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Deutsche Bank AG
Oil and CommoditiesThe 2008 Price Spike Was Not an AnomalyJune 2011
Adam Sieminski, Chief Energy Economist Commodities Research
[email protected] USA +1 202 662 1624
Deutsche Bank AGAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
0
20
40
60
80
100
120
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: API, DOE, and Deutsche Bank estimates
U.S. Oil Prices(Constant 2010 Dollars Per Barrel)
Oil Prices Back To 1860
Trying to Re-Invent the Texas Railroad Commission
2
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
If It Happens Again- Is It Still an Anomaly ?
0
20
40
60
80
100
120
140
160
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Brent
Euro equivalent OPEC basket price
USD/barrel
May of the factors present in 2008 and 2011 are likely to persist
Source: Bloomberg Finance LP, Deutsche Bank
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
AUM of Index Investments
AUM of Listed US & EU ETFs
AUM of US & EU ETFs By Sector
Source: CFTC, Deutsche Bank (Data as of end March 2011) Source: Deutsche Bank (Data as of March 31, 2011)
Investor Demand For Commodities Is Strong
Index investment f low s by sector (US market, USD bn)
0
40
80
120
160
200
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
Livestocks
Softs
Grains
Precious & Base Metals
Energy
0
20
40
60
80
100
120
140
Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10
AUM
(USD
bn)
Europe US
0%
10%
20%
30%
40%
50%
60%
70%
80%
Diversified Broad
Agriculture Energy Industrial Metals
Livestock Precious Metals
US Europe
Source: Deutsche Bank (Data as of March 31, 2011)
Outlook Investor inflows into commodity indices is now at an all time high. We believe commodities will continue to attract inflows as investors
seek to play EM growth, given the risks of higher inflation ahead and as a tool to hedge against tail events. We are also maintaining our bullish outlook for commodities in response to US efforts to stimulate growth, which we expect will be
successful. We also believe European sovereign risk fears will be contained and that physical fundamentals across various commodity markets are tightening.
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank 5
Income Elasticity of Oil Demand is Strong
ChinaIndia
Brazil
US
UK
Canada
Sweden
MexicoRussia
ThailandIndonesia
Venezuela
Japan
Italy
Australia
FranceGermany
South Korea Taiwan
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 5 10 15 20 25 30 35 40 45 50
Oil
cons
umpt
ion
per c
apita
(gal
lons
per
day
)
GDP per capita ('000 USD)
Contributing to a view that demand is highly inelastic
Source: IMF, IEA, Deutsche Bank
Twenty five years ago,
South Korea and Taiwan were where
China and India are now.
One third of the world’s
population is just entering
the middle class and want
the oil-consuming
lifestyle that goes with that.
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank 6
Oil Price Elasticity of Demand Is Low
Hard to turn off transportation demand
Source: US DOE/EIA, Deutsche Bank
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Electr ic Power Residential / Commercial
Industr ial Transpor tation China SPR Avg Annual Growth
million b/d
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank 7
OPEC Spare Capacity Impacted by MENA Events
OPEC Spare Capacity
Relatively healthy OPEC spare capacity levels are available to offset the loss of 1.4 mmb/d of Libyan crude oil production alone. The pledge from Saudi Arabia to increase supply though welcomed by the market comes with some challenges for some end-users
because of the differing quality of the crude grades. Libya produces higher quality crude closer to Brent than to the Saudi crude oil grades. In our view, this should prove supportive for the
light-heavy spread. Algerian production and exports are also a very light/sweet grade.
Outlook
Source: US DOE/EIA, Wood Mackenzie, Deutsche Bank
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Saudi Spare Capacity
Spare Capacity Drops as Demand Increases and Libya Falters
We estimate that overall OPEC capacity will decline as the “call on OPEC” grows faster than capacity additions. We are assuming that Iraq’s total capacity will grow from circa 2.5mmb/d in 2010 to circa 4.3mmb/d in 2015. Absent this improvement,
spare capacity in OPEC in 2015 could be closer to the 1.0mmb/d low hit in 2005.
Outlook
Source: US DOE/EIA, Deutsche Bank
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Actual Estimate
million b/d
Khurais (+1.2), Nuayyim +0.1), Shaybah (+0.25)
Libya (-1.4)
Demand increase(-0.7)
Demand decrease(+1.5)
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
47
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51
53
55
57
59
61
63
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
DaysTotal OECD crude oil and product stocks relative to OECD demand
Refining Capacity and Stocks Look Healthy for Now
Global refining capacity vs. demand
The refining capacity bubble of 2009 has been partially closed by strong demand growth in 2010. However, capacity additions over the next few years will continue to provide excess spare capacity.
Our supply/demand model suggests OECD forward demand cover could be down to 54 days by the end of 2012 v. 58 days now.
Source: IEA, Deutsche Bank
Outlook
OECD total inventory cover
55
60
65
70
75
80
85
90
95
100
105
1984 1989 1994 1999 2004 2009 2014F
Global Refinery Capacity Global Oil Demand
Millio
n Bbl/
day
Source: BP, IEA, Deutsche Bank
9
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Global Trends in Demand & Non-OPEC Supply
Need for OPEC oil grows over time… even allowing for a slowdown in 2014
Source: IEA, Deutsche Bank
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2001 2003 2005 2007 2009 2011E 2013E 2015E
Demand Growth Non-OPEC Supply Growth
mmb/d
10
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
According to the IMF, in the long run, a 1% depreciation in the US dollar is associated with increases for gold and oil prices of more than 1%. In the short run, the elasticity is close to 1, but higher for gold than for crude oil, says the IMF.
We believe the relationship between oil prices and the US dollar is highly unstable. The EURUSD at 1.60 implies USD150/bbl oil, but USD1.40 to the euro suggest USD80/bbl oil.
Oil Prices and the US Dollar
The close relationship in 2007- 2008 fell apart in 2009-1010
Outlook
Source: Bloomberg Finance LP, Deutsche Bank
0
15
30
45
60
75
90
105
120
135
150
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
USD/Euro WTI Oil Price (USD/bbl)
USD/bblEUR/USD Rate
Stronger US dollar
11
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
0
15
30
45
60
75
90
105
120
135
150
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
S& P 500 WTI Oil Price (USD/bbl)
USD/bblS& P 500 Index
Oil Prices and the US Stock Market
Positive correlation takes hold in March 2009
The relationship between the S&P 500 and oil is usually inverse. From July 2008 to the start of March 2009, the two moved in parallel down. From April 2009, the relationship appears to be positively correlated.
The 2010 regression implies the S&P500 at 1400 equates to an oil price circa USD100/bbl oil. The recent ‘crossover’ (oil now above the S&P 500 in the figure above) suggest that we may be back to an inverse relationship.
Outlook
Source: Bloomberg Finance LP, Deutsche Bank
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Can Oil Prices Be Too High or Too Low?
Oil’s share of World GDP (nominal oil price x demand volume / nominal GDP)
At 5-6% of global GDP, oil absorbs too much of disposable income -- and provides too much incentive for substitutes. At 1-2% of global GDP, oil demand grows rapidly and upstream investment does not. Company cash flow is insufficient to expand. The “sweet-spot” appears to be near 3-4% (not often achieved).
OutlookSource: US DOE/EIA, IMF, Deutsche Bank
$125/bbl oil in 2011 would push oil’s share to 6%
$150/bbl oil in 2011 = 7%, near the all time high of
1980-81
Using the IMF’s GDP growth forecasts, oil at $180/bbl in 2016 would
imply a 7% share
0%
1%
2%
3%
4%
5%
6%
7%
8%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
7% Avg 1980-1982
1.9% Avg 1986-2003
5% 2008
$180 Oil ( 7% )
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Finding Costs Are Related to Oil Prices
Outlook
Finding and development (F&D) costs were up sharply in 2008 to circa USD24/bbl, then dropped sharply to USD18/bbl in 2011. We believe that the 2009 data was skewed downward by high natural gas reserves (converted by the EIA to equivalent barrels of oil at
0.178 barrels per thousand cubic feet, or a 5.6x ratio). F&D costs have tended to be closely related to oil prices. Since 1995 we find that the oil price has tended to be about 3.5-4.0 times
greater than F&D costs. Assuming 2011-12 finding costs are near USD22/bbl implies that current “equilibrium” oil prices are close to USD80-90/bbl.
Worldwide Finding Costs (USD/boe) Oil Prices & Finding Costs Are Related
Source: US DOE/EIA, Deutsche Bank Source: US DOE/EIA, Deutsche Bank
-
5
10
15
20
25
30
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
y = 3.522x + 4.9301R² = 0.9332
-
10
20
30
40
50
60
70
80
90
100
5 10 15 20 25Finding Costs (real 2009 USD/bbl)
Brent (2009 real USD/bbl)
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
OPEC Revenue Requirements
OPEC “Fiscal Cost” Curve for 2010
15
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Commodity Index Returns
The Performance Of Commodity Indices Compared
Source: Deutsche Bank, Bloomberg Finance LP
0
500
1000
1500
2000
2500
3000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Deutsche Bank Liquid Commodity Index
DBLCI- Mean Reversion
DBLCI- Optimum Yield
S&PGSCI
Total returns1-Dec-1988=100
16
Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Precious Metals
Energy
Industrial Metals
Agriculture
Sector Outlook Comment
Energy Spare capacity fears are coming to the fore given the unrest across the MENA region. Events in Japan and Germany as well as supply-demand fundamentals are bullish natural gas prices.
Industrial Metals Higher energy prices are injecting negative growth risks for the sector. However, we believe supply side trends remain bullish especially for copper.
Precious Metals We believe renewed inflows into gold ETFs and central bank buying will drive gold prices higher over the medium term. Gold prices would need to move above USD2,000/oz to represent a bubble in our view.
Agriculture Price rallies in the sector are maturing and markets should be braced for strong production responses. We view corn and soybeans as the tightest markets in terms of physical fundamentals.
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report.
Adam Sieminski
Appendix 1: Certification
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the AustralianCorporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Appendix 1: Regulatory Disclosures
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Adam Sieminski +1 202 662 1624 [email protected] June 2011Deutsche Bank
Appendix 1: Disclaimer
Global DisclaimerInvesting in and/or trading commodities involves significant risk and may not be suitable for everyone. Participants in commodities transactions may incur risks from several factors, including changes in supply and demand of the commodity that can lead to large fluctuations in price. The use of leverage magnifies this risk. Readers must make their own investing and trading decisions using their own independent advisors as they believe necessary and based upon their specific objectives and financial situation. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Deutsche Bank makes no representation as to the accuracy or completeness of the information in this report. Target prices are inherently imprecise and a product of the analyst judgement. Deutsche Bank may buy or sell proprietary positions based on information contained in this report. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof. This report is provided for information purposes only. It is not to be construed as an offer to buy or sell any financial instruments or to participate in any particular trading strategy.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.Copyright © 2011 Deutsche Bank AG
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