Argus Crude and Refined Products Outlook

Transcription

1 consulting services Issue 18-1 Wednesday 1 January 218 Argus Crude and Refined Products Outlook Overview This year has started well for oil producers. Atlantic basin benchmark North Sea Dated averaged $64/bl in December, and on the last trading day of the year averaged $66.4/bl, the highest daily average for the whole of 217. Prices have continued to rise since then, and at the time of writing have breached key technical resistance and are trading above $69/bl. As forecasters, we have been consistently towards the bearish end of the spectrum, so this latest bout of price strength has defied our expectations. We have bowed to the inevitable and have upped our forecast for North Sea Dated this year by around $6/bl to an average of almost $65/bl. But we have left our forecast for 219 broadly unchanged, with North Sea Dated averaging around $61/bl. And we continue to believe that crude prices are more sustainable at $6/bl than at $7/bl North Sea Dated: Month-on-month change Jan 18 is average to 9 January Prices have been on a steady upward trend since the middle of last year, so it could be argued that we are somewhat late in arriving at a more bullish view on prices going forward. But even now we are still somewhat reluctant to do so. The average monthly price of North Sea Dated has increased every month since June by at least by $1/bl, and on occasion by $4-5/bl (see graph). The monthly average so far in January is $4/bl higher compared with December. A combination of factors has sustained this relentless increase. The producers themselves have done much to push prices higher. In June, the joint ministerial monitoring committee left the market mildly impressed with its commitment to the Opec and non-opec November 216 production accord. The partners reconfirmed this commitment in November by extending the production accord to the end of 218. Other factors have also helped pull prices higher. Hurricane Harvey led to sharp increases in refining margins in August, which pulled refinery demand for Atlantic basin crude higher and boosted prices. The Kurdish independence referendum in September raised geopolitical uncertainty in northern Iraq, while October saw Iran re-emerge as a possible geopolitical issue after US president Donald Trump refused to recertify the nuclear deal. And the discovery of a small leak in the Forties pipeline resulted in a three-week halt to around 4, b/d of North Sea production in December. 1 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 The old adage is that the market buys the rumour and sells the fact. It is clear though that in the last six months the selling has failed to materialise. This is owing to the Petroleum illuminating the markets

2 2 Summary of global crude balance mn b/d 1Q16 2Q16 3Q16 4Q Q17 2Q17 3Q17 4Q Demand Supply Opec crude Opec NGL and condensate Non-Opec crude and NGL Other supply Global balance* *equivalent to global stock change success that producers have had in delivering the production cuts as agreed (see graph). After a full year, Opec producers delivered an impressive overall compliance rate of 16pc and a particularly impressive pc in November and December, although their efforts were supported by the steadily deteriorating situation in Venezuela, where production slumped to 1.8mn b/d in December, 2, b/d below target. Non-Opec compliance was lower, at an average 87pc last year. But this is still impressive by historical standards, and non-opec compliance did exceed 1pc between August and November. Against this backdrop of strong compliance and with evidence of a steady fall in OECD commercial inventories, the market has been able to remain firmly bullish even as each incidental and transitory prop to prices has been removed. Quite simply, as long as producers can demonstrate that they are complying with their commitments and as long as the data show OECD commercial stocks falling, there is no reason for the market to start selling again and every reason for laggards to jump on the bandwagon and go long. Opec and non-opec compliance in 217 mn b/d % compliance 16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Opec cut Non-Opec cut Opec compliance Non-Opec compliance At the moment it is hard to identify anything that might crop up in the immediate future to break this bullish mood it is easier to identify factors that may support this trend. Libya and Nigeria always have the capacity to surprise, and the situation in Venezuela becomes ever more alarming with speculation growing that production could already be as low as 1.6mn b/d and likely to fall further. We have to expect prices to remain well supported through the first half of this year. But we question whether higher prices can be sustained through to the end of 218 and into 219. Russia continues to achieve decent compliance with its output target, but individual producers are lobbying hard for an exit from the production agreement. And the longer prices remain high, and especially if they continue to rise, this lobbying can only intensify. The chances of the output agreement unravelling in some way after the June 218 meeting are likely to increase the longer that prices remain strong. Meanwhile, all eyes will be on US production. On the basis of our current price forecast, we already expect US crude output to rise to almost 1.5mn b/d by the end of this year and to 11.5mn b/d by the end of 219, from 9.8mn b/d now. And if prices average $7/bl through 218 and 219, we estimate that US production could be.5mn-.7mn b/d higher still. On the basis of our price forecast, the projections show a finely balanced market with a small but sustained global stockdraw. Prices in the $7-75/bl range will probably lead to a situation in which stocks will start to increase again. It may seem somewhat perverse but it is in producers interests to cap this price recovery before it gets out of hand. If they do not, eventually market forces will. The situation in Venezuela remains a major potential source of price support in the months ahead, but without this current prices simply look unsustainable.. Issue Ref:

3 3 Forecast crude prices Dec Jan Feb Mar 4Q17 1Q Ice Brent Nymex WTI North Sea Dated Urals NWE Urals Med CPC Blend Bonny Light WTI Midland WTI Houston LLS Mars Dubai ESPO Blend Dec Jan Feb Mar 4Q17 1Q Urals NWE vs North Sea Dated Urals Med vs Urals NWE Urals Med vs North Sea Dated CPC Blend vs North Sea Dated Bonny Light vs North Sea Dated Nymex WTI vs Ice Brent WTI Midland vs Nymex WTI WTI Houston vs Nymex WTI LLS vs Nymex WTI LLS vs Mars Mars vs Nymex WTI Dubai vs Ice Brent ESPO Blend vs Dubai

4 4 Crude futures analysis With Ice Brent above $68/bl at the time of writing and WTI in excess of $61/bl, oil prices have increased by $17/bl or around a third since August, an outcome few would have predicted five months ago. Opec extended its output agreement until the end of 218 at its November meeting in Vienna, reinforcing the group s declared intention to reduce oil inventories and rebalance the market, but few expected prices to reach such heights so quickly. Market rebalancing is indeed proceeding at a good pace, driven by strong global oil demand growth, but a number of factors geopolitical and otherwise conspired to add upward pressure to price expectations and tighten market fundamentals. From the supply side, Venezuela s oil sector continues to implode, tensions between competing factions in Libya that have disrupted supply show no sign of abating, while the North Sea Forties pipeline shutdown although of relatively short duration and extreme cold in North America also supported stronger crude prices. Adding to this mix, news that Saudi Arabia has budgeted for another large fiscal deficit this year of $52bn compared with $61bn in 217 suggests that it will keep the pressure on the oil price, simply because Riyadh needs the oil revenues, which still account for over 63pc of the Saudi budget. Meanwhile, the underlying fundamentals in the US are finally proving supportive for WTI prices. Crude stock cover in the US has plummeted, after the temporary spike occasioned by hurricanes Harvey and Nate, and is rapidly approaching the 24-day mark below the average cover of 28.7 days in (see graph). US crude stock cover has not been this low since January 215 and there is every indication that cover will decline even further, despite the continuing increase in US crude production. US crude output rose by almost 57, b/d between June and October last year, but the country s crude imports dropped by 4, b/d over the same period and its crude exports rocketed by 945, b/d. These are trends that are likely to continue underpinning bullish sentiment in the WTI market, alongside the continuing strength in US oil demand. Swap shop This bullish outlook cannot be ascribed to increasing strength in the money managers net long positions, which have stagnated since the end of November (see graph). On the other hand, the swap dealers net short positions have continued to rise more or less in line with WTI, posting a correlation co-efficient with the benchmark of.99 since 27 June compared with.93 for the correlation between the money managers net longs and WTI. US oil producers have boosted their hedging activity for 218 to lock in recent high oil prices, but what the Nymex numbers show is that they are hedging growing amounts of their output with the swap dealers rather than by using more straightforward futures. From 27 June onwards, their short positions have actually decreased by 19pc, whereas the swap dealers shorts have risen by 71pc over the same period, a clear indication of rapidly rising producer hedges, since these dealers sell futures to cover their fixed-price purchases of paper oil from the producers. US crude stock cover Nymex net positions contracts 36 US crude stock cover (days, LH axis) WTI spot price () Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Money managers' net long positions on Nymex (LH axis) Swap dealers' net short position on Nymex (false positives, LH axis) WTI spot price (, RH axis)

5 5 Looking to the future Unlike the Nymex crude futures market, the swap merchants on Ice are net long, implying that those producers hedging on Ice prefer to use the exchange s crude futures to hedge their output rather than Ice s swap dealers. The close relationship between the net long positions of the money managers and the net short positions of the producer merchants provides clear evidence of this (see graph). The correlation co-efficient between these two sets of open positions on Ice was.98 over the period from the end of June until the end of last year, which is not surprising given that they are highly likely to have represented counterparty positions between speculators and hedgers. In a tightening market, the producer hedgers would be keen to lock in higher prices by selling futures, thereby putting downward pressure on the prices of the months ahead relative to the front month and increasing the degree of backwardation on the forward curve. As counterparties to the hedgers, the speculators would be happy to increase their long positions, but only at prices lower than current levels, which would deepen the backwardation. The key drivers in the WTI and Brent futures markets are, on the one hand, the belief that the oil market is tightening owing to Opec s drive to reduce inventories, and on the other, the likelihood of US tight oil producers being able to increase their output further as a result of higher prices. This dynamic is keeping the WTI and Brent forward curves in backwardation for at least five years ahead. Keep the faith The message from the futures markets is that they are not in the grip of a speculative fever pushing oil prices ever higher, as their measures of speculation intensity remain historically low. Instead, they reflect a strong belief in the determination of Saudi Arabia and Russia to restrain output in the interest of reducing global oil stocks. This belief is exemplified by the rising and falling costs, respectively, of normalised $55/bl call and put options on Ice, averaged over 218 as a whole (see graph). The cost of a $55/ bl call option normalised by the percentage by which it is in or out of the money reached a level 11 times the cost of a $55/bl put option on 4 January, whereas the same call option was only four times the cost of a put with the same strike price on 24 November. Beating the count What could possibly upset this dynamic? US oil production continues to grow, despite a stagnating oil rig count, rising by 1mn b/d in December compared with a year earlier according to preliminary weekly data from the EIA reflecting increasing drilling productivity in US shale prospects. As for Opec s much-vaunted compliance, production cuts in 217 totalled 1.1mn b/d compared with 216, with Saudi Arabia accounting for 45pc and Venezuela for 22pc of the total. But output increases in Libya, Iran, Iraq and Nigeria amounted to.9mn b/d, leaving overall Opec output down by just 2, b/d last year. Surging global oil demand saved Opec s blushes in 217, but is it safe to bet on the same happening this year? Ice Brent net positions contracts Ice Brent: Average cost of 218 options 9 8 Net long positions of swap dealers Net long positions of money managers Net short positions of producer merchants (false positives) Cost of normalised $55/bl put options Cost of normalised $55/bl call options Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17

6 6 Northwest Europe Atlantic basin benchmark North Sea Dated averaged $64.14/ bl in December, up by 2pc from November and the highest monthly average since May 215, supported by unexpected disruption to Forties supply. The Forties Pipeline System (FPS) was shut down from December, resulting in the closure of all 8 related fields that feed into the system. Forties loadings restarted on 31 December, with the benchmark grade averaging a premium of 45 /bl to North Sea Dated last month. Urals cif NWE vs North Sea Dated Baltic Sea Urals prices rose to a four and a half year-high against North Sea Dated in December, averaging a discount of just 34 /bl, as the FPS shutdown restricted supplies of sour crude. Prices were further supported by adverse weather conditions that forced brief closures at Urals-exporting ports in December. But Baltic Urals has dropped to a 65 /bl discount to North Sea Dated in early January, following the restart of Forties loadings. January Urals exports from Baltic Sea ports are scheduled to drop by 7pc from December to 1.23mn b/d. Around 743, b/d will load from Primorsk a 3pc decline compared with December while just 488, b/d is due to load from Ust- Luga, down from December s 557, b/d, partly because of a planned suspension of loadings from 15-2 January owing to terminal maintenance. The drop in January Baltic Sea Urals exports marks the third consecutive month of declines and is mainly the result of lower deliveries from Russia s state-controlled Rosneft, as it boosts exports to China through a new spur from the East Siberia-Pacific Ocean (ESPO) pipeline. The drop also reflects reduced supplies by Surgutneftegaz, which plans to increase crude runs at its 35, b/d Kirishi refinery Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar Bonny Light vs North Sea Dated Forties exports in December were scheduled at 46, b/d over 21 cargoes, but loadings are estimated to have been just 175, b/d owing to delays resulting from the shutdown of the FPS. Loadings are slated to average 445, b/d and 386, b/d in January and February, respectively. Total loadings of the five grades that make up North Sea Dated will be 1.1mn b/d in February, 3pc higher than in January, but still 5pc lower than the average for last year. Forties will continue to find strength over the next few months as production declines at the grade s biggest contributing field, Buzzard, seem to be accelerating, with April output forecast at just 133, b/d, down from 155, b/d a year earlier. In addition to supply constraints, Forties will continue to be supported by strong buying interest from Asia- Pacific refiners, which bought more than half of the available cargoes in September-November Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 Nigerian crude loadings are scheduled at 1.89mn b/d in February, up from January s 1.75mn b/d and marginally above average 217 loadings of 1.87mn b/d. Nigeria has promised to cap crude production at around 1.8mn b/d, according to the Opec output agreement, but its classification of Agbami and Akpo with a specific gravity of above 45 API as condensate rather than crude, will help Abuja to work its way around this informal production limit. Bonny Light exports are forecast at 15, b/d in February compared with 139, b/d in January. This supply drop combined with buying interest from Indian refiners should keep the light sweet grade at above a $1/bl premium to North Sea Dated.

7 7 Mediterranean Russian Black Sea Urals crude averaged a discount of 4 /bl to North Sea Dated in December, widening from an unusually tight discount of just 1 /bl in November. Opec s decision in November to prolong its production restraint deal to the end of this year is likely to tighten sour crude availability in the Mediterranean region over the next 12 months, as producers place greater emphasis on maintaining market share in Asia-Pacific. This should support a relatively narrow Black Sea Urals discount to North Sea Dated. Urals cif Med vs North Sea Dated Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 loadings from January because of maintenance. And some market participants expect lower westbound Russian exports in the months ahead, as the country seeks to increase crude supplies to China through the new spur from the ESPO pipeline. Caspian light sour CPC Blend averaged a premium to North Sea Dated for the second consecutive month in December, at 15 /bl, receiving support from the closure of the Forties Pipeline System, which prompted European as well as Asia-Pacific refiners to seek alternative supplies of light sour crude. Keen buying interest is broadly expected to continue and should prevent the Caspian grade from falling to the steep discounts seen in the second quarter of 217, despite expectations that CPC Blend exports will continue to grow. CPC Blend exports are scheduled to reach a record high of 1.34mn b/d in January, driven by rising production from Kazakhstan s Kashagan field, which will contribute just over 27, b/d up by a fifth compared with December flows and accounting for 2pc of total CPC Blend exports compared with 17pc in December. Kashagan is expected to reach its initial output target of 37, b/d this year, after missing this in 217 following production problems at the field. In addition to Middle East producers trimming their crude deliveries to the Mediterranean region, flows of Iraqi medium sour Kirkuk are likely to be constrained to around 2,- 35, b/d in the months ahead, compared with previous peak rates of 6,-65, b/d. Baghdad is trying to compensate with higher exports from Basrah, but these extra supplies from Iraq s southern terminal will not necessarily find their way to the Mediterranean region. Europe received just 59, b/d of Basrah crude in January-October, around 1, b/d less compared with the same period of 216. CPC Blend vs North Sea Dated Saudi Arabia and Iran might provide relatively more medium sour crude to the Mediterranean region Saudi Aramco will keep January allocations to Europe unchanged from December. But both countries have been increasing prices to Mediterranean buyers recently, so regional refiners may turn to alternative sources of supply and/or try to maximise their intake of light sweet crude within the confines of their refining systems. These dynamics should support Black Sea Urals, with shipments from Novorossiysk scheduled at around 395, b/d for January, unchanged from December, with no Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 Meanwhile, US exports continue to flow to the Mediterranean region, bolstering supplies of light sweet crude and applying downward pressure on values for Caspian, Libyan and Algerian grades. But this could be offset partially by continuing robust demand for light sweet north African crude from Asia-Pacific and, to a lesser extent, North America.

8 8 US US marker Nymex WTI traded at an average discount to Ice Brent of more than $6/bl in December. The discount remains wide as rising US crude output of 9.8mn b/d towards the end of last year and growing product inventories are countering the effect that large crude stockdraws are having on WTI prices at Cushing. But new pipeline takeaway capacity from the Oklahoma hub might provide some support to Nymex WTI. Independents Plains and Valero plan to ramp up shipments in the first quarter of this year on their new 2, b/d Diamond crude pipeline from Cushing to Memphis, Tennessee, after beginning the commissioning process in December. Nymex WTI vs Ice Brent Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 Permian WTI climbed slightly at the Midland, Texas, pricing point to trade at an average premium to Nymex WTI of 38 / bl in December, drawing strength from market expectations regarding the effect of an increase in pipeline takeaway capacity. Enterprise Products Partners has started limited service on its 45, b/d Midland-to-Sealy pipeline, which connects Enterprise s Sealy storage facility west of Houston to the company s Echo terminal. From Echo, shippers can reach refiners in Houston, Texas City, Beaumont and Port Arthur as well as Enterprise s dock facilities for export. The line, when in full service, will include four segregations for West Texas Sour (WTS), WTI, higher-gravity crude dubbed Light WTI and condensate. Many other infrastructure projects have been proposed, the most recent being an open season launched by US firm Phillips 66 and Canada s Enbridge for a new pipeline to move Permian crude to the Texas coast. The Gray Oak pipeline would ship an initial 385, b/d from Reeves, Loving, Winkler and Crane counties in west Texas to the ports of Corpus Christi, Freeport and Houston by the end of 219. Further expansions will be considered depending on shipper interest. And interest seems to be growing for an increase in pipeline capacity to the US Gulf coast, especially for exporting crude to Europe, Asia-Pacific and Latin America. Recent examples include Poland s Grupa Lotos committing to buy at least five US crude cargoes this year, and Chinese-UK joint venture Petroineos buying Eagle Ford and Bakken crude for its 21, b/d refinery in Lavera, France. India continues to import US crude as does China, which has been consistently the second-largest importer of US crude after Canada. As a consequence of the boom in US crude exports from the Gulf coast, we have added Argus WTI Houston price to our forecasts as it is widely considered the most representative price for the US crude export market. WTI assessed at the Magellan East Houston terminal averaged a premium of $4.44/bl to WTI at Cushing in December, compared with a premium of $1.62/bl in December 216. This surge is the result of rising interest in US crude exports, which has been prompted by the wider Brent-WTI spread. The increase in open interest for Argus WTI Midland and WTI Houston is a further indication of growing interest in the two pricing hubs. WTI Houston and Midland vs Nymex WTI WTI Midland vs Nymex WTI WTI Houston vs Nymex WTI Nymex WTI = -2. Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 LLS and Mars are also exported from the Gulf coast and their premiums to Nymex WTI averaged historically high levels of $5.36/bl and $2.21/bl, respectively, in December. Both are forecast to remain well supported in the near term.

9 9 Asia-Pacific Mideast Gulf marker Dubai s discount to Ice Brent increased by more than 4 /bl to $2.48/bl in December, the widest since January 217. And the front-month Brent-Dubai EFS Ice Brent s premium to Dubai swaps averaged $3.21/ bl in December compared with $2.7/bl in November. Both of these movements can be partly explained by the Forties disruption that pushed North Sea prices higher. Brent s rising premium to Dubai should make crude from west Africa and Europe less attractive to Asia-Pacific buyers Dubai vs Ice Brent for Asia-Pacific customers, especially in view of strong regional refining margins for naphtha. But weakening margins for fuel oil and gasoline in Asia-Pacific were probably the main drivers for the Saudi decision to cut prices for Februaryloading Arab Medium and Arab Heavy. In the meantime, Qatari state-owned QP raised the premium to Dubai for light sour Qatar Land and medium sour Qatar Marine by 57 /bl and 42 /bl, respectively, in its retroactive December official selling prices. And Adnoc raised the premium of light sour Murban to Dubai by 42 /bl to $3.25/bl a 22-month high while maintaining medium sour Upper Zakum s premium to Dubai at 9 /bl. Tighter supply and higher prices for Mideast Gulf light sour crude helped push Russian ESPO Blend premiums to Dubai to $3.53/bl in December the highest monthly average since January 217. Firm demand for February-loading cargoes was further encouraged by Brent s widening premium to Dubai, which favours crudes priced against the Mideast Gulf benchmark. -4 ESPO Blend vs Dubai -5 Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 But Dubai discounts to Brent are expected to remain relatively tight given that Opec and its non-opec partners have extended their output constraint agreement to the end of this year. Compliance with the cuts is holding up above 1pc, especially from producers such as Saudi Arabia and Russia that produce mainly medium sour grades. Saudi Arabia plans to trim its January supplies to Asia-Pacific by more than 1, b/d below December shipments. And Abu Dhabi s Adnoc will deepen cuts to February allocations of its three crude grades to 1-2pc, from cuts of 5-15pc for January. This reflects the UAE s continued adherence to its Opec commitments, a small increase in Adnoc s refining intake and planned maintenance in February. February allocations for light sour grades Murban and Das will be cut by 2pc, while February allocations of medium sour Upper Zakum will be reduced by 1pc. Mideast Gulf producers have tended to increase their prices to compensate for lower output and/or exports. Saudi Aramco raised its Arab Super Light and Arab Extra Light prices Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Nov 17 Mar 18 ESPO Blend exports are scheduled at 648, b/d in January, before dropping to below 56, b/d in February. Values should remain well supported in the months ahead as seaborne loadings at Kozmino are expected to fall to about 64, b/d in 218 compared with an average 65, b/d in 217, as a result of a planned increase in supplies to China through the new ESPO pipeline spur from Skovorodino to Mohe. ESPO Blend exports could increase to 735, b/d in 219, by which time support for the grade will come from the IMO s impending 22 tighter sulphur cap for marine fuel.

10 1 Light distillates The northwest Europe gasoline crack spread fell by $3.85/bl in December from November, to its narrowest premium to North Sea Dated since March 216. Continued product shortages in Nigeria supported exports from northwest Europe to west Africa, but this was not enough to offset a fall in transatlantic gasoline exports. US gasoline stocks recorded their eighth consecutive build in the week ending 29 December, hitting a six-month high of 233mn bl and compounding the impact of seasonally weak regional demand. The northwest European gasoline margin is forecast to remain relatively narrow in the first quarter, owing to seasonally weaker demand and limited export opportunities to the US and east of Suez markets. The gasoline crack spread is forecast to average $1.7/bl lower than a year earlier, as higher pump prices weigh on demand growth in Europe and North America and reforming capacity additions in Russia add to Baltic exports. The Singapore gasoline margin fell by $1.7/bl on the month in December, as strong regional demand was outweighed by an increase in exports from China. The Singapore gasoline crack spread is forecast to weaken further in January, falling to a $12.45/bl premium to Dubai crude, under pressure from a further increase in Chinese gasoline exports. Beijing allocated gasoline export quotas of 615, b/d for the first quarter, 7pc higher than a year earlier. The impact of the quota change will quickly become apparent, with stateowned CNOOC expected to double exports after completing a 2, b/d expansion at its 24, b/d Huizhou refinery Gasoline crack spreads 5 NW Europe Singapore Mediterranean US Gulf coast Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 The northwest Europe propane crack spread fell by $1.31/bl in December to minus $17.16/bl, improving the product s attractiveness to petrochemical producers in relation to naphtha. More competitively priced propane combined with weaker buying interest from regional gasoline blenders weighed on naphtha margins in December. The northwest European naphtha margin fell by over $1.1/bl from November, but remained at a premium of 37 /bl to North Sea Dated. The US Gulf coast naphtha margin fell by $1.5/bl on the month in December. Exports to Asia-Pacific and Venezuela offered support, but did not offset higher supply from Texas owing to two reformer shutdowns. Relatively high gasoline stocks and weak gasoline margins are forecast to weigh on reformer utilisation in the US in the coming months, leaving the market well supplied. Asia-Pacific naphtha margins were relatively strong in December, despite increased Indian exports of around 1.5mn bl. Singapore margins fell by just 25 / bl from November, compared with an average fall of $1.32/bl across the other three regions. Strong petrochemical margins supported northeast Asian demand. But the naphtha crack spread is forecast to weaken in January as 575, b/d of imports are due to arrive in Asia-Pacific, a two-year high. Light distillates crack spreads Nov Dec Jan Feb Mar Northwest Europe vs Dated Propane Butane Naphtha 65 para R gasoline Mediterranean vs Urals Propane Butane Naphtha 65 para R gasoline US Gulf coast vs LLS Propane Butane Naphtha conv gasoline Singapore vs Dubai Propane Butane Naphtha R gasoline

11 11 Middle distillates Middle distillate margins weakened throughout December in northwest Europe. The diesel crack spread fell by almost 8 /bl from November, amid returning supply from Shell s 42, b/d Pernis refinery in the Netherlands following the completion of maintenance. The jet-kerosine crack spread fell by 6 /bl amid an influx of cargoes from Russia. A cold weather snap on the US east coast, which saw temperatures in New York and across the east plummet to near recordlows in late December to early January, has resulted in a reverse of the traditional transatlantic arbitrage in recent weeks diesel usually flows from the US to Europe. This is expected to provide further support to northwest Europe diesel and heating oil margins throughout January. Diesel crack spreads Northwest Europe Mediterranean USGC Singapore Large parts of the eastern US experienced temperatures 1 C below average in late December through to early January. US Gulf coast middle distillate margins rose in December from November in anticipation of the seasonal increase in heating demand. But crack spread strength was limited amid weakening arbitrage economics to Latin America. The end of the holiday season in Mexico coincided with a domestic price reduction in Brazil, combining to weaken demand for shipments from the US Gulf coast. US Gulf coast distillate margins are forecast to retreat next month, as the extreme weather abates through the second half of January. All middle distillate margins against Dubai crude rose in the Singapore market in December. Jet fuel demand was strong last month, spurred by the seasonal end-of-year increase in travel. Heating demand was also firm, limiting the supply of jet fuel as refiners looked to maximise profits on heating kerosine. The 5ppm gasoil crack spread displayed the strongest month-on-month growth, rising by more than $1.3/bl in December. Exports from China were in short supply amid strong domestic demand. Low-sulphur gasoil continues to take market share away from 5ppm gasoil, as tighter fuel specifications have weighed on demand for the higher-sulphur grade. The Singapore gasoil benchmark switched from 5ppm to 1ppm on 2 January Middle distillates crack spreads Nov Dec Jan Feb Mar In the Mediterranean region, jet and diesel margins weakened in December against Russian Urals crude, with the return of the Pernis refinery in Rotterdam supplying not just northwest Europe, but the Mediterranean as well. Supply of jet fuel was plentiful, with cargoes also arriving from India and the Mideast Gulf, although further downward pressure was limited by a drop in imports from northeast Asia. Distillate crack spreads in all regions are forecast to strengthen over the coming 12 months as oil demand remains firm this year. But European diesel margins will lag behind those in the US and Asia-Pacific as an increasing number of countries in Europe introduce measures to restrict and ultimately phase out the use of diesel in road transport, weighing on demand for the fuel (see graph). UK diesel car sales fell for the first time since 29 last year, and this trend is expected to continue throughout Europe. Northwest Europe vs Dated Jet-kerosine ppm diesel ppm heating oil Mediterranean vs Urals Jet-kerosine ppm diesel ,ppm heating oil US Gulf coast vs LLS Jet-kerosine ppm diesel ,ppm heating oil Singapore vs Dubai Jet-kerosine ppm diesel ppm gasoil

12 12 Fuel oil The northwest European high-sulphur fuel oil crack spread fell by $2/bl in December compared with November to minus $11.36/bl, weighed down by increased Russian exports following the end of a period of heavy refinery maintenance and high throughputs in Europe that boosted supply. Limited opportunities to export product to Asia-Pacific contributed to fuel oil margins falling to a low of minus $13/bl on 11 December, the widest discount to North Sea Dated since July 216. The crack spread recovered slightly towards the end of the month as lower freight rates for very large crude carriers (VLCCs) led to at least three VLCCs being booked provisionally for late-december and January loading to Asia-Pacific. The Singapore high-sulphur fuel oil (HSFO) 38cst crack spread fell by almost $1.3/bl in December to its widest discount to Dubai crude since March. Demand from Pakistan is unlikely to recover following an abrupt switch towards cleaner fuels in the power generation sector, prompted by severe air pollution in October. Pakistan s state-owned PSO suspended imports of fuel oil, with LNG making up the shortfall in domestic power generation. PSO imported around 5, t/month of fuel oil last year, but this is unlikely to be replicated in 218. The government has ordered oil-fired power plants to halt the use of fuel oil, and two new LNG import terminals are scheduled to come on line this year. The extent of the switch is demonstrated by the fact that Pakistan issued a tender to export 125cst or 18cst HSFO in January, despite typically being a significant net importer of fuel oil. The Singapore fuel oil margin is forecast to remain relatively weak in January, before a wave of refinery maintenance in Singapore HSFO 38cst crack spread to Dubai the Middle East and refinery capacity upgrades in Kuwait and South Korea reduce fuel oil yields and limit regional supplies. The 35, b/d Sasref refinery in Jubail a joint venture between Shell and Saudi Aramco is due to undergo maintenance in January-February, while ExxonMobil and Saudi Aramco s 4, b/d Samref refinery in Yanbu is scheduled to have a turnaround in March-April. These two turnarounds will limit supplies of fuel oil available for export to Asia- Pacific. Singapore, which imported about 45, b/d of fuel oil from Saudi Arabia in January-November, will have to find alternative supplies. Residual strength South Korean refiner S-Oil is due to add a 76, b/d residual fluid catalytic cracker (RFCC) at its 58, b/d Onsan refinery, which will be fully operational by June. Onsan produces around 35,-4, b/d of fuel oil that supplies the domestic bunker market, which is likely be replaced by imports following the start-up of the new RFCC. In addition, Kuwait s KNPC is adding 38, b/d of coking capacity as part of its clean fuels project at the 44, b/d Mina al-ahmadi refinery. The loss of Middle East exports to maintenance in the first half of this year and lower supply from South Korea and Kuwait in the second half will keep regional supplies relatively tight. As a result, Singapore fuel oil margins are forecast to remain relatively strong throughout this year, averaging a $4.8/bl discount to Dubai crude. This would be $1.7/bl weaker than the average last year, but well above the average of a $7/bl discount (see graph). Fuel oil crack spreads Nov Dec Jan Feb Mar Northwest Europe vs Dated LSFO (1% sul) HSFO (3.5% sul) Mediterranean vs Urals LSFO (1% sul) HSFO (3.5% sul) US Gulf coast vs LLS LSFO HSFO (No 6 / 3% sul) Jan Apr Jul Oct ] Singapore vs Dubai HSFO 18cst HSFO 38cst

13 13 Refining margins The northwest Europe fluid catalytic cracking (FCC) margin to North Sea Dated plummeted by $2.4/bl from November to average $2.53/bl in December. The gasoline crack spread drove the fall, declining by $3.85/bl on the month. A sizeable 5.7mn bl build in US gasoline stocks in the first week of December stifled the transatlantic arbitrage. A larger reduction to the margin was limited by strong demand from west Africa amid product shortfalls in Nigeria. The high-sulphur fuel oil crack spread also posted a strong decline, falling by almost $2/bl. The region was well supplied by exports from Russia, and further downward price pressure came from a weak arbitrage to Asia-Pacific markets Singapore refining margin vs Dubai 4Q17 level 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 jet-kerosine limited further losses by rising by $1.6/bl as demand strengthened on a rise in travel at the end of the year. The gasoline crack spread weakened, as Gulf coast gasoline stocks rose by 3.2mn bl in the first week of December, to account for more than half of the total US gasoline stockbuild. The Singapore margin to Dubai also fell in December to average $5.31/bl, although the 12 /bl fall represents the best performing margin of all four regions in the final month of 217. Narrower gasoline and fuel oil crack spreads were almost entirely offset by strong middle distillate margins. 5ppm gasoil strengthened by $1.3/bl amid a lack of Chinese supplies reaching the wider Asia-Pacific market as domestic demand strengthened. But fuel oil fell to a ninemonth low as buying demand from Pakistan slowed. The fourth-quarter Singapore refining margin proved to be strong for Asia-Pacific refiners. The margin has exceeded the fourth-quarter level in just four of the previous 23 quarters, notwithstanding the third quarter of last year, when refining margins globally were inflated by the hurricanes that hit the US Gulf coast. The recent strong margins may come under pressure as Chinese refiners ramp up production to take advantage of the favourable market. The latest data put Chinese refinery runs at 12.3mn b/d in November, the highest in at least six years, and Argus expects throughputs to be similarly high in December. The Mediterranean margin to Urals fell by almost $1.2/bl in December, averaging $2.96/bl. Gasoline and high-sulphur fuel oil were responsible for the majority of the fall. The gasoline crack spread declined by $1.6/bl, despite firm demand from markets east of Suez. High-sulphur fuel oil fell by $1.7/ bl on the month, amid rising imports from Asia-Pacific. European refining margins are forecast to recover in the coming months, and should receive an immediate boost towards the end of January from maintenance to Essar s 195, b/d Stanlow refinery in the UK. The plant produces 5, b/d of gasoline and 75, b/d of diesel. The turnaround at the refinery is expected to run until mid-march, and the reduction in supply will tighten the market. The US Gulf coast FCC margin to LLS fell by 7 /bl to average $7.5/bl in December. The decline was led by light and heavy products, with gasoline and fuel oil weakening, although Refining margins Nov Dec Jan Feb Mar Northwest Europe vs North Sea Dated vs Urals Mediterranean vs Urals vs CPC Blend US Gulf coast vs LLS vs WTI vs Mars Singapore vs Dubai vs ESPO Blend Margins calculated based on FCC unit yields

14 14 Forecast crude prices 1Q17 2Q17 3Q17 4Q Q18 2Q18 3Q18 4Q Q19 2Q19 3Q19 4Q Ice Brent Nymex WTI North Sea Dated Urals NWE Urals Med CPC Blend Bonny Light WTI Midland WTI Houston LLS Mars Dubai ESPO Blend Forecast crude differentials 1Q17 2Q17 3Q17 4Q Q18 2Q18 3Q18 4Q Q19 2Q19 3Q19 4Q Ice Brent vs N Sea Dated Urals NWE vs N Sea Dated Urals Med vs Urals NWE Urals Med vs N Sea Dated CPC Blend vs N Sea Dated Bonny Light vs N Sea Dated Nymex WTI vs Ice Brent WTI Midland vs Nymex WTI WTI Houston vs Nymex WTI LLS vs Nymex WTI LLS vs Mars Mars vs Nymex WTI Dubai vs Ice Brent ESPO Blend vs Dubai

15 15 Product prices 1Q17 2Q17 3Q17 4Q Q18 2Q18 3Q18 4Q Q19 2Q19 3Q19 4Q Northwest Europe Propane Butane Naphtha 65 para R gasoline Jet-kerosine ppm diesel ppm heating oil LSFO (1% sul) HSFO (3.5% sul) Mediterranean Propane Butane Naphtha 65 para R gasoline Jet-kerosine ppm diesel ,ppm heating oil LSFO (1% sul) HSFO (3.5% sul) US Gulf coast Propane Butane Naphtha conv gasoline Jet-kerosine ppm diesel ,ppm heating oil LSFO HSFO ( No 6 / 3% sul) Singapore Propane Butane Naphtha R gasoline Jet-kerosine ppm diesel ppm gasoil HSFO 18cst HSFO 38cst