Oil and Commodities€¦ · 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

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


If It Happens Again- Is It Still an Anomaly ?

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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

3


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)

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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.

4

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.


Oil Price Elasticity of Demand Is Low

Hard to turn off transportation demand

Source: US DOE/EIA, Deutsche Bank

-0.20

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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


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


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

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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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47

49

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


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


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


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135

150

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1.25

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1.35

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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


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1000

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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


12


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% )

13


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

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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

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90

100

5 10 15 20 25Finding Costs (real 2009 USD/bbl)

Brent (2009 real USD/bbl)

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OPEC Revenue Requirements

OPEC “Fiscal Cost” Curve for 2010

15


Commodity Index Returns

The Performance Of Commodity Indices Compared

Source: Deutsche Bank, Bloomberg Finance LP

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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


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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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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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

19


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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Oil and Commodities€¦ · 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