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�� Oil market update �� November 2018

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Oil market updateMarket commentary

November 2018

Oil prices off their peak as the market takes stock

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Oil market analysisBrent / Sanctions / Refining Margins / Wavering Demand

Brent traded at highs of $86/bbl at the beginning of October, amidst nervous sentiment in the run-up to the USsanctions against Iran coming into force on the 4th November. Front month Brent has since fallenconsiderably and is now trading around $67/bbl. Crude production from OPEC and Russia has increased to offset declines in Iranian exports, with much of thefocus being on the availability of spare capacity in Saudi Arabia.

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The WTI-Brent spread has widened to trade around $10/bbl as US supply remains bottlenecked and the Brentphysical market continues to be supported. Global refining margins declined over the past two months on the back of rising stocks and high crude runs.NWE gasoline cracks have been especially weak, briefly trading in negative territory amid modest demandand inventory builds.

Demand growth has come under pressure, with the IEA reducing its forecasts for 2018 and 2019 by 110 kbd,to 1.3 mbd and 1.4 mbd respectively. Their downward revision was attributed to a weaker global economicoutlook, higher energy prices and trade concerns.

Source: BP Internal, ICE, NYMEX

Crude prices reached new highs as the market prices in the impactof Iranian sanctionsOctober saw a sharp spike in crude prices, as trade concerns heightened in the run up to Iranian sanctionscoming into effect on the 5th November. Prices remain supported, however they have since come off their highson news of weaker global demand.

Global crude supply comes under pressureAs Venezuelan supply continues to fall, the announcement of US sanctions on Iran has caused a rapid downturnin their exports. There is increasing pressure on OPEC to compensate for these supply losses.



OPEC and Russia increase crude supply to offsetdeclines elsewhereRussian production has ramped up significantly since May and there is continued pressure on Saudi Arabia toramp up production, although it remains to be seen how much spare capacity they hold.

US production remains at record highs…US production leads non-OPEC supply and has risen year on year by 1.5 mbd to almost 11 mbd, aided bycontinued productivity gains.



…as productivity continues to increaseThe gains in US crude production have been achieved with only a slight increase in oil rig count. Overallproductivity has increased as technical efficiencies, such as longer laterals, have helped increase production perrig.



Brent-WTI bounces back upThe Brent-WTI spread has seen significant volatility this year, and in September spiked once again to around$10/bbl. Since September the spread has widened. Cushing stocks have built as a result of continued pipelinecapacity constraints in the US, whilst Brent has remained supported.

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OECD crude stocks remain below last year’slevelsAfter a stable start to the year, OECD crude stocks have drawn significantly since May, principally driven byOECD Americas. OECD Asia Oceania stocks have remained stable after a large draw in March, whilst OECDEurope’s inventory builds were largely offset by draws in August.

Refinery runs in the US have been particularly highUS crude runs have been above the 5 year range for most of the year, peaking at 17.7 mbd in June. After fallingbelow 2017 levels in March, OECD Europe has recovered in line with previous years, and is edging towards thetop of the 5 year range.



Consequently, OECD product stocks continue tobuildQ3 has seen OECD product stocks build in line with strong refinery runs in the US and OECD Europe. Aftersignificant draws in 2017, middle distillate inventories have built in 2018. While gasoline stocks are lower thanDecember 2017 they remain above the level observed 12 months ago.



Gasoline stocks in the US have been especiallyhighGasoline stocks built in August, diverging from the typical seasonal downtrend. In particular, US gasoline stockswere up 8.8 mb year on year on the back of record refinery runs.

The combination of high refinery utilisation andinventory builds has seen gasoline cracks collapseGasoline cracks recently traded just under Brent parity, after a rapid decline since the beginning of September.Naphtha cracks have also weakened whilst diesel and jet cracks have been supported on the back of robustdemand.



Diesel and jet are in high demand2018 has been a strong year for diesel/gasoil and jet/kerosene OECD demand, with jet consistently tracking above2017 levels due to increased passenger numbers. Conversely, Naphtha and more recently gasoline have seenlower demand, which has been reflected in light-end cracks.

European jet/kerosene has had another strong



yearAfter an impressive year of growth, European jet/kerosene demand levelled off in August at just under 1.7mbd.Germany saw particularly strong demand over the summer, and France has also tracked slightly higher than2017. The UK has been relatively stable, with average demand YTD 3% higher than last year

However, overall 2018 has seen some demandweaknessThe higher price environment coupled with a weaker macroeconomic backdrop has resulted in lower overallproduct demand growth. Despite its continued strength, jet demand growth in 2018 has fallen short of thesignificant Y/Y increase seen in 2017. Additionally, naphtha demand growth is down 157kbd Y/Y.



Refinery margins weakened in Q3 2018Refinery margins in Q3 2018 were $2/bbl lower than Q3 2017. Despite high run rates, tumbling gasoline crackshave seen global RMM fall to around $11/bbl in October.

2020 HSFO and gasoil cracks have beenresponsive to IMO 2020 regulatory changeThere is continued speculation in the market as we draw closer to the implementation of the marine fuel sulphurcap from 1st January 2020. 2020 HSFO cracks have been fairly volatile, but have retracted from the lows seen



earlier this year. Meanwhile, gasoil cracks remain elevated as markets price in the additional demand expected.

Upcoming eventsIranian sanctions took full effect on 5th November 2018,which will impact Iran’s ability to trade crude and oil products.

OPEC are due to meet on 6th December,and will be joined by Russia and 9 other non-OPEC members on 7th December. The meetings will provide an

opportunity to assess global market conditions and discuss appropriate levels of crude production.

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Global crude supply comes under pressure › content › dam › bp › business-sites › ... · Oil market analysis ... Demand growth has come under pressure, with the IEA reducing