1. Oil Prices: ‘Collaring’ Prices in the near term
Robert K. Kaufmann
Project Link
October 3, 2017

2. Prices since we last met

3. The Forecast..
$51.80: 2018
$51.75
$50.17
$43.41

4. The Issues…
Collar on short-run prices
Downside
OPEC NonOPEC cooperation
Saudi oil policy
Equity markets
Upside
US tight oil production
Hedging
Political uncertainty
Long-run demand constraints
Peak demand

5. short-run: Inventories

6. Limits for Iraq and Iran Nigeria & Libya exempt Non-Opec (0.6 mbd)
The Deal: November 30, 2016
Goal (OECD inventories March 2018)
214 million barrels
Supply deficit mbd
OPEC (1.2mbd)
Saudi Arabia 10.6 to 10.2
Limits for Iraq and Iran
Nigeria & Libya exempt
Non-Opec (0.6 mbd)
Russia

7. Production drop below 32 mbd
rebalancing
Difficulties
Libya (0.5 mbd)
Nigeria (0.3 mbd)
Non-Opec (1.45)
China SPR
Compliance
OECD stocks 243 above (285)
Production drop below 32 mbd

8. Middle East Spare capacity
First call on putting new oil into the market
Accept lower spare capacity
Use money elsewhere

9. Cannot thrive as oil exporter Aramco IPO ($50 oil $2 trillion)
New Saudi Strategy
Mohammed bin Salman (Vision 2030)
Cannot thrive as oil exporter
Aramco IPO ($50 oil $2 trillion)
Leaning against NYSE
Aramco
Defend market share
Competition from arbitrage crudes
Supply Asian refiners
No need for large spare capacity

10. Majors: “More opportunities that we can actually pursue going forward”
$50 oil is here to stay
Lower cost fewer megaprojects
Liza development (Guyana)
Gulf of Mexico
Growth vs Cost
Lower capital investment
Dump high cost assets
Pushing down break-even
Private equity (not a typo!)

11. Blackstone, Carlyle, Warburg Pincus Chrysoar, Neptune, Siccar Point
Private equity
Buying $10 billion
Blackstone, Carlyle, Warburg Pincus
Chrysoar, Neptune, Siccar Point
BP Shell Royal Dutch Shell
Mature basins late life potential
North Sea
New strategy
Hold
Longer horizon (3-4 years)
Management incumbent operator

12. Top of the Range: Tight Oil

13. Tight Oil Pioneer Natural Resources

14. Tight Oil: Low oil environment
Technology
Longer more accurate lateral wells
Improved well spacing & management
Service costs (rising 10-15%)
Capital markets
2016 $39 billion
S & P E&P index down 25%
Break even points
Growth vs margins
Balance cash flows
$43-$47 drop 60 rigs
$40 drop 200 rigs

15. Forward Curve

16. Flattening farther out Hedged against As prices rise, sell forward
Hedging
Forward supply curve
Flattening farther out
Hedged against
As prices rise, sell forward
Highly protected production
47% of 2017 production
13% of 2018 production

17. Political uncertainties
Venezuela (domestic turmoil)
Dropping revenues; loan deal with China
International debt ($0.31 on the dollar)
US ban imports?
Russia
New sanctions (33% Russian stake)
Offshore developments
China
Delays in SPR
Goal 90 days (current 36 days)

18. Long-Term: Demand Constraint
Supply Constraints
Efficiency
Low hanging fruit depleted
10 year lifespan
Battery prices
2010 $1000 kwhr
2016 $227 kwhr
2020’s $100 kwhr (EV cheaper)
Capacity vs. oil price
Gasoline prices vs investment in capacity
Split ownership