil market loss of refineries temporarily raised refining margins hit US gas harder than oil revealed new dimensions of energy security – it is not always the Middle East and embargoes


OPEC Crude Oil Production 2004-5: OPEC Crude Oil Production 2004-5


2005 Oil Markets: The Conundrum: 2005 Oil Markets: The Conundrum Why did market fundamentals weaken but prices still rise?


OECD Commercial Inventories: OECD Commercial Inventories Million bbls Million bbls


Brent Contango & Backwardation: Brent Contango & Backwardation Backwardation Contango US$/bbl


Brent Contango & Backwardation 2004-5: Brent Contango & Backwardation 2004-5 Backwardation Contango US$/bbl


Brent Contango & Backwardation 2005: Brent Contango & Backwardation 2005 Backwardation Contango US$/bbl


Brent Contango & Backwardation 2005: Brent Contango & Backwardation 2005 Backwardation Contango US$/bbl US$/bbl


Brent Forward Price Curves: Brent Forward Price Curves Forward Price Curves on 1st trading day of January


2005: The Explanation: 2005: The Explanation Inventories built in face of oversupply and enabled through ‘flip’ into contango 4Q saw: Hurricane net tightening as production was slow to return Colder than average weather High gas prices stimulating resid demand Geopolitical concerns Iran Iraq Spare capacity remained low Emerging consensus on OPEC price objectives – floor of $45-50 OPEC basket


Entering 2006: Entering 2006 Prices breakthrough $60 – in face of rising concerns over Iran Global economic momentum – and expectations of trend economic growth in 2006 OPEC wait and see through the winter


Oil Markets in 2005/6: Oil Markets in 2005/6 Million b/d 2006 Prospects Trend demand growth with Chinese acceleration Non-OPEC acceleration: Hurricane restoration Project delivery Starting from a stockbuild in 2005


2006 supply growth outside of OPEC quotas: 2006 supply growth outside of OPEC quotas Million b/d


2006 Oil Price Prospects: 2006 Oil Price Prospects Drivers 2006 call on OPEC less than current OPEC production levels OPEC capacity rising Geopolitical uncertainties Risks Economic growth Supply delays and outages Geopolitics OPEC may need to trim production to achieve price objectives – but production already at historical high levels Reasonable expectation of $50-60 Brent for 2006


OPEC: Spare Capacity: OPEC: Spare Capacity Mb/d Spare capacity should recover …… but OPEC likely to remain in control


Conclusions: Conclusions Oil prices driven up in 2004 by demand surge and low spare capacity – and further in 2005 despite rising inventories 2006 shows further momentum but OPEC may need to trim production. $50-60 oil prices likely Spare capacity expected to build back to historic levels through 2010 – but call on OPEC still projected to edge upwards. Potential for prices to remain over $40. Market forces expected to respond – but could take a long time to reassert.