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Oil Market UpdateMarket Commentary

January 2019

Crude prices retracted all of the gains made in Q1 - Q3 2018

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Oil Market AnalysisBrent / OPEC+ / Sanctions Waivers / Macroeconomic Outlook / Refining Margins

Brent is now trading around $61/bbl, following a volatile Q4 which brought highs of $86/bbl in October 2018followed by lows of $50/bbl in December 2018. Overall the average Brent price for 2018 was $16/bbl higherthan in 2017, at $72/bbl.

In December 2018, OPEC+ announced a six month production cut from January 2019 of 1.2 mbd based onOctober 2018 levels, which came in line with market expectations amidst growing oversupply in the global

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crude markets.

The announcement of Iran sanctions waivers in early November 2018 mitigated the bullish sentimentpreviously priced into the market. The waivers granted to 8 jurisdictions including China, India and SouthKorea allowed these major customers to continue their purchases of Iranian crude into early 2019.

The macroeconomic outlook for 2019 remains in question, however the IEA note that falling crude pricesmay help to offset the impact on oil demand. Accordingly, the IEA maintain their global oil demand growthforecast of 1.3 mbd in 2018 and 1.4 mbd in 2019.

Global refining margins continue their decline on the back of rising product stocks and high crude runs. Lower margins relative to the first half of 2018 has largely been driven by exceptionally weak gasoline cracksamidst abundant gasoline supplies.

Source: BP Internal, EIA

Global crude prices gave back gains made in Q1 - Q3 2018Prices corrected sharply throughout October and November 2018 as concerns surrounding Iranian sanctionswere mitigated and a weaker macroeconomic outlook emerged. Brent ended the year at just above $50/bblfollowing a significant sell off in net speculative length. Prices have since recovered to around $61/bbl as outputcuts from OPEC, and namely Saudi Arabia, have taken effect.

Canadian crude pricing recorded high levels of volatility in 2018Whilst the Brent-WTI differential remained between $8-9/bbl towards the end of 2018, a collapse in WCS prices inOctober 2018 coincided with the spike in US benchmark WTI, leading to a spread of over $45/bbl. Canadianprices, which had been supressed due to transportation bottlenecks, then bounced back sharply in December2018 following the announcement of a 325 kbd production cut in Alberta.

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The sharp sell off in Brent net speculative length was a key factor indriving down pricesContracts fell from 480 thousand in October 2018 to 140 thousand in December 2018.

OPEC+ agreed to cut production by 1.2 mbd in December 2018The agreement comprises of an 800 kbd cut by OPEC and a 400 kbd cut by OPEC’s allies including Russia.Despite the cut being due to begin in January 2019, Saudi Arabian production fell by 400 kbd in December 2018,although November was an especially high month and the reference for the cut is October 2018. In contrast,Russian production increased in December

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Declines in production linger elsewhereIranian supply fell by almost 1 mbd in 2018 following the US withdrawal from the JCPOA, and continued to declinebeyond November 2018 despite the announcement of sanctions waivers. The economic crisis in Venezuelacontinues to drag on supply (with production down 360 kbd year on year) although the pace of decline hasrecently moderated. Given their already declining production, Iran and Venezuela are exempt from the latestOPEC cuts.

US emerges as the leading global supplierUS crude production grew by a record 1.6 mbd in 2018, led by continued growth in the Permian. The IEA expectsUS crude production growth to moderate in 2019 but remain healthy at 1.1 mbd. Cushing stocks continue to buildas a result of the infrastructure bottlenecks restricting crude exports, however new pipelines coming onstream in2H 2019 are expected to reduce stock levels.

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Overall US rig count flattens whilst DUCs continue to growSignificant productivity gains allowed for a steep increase in US production despite the rig count rising by just 2%in 2H 2018. In the same period, Drilled But Uncompleted (DUC) wells increased by almost 20% in the major shaleregions, with the Permian being the main driver, offering increased operational flexibility for these producers.

Total OECD crude stocks were broadly flat in 2018Despite higher refinery runs across the OECD, crude stocks built in November 2018 to reach their highest level

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since June 2018. Total OECD crude stocks in November 2018 stood 62 mb lower year on year, with OECD AsiaOceania stocks down 32 mb. Throughout 2018, OECD crude stocks moved within a 77 mb range in contrast to the173 mb range witnessed in 2017.

Average US refinery utilisation of 93% in 2018 resulted in recordrunsUS crude runs were on average 400 kbd higher year-on year, with throughput above the 5 year range for themajority of the year. Conversely, crude runs in OECD Europe were on average 250 kbd lower year-on-year,largely as a result of German outages in the Autumn.

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High US crude runs inflated gasoline stocksOECD gasoline stocks remained high into November 2018, up 5.4 mb year-on-year. US inventories contributedsignificantly to the builds, as a result of record refinery throughput in the US where gasoline yields tend to be high.

Product stocks recovered towards 2017 levelsOverall OECD product stocks had a mixed year, falling to a year-on-year deficit of 120 mb in May 2018, beforebuilding 100 mb to peak in September 2018 just above 2017 levels.

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Product demand growth has moderatedThe relatively high price environment in 2018 had a negative impact on product demand growth which fell to 1.3mbd. After negative growth in 2017, demand for LPG and ethane supported overall OECD products demand,growing by 325 kbd year-on-year.

2018 was a weak year for naphthaOECD demand for naphtha fell by 200 kbd in 2018 due to lower steam cracking demand. Distillates had a strongyear overall, as did LPG & ethane owing to the start up of new petrochemical projects.

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Sustained weakness for gasoline and naphtha cracksGasoline cracks have hovered around Brent parity since September 2018 whilst downward pressure on naphthahas re-emerged following a partial recovery in December 2018. HSFO cracks were especially high in November2018 as market conditions tightened. Distillates cracks remain relatively elevated but have softened sinceNovember 2018 on the back of strong supply.

Global refinery margins fell slightly in 2018 but were above 2016

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levelsThe collapse in gasoline cracks in 2018 was offset by strength in diesel, resulting in the global RMM falling by justover $1/bbl year-on-year. However, 2019 has so far recorded suppressed margins of around $6-7/bbl due toexceptionally low gasoline values.

New IMO regulation to shift demand for products from Jan 2020Both MGO and VLSFO are expected to be in high demand with the IMO regulation limiting sulphur content inbunker fuel to 0.5% from 1st January 2020. Ship operators have the option of installing scrubbers to reduce thesulphur content of HSFO exhaust gases or switching to a compliant fuel.

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Upcoming eventsOPEC members are due to meet in Vienna on 17th April 2019, and will be joined byother members of OPEC+ on 18th April 2019The meeting will provide an opportunity to assess the extent to which their production cut has succeeded inrebalancing the market. Waivers granted by the US government on Iranian crude exports sanctions are dueto expire early May 2019There is likely to be speculation in the run up to this around whether the US government will grant extensions onthese waivers Nigerian presidential election on 16th February 2019

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