OIL

WHY OIL?
• It’s the most important natural
resource of the industrialized nations
• Important determinant of inflation
TYPES OF CRUDE OIL BENCHMARKS
• West Texas Intermediate (WTI) • Bonny Light
• Brent Blend • Minas
• Dubai • Tapis
• OPEC Reference Basket • Louisiana Light Sweet (LLS)
 West Texas Intermediate (WTI)
• Produced predominantly in the U.S.
Midwest and Gulf Coast refineries,
and is easily refined into high-quality
crude products
• Considered a "sweet" crude because
it is about 0.24% sulfur, a lower
concentration than North Sea Brent
crude. WTI is high quality oil that is
easily refined
 Brent Crude
• Produced predominantly in a range of
oil fields scattered in the Atlantic
Ocean and shipped to European
refineries
• Light sweet crude with a higher sulfur
content than West Texas Intermediate
 WHY BRENT CRUDE?
• WEST TEXAS INTERMEDIATE(WTI)
• key price benchmark for crude sold on
the North American market and
continues to be the primary
benchmark price for Canadian crude
blends, including West Canada Select
heavy oil, Edmonton Par light oil, and
Syncrude
• Does not accurately reflect the global
demand for crude because of an
oversupply of crude in North America,
which is seeing WTI now trade at a
discount to Brent
• BRENT CRUDE
• Represents the Northwest Europe
sweet market, but since it's used as
the benchmarks for all West African
and Mediterranean crude, and now
for some Southeast Asia crudes, it's
directly linked to a larger market
• Replaced WTI as the global crude
price benchmark, with it representing
crude prices for Northwest Europe,
West Africa and the Mediterranean
• Better representation of global oil
demand
 Brent Crude 2015 Forecast
Brent Crude Oil Price Forecast

$97.00 Mean Forecast

97.012 Made
Median Type of Crude
For Date:
No. Organisation Weighted
97 St Dev. 5.595235672
(dd/mm/yy) Oil
Average for 2015

1 30/10/2014 ANZ Brent Crude $ 105.00

2 30/10/2014 Standard Chartered Brent Crude $ 105.00
3 7/10/2014 EIA Brent Crude $ 101.67
4 15/10/2014 Bank Of America Brent Crude $ 98.00
5 30/9/2014 Credit Suisse Brent Crude $ 97.00
6 15/10/2014 BNP Paribas Brent Crude $ 97.00
7 30/10/2014 Reuters Polls Brent Crude $ 93.70
8 28/10/2014 Barclays PLC Brent Crude $ 93.00
9 16/10/2014 Societe Generale Brent Crude $ 91.00
10 27/10/2014 Deutsche Bank Brent Crude $ 88.75

Mean $97.01
Median $97.00
St Dev. 5.60
 Current Prices
Data taken from NASDAQ
• Data taken from EIA(Oct 7 2014)
Price/$

DD SS

$101.04

91.95 Quantity/million barrels per day

 Factors Affecting Brent Crude Prices
• Supply Factors • Demand Factors
1) US Shale Oil Production 1)US
2) OPEC Production 2)China
3) Non-OPEC Production 3)Eurozone
 Supply Factors
US Shale Production
1)Horizontal drilling and hydraulic
fracturing has increased production
2)New drilling techniques have lowered
break-even prices
OPEC/Non-OPEC Production
1)Libya is boosting its oil output after civil
war had shut things down for a spell
2) Saudi Arabia, the world's largest
exporter, had slashed its contract price
for its US customers
3)Iran unlikely to increase production due
to sanctions
4)Iraq unlikely to face production
disruptions as it still controls major
oilfields
5)Russia has kept production high in spite
of western sanctions
 Demand Factors
US
1)Inflation rate of 1.7%
2)Budget deficit declines to 2.8% of GDP
3)Trade deficit in September rose 7.6% to a
seasonally adjusted $43 billion
4) Overall index on consumer sentiment
finished at 86.9, the highest level since
July 2007, up from 84.6 at the end of
September.
5)Strengthening US dollar
6) The US unemployment rate dipped to
5.8% in October
Eurozone
1) Annual inflation increased to 0.4%
from 0.3% in September
2) In October, after four months of
stagnation or decline, the Economic
Sentiment Indicator (ESI) picked up in
both the euro area (by 0.8 points to
100.7) and the EU (by 0.5 points to
104.0)
3) ECB launched its third round of bond
purchasing programme in September
4) Eurozone’s unemployment rate
unchanged at 11.5% in September
 Demand Factors
China
1) China’s Purchasing Managers’
Index was at 50.8 for October,
government data showed on Nov. 1,
trailing the median estimate of 51.2
in a Bloomberg News survey and
below September’s reading of 51.1.
2) Gross domestic product at 7.3% in
the third quarter well short of 7.5%
expansion in the second quarter.
3)China recorded GDP growth of 7.7%
in the last two years, versus 9.3% in
2011 and 10.5% in 2010.
4) Global consumer confidence
increased one index point to 97 in the
second quarter of 2014, following a
two-point rise at the start of the year.
 Summing Up

Sluggish Sluggish
economic growth economic growth
in the Eurozone in the US

Declining Little indication

economic growth that OPEC and US
in emerging will cut
Increasing crude
nations such as production coupled production in the
China with sluggish short run
demand point to a
bearish outlook for
brent crude prices
in 2015
 Our Forecast
• We predict a weighted average of $95 Price/$
In The Short Run
for brent crude in 2015, below the DD2
mean of $97 by the 10 sources due to DD1 SS1
the reasons stated below:
SS2
• 1)We do not expect Saudi Arabia to
continue slashing its prices next year
• 2)We expect OPEC to cut back $80.38
production next year since some
members cannot sustain production $75
at prices below their break-even price

91.95 92.71
Quantity/million barrels per day
 Our Forecast
Brent Crude Forecast Price/$ In The Long Run SS2
120
DD2 SS1
100
80 DD1
60 $101
40
$80.38
20
0
current 2014 2015 q1 2015
price weighted weighted
average average
90 91.95 Quantity/million barrels