Tom Kloza: Wronger for Longer: A Sideways Look at North American Energy Supply

Wronger for Longer: A

Sideways Look at

North American

Energy Supply

National Ethanol Conference • February 16, 2016 • New

Orleans

Tom Kloza

Global Head of

Energy Analysis

732-730-2558

tkloza@opisnet.

com

@tomkloza

National Ethanol Conference • February 16, 2016 • New Orleans

Quick Political Disclosure


Myth: There are true energy price experts SEPTEMBER 22, 2014 (Jim Volker, CEO of Whiting Petroleum) “Let’s not panic over the first little decline in oil prices.”

NOVEMBER 5, 2014 (T. Boone Pickens, Chairman & CEO of BP Capital) “This has only been going on for 30 days. The world hasn’t changed. OPEC has got to have a better price for oil than $80 a barrel.”

NOVEMBER 10, 2014 (John Hess, CEO of Hess Corp.) “We have an $80 Brent case; that is what we call our stress test. We don’t think $80 Brent is likely.”

NOVEMBER 26, 2014 (Tom Kloza, Global Head of Energy Analysis at OPIS, via CNBC) “Oil could plummet to $35 a barrel in 2015 if OPEC doesn’t reach an agreement by the spring.”

JANUARY 1, 2015 (Andy Hall, Crude Trader and Commodities Hedge Fund Manager) Proclaimed that $40 a barrel represented an “absolute price floor,” saying that crude couldn’t sell for long below the marginal cost of supply.

FEBRUARY 17, 2015 (John Catsimatidis, Chairman at Red Apple Group & CEO of United Refining) “You’re going to see $85 or $90 oil in the next 3-6 months.”

APRIL 7, 2015 (Tom Kloza, Global Head of Energy Analysis at OPIS, via CNBC) “Don’t trust this oil bounce.”


Spring WTI Crude Oil Price Estimates, 2015 – 2016

Bank/Entity 2H 2015 Outlook 2016 Projection

WTI Futures $60.25 bbl $63.10 bbl

Bank of America ML $54.00 bbl $57.00 bbl

Barclays $49.50 bbl $57.00 bbl

CIBC $66.00 bbl $70.50 bbl

Citi $51.00 bbl $61.00 bbl

EIA $56.85 bbl $70.00 bbl

Goldman Sachs $40-$65 bbl $65.00 bbl

Raymond James $60.25 bbl $65.00 bbl

TD $52.50 bbl $65.00 bbl

Average $55.87 bbl $63.73 bbl


WTI Brent Brent-WTI Diff

2016 2016 2016

Goldman Sachs $45.00 $45.00 $0.00

Citi $48.00 $51.00 $3.00

Socitie Generale $40.50 $42.50 $2.00

BAML $45.00 $46.00 $1.00

Barclays $35.50 $34.30 -$1.20

PK Verleger LLC $39.50 $39.50 $0.00

BNP Paribas $36.00 $37.00 $1.00

Moody's $33.00 $33.00 $0.00

Morgan Stanley $46.00 $48.00 $2.00

Raymond James $50.00 $53.00 $3.00

Genscape $40.00 $42.00 $2.00

EIA $37.59 $37.52 $0.00

OPIS $37.50 $38.50 $1.00

Average $41.05 $42.10 $1.06

*Forecasts as of Jan. 9, 2016

Source: Various bank reports and best sources, but numbers

cannot be guaranteed

AND TODAY’S VIEWPOINTS FROM THE PEANUT GALLERY


Game Changes


N. American Diversity in Crude - 2013

• ANS - $102/bbl

• WCS – Hardisty, Alberta - $57/bbl

• Bakken - $80/bbl

• West African - $111/bbl

• LLS Sweet Crude - $96.00/bbl

WTI – Cushing, OK- $92/bbl •

WTI – West Texas - $88/bbl • WTS – West Texas - $87/bbl


N. American Diversity Crude –Mid-Feb 2016

WTI – Cushing, OK- $29.45/bbl •

WTI – West Texas - $29.45/bbl • WTS – West Texas - $29.00/bbl

• WCS – Hardisty, Alberta - $16/bbl

• Bakken - $26/bbl

• ANS - $30/bbl

• LLS Sweet Crude - $30.25/bbl

• West African - $30/bbl


Observations on U.S. Refining Trends

• Refineries are much more valuable assets these days, and are sophisticated. That means the maintenance cycles are longer, and breakdowns during periods of high runs are more plentiful.

• Another 200,000 b/d of U.S. refining capacity comes online in 2016, so by year’s end we’ll have added 2-million b/d of capacity in the 21st century. Most of the recent production additions have been tilted toward maximizing diesel output and minimizing gasoline production.

• One can make a case that worldwide additions to diesel and jet fuel production have been too ambitious, particularly given slowdowns in EM countries.

• Gasoline is now the marquee product, or the make-or-break product. Diesel had that stature from 2007-2015.


Key Drivers of Oil Price Volatility in the Next 14 Months

• Outright crude oil prices

• North American crude oil logistics

• Variable gasoline recipes

• Export & Import Dynamics . . .RINs?

• Financial Fund Flows

• The Madness of Crowds

• And one key driver that deserves its own slide…


The Problem with Just-In-Time Inventory

• Shallow product inventories are quick-to-fill, but also quick-to-empty

• Storage per capita is a mere fraction of what it was in 1975-1985

• Refinery turnarounds, maintenance, and projects accent the tidal swings.


Gallons Per Guys & Gals

• Gasoline Storage Per Person

• Diesel Storage Per Person

1980 Summer 2016 ?

PADD 5 38.5gal 18.5gal

PADD4 43.0gal 21.4gal




Total 49.8gal 28.0gal

1980 Summer 2016?


PADD4 24.3gal 13.0gal




Total 49.8gal 19.2gal*

All of this data was pulled out of my ass!


Downstream Demand


What we thought . . . Two Years Ago


Future Gasoline Demand


Predictions

• North America will have slightly cheaper crude than the rest of the world in this decade. But the natural gas edge has dwindled.

• The seasonality of gasoline will continue as time goes on. There are fundamental reasons why this market is bipolar.

• Do-it-yourself futures’ hedging is troublesome. Can you imagine if you sold ethanol as a discount to RBOB?

• The world is still a very dangerous place, but the U.S. has several layers of insulation. Impact of exports?.


Annual Household Dollars Spent on Fuel (in Billions)

255.7

317.0

364.5

395.6

447.1

323.3

383.5

473.7 478.5467.9

462.0

330.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Estimated Percent of Income Spent on Gasoline

$216

$335

$343

$235

$332

$238

$141

$325

$272

$163

$194

$294

$344

$276

4.0%

4.5%

5.3%

6.2%

6.8%7.0%

7.9%

5.7%

6.7%

8.3% 8.2%8.0%

7.5%

5.0%

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%Cost Per Household

Percent of Monthly Income Spent on Gas



Barrels of Crude Oil Per Capita

5.250

5.750

6.250

6.750

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Barrels per Person


Has Diesel Lost its Mojo?


No Longer the Magic Molecule?

• Refiners have tilted production toward making more diesel. US Gulf Coast refineries are the most privileged in the world.

• Gasoline crack spreads have been very strong this past summer.

• This may be the start of a new normal. “Cheap crude” and refinery downtime help push the gasoline crack spreads.

• New refining capacity coming on internationally (Middle East, Asia) are geared toward producing and exporting diesel.

• Case in Point (OPIS Alert August 19th, 2015) Saudi Arabia's distillate exports increased by 30% in the first six months of this year, from a year earlier, according to data released by the Joint Organisations Data Initiative (JODI) today.


The Magic Molecule

24.97

22.92

28.07

11.94

15.54

34.47

39.10

32.19

29.37

25.84

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Myth: International Data Integrity


“He uses statistics as a drunken man uses lamp-posts… for support rather than illumination.”

– Andrew Lang


Predictions

• Crude oil prices remain under pressure as long as Middle East troika maintains market share strategy. Shale costs extremely variable but expenses are dropping.

• Return to $70 bbl crude would bring 10-million b/d or more of U.S. crude oil output.

• Don’t simply write off an effort to impose an oil tax, or perhaps more workable, an oil import fee. Dramatic consequences.

• The seasonality of gasoline will continue as time goes on. There are fundamental reasons why this market is bipolar.

• The magic days of the diesel molecule are over. Watch for tighter refining margins – refineries committed to projects that will maximize diesel yields. China is vital.


Chicago Gasoline vs. Ethanol

50.0

125.0

200.0

275.0

350.0

425.0

Gasoline Ethanol


The Premium for Premium Gasoline

27.8 27.1

29.1

33.3

36.6

44.0

51.6

26.0

30.0

34.0

38.0

42.0

46.0

50.0

54.0

2010 2011 2012 2013 2014 2015 2016

Pre-Unl Differential (cts/gal)


SOME RANDOM OBSERVATIONS . . . • The first instances where WTI crude settled above $40 barrel came on October 9 and October 11, 1990. Not until May 11,

2004 did WTI again settle above $40 barrel - if you are keeping score, that was a span of 4961 days.

• Last Wednesday, futures contracts representing approximately 1.7-billion barrels of oil traded on the CME. That is more than half the U.S. output in 2016, and doesn’t even include trades for Brent, financial WTI contracts, or any of the action on the InterContinentalExchange.

• Energy prices can go negative. In January 2014, we saw Edmonton propane trade for $4.50 gal. In May 2015, that propane was available at Minus-5cts gal.

• I hate the Dallas Cowboys and especially their owner Jerry Jones. If they were playing Boko Haram or Al Qaeda, I would seriously have to contemplate who I would root for.

• Top executives from Shell & BP have both recognized global warming, and have indicated that the world needs to more aggressively cut back on fossil fuel consumption.

• The planet will have many more cars in the next five years. Car penetration rates in developed countries run around 54 percent, versus about 14 percent in emerging countries. If China matched the developed rate, it would require the sale of another 580-million vehicles there.

• Oil producers lack flexibility and finesse and with the exception of the years where the OPEC cartel has real clout, they have little choice but to continue pumping. Oil refineries do not face the same Hobson’s Choice.

• Don’t write off the Obama Administration’s efforts to impose an additional fee on oil. It may look little like the $10.25 bbl tax, but there are other options.

• Believe it or not, there is a group (that meets regularly) called the American Stripper Association.


The Premium for Premium Gasoline

27.8 27.1

29.1

33.3

36.6

44.0

51.6

26.0

30.0

34.0

38.0

42.0

46.0

50.0

54.0

2010 2011 2012 2013 2014 2015 2016

Pre-Unl Differential (cts/gal)


Questions & Answers

Education

Tom Kloza: Wronger for Longer: A Sideways Look at North American Energy Supply