2Q18 June, 218 United States
Key Messages 1. The geopolitical premium marked the evolution of oil prices in 2Q18 2. OPEC may decide to boost production to compensate the shortfall left by Iran and Venezuela 3. Prices will remain supported by robust demand from China, India and the U.S. 4. We continue to expect convergence to long-term equilibrium as demand growth converges to historical trend and U.S. export capacity expands 5. The main uncertainty to oil prices arises from the effect of subpar CAPEX on supply 2
3/21 3/23 3/25 3/27 3/29 3/31 4/2 4/4 4/6 4/8 4/1 4/12 4/14 4/16 4/18 4/2 4/22 4/24 4/26 4/28 4/3 5/2 5/4 5/6 5/8 5/1 5/12 5/14 5/16 5/18 5/2 5/22 5/24 5/26 5/28 5/3 6/1 The U.S. withdrawal from the nuclear agreement with Iran has added a risk premium Crude oil prices ($ per barrel) 85 8 April 1. U.S. trims 218 production forecast May 8. U.S. abandons the nuclear deal with Iran May 26. Saudi Arabia and Russia agree to increase output June 5. U.S. asks OPEC to increase production by 1Mb/d 75 7 2Q18 actual average May 29. OPEC may keep output cuts through the year 65 6 April 11. Ballistic missiles fired by Yemen s Houthi rebels at Ryadh and Jizan 2Q18 projected average Source: BBVA Research and Haver Analytics` 3
25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 The level of enforcement will determine Iran s oil exports Iran: crude oil exports Million barrels per day 3. 2.5 2. 1.5 1..5. U.S. sanctions + full support of allies = -1.5M b/d U.S. sanctions + limited support of allies = -5K to -1M b/d Based on 212 sanctions and the current level of exports, around 54, b/d would be at risk of losing access to international markets Lack of international support makes the enforcement of sanctions more difficult than in 212 Saudi Arabia and other Gulf States are seen as the best-placed to fill the gap left by Iran Actual Limited enforcement Strong enforcement Source: BBVA Research, Haver Analytics and FRED 4
Inventory data continues pointing to a tighter market OECD Stocks of Petroleum (Vs. 5-year and 7-year average, million barrels) Global stock change needed to balance (Million barrels per day) 1 4. 8 3. 6 4 2. 1. 12mma 2. -1. -2 Deviation from 7-year average Deviation from 5-year average -2. -4 214 215 216 217 218-3. 215 216 217 218 Source: BBVA Research and Haver Analytics 5
Recent time spreads display mixed signals Brent time spreads (1-2 month, $/b) 1.2 WTI time spreads (1-2 month, $/b).5 1..8.6.4.2. -.2.4.3.2.1 -.1 -.4 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 -.2 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Source: BBVA Research and Bloomberg 6
28 28 29 29 21 21 211 211 212 212 213 213 214 214 215 215 216 216 217 217 218 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Global demand remains supportive, driven by China, India and the United States Oil product demand (12-month MA, million b/d) 53 Oil product demand (YoY % change, million b/d) 3. 2.5 51 49 47 45 2.5 2. 1.5 1. 2. 1.5 1. 43.5.5 41. 39 37 OECD non-oecd -.5-1.. -.5 35 Western Europe United States China India Total World (rhs) Source: BBVA Research and Haver Analytics Source: BBVA Research and Haver Analytics 7
We expect demand growth to remain above average Oil product demand (YoY change, million b/d) Oil product demand (million b/d) 2. 1.8 1.6 Actual BBVA Research Forecast OPEC Forecasts Average 28-17 IEA 1.6 1.6 1.5 11 15 1 98.3 16.9 15.6 14.3 12.9 11.4 99.9 1.4 1.4 1.3 1.3 1.3 95 1.2 9 Actual BBVA Research Forecast 1. 85.8 8 Source: BBVA Research, IEA and OPEC Source: BBVA Research and Haver Analytics 8
Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 With 167% compliance rate, OPEC & partners have ample room to cover any gap left by Iran, Angola and Venezuela OPEC+11 crude oil production* (Production at the wellhead, million b/d) OPEC+11 crude oil production* (Production at the wellhead, change since Dec 216, thousand b/d) 46. Nigeria Kazakhstan 45.5 45. Libya Ecuador Gabon Oman South Sudan 44.5 44. 43.5 Algeria Qatar Kuwait Iran Angola Bahrain Brunei Sudan Malasya 43. 42.5 42. UAE Iraq Venezuela Saudi Arabia -1-5 5 Azerbaijan Mexico Russia -4-2 2 OPEC Non-OPEC *Excluding Libya, Iran and Nigeria * Libya, Iran and Nigeria were not part of the deal Source: BBVA Research and Haver Analytics 9
27 28 29 21 211 212 213 214 215 216 217 218 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 215 217 Involuntary cuts to Venezuela and Angola s production have helped OPEC to exceed its quotas Venezuela: oil production & rig count (million b/d and number) 4. 3.5 3. 2.5 2. 1.5 1..5. Wellhead production (lhs) Rig count (rhs) Angola: oil production & rig count (million b/d and number) 14 12 1 8 6 4 2 A combination of low crude oil prices and the mismanagement of the country s oil industry has led to accelerated declines in production Decreasing rig count suggests further production declines in 218-219 If trends persist, production could fall below one million barrels per day 2.4 2.2 2. 1.8 1.6 1.4 1.2 1. Wellhead production (lhs) Rig count (rhs) 2 15 1 5 Crude oil production is falling due to lack of investments in naturally declining offshore fields Angola s fields are costly to maintain and there is no appetite from investors given other alternatives Source: BBVA Research & Haver Analytics 1
21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 OPEC spare capacity is enough to prevent a higher risk premium OPEC spare production capacity (Million b/d) 7 6 5 4 3 2 1 Source: Energy Information Administration 11
The Permian driving U.S. production to record-highs U.S. Estimated crude oil production (Thousand b/d) U.S. Change in crude oil production (January 217 to May 218, million b/d) 112 18 14 1 96 92 88 84 8 215 216 217 218 Permian Delaware Tight Permian Midland Tight Niobrara Shale Bakken Shale Eagle Ford Shale Meramec Shale Austin Chalk Tight PRB Tight Oil Uinta-Piceance Tight Woodford Shale Anadarko Tight Oil..2.4.6.8 Source: BBVA Research, Haver Analytics & Rystad Energy 12
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 However, transportation bottlenecks limit impact on international prices U.S. Crude oil exports (Million b/d) 2. 1.8 1.6 1.4 WTI Midland-Cushing differential ($/b) 4 2-2 -4-6 -8-1 -12-14 1.2 1..8 Brent-WTI differential ($/b).6.4.2 12 1 8 6. 4 2 Source: BBVA Research, Haver Analytics and Bloomberg 13
$USD/bbl A significant upward shift in the long-term portion of the forward curve highlights the potential impact of underinvestment Brent crude futures Global capital expenditures in crude oil (Billion USD) 8 75 7 65 6 55 5 45 4 6/6/18 1 month ago 3 months ago 6 months ago 1 4 7 1 13 16 19 22 25 28 31 34 37 4 43 46 Months Ahead 1 9 8 7 6 5 4 3 2 1 Capex Exploration Capex Opex Source: BBVA Research, Bloomberg and Rystad 14
Discovered Investments will be needed to replace naturally declining production Global liquids production by life cycle and breakeven price (Thousand b/d) Source: Rystad Energy 15
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-2 Jun-2 Sep-2 Dec-2 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Oil prices will remain above the estimated long-term equilibrium Crude oil prices forecast (Brent, $ per barrel, avg.) 12 1 8 6 72.1 7.2 64.9 6.8 6. 4 2 Actual Baseline (June 6, 218) Source: BBVA Research 16
Consensus around $7/b for 218-19; expectations for 22-21 reflect large discrepancies Short-term forecasts (Brent, $/b) 16 85 Annual forecasts (Brent, $/b) 14 12 1 8 6 4 Actual BBVA Forecasts 95% futures upper confidence interval 95% futures lower confidence interval 8 75 7 65 6 2 217 218 219 55 5 BBVA Research (June) Bloomberg (June) Rystad Energy (June) World Bank (April) OECD (May) EIA (STEO, last) 218 219 22 221 222 Source: BBVA Research, Bloomberg, EIA, Rystad Energy, OECD, The World Bank 17
2Q18 June, 218 United States