Download Mr. Lawrence Eagles, Global President-Oil

COMMODITY OUTLOOK: GEOPOLITICS, GROWTH AND VOLATILITY
STRICTLY PRIVATE AND CONFIDENTIAL
March, 2011
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OIL MARKET OVERVIEW
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Macroeconomic Outlook for 2011
 The world economy appears to be on track to return to synchronous above-trend growth in
2011. The foundation for a strong synchronized global upturn lasting 4-8 quarters is in place
 High oil prices, inflation and possible sovereign debt are the key forecast risk factors –Volatility
will be the norm
 High oil prices driven by a supply shock are likely to be more damaging than those driven by
strong economic growth
 The IEA and OPEC can offset supply disruptions
– Delayed or partial response could trigger hoarding activities
 Major economies in the emerging world, including China, India, and Brazil are in a much
better place than the G3, but need to find a balance between growth and inflation
 High oil prices have a greatest influence on importing countries with low energy taxes
 In the 2007/8 oil rally, high oil prices contributed to a weaker dollar
 While the Fed may be forced to raise interest rates quicker than expected, high
OIL MARKET OVERVIEW
unemployment may lead to it remaining ‘behind the curve’ in 2011
 Both factors could weaken the US dollar, which would be supportive for commodity prices
 A shift from a zero interest rate policy will be extremely significant for the commodity markets
 Impact strongest for those with high inventories
 A weaker dollar encourages inventory accumulation as a store of value
1
Commodity markets have moved higher as emerging market growth surges
INDUSTRIAL METALS TOTAL RETURN
AGRICULTURE TOTAL RETURN
23-Feb-11
23-Feb-11
2,300
1,000
2,200
950
2,100
900
2,000
850
1,900
800
1,800
750
1,700
700
1,600
650
1,500
600
1,400
550
1,300
500
1,200
1,100
450
Source: J.P. Morgan Energy Strategy, Bloomberg
Source: J.P. Morgan Energy Strategy, Bloomberg
17-Feb-11
28-Jan-11
8-Jan-11
19-Dec-10
29-Nov-10
9-Nov-10
20-Oct-10
30-Sep-10
10-Sep-10
21-Aug-10
1-Aug-10
12-Jul-10
22-Jun-10
2-Jun-10
13-May-10
23-Apr-10
3-Apr-10
22-Feb-10
17-Feb-11
28-Jan-11
8-Jan-11
19-Dec-10
29-Nov-10
9-Nov-10
20-Oct-10
30-Sep-10
10-Sep-10
21-Aug-10
1-Aug-10
12-Jul-10
22-Jun-10
2-Jun-10
13-May-10
23-Apr-10
3-Apr-10
14-Mar-10
22-Feb-10
14-Mar-10
400
1,000
PRECIOUS METALS TOTAL RETURN
23-Feb-11
 Broad rally in commodities as the world economy
2,000
has recovered from the global recession
1,900
1,800
 Sustainable recovery in commodities, despite
1,700
anemic growth in OECD shows consumption driver
from emerging market economies
1,600
1,400
 Agricultural markets have seen some of the
1,300
strongest recoveries
1,200
1,100
 Supply disruptions have played their role, but low
Source: J.P. Morgan Energy Strategy, Bloomberg
ending stocks have been a significant driver
17-Feb-11
28-Jan-11
8-Jan-11
19-Dec-10
29-Nov-10
9-Nov-10
20-Oct-10
30-Sep-10
10-Sep-10
21-Aug-10
1-Aug-10
12-Jul-10
22-Jun-10
2-Jun-10
13-May-10
23-Apr-10
3-Apr-10
14-Mar-10
1,000
22-Feb-10
OIL MARKET OVERVIEW
1,500
13
Demand-supply situation for 2011
Hurdle rates required for global demand to catch up with global production in 2011
Demand growth required by commodity is relative to JPM projections for global production
14%
11.7%
12%
10%
9.0%
7.4%
7.1%
8%
6.0%
5.1%
6%
3.9%
3.4%
4%
2.3%
2.1%
2%
2.3%
2.3%
3.0%
1.7% 1.9%
1.1%
-2.1%
0%
0.1%
-1.8%
-0.1%
Total
Palladium
Platinum
Cocoa
Silver
Lead
Coffee
Zinc
Nickel
Cotton
Sugar
Aluminium
Soybeans
Corn
Copper
Wheat
Gold
Iron ore
Steel
-4%
Petroleum
-2%
Source: JPMorgan Commodity Research. “Total” equals world-value-weighted average using 2010 YTD prices and production
OIL MARKET OVERVIEW
 A 1.5% to 2.0% global real GDP growth rate is all that is required to send most commodity
markets, including oil, into deficit in 2011. Our economists expect global real GDP growth of
3.5% in 2011, suggesting ample room for any would-be downshift in growth expectations to
arrive at the same conclusion.
 Inventories are already low in softs and grains, higher in metals and energy; but across sectors,
the fact that US real interest rates are negative means global carrying costs are abnormally low
and there are strong incentives to accumulate stocks for anticipated demand well into the future,
especially in non-USD-based jurisdictions.
4
Geopolitical risk takes over from demand as oil price driver
Volatility to remain heightened
Brent and WTI Historical Price
In $/bbl
160
140
120
100
80
60
40
20
WTI
 Civil unrest is rapidly redrawing the political map in North Africa, market concern tensions
will spread to major oil producing and transporting regions
Brent
 Price spike risks have materially increased
 World oil demand growth of 2.7 mbd in 2010 will moderate to 1.7 mbd in 2011
 Demand seen above trend, driven by EM demand and healthy GDP growth
 Risks include an overly aggressive rise in price hurting global economic recovery and
Eurozone financial market volatility
4-Jan-08
9-Jan-09
15-Jan-10
21-Jan-11
Global Supply & Demand and Forecast
In mbd
92
Demand
 OPEC output restraint by key members has kept a cap on supply, but there are signs they
are upping output in the face of outages and +$100/bbl prices
Supply
 Robust diesel demand is once again driving crude prices as refiners run more crude
90
 High product inventories and seasonal refinery maintenance will lead to reduced crude
88
demand in the coming months
86
 Although we do not envisage a significant retracement in prices having hit our price target
84
for 1Q2011, a dramatic increase in OPEC output provides downside risk
82
Q1'10
Q3'10
Q1'11
Q3'11
Q1'12
Q3'12
US Total Product Inventories
Five-Year Range
Five-Year Average
2010
2011
Mb
850
800
OIL MARKET OVERVIEW
J.P. Morgan Crude Oil Price Forecast
In $/bbl
750
650
600
J
F
M
A
M
J
J
A
S
O
N
D
Source: JPMorgan Energy Strategy, IEA, government and industry sources
1Q11 2Q11 3Q11 4Q11 2011
1Q12 2Q12 3Q12 4Q12 2012
Brent Forecast*
…
…
…
…
…
108.00 105.00 102.00 102.00 104.00
110.00 105.00 110.00 115.00 110.00
Prev ious Brent Forecast**
…
…
…
…
…
95.00 95.00 90.00 100.00 95.00
105.00 100.00 105.00 110.00 105.00
Brent Actual To Date
700
1Q10 2Q10 3Q10 4Q10 2010
77.37 79.41 76.96 87.45 80.34
100.08
…
…
…
…
...
…
…
…
…
WTI Forecast*
…
…
…
…
…
96.00 103.00 95.00 92.00 97.00
100.00 98.00 103.00 110.00 103.00
Prev ious WTI Forecast**
…
…
…
…
…
93.00 93.00 88.00 98.00 93.00
104.00 99.00 104.00 109.00 104.00
Actual To Date
78.88 78.05 76.21 85.24 79.61
89.43
…
…
…
…
...
…
…
…
All forecasts are period averages. Actual to date prices are as of February 21, 2011. Source: JPMorgan Energy Strategy
8
…
Probability assessment: a useful guide
Different Price Scenarios
Unrest in Middle East/North Africa
Contagion 5%
Continuation 35%
Resolution 60%
Geopolitical concerns increase
Supply outages remain
Political unrest moderates
Further supply shocks emerge
OPEC only partially offsets loss
Additional supplies balance the market
OIL MARKET OVERVIEW
IEA does not release
Price $180
Price $120
Price $95
Av Weighted Price $9
Av Weighted Price $42
Av Weighted Price $57
Average Weighted Price $108
But low-high variance $85
9
Three reasons why OPEC needs a higher oil price
Middle East Oil Demand Surges as % of Production
Budget Breakeven (BBE) Oil Price $/bbl
40%
$ bbl
200
38%
BBE Price - +7% spend,
flat production, flat
demand
36%
34%
150
BBE Price - +7% spend,
flat production, 4.5%
demand
32%
30%
100
28%
26%
50
24%
22%
20%
1Q2000
Note: Does not include Israel, Jordan and Lebanon
3Q2002
1Q2005
3Q2007
0
1Q2010
2007
Source: J.P. Morgan Energy Strategy, IEA, Government Statistics
2011
2013
2015
2017
2019
Source: J.P. Morgan Energy Strategy, Various National Sources
UK Gasoline Prices—With and Without Tax $/bbl
 Social spending rising by 7% per year
350
 Government spending on wages and capital projects has risen
UK Gasoline Retail Price Ex Tax $/BBL
UK Gasoline Retail Price $/BBL
300
in tandem with higher oil prices: Abu Dhabi : $20/bbl in 2004;
Bahrain $30/bbl in 2003 – now 2-3 times that level
250
200
 Energy demand rising rapidly, production is stagnating
OIL MARKET OVERVIEW
2009
150
 Energy export revenues fall unless prices rise
100
 Stemming taxation in consumer countries
50
 If prices fall, consuming countries are likely to use the
0
opportunity to raise taxes—the end user price remains high
regardless
1978
11
1982
1986
1990
1994
1998
2002
2006
2010
(Dec)
Commodities Outlook for 2011
 Outlook: The outlook for commodities in 2011 is positive, spurred by global cyclical recovery and
easy hurdles for global consumption to surpass constrained global production. For long exposures
heading into 2011, we prefer Brent crude oil, Wheat, Corn and Copper.
 Demand growth:. In 2011, the cyclical re-ignition of demand growth expectations will likely
become a more dominant factor in guiding the performance of physical commodities and their
associated futures markets.
 Macroeconomic Policy: The low interest rate regime in place around the world will push money
into commodities and other hard assets as a hedge against the value of paper money.
 Inflationary risks: Rising inflation expectations and actual rate hikes in 2011 will tend to steepen
upward-sloping commodity forward curves, as rising forward valuations and higher carrying costs
are embedded in term structures.
OIL MARKET OVERVIEW
 Supply Side Risks: A number of commodity forward curves are already exhibiting backwardation,
providing concrete evidence of the very low level of inventories that prevail in a number of
agricultural markets. Low stock levels will continue to be an important factor in 2011. Apart from
this, a number of markets face individual supply risks arising from weather related phenomena
which can spike prices.
 Policy Risks (Part 2): The risks to our central view are skewed toward higher price volatility
and higher returns, especially should governments implement price controls and other trade
barriers that increase friction in the movement of scarce inventories to jurisdictions where they are
needed most.
3