Global Energy & Petrochemicals Outlook

Indian Petrochem 2019

Mumbai, 14 November 2019

Vandana Hari
Founder & CEO
 About Us

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 Our Publications

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• Succinct view of factors affecting crude price moves

• Recap of major overnight oil market developments

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 Our Publications

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• Insights on the week’s major oil market developments

• Explains, dissects, challenges and connects the dots

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 Our Publications

BULLS & BEARS

• Monthly and as needed

• A scorecard of bullish and bearish factors in oil market

• Quick read, easy to digest and yet comprehensive

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 …Plus Executive Briefing Notes on major breaking news

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 Demographics, Economics and Energy Demand

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 World population to hit 9 billion in 2040; denser urban areas
World population growth, 1996-2018 vs 2018-2040 Regions with fastest rates of urbanisation

2018 total: 7.7 billion China

World avg
Rest of the 2040 total: 9.2 billion
world Other Asia
Rest of the Mideast &
world Africa
China China India

India India

Mideast & Mideast &

Africa Africa
OECD
OECD

Source: OPEC World Oil Outlook, 2019

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 Asia to take growing share of global economy
Distribution of global economy: Rise of China, India

• Global economy expected to DOUBLE between

Other Asia
2018 and 2040
OECD Asia
OECD OECD

Oceania
Rest of the

India
China
Americas Europe world
• China, India, rest of Asia expected to be
biggest centres of economic growth

Other Asia
• Globally, 1 billion people lack access to
OECD Asia

OECD OECD Rest of the

Oceania

China India
Americas Europe world electricity, 3 billion lack access to clean
cooking fuels. Much of the energy poverty is
concentrated in Asia
OECD
Source: OPEC World Oil Outlook, 2019

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 World primary energy demand growth by fuel type
Mil boe/d
Volumetric growth 2020-2030 2030-2040
14
12
10
8
6
4
2
0
-2

Source: OPEC World Oil Outlook, 2019

• Demand growth in China, India will outpace global average of 1% per annum
• Total global primary energy demand expected to rise by 25% between 2018-2040 to 358 mil boe/day
• Gas use to grow the fastest (in volume), reaching 25% of primary energy share by 2040

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 OPEC sees dramatic drop in rate of oil demand growth
Average annual oil demand growth, 2018-2040
• Global oil demand seen rising from
101 mil b/d in 2020 to 110 mil b/d
in 2040

• Annual demand growth to shrink

from 1.1 mil b/d at present to just
130,000 b/d by 2040

• Main causes of decelerating demand:

- Displacement by gas, renewables,
cleaner fuel alternatives
- Technology-driven efficiency gains
- EVs, alternative-fuelled vehicles
Source: OPEC World Oil Outlook, 2019

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 Petchems to underpin rise in oil demand over next 20 years
Oil demand growth by sector, 2018-2040

• Petrochemical sector seen as

leading source of incremental oil
demand to 2040 (+4 million b/d)

• Road transportation and aviation

the other big contributors

• Oil demand in road transportation

may plateau sometime between
2040
2030 and 2040
2040

Source: OPEC World Oil Outlook, 2019

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 A world of lighter, sweeter crude … but may switch again?
Global crude oil* quality swings, longer-term
◦API gravity % Sulphur
• Consensus on global crude slate
becoming lighter, sweeter on the back of
US shale boom, OPEC output cuts

• But OPEC sees trend reversing again

around middle of next decade

• Expected post-2025 decline in output

from US, Canada, Asia-Pacific, Caspian to
increase share of OPEC’s heavier, more
sulphurous crude
2040

*Includes condensates, synthetic crude

Source: OPEC World Oil Outlook, 2019

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 Ethane demand growth strongest among petchem feedstocks
Short-term changes in petchems feedstock demand
• LPG, ethane to record largest demand
increase among oil products, driven by
petrochemical and residential sectors

• Marks a shift from gasoil/diesel leading

the pack, historically

• Naphtha is expected to remain the prime

petrochemical feedstock

• New ethane-based capacity in US, but

mostly naphtha-based in Asia, Middle East
2040

Source: OPEC World Oil Outlook, 2019

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 Oil Markets Outlook

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 Brent range-bound around $60: Will it break out?
$/bbl
90
Brent WTI Brent 4-year high $86
80

70

60 $60

Brent 16-month low $50

50

40 2018 average 2019 Jan-Oct average

WTI ~$65 Brent ~$72 WTI ~$57 Brent ~$65
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Source: ICE, CME

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 …Hinges on which way US-China trade war goes
$/bbl
Jul 2018: Start of tit-
90 for-tat import tariffs 10 May:
Economic gloom
over trade tensions Trade talks
collapse Phased
80
resolution
$60-70
70

60
Impasse
Brent WTI $50-60
50
Growing 29 Jun: Trump, China signals
Xi agree to 11 Oct: Plan likely rollback
40 optimism for “phase- in tariffs
1 Dec: Trump, Xi Jan 2019: Trade over trade resume trade
talks one” trade
agree 90-day truce talks resume deal deal
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Source: ICE, CME

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 Demand concerns: The biggest drag on oil
• Global economic growth has been decelerating
• Manufacturing contraction across the globe; consumer sentiment cooling
• World trade growth to slow to 3-year low of 2.6% in 2019: IMF
IMF: 3 consecutive downgrades in global GDP growth forecast
5
2019 2020
4 From global ”synchronized
3
growth” in 2017 … to a
“synchronized slowdown”
2
in 2019.
1

Source: IMF. The “S” and “F” represent Spring and Fall World Economic Outlook Forecasts each year
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 Easy money has boosted stock markets but not crude prices

$/bbl S&P 500 (rhs) WTI (lhs) Brent (lhs)

90 3200
Divergence since June 2019 3100
80
3000

70 2900

2800
60
2700

50 2600

2500
40
2400

30 2300

Source: ICE, CME, Yahoo Finance

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 Global oil demand growth forecasts downgraded since Feb

Mil b/d The slippery slope of oil demand: Changes in 2019 projections

2.0
IEA EIA OPEC Avg
1.52
1.51
1.6 1.41 1.42
1.45 1.38 1.37
1.41 1.38 1.34 1.30
1.19
1.2 1.12
1.06
1.00
0.93

0.8

0.4

0.0
Month of
forecast

Source: International Energy Agency, OPEC, US Energy Information Administration, Vanda Insights

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 Non-OPEC oil supply growth outpaces rise in demand

Annual growth
in mil b/d
Non-OPEC output Global demand
3 • Strong rise in non-OPEC oil supply, led
by tight oil from US shale
2

• Continuing gap puts pressure on

1 OPEC/non-OPEC alliance to keep tight
reins on oil output
0

Source: International Energy Agency

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 Major areas of oil supply growth and decline

Annual jump Annual slump

(in mil b/d) (in mil b/d)

2019 2020 (e) 2019 2020 (e)

• US 1.6 1.3 • Iran 1.1 ?

• Canada 0.1 0.1 • Venezuela 0.5 ?

• Brazil 0.2 0.3 • Saudi Arabia 0.3 ?

• Norway - 0.4 • Mexico 0.2 0.03

Source: International Energy Agency, OPEC. Non-OPEC volumes include condensate and NGLs. OPEC volumes are only crude.

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 OPEC output didn’t really drop – until this year!
"Core" OPEC production in million b/d Vanda Insights analysis:
33

32
2016 avg: 31.5
2017 avg: 31.4
2018 avg: 31.2
• OPEC agreed to cut output by
31
1.2 mil b/d from Jan 2017 and
2019 Jan-Sep
30 avg: 29.3 by 0.8 mil b/d from Jan 2019
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• But actual reduction in 2017
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and 2018 was much smaller
27

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• First REAL CUT – of nearly 2
25 mil b/d on year – has
happened only in 2019
Source: Vanda Insights analysis based on OPEC monthly reports

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 The picture of oil demand: Few bright spots
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Asia-Pacific
36

Africa 35
4.5
34
32.5 Americas
4.0 33
32 32.0
3.5
31 31.5

31.0

30.5
FSU
5.0
15.5
Middle East Europe
4.5
8.5

4.0 15.0

8.0 14.5
Source: International Energy Agency
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 China, India biggest drivers of oil demand growth

Mil b/d
IEA outlook over next 5 years • Chinese economy and oil demand
1.5
growth have been slowing, now
ROW amplified by trade war
1.0
Middle East
• China still remains the biggest
0.5 India contributor to demand growth: Up
China
6% on year over Jan-Sep
0.0

• Indian oil demand rose 2% over

-0.5 Jan-Sep (vs annual growth of 4.5%
for full-year 2018)
Source: International Energy Agency 2019 annual report

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 Downstream: Asia dominates refining capacity additions
Distillation capacity additions from existing projects

Global total
• Global capacity creep cools
off after 2021
2024: 0.4 mil b/d

2023: 0.8 mil b/d • Asia ex-China and Middle

2022: 1.4 mil b/d
East to surpass China in
additions from 2020
2021: 1.7 mil b/d

2020: 1.6 mil b/d • Latin America continues to

lag in adding downstream
2019: 2.0 mil b/d
capacity

Source: OPEC

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 OPEC worries about oil stocks, ghost of 2015-2017 glut

• OECD oil stocks rose for the fifth straight

month in August 2019

• Closing in on the 3 billion barrel figure last

seen during the 2015-2017 overhang

• IEA projects >1 mil b/d build in stocks

through first-half 2020

Source: International Energy Agency

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 Producer alliance is girding for tough times…
Non-OPEC liquids supply outlook 2018-2040
Peak in 2026

Biofuels
…But only till the end of next decade
Other liquids (ex-Biofuels)

Tight oil (crude + NGLs) • Sees non-OPEC oil supply peaking

Conventional NGLs
around 2026

• Sees demand for OPEC liquids (crude +

Conventional crude
NGLs) rising from 34 mil b/d in 2020 to
44 mil b/d in 2040

Source: OPEC World Oil Outlook 2019

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 Trump wants US stock markets high – Implications for trade deal

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 Speculators raising bullish bets on crude since Oct
Mil bbl Spec length in WTI (lhs) $/bbl
1,000 90
Mil bbl Spec length $/bbl
800 75 in Brent (lhs) Brent (rhs)
90
580
60
600 480 75
45
400 380 60
30
200 280 45
15

0 180 0 30

80 15

-20 0

Source: US Commodity Futures Trading Commission, CME, ICE

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 Deeper OPEC+ cuts in 2020 far from certain
• US-China trade deal likely to support Brent above $60 psychological mark

• Russia, important non-OPEC ally, has been dovish since late 2018

• Saudi Arabia needs to manage optics around Aramco IPO with oil buyers

• Saudi Arabia cutting more than it needs to, complicating the maths

• Tough to impose deeper cuts without 100% compliance with current quotas

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 Is geopolitical risk underpriced in oil?

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 US Production Surge and Uncertainties

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 US shale boom drives crude, product exports higher
Mil b/d Crude exports Finished petroleum product exports NGLs exports Crude production
14

12

10

Source: US Energy Information Administration

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 Petchem feedstocks: Cracks under pressure, ethylene volatile
$/mt
1800

1600

1400

1200
Ethylene CFR NE Asia

1000
Propylene Poly Grade CFR
China
800
Benzene FOB Korea
Marker
600
Naphtha C+F Japan
400
ICE Brent front-month
200

Source: S&P Global Platts (naphtha, ethylene, propylene, benzene), ICE (Brent)

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 Big question on future trajectory of US oil output
OPEC outlook on US tight oil supply US EIA projection

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Peak in 2032: 14.5 mil b/d

Peak in 2027: 11.8 mil b/d

12.5

10

7.5

2.5

Source: OPEC World Oil Outlook 2019 Source: EIA Annual Energy Outlook 2019

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 Near-term uncertainty too, as shale succumbs to price pressure
WTI in $/bbl (lhs) Oil rig count (rhs)
80 900

70
850
• US shale producers have laid off
800
60 750
23% of oil rigs since start of 2019
700
50
650 • Fracturing fleet count has dropped
40 600 28% from recent high of April 2019

WTI in $/bbl (lhs) Frac fleet count (rhs) • Shale producers under pressure to
80 500
increase cash flow, have exhausted
70 450
“sweet spots”, face well
60 400 interference issues, challenges of
50 350 limited access to capital and credit
40 300

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Source: Baker Hughes, Primary Vision, CME
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 US output growth decelerating, but by how much?
?
US crude production in million b/d 2020: 13.17 mil b/d
13
+0.91 mil b/d
2019: 12.26 mil b/d

12 +1.3 mil b/d

2018: 10.99 mil b/d

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+1.6 mil b/d

10

2017: 9.35 mil b/d

9

Source: US EIA. 2019 and 2020 are the latest projections

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 The future ain’t what it used to be

In early 2019, we were focusing on: For now it’s all about:

• US sanctions against Venezuela, • Trade war

implications of civil war or regime change

• US sanctions against Iran, fate of 6-month • Trade war

waivers granted on crude exports in Nov

• US-China trade war: Resumption of talks • Trade war

promising, but no guarantees
• Rising Middle East tensions
• Will US launch a trade war with Europe?

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 Thank You!

Email: vandana.hari@vandainsights.com
Web: www.vandainsights.com
Twitter: @VandanaHari_SG

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