Download Oil Price Analysis: November 2014

OIL PRICE ANALYSIS
Prepared by: Vangie Bhagoo-Ramrattan,
Head, First Citizens Research & Analytics
[email protected]
19-November-2014
Introduction
The combination of strong crude oil supply and weak global demand has pushed crude oil prices to their lowest levels in
nearly four years. The volatility of the global oil market has been heightened based on a culmination of various factors
currently afflicting energy markets including geopolitical unrest as well as economic uncertainties. There has been changing
dynamics in the global energy market, as in the last quarter of 2013, the US overtook Saudi Arabia as the largest producer of
crude, Natural Gas Liquids (NGL’s) and other liquids, producing more than 10% of the world’s output in that particular
quarter. The increase in production in the US was mainly driven by rising tight oil1 production. Some Energy Analysts are
suggesting that oil prices will only recover when some of the extra shale oil supply is removed from the market, rather than
when/ if OPEC decides to cut production. Saudi Arabia remains the largest supplier of crude oil in the world, accounting for
13.1% of global production in 2013, while non-OPEC member Russia is in a close second accounting for 12.9%. In 2013,
OPEC accounted 42.1% of total world production of crude oil, while Non-OPEC’s share was 41.4%.
The energy sector is fundamental to the Trinidad and Tobago economy, accounting for an average of 42% of GDP, 53% of
government revenue and almost 85% of merchandize export receipts over the last five years. Of course, this dependency
places the country in a vulnerable position as swings in the global market directly impacts upon the domestic economy, either
directly or indirectly. On 19 November, Petrotrin’s President announced that due to falling oil prices, the company budget for
the next year will be revised downwards to USD75 per barrel while on the same day, the Minister of Finance and the
Economy announced that the national budget has been reworked using oil prices of USD70 per barrel, down USD10.
According to the Minister of Finance and the Economy, if oil prices fall to the ‘worse-case scenario’ of USD70 per barrel, the
country will lose USD1 billion in revenue (2% of total government revenue). But the Ministry believes prices will average
‘somewhere between USD73 and USD80 per barrel.’
The purpose of this report is to highlight recent developments in the international oil market and attempts to discuss the
potential impact the market movements will have on the local economy. It also serves to examine the impact that Petrocaribe
may have on the region and Trinidad and Tobago at a high level if the terms of the arrangement are modified. The report
looks specifically also at the potential impact on Trinidad and Tobago’s banking sector from a general point of view.
However, due to data limitations, the conclusions are general, and look at the impact at a macro level. Further, this report
was written as at 19-November, 2014. There are key upcoming events in the market which will have implications for oil
prices. OPEC meets on 27 November to determine if the cartel’s supply will be cut or maintained in order to influence prices
and the outcome of this meeting will have significant repercussions on the direction of oil prices in the coming months.
1
Tight Oil is a term often used to describe shale oil, the supply of which has risen sharply in recent years in North America because of
greater use of so-called ‘fracking’ techniques to extract oil from dense rock formations.
Page 1 of 22
EXECUTIVE SUMMARY

Year to date, the West Texas Intermediate (WTI) Cushing Oil Price (US benchmark) has fallen by close to 23%,
closing 14 November at USD75.32 per barrel. The volatility of the global oil market has been heightened based on a
culmination of various factors currently afflicting energy markets including geopolitical unrest, economic
uncertainties as well as the potential impact of Ebola.

China is a major player in the global crude oil market, given that it was the world’s second largest consumer in
2013, only behind the US. The weaker economic data coming out from China has added to the bearish view on
crude oil prices this year.

OPEC meets on 27 November to consider whether they will adjust its output target of 30 million barrels per day for
the first half of 2015. So far, only a minority of members have called for an output cut.

Primarily an energy-based economy, the T&T budget is constructed on an assumed oil price of USD80 per barrel,
using the WTI measure and gas price of USD2.75 per mmbtu (Henry Hub). Trinidad and Tobago had 728 million
barrels of proven crude oil reserves as of 2014, according to the Oil and Gas Journal (OGJ). The country produced
118,000 BPD of petroleum and other liquids in 2013, of which 81,000 BPD was crude oil including lease
condensates, and the remainder consisted mostly of NGL.

The direct impact upon Petrotrin from an investment perspective if oil prices continue to decline will be
deterioration in the credit rating and a rise in USD bond yields. The yield on Petrotrin’s 2019 US dollar bond has
already increased by 27 basis points over the last six months.

In the short-term we do not believe that the Trinidad and Tobago’s credit rating is under threat of being downgraded
in the short term. In our view, changes to the rating will come if there is a secular trend of weakening FDI flows into
the country via the energy sector, which will affect the country’s external accounts, output levels of the energy
sector, which will then impact upon the fiscal accounts. We will have to look closely at the evolution of the market
for natural gas, as we do think in the medium term, prices will decline based on the further development of shale gas
and changing dynamics of Trinidad and Tobago’s major export markets. For the next fiscal year, however, the
revenue assumption might have to be more conservative to take into consideration the global situation of higher
output of crude oil and possibility of reduced demand.

While Venezuela has retained that Petro Caribe will be maintained, we believe that the terms and conditions may be
adjusted based on the financial circumstances of the state-owned oil and gas company PDVSA, shrinking foreign
exchange reserves and guaranteed export arrangements with other countries.

CARICOM countries account for about 40% of Trinidad and Tobago’s non-energy exports and a prolonged
recession in these countries as well as the potential impact of Petrocaribe on the region’s external accounts
can severely affect T&T’s external current account as well as the performance of the exporters of this
country.

Trinidad and Tobago’s Banking Sector can be affected through:
o Direct/ Indirect Credit Exposure to the energy sector (which is relatively small)
o Foreign exchange shortage situation exacerbated (since energy is the country’s major foreign exchange
earner) and subsequent impact on the TT dollar against the US dollar.
o Contagion effects via trade channels. If non-energy regional imports fall, local exporters may be affected,
which can then affect the banking sector’s non-performing loan portfolio.
o Changes in the central bank’s monetary policy stance, which will directly impact the Bank’s lending rates
and subsequent spread income.
Page 2 of 22
I.
Recent Trends in the Oil Market
Year to date, the West Texas Intermediate (WTI) Cushing Oil Price (US benchmark) has fallen by close to 23%, closing 14
November at USD75.32 per barrel. For the year, prices hit a high of USD107.62 per barrel (23-July), and averaged
USD97.07 per barrel. Since August, however, prices have traded well below the year to date mean.
FIGURE 1: A Historical Look at Oil Price Movements
West Texas Intermediate (WTI) Cushing Oil Price, USD per barrel
160
Great Recession
BP Oil
Spill
140
Arab Springs
120
100
Gulf War
Chinese Economy
Takes Off
80
60
40
Uncertain Economic Environment
creates supply/ demand concerns
20
0
1984 1986 1988 1990 1992 1993 1995 1997 1999 2001 2003 2004 2006 2008 2010 2012 2014
Source: Bloomberg, First Citizens Research & Analytics
FIGURE 2: Year-To-Date (YTD) Price Movement – WTI Crude (USD per barrel)
110
107.62
105
100
98.42
95
90
Reasons for the drastic drop
in prices:
1. Growth in US poroduction
2. Weakening demand from
Europe
3. Middle East Violence which
threatened supply
+9.3%
85
80
75
High (23-Jul) 107.62
Low (13-Nov) 74.21
Average 97.07
-31.0%
74.21
70
Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
Jul-14 Aug-14 Sep-14 Oct-14
Source: Bloomberg, First Citizens Research & Analytics
Page 3 of 22

The plunge in oil prices began around end of July and was largely driven by a series of factors. First, the weaker
global economic recovery, particularly in the advanced economies has dampened the outlook for fuel demand. For
instance, the IMF in October downgraded its projection for global economic growth to 3.3% for 2014, from 3.4%
projected just three months prior, with downward revisions for most advanced economies, except the US.
Furthermore, in the world’s second largest consumer of oil, China, there are increasing concerns of a slowdown in
economic growth, with the IMF projecting growth of 7.4% in 2014 and 7.1% in 2015, down from an average of
8.9% recorded over the last five years. Recent data shows that growth is levelling off just above 7%, with the
economy now largely driven by higher public investments, particularly on large infrastructural projects. Meanwhile,
the US economy continues apace, with sustained economic growth rates, increasing import demand as well as signs
of improving labor market conditions.

Figure 3 indicates the shift in crude oil market dynamics in 2014. The green bars indicate periods when world
supply of crude oil exceeded demand, and the orange bars indicate the opposite (demand exceeded supply). There is
a clear and direct impact on crude prices as a result of these market dynamics. The imbalance of supply and demand
became increasingly apparent in the third quarter of 2014 as demand remained fairly steady, falling just 0.3%
(quarter on quarter), while for the same period, supply surged 2.5%. This highlights the glut in the world crude oil
market in to the third quarter of 2014 and the primary reason for the decline in prices.
FIGURE 3: Global Crude Oil Market: July 2013 – September 2014
1.0
110
0.5
105
0.0
100
Green bars:
Supply exceeds Demand (SS>DD)
Orange Bars:
Demand exceeds Supply (DD>SS)
-0.5
-1.0
95
-1.5
90
-2.0
85
-2.5
-3.0
80
Imbalance (Millions BPD)
WTI Spot (USD/ per barrel) (Right Scale)
Source: Bloomberg, First Citizens Research & Analytics
Page 4 of 22
FIGURE 4: Top 15 Countries: 2013 Share of Total (Oil)
Consumption
Production
Source: BP Statistical Review 2014, First Citizens Research & Analytics
FIGURE 5: Selected Suppliers of Crude Oil
15.0%
Production Growth Rate - Crude Oil
(year-on year)
10.0%
5.0%
0.0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-5.0%
Average Production
Growth Rate over Last 3
Years:
-10.0%
Non-OPEC
OPEC
US
Non-OPEC:
OPEC:
US:
+1.3%
+1.7%
+9.9%
Source: BP Statistical Review 2014, First Citizens Research & Analytics
Page 5 of 22

Figure 5 shows that the US, which is that third largest global crude oil producer, has been able to significantly
increase its output since 2011, mainly due to the fact that the US continues to be a leader in research and
development into tight oil. According to the Energy Information Administration, the US has the second largest
recoverable shale oil resources only behind Russia. Tight oil production in the US has increased significantly in the
past few years, going from less than 1 million BPD in 2010 to in excess of 3 million BPD in the second half of 2013.
Traditional Drivers of Oil Price Movements

Seasonal weather across the Globe

Severe weather events globally

Supply and demand dynamics

OPEC Production Decisions

OPEC spare capacity levels (gives the market the assurance that supply can be maintained… so that high levels of
OPEC spare capacity is typically associated with lower prices) (see Section III for details)
Current Drivers of Oil Price Movements

Non-OPEC Production Levels (e.g. United States)

OPEC’s Output decision

Geopolitical Risk in Middle East (Rise of ISIS, which is seizing major oil refineries in Iraq and Syria, selling black
market oil)

Pace of Economic Recovery in countries which are large consumers of oil (e.g. China)
Page 6 of 22
China’s Demand
II.

China is a major player in the global crude oil market, given that it was the world’s second largest consumer in
2013, only behind the US. The weaker economic data coming out from China has added to the bearish view on
crude oil prices this year. On 21 October, China’s GDP data for third quarter 2014 was released, and was slightly
above analysts’ expectations, which resulted in oil prices moving higher. Indeed, the world’s second largest
economy grew 7.3% (y/y) in the third quarter, exceeding analysts’ forecast of 7.2%. Despite this, the third quarter
result was actually the slowest pace of growth since the first quarter of 2009. China’s oil demand rose by 7.1% in
September, more than double the growth rate in August.
FIGURE 6: China’s GDP and Consumption Growth Rates (Year on Year)
14.0%
120.00
12.0%
98.83
98.42
100.00
91.82
91.38
10.0%
80.00
79.36
8.0%
60.00
6.0%
40.00
4.0%
Oil Consumption Growth
20.00
China's GDP Growth
2.0%
WTI Oil Prices (USD/ per barrel) (Right Scale)
0.0%
0.00
2009
2010
2011
2012
2013
Source: Bloomberg, BP Statistical Review 2014, First Citizens Research & Analytics

China’s GDP growth rate is positively correlated to the country’s oil consumption (0.30). Due to the size of China’s
economy, the country has become a very influential player in the world energy markets. According to the US
Energy Information Administration, China is projected to move from second largest net importer of oil to the largest
in the world in 2014. China's oil consumption growth accounted for one-third of the world's oil consumption growth
in 2013, and EIA projects the same share in 2014.
Page 7 of 22

China has diversified its base for its oil imports due to the robust growth rate in oil demand in China, as well as the
geopolitical uncertainties. The country’s largest supplier is Saudi Arabia (19%), Angola (14%) and Russia (9%) the
top three individual countries.
FIGURE 7: China’s Consumption and Production of Crude Oil (000’s BPD)
12000
+29.5%
10000
8000
6000
4000
+9.9%
2000
0
2009
2010
2011
China's Oil Consumption
2012
2013
China's Oil Production
Source: Bloomberg, BP Statistical Review 2014, First Citizens Research & Analytics

As of January 2014, China held about 24.4 billion barrels of proven oil reserves, the highest in the Asia-Pacific
Region and the country’s total oil and liquids production, which the fourth largest in the world, only serves its
domestic market. Production has not kept up pace with consumption. The EIA projects that China will surpass the
US in net oil imports on an annual basis by 2014 as US production and Chinese oil demand increase concurrently.
However, the strength of Chinese demand for oil is dependent on several factors, including, the sustainability of
high Chinese economic growth rates as well as trade, power generation, transportation sector shifts, and refining
capabilities.
TABLE 1: Top 10 Annual Net Oil Importers, 2013.
Millions of Barrels per Day
US
China
Japan
India
South Korea
Germany
France
Spain
Italy
Taiwan
6.6
6.2
4.4
2.7
2.3
2.2
1.6
1.2
1.1
1.1
Source: US Energy Information Administration, First Citizens Research & Analytics
Page 8 of 22
III.
OPEC

OPEC meets on 27 November to consider whether they will adjust its output target of 30 million barrels per day for
the first half of 2015. So far, only a minority of members have called for an output cut.

Saudi Arabia has been hinting that they are comfortable with lower oil prices, while Kuwait has said that an OPEC
cut in supply is ‘unlikely’.

OPEC spare capacity levels gives the market the assurance that supply can be maintained, so that high levels of
OPEC spare capacity is typically associated with lower prices. Spare capacity is defined by the EIA as the volume of
production that can be brought on within 30 days and sustained for at least 90 days. Saudi Arabia, which is the
largest producer with OPEC and the world’s largest exporter of crude, historically has had the greatest spare
capacity. In figure 8, during the period 2003 – 2008, OPEC’s spare production levels were low, thus limiting the
cartel’s ability to respond to demand and price increases. Crude oil price increases in 2015 may be limited as the
producer of 40% of the world’s crude oil, OPEC has relatively restricted production spare capacity based on the
EIA’s projection as shown in figure 8. The EIA is projecting WTI crude oil price at USD71.11 per barrel (in real
2010 dollars) in Q115 and to end 2015 at USD72.36 per barrel, compared to USD91.26 per barrel at the end of the
third quarter 2014.
FIGURE 8: OPEC Spare Production Capacity and WTI Crude Oil Prices
140
7
Projectio
ns
Spare Capacity <2.5 million barrels
per day
120
6
100
5
80
4
60
3
40
2
20
1
0
0
Q101
Q102
Q103
Q104
Q105
Q106
Q107
Q108 Q109
Spare Capacity (Millions BPD) (Right Scale)
Q110
Q111
Q112
Q113
Q114
Q115
WTI Real Price (USD/ barrels per day)
Source: US Energy Information Administration, First Citizens Research & Analytics
Page 9 of 22

OPEC’s oil output is likely to remain around the same level next year as 2014, and the group is unlikely to cut the
ceiling on its production at a meeting next month despite the recent sharp slide in global oil prices, according to
OPEC’s General Secretary.

According to OPEC, likely demand for OPEC oil next year would likely be between 29.5 million and 30 million
barrels of oil a day next year, roughly the same as this year and suggested that the price decline does not reflect
market fundamentals.

OPEC also said that the current oil price weakness would likely hit shale oil output, and expects that the weakness in
prices would eventually temper supply growth.

Essentially there seems to be a lot of political wrangling. Saudi (and the other price-makers) is trying to keep price
low to reduce the attractiveness of shale oil in order to preserve market share. It will be interesting to see how this
unfolds, since China has already indicated plans to divert oil imports from Saudi to Colombia.

According to analysis done by Deutsche Bank, the following represents the break-even Brent prices for the various
Emerging Markets and major oil players:
o
Latest estimates suggest that the (Brent) spot price is now below the level needed to balance the budget in
Bahrain (USD136 per barrel), Oman (USD101 per barrel), Saudi Arabia (USD99 per barrel), Nigeria
(USD126 per barrel), Russia (USD100 per barrel), and Venezuela (USD162 per barrel).
o
Within this group, Saudi Arabia has a substantial net foreign assets estimated at USD768.5 billion at the
end of 2014 that would enable it to withstand lower oil prices for a sustained period without necessarily
needing to borrow or tighten policy. The same is true to a lesser extent for Russia. This means that these
two countries will be better able to withstand a sustained period of weakened oil prices, without
significantly hurting the respective economies.
o
But Nigeria will exhaust its limited oil savings well within a year at current prices in the absence of any
adjustment.
o
Venezuela has no meaningful cushion to absorb this shock (Venezuela had USD20.476 billion in
International Reserves at the end of October 2014).
o
Breakeven prices remain below the spot price in Kuwait (USD75 per barrel), Qatar (USD71 per barrel),
and United Arab Emirates (USD80 per barrel).
Page 10 of 22
IV.
Energy Futures Contracts
(Prepared by Proprietary Portfolio Management, FCIS)

Energy futures are derivative instruments that allow the buyer to lock in the price of a commodity at a specific date.
Once the buyer locks in to a futures contract, they will pay that price, regardless of whether the market price has
changes.

As at 17 November, WTI Crude Futures show that up to July 2016, the market is expecting that prices will remain
stable at around the USD76.00 per barrel. This means that market players can lock in a price of USD76.64 for
delivery in July 2016. The market also shows WTI prices climbing to USD80 per barrel in December 2019.
WTI Futures Price (USD
per barrel)
FIGURE 9: WTI Future Contracts and One-Month Change in Contract Prices
81
80.24
80
79.16
79
78.4
78
77.41
77
76
76.21
76.01
75.65
75
5/2015
11/2015
11/2016
11/2017
Delivery Date
11/2018
11/2019
95
90
85
80
75
WTI Futures (17-Nov-2014)
70
WTI Futures (1-Oct-2014)
Dec-22
Aug-22
Apr-22
Dec-21
Apr-21
Aug-21
Dec-20
Aug-20
Apr-20
Dec-19
Apr-19
Aug-19
Dec-18
Aug-18
Apr-18
Dec-17
Aug-17
Apr-17
Dec-16
Aug-16
Apr-16
Dec-15
Aug-15
Apr-15
65
Dec-14
WTI Futures (USD/ per barrel)
12/2014
Delivery Date
Source: Bloomberg, First Citizens Research & Analytics
Page 11 of 22
V.
Oil Prices and Trinidad and Tobago

Global oil prices have deteriorated sharply in recent weeks, dipping to levels not seen since 2010. The volatility of
the global oil market has been heightened based on a culmination of various factors currently afflicting energy
markets including geopolitical unrest, economic uncertainties as well as the potential impact of Ebola. The decline
in prices have largely come due to supply side factors, however weakening demand has also played a part. The glut
in the market (see figure 3 for evidence) stems from the increased production levels in the US. Weakening
macroeconomic fundamentals in some of the large economies (and therefore large consumers of oil) have also
resulted in the bearish turn in the oil market.

Primarily an energy-based economy, the T&T budget is constructed on an assumed oil price of USD80 per barrel,
using the WTI measure and gas price of USD2.75 per mmbtu (Henry Hub)

Trinidad and Tobago had 728 million barrels of proven crude oil reserves as of 2014, according to the Oil and Gas
Journal (OGJ). The country produced 118,000 BPD of petroleum and other liquids in 2013, of which 81,000 BPD
was crude oil including lease condensates, and the remainder consisted mostly of NGL.

Petroleum and other liquids production in Trinidad and Tobago peaked at 179,000 BPD in 2006. However, it has
declined overall since then because of maturing oilfields and operational challenges, according to IHS Energy.
TABLE 2: The economic contribution of the energy sector is as follows:
Average (2009 – 2013)
Share of GDP
42.14%
Share of Government Revenue (fiscal year)
52.66%
Share of Merchandize Export Receipts
84.3%
Share of Total Employment
3.28%
Source: Review of the Economy, 2013 (Ministry of Finance and the Economy)

Gas revenue impacts more heavily upon government revenue than oil. So if gas prices hold at above the assumed
budget price of USD2.75/mmbtu, then it should be sufficient to offset the fall in oil price. However, this will depend
on the sharpness of the decline in oil prices. (There is a 0.50 correlation between WTI and Henry Hub prices since
1991). (See figure 11). Over the period 2001-2013, government energy revenue increased almost five-fold, while
crude oil production fell 28% and at the same time, natural gas production rose also five-fold. (See figure 10). While
there is no data to substantiate this claim, the movement in government energy revenue can be more greatly
attributed to the sharp increase in natural gas production over the period.
Page 12 of 22
FIGURE 10: Production vs. Spot Prices (Crude Oil and Natural Gas)
15,000,000
4.0
10,000,000
3.0
5,000,000
2.0
0
2001
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
25,000
5.0
2013
20
20,000,000
2012
30,000
6.0
2011
40
25,000,000
2010
35,000
7.0
2009
60
30,000,000
2008
40,000
8.0
2007
80
35,000,000
2006
45,000
9.0
2005
100
40,000,000
2004
50,000
10.0
2003
120
2002
55,000
Crude Oil Production (000 Barrels)
Henry Hub (USD/ mmbtu)
WTI Crude Oil Prices (USD/ barrels per day) (Right Scale)
Natural Gas Production (mmcf/d) (Right Scale)
Source: Bloomberg, Central Bank of Trinidad and Tobago, First Citizens Research & Analytics
FIGURE 11: WTI Crude Oil Prices vs. Henry Hub Natural Gas Prices
12.00
100.00
10.00
80.00
8.00
60.00
6.00
40.00
4.00
20.00
2.00
0.00
0.00
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
120.00
WTI Oil (USD, bbl)
Henry Hub (USD,mmbtu) (Right Scale)
Source: Bloomberg, First Citizens Research & Analytics
Page 13 of 22
TABLE 3: Correlation Matrix
WTI Prices
Government Energy Revenue
Ammonia Prices
Methanol Prices
WTI Prices
1.000
0.735
0.806
0.824
Government Energy Revenue
0.735
1.000
0.719
0.564
Ammonia Prices
0.806
0.719
1.000
0.747
Methanol Prices
0.824
0.564
0.747
1.000
Source: Bloomberg, Central Bank of Trinidad and Tobago, First Citizens Research & Analytics

Based on the correlation matrix in table 3, there is a high positive correlation between WTI, Ammonia and Methanol
spot prices and further, a moderately high positive correlation between ammonia and methanol prices to government
energy revenue. Therefore, there is a possibility that further declines in oil prices will impact upon downstream
prices, and ultimately upon the revenue stream of the government.
FIGURE 12: Crude Oil Production vs. Crude Oil Reserves
Crude Oil Production (000 barrels)
58,000.00
Crude Oil Reserves (billion barrels) (Right Scale)
53,000.00
48,000.00
1.20
1.10
1.00
0.90
43,000.00
0.80
38,000.00
0.70
33,000.00
0.60
28,000.00
0.50
Source: Bloomberg, Central Bank of Trinidad and Tobago, First Citizens Research & Analytics
Page 14 of 22
FIGURE 13: Impact of Shale Gas on LNG Exports to the US
70,000
1.4
1.2
60,000
1.0
50,000
Gradually declining trend in
T&T’s LNG Exports to the US
0.8
40,000
0.6
30,000
0.4
20,000
0.2
10,000
0.0
0
2000
-0.2
2001
2002
2003
2004
LNG Exports to US
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Dry Shale Gas Production (Trillion cubic feet)(Right Scale)
Source: Bloomberg, US Energy Information Administration, First Citizens Research & Analytics

Crude production in Trinidad and Tobago has been on secular decline since 2005 with the rise of the downstream
and petrochemical industries, evidenced by the almost 50% decline in output since 2005. In 2014 though, there are
some positive signs, particularly from the marine side in terms of crude oil and condensate production. Total crude
oil and condensate output rose close to 10% YTD, driven by a 15% increase in offshore production, compared to a
2.4% decline in onshore output. Large players like BPTT and Repsol have been able to significantly ramp up
production during the year, increasing by 115% and 34%, respectively, year to date up to August 2014. The uptick
in marine production is driven by increased exploration and development activity by several companies, which
would have recorded significant discoveries in the past few years, including Repsol, Petrotrin, BP and Trinity.

The Trinidad and Tobago energy market is now dominated by downstream and gas, despite recent efforts by the
government to boost the upstream sector. Trinidad and Tobago is the world’s sixth largest exporter of LNG and the
largest LNG exporter to the US, however, US imports has been declining since the develop of its shale resources.
Since 2008, Trinidad and Tobago accounted for an average of 57.5% of US LNG imports T&T is the world’s largest
exporter of ammonia and second largest exporter of methanol as there are 11 ammonia plants and seven methanol
plants.
Page 15 of 22
FIGURE 14: US Import of LNG by Country (Volumes in Millions of Cubic Feet)
500000
450000
Yemen
400000
Trinidad
350000
Qatar
Peru
300000
Norway
250000
Nigeria
200000
Egypt
150000
Canada
100000
50000
0
2008
2009
2010
2011
2012
2013
Source: US Energy Information Administration, First Citizens Research & Analytics

The Minister of Finance and The Economy has indicated that the USD80 per barrel assumption for the budget is
based on the following:
o
Saudi Arabia –the biggest player in OPEC. Saudi requires a price of USD92 per barrel to balance their
budget.
o
Shale oil producers require prices at USD80 – USD85 per barrel to break even. Prices below this level
result in cut in investment and output.
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Bottom Line:

In terms of production of crude oil and condensate production in 2014, Trinmar, Petrotrin, Repsol and BPTT are the
largest players (in that order). Petrotrin’s revenue will be materially impacted by the decline in oil prices.

The direct impact upon Petrotrin from an investment perspective if oil prices continue to decline will be
deterioration in the credit rating and a rise in USD bond yields. Petrotrin’s 2022 Eurobond was trading at a yield of
5.151%, with the corresponding price of 105.221 as at 6-Novmeber 2014, compared to 106.513 (5.033%) at the start
of the year.
FIGURE 15: Petrotrin’s Eurobond Yield, Year to Date (%)
Impact of Lower Oil Prices: Investors are
starting to demand higher premium to hold
Petrotrin’s Eurobonds
5.3
5.1
4.9
4.7
4.5
4.3
4.1
3.9
3.7
3.5
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Petrotrin 2022
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Petrotrin 2019
Source: Bloomberg, First Citizens Research & Analytics

In a low oil price environment, energy companies tend to cut back on investment and all types of expenditure as
certain projects are no longer economically viable, which will further impact FDI as international oil companies may
not want to raise funding or debt lines may no longer be available.

Based on the foregoing, we expect that oil prices will dip below USD70 per barrel by the end of the year given the
imbalance in demand and supply, and based on the assumption that OPEC does not cut supply at its 27 November
meeting. We then expect price to end 2015 around USD75 per barrel and USD80 per barrel by the end of 2016. Our
fairly pessimistic view is largely based on increased in production in the US and to a lesser extent on relatively
lower global demand. The impact therefore on T&T may be lagged, as future investments into the economy via the
energy sector may be curtailed by large multinational oil players. The economic growth model in Trinidad and
Tobago is arguably unsustainable in the long term, given the high dependence on an exhaustive resource
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(hydrocarbons), coupled with the shifting dynamics of the global energy markets, made more acute by the fact that
the energy sector is highly reliant on the ability of multinational corporations to invest into the sector.

On a micro-level however, because our energy sector comprise of mostly large multinational players, if oil prices
were to decline further for a sustained period, key projects/ investments by those corporations may be reevaluated,
as companies seek to rationalize expenses on the possibility of lower revenue.

Government borrowing will increase only if oil prices and gas/ downstream prices fall concurrently, and there is a
squeeze on government revenue from the sector, particularly given our outlook for a significant increase in
government expenditure in the run up to elections 2015.

The FY 2015 budget forecasts total government revenue of TTD60.4 billion, with 35% coming from the energy
sector. Total expenditure is budgeted at TTD64.7 billion, resulting in an overall fiscal deficit of 2.3% of GDP.
According to the budget statement, oil and gas companies have advised that investments amounting to USD3.3
billion will take place in 2014, with projections of USD3.2 billion in 2015 and USD3.0 billion in 2016.

The TTD21.2 billion budgeted for energy revenue for 2015 is based on oil price of USD80 per barrel and gas of
USD2.75/ mmbtu. Assuming a dip in oil price to a worse-case low of USD70 per barrel at the end of 2015 and a
low of USD3.70/ mmbtu for natural gas, we believe that the impact will be fairly benign on the fiscal accounts of
Trinidad and Tobago, but caution if the worse-case scenario is breached, and the global economy deteriorates
greater than anticipated, and if the imbalances in oil market are not resolved, there will be a severe impact on T&T,
in the short-to-medium term.
FIGURE 16: Government of Trinidad and Tobago Eurobond Yield, Year to Date (%)
4.12
3.80
4.01
3.24
2.19
2.58
Jan-14
Feb-14 Mar-14
Apr-14
May-14
TRITOB 2020
Jun-14
Jul-14
TRITOB 2024
Aug-14
Sep-14
Oct-14
Nov-14
TRITOB 2027
Source: Bloomberg, First Citizens Research & Analytics
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
In the short-term we do not believe that the sovereign’s credit rating is under threat of being downgraded. In our
view, changes to the rating will come if there is a secular trend of weakening FDI flows into the country via the
energy sector, which will affect the country’s external accounts, output levels of the energy sector, which will then
impact upon the fiscal accounts. We will have to look closely at the evolution of the market for natural gas, as we do
think in the medium term, prices will decline based on the further development of shale gas and changing dynamics
of Trinidad and Tobago’s major export markets. However, at this time, we do not foresee a rating downgrade due to
the weakness in the oil prices. The sovereign US Dollar Eurobonds have not been adversely impacted by the fall in
oil prices (see figure 16). In fact, yields continue to decline over the year to date period, indicating that investors
view Trinidad and Tobago as stable, demanding a lower risk premium to hold government debt. In terms of the
national budget assumptions, our view is that if oil prices continue to fall, then the government may be forced to
adjust expenditure, but given that it is an election year (general elections are due in 2015), it may be a politically
difficult move to cut expenditure. For the next fiscal year, however, the revenue assumption might have to be more
conservative to take into consideration the global situation of higher output of crude oil and possibility of reduced
demand.
VI.
Petro Caribe

We also have to consider the impact upon the falling oil prices on Venezuela and sustainability of the Petro Caribe
Arrangement. Under the Petro Caribe initiative, Venezuela provides crude oil and refined products to many
countries in the Caribbean and Central America, offering favorable financing and long repayment terms that often
feature barter arrangements instead of cash transactions.

Venezuela’s economy is under pressure, with high inflation, low growth, and a foreign exchange crisis, not to
mention unpredictable economic policy. The country’s break-even oil price is estimated at USD162 per barrel,
relative to the current price of USD77.81 per barrel.

Venezuela is the world’s largest owner of oil and natural gas proven reserves and is the third-largest exporter crude
oil to the US. In 2013, the country was the world’s ninth largest exporter and 12th largest producer of petroleum and
other liquids. The fiscal and external accounts of Venezuela are both highly dependent on the energy sector.

If oil prices decline further, there will be additional pressure on Petroleos de Venezuela S.A. (PDVSA). PDVSA is
Venezuela’s state-owned oil and natural gas company. It is the country’s largest employer and accounts for a
significant chunk of government revenue and export earnings (exact contribution unavailable).

On 19 November, President Nicolas Maduro raised taxes almost across the board and also ordered that a USD4
billion loan from China to be added to international reserves as oil prices continued to decline. The move to increase
reserves came after the country’s international reserves fell to an 11-year low of USD19.4 billion on 14 November.

While Venezuela has retained that Petro Caribe will be maintained, we believe that the terms and conditions may be
adjusted based on the financial circumstances of the state-owned oil and gas company PDVSA, shrinking foreign
exchange reserves and guaranteed export arrangements with other countries, like China (which imports 6% of its
crude oil from Venezuela).
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
Most of the Caribbean are Petro Caribe beneficiaries (except Barbados and Montserrat). The IMF has already
warned large recipients like Jamaica of a possibility of a halt to the arrangement, suggesting that stress tests should
be done to include this scenario. Figure 17 shows the countries that are risk of changes to the Petrocaribe
arrangement, showing that Cuba, Dominican Republic, Jamaica and Haiti are the most vulnerable. Cuba’s mineral
imports constitute a large portion of total imports, and at the same time, is the largest recipient of Petrocaribe.
However, of concern to Trinidad and Tobago is the fact that many of our trading partners are very dependent on
mineral imports, and at the same time, runs very large external current account deficits, placing them in a very
precarious position.

If Petro Caribe is modified, then there may be a balance of payments crisis in the region, given the already strained
external liquidity conditions with most of the countries recording external current account deficits in excess of 20%
of GDP. This can result in a rapid erosion of US dollar reserves and pressure on fixed exchange/ pegged rate
regimes, and of course, inability to service external debt, if the situation deteriorates significantly.

The countries with a fixed exchange rate regime may most likely suffer the most (the ECCU); given that FX
reserves will be quickly eroded under this situation, exacerbated by persistent lower foreign exchange inflows from
a weak external environment and narrow export bases.

CARICOM countries account for about 40% of Trinidad and Tobago’s non-energy exports and a prolonged
recession in these countries can severely affect T&T’s external current account as well as the performance of the
exporters of this country.
FIGURE 17: Caribbean - Exposure To Higher Fuel Import Costs
Note: Bubble size indicates daily oil import quota from Petrocaribe ('000 b/d).
Source: Business Monitor International
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VII.
Impact on Trinidad and Tobago Banking Sector

If large multinational energy players hold back on investments into the Trinidad and Tobago market, then
employment in the energy sector may be affected. This may have an impact upon the Bank’s exposure to this sector
(institutional and on an individual level). Credit exposure by sector shows that the energy sector only accounts for a
small portion of Banks’ overall loans, with RBL, First Citizens and CIBC under 1%, and Scotia with the highest
exposure of 9% as at the end of the respective bank’s financial year 2013.
FIGURE 18: Commercial Banks: Large Exposure by Sector (March 2013)
Other Services
4%
Transport, Storage and
Communication
1%
Agriculture
0%
Consumers
2%
Construction
11%
Distribution
2%
Electricity and Water
4%
Government
34%
Energy and Mining
7%
Financial
20%
Real estate
14%
Manufacturing
1%
Hotel and Restaurant
0%
Source: Central Bank of Trinidad and Tobago, First Citizens Research & Analytics

The country’s largest earner of foreign exchange is the energy sector, providing 75% of the supply in 2013.
Therefore, if the sector is facing a lower price environment, then there will be lower FX inflows. The FX shortage
which is currently a major concern will therefore continue to pose a significant challenge for the banking sector and
their ability to meet customers’ demand for foreign exchange.

Contagion via the trade channels can negatively impact the financial institutions. If Petro Caribe is modified, then
the fallout in economic performance can impact upon the local financial sector. If regional non-energy import
demand falls, local exporters may find it difficult to meet financial commitments to local financial institutions, as
such under this scenario, commercial banks’ non-performing loans may increase.
Page 21 of 22

We think that interest rate policy in Trinidad and Tobago will be tightened at a gradual rate for the rest of this year,
and into next year. November 28 2014 is next CBTT Monetary Policy Committee Meeting. We expect that a 25bps
increase in the repo rate to 3.25% may be implemented by the end of the year, to rise further to 3.75% by Q1 2015 in
response to anticipated higher US interest rates. CBTT will likely hold at 3.75% till year end 2015 as it could be that
long before public spending restarts following the May General Elections. The commercial banks’ average prime
lending rate will increase, which should increase the banks’ spread income. We do not think that the current
movements in energy prices will result in a deviation of the current monetary policy stance adopted by the central
bank.

US dollar shortage (due to current shortage, lower energy revenues and falling demand for T&T natural gas) might
force the Trinidad and Tobago dollar to depreciate against the US dollar. This may encourage imported inflation,
where the costs eventually trickle down to consumers, which can stoke headline inflation and force the central bank
to be more aggressive towards monetary policy (raising rates faster than our baseline). The implications for
commercial banks may be two-fold: operating in a higher interest environment, as well as increased FX expenses
associated with a depreciating TT dollar. The latter will be minimal, based on the managed float the CBTT operates.
DISCLAIMER
This report has been prepared by First Citizens Investment Services Limited, a subsidiary of First Citizens Bank
Limited. It is provided for informational purposes only and without any obligation, whether contractual or otherwise. All
information contained herein has been obtained from sources that First Citizens Investment Services believes to be
accurate and reliable. All opinions and estimates constitute the author’s judgment as at the date of the report. First
Citizens Investment Services does not warrant the accuracy, timeliness, completeness of the information given or the
assessments made. Opinions expressed may change without notice. This report does not constitute an offer or solicitation
to buy or sell any securities discussed herein. The securities discussed in this report may not be suitable to all investors,
therefore Investors wishing to purchase any of the securities mentioned should consult an investment adviser.
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