welcome [] · welcome london –tuesday 4th june ... 2000 4000 6000 8000 10000 12000 14000 16000...
TRANSCRIPT
WelcomeLondon – Tuesday 4th June 2019
2Sensitivity: Confidential
• 13:45 European Gas Outlook
Gilles Heyberger, Senior Gas Analyst, S&P Global Platts
• 14:15 Carbon – Back to fundamentals?
Ingvild Sørhus, Lead EU Carbon Analyst, Refinitiv
• 15:00 Afternoon Break
• 15:30 Base metal fundamentals sour as macro headwinds grow
Bruce Alway, Manager - Metals and Mining, Refinitiv
• 16:15 European Refined Product Trends and Outlook
Oil - Alex Pearce, Lead Analyst - Oil Research, Refinitiv
• 17:00 Networking Drinks Reception
Agenda
Ingvild SørhusLead EU Carbon Analyst
Refinitiv
Carbon Market Outlook
Commodities Outlook
4 June 2019, London
Ingvild Sørhus, Lead Analyst, Refinitiv
Agenda
• Carbon price so far
• 2019: Back to fundamentals
• Brexit and EU ETS
• Short-term outlook and main price drives
• German coal phase-out
• Long-term outlook
6Sensitivity: Confidential
Carbon price development 2008-2019Back to where it started off
EU ETS review
Backloading
Market Stability Reserve
0
5
10
15
20
25
30
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Euro
/t
EUA front-Dec contract, ICE
7Sensitivity: Confidential
Annual shortages return to focusMarket Stability Reserve started in 2019
-500
0
500
1 000
1 500
2 000
2 500
3 000
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030E
U E
TS
an
nu
al
an
d c
um
ula
tive b
ala
nces a
nd
M
SR
(i
n M
t)
MSR Annual Balance Cumulative Balance
MSR 24%
intake rate
Started in 2019
Removes 24% of surplus
Removes EUAs from auctions
2019: ~40% auction supply
Instrument to tackle oversupply
TNAC: 1.65 Gt by 2018
8Sensitivity: Confidential
Carbon price in 2019: upward move and volatility continuesFront-December EUA contract traded between €19-27/t so far in 2019
EUA price averaged €22/t in Q1 and €23.4/t y-t-d
New 11-year high of €27.85/t
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Fro
nt-
De
c E
UA
co
ntr
act
da
ily t
rad
ing
ra
ng
e,
€/t
2017 2018 2019
Daily trading ranges still above recent years,
but have narrowed compared to last autumn
9Sensitivity: Confidential
Carbon goes back to fundamentals EUA price converging to fuel switching prices, partly driven by low gas prices
Front-month TTF contract dropped 45% to below €11/MWh
Aggregated NWE gas storage
EUA price above fuel switching prices
10Sensitivity: Confidential
SRMC €/MWh
Gas
Generation TWh
Hydro/Wind/CHP
Nuclear Lignite & Hard Coal
OCGT & Oil condence
Price uplift
Load curve
Power sector emissions: Fuel switching
11Sensitivity: Confidential
SRMC €/MWh
Gas
Hydro/Wind/CHP
Nuclear Lignite & Hard Coal
OCGT & Oil condence
Price uplift
Load curve
Generation TWh
Fuel Switching
12Sensitivity: Confidential
Fuel switching a reality CO2 price of €27/t switching the merit order
Source: Refinitiv Power Curve in Eikon
German front-month merit order shows gas plants are even favored over lignite (fuel prices on 31 May, FM TTF €11/MWh)
We estimate that EU ETS power emissions are -30Mt in 2019 due to coal switching to gas generation (+60TWh)
13Sensitivity: Confidential
Source: Refinitiv Power Curve in Eikon
Fuel switching a reality
German front-year merit order shows hard coal plants are favored over gas (fuel prices on 31 May, FY TTF €18/MWh)
We estimate that EU ETS power emissions are -30Mt in 2019 due to coal switching to gas generation (+60TWh)
14Sensitivity: Confidential
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Still following gas?Fuel switching potential utilized front-mont, now holding up with front-year
15Sensitivity: Confidential
...but Brexit is still playing a part
16Sensitivity: Confidential
Brexit - All options still on the table
Flexible Brexit deadline 31 October
Deal with EU?
Hard Brexit?
New referendum?
New election?
17Sensitivity: Confidential
• UK issued EUAs suspended until a deal
with EU.
• Uncertainty if UK installation will need to
comply with EU ETS for their 2019
emissions
• Likely UK installations need to plan for
2019 emissions
• Increased demand from UK without UK
supply coming to the market
UK Supply-demand mismatch 2019UK policy making life difficult for EU ETS
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Mill
ions
of
EU
As
Spread-out (reference) Medium (Scenario 1) Concentrated (Scenario 2)
Support for EUA prices in Q2
18Sensitivity: Confidential
• UK a net contributor to building up of surplus
• Emissions continue to be lower than UK
share of the EU ETS cap
• Without the UK, overall EU ETS balance
tightenes in the order of 600 Mt
....but not all about numbers!
Option 1 & 2: Long-term effects on EU ETS balances
UK oversupply in 2021-2030 = 580 Mt
19Sensitivity: Confidential
Carbon market outlook: changes in market participants’ behavior in 2019?
2018: aggressive hedging
2019: slowing down?
Major utilities seems well on track with hedging in Q1 2019
most adjusted down expected generation for 2019 and 2020
RWE ‘financially’ hedged carbon into mid 2020s.
2018: awakening to carbon costs
2019: catching up with carbon risk management
Widely reported of ‘borrowing’ future allocation
In contrast to cumulative surplus of 600Mt
Financials
2018: re-entering carbon market and seeing carbon as an attractive assests
2019: some might have exit
positions in Q1 due to persisting Brexit limbo and capped prices
Signs of new investors?
Financials
20Sensitivity: Confidential
0
50
100
150
200
250
0
5
10
15
20
25
30
8 9 10 12 14 15 16 17 18 19 20 20 21 22 22 23 24 24 25 25 26 27 27 28 28 29 29 30 31 32 33 34 35 38 40 45 50 55 75
Cu
mu
lati
ve O
I D
ec
-19 c
all
op
tio
n (
in M
t)
Op
en
in
tere
st
of
Dec
-19 c
all
op
tio
n (
in M
t)
Strike price (euro/t)
EUA options market drives up volatility
Dec-19 call option open interest by 17 May
Strike prices with largest OI:
€25, €30, €35, €40
21Sensitivity: Confidential
Short-term market outlook
• Tightened supply with MSR in place will continue to support prices
• Annual shortage and abatement cost (Fuelswitching price) still in focus
• Publication of EU ETS oversupply number (TNAC) on 15 May
• Overall little changes to EU ETS balances in 2019
• Slightly lower emissions (50Mt) due to fuelswitching (15Mt more than we assumed previously)
• But some of EEA auction volumes are spreaded to 2020
• Movements in gas prices will be key to watch
• Brexit...
Price outlook: Q2: € 25/t 2019: €23/t 2020: €24/t
Mid-term and long-term: National and EU-wide policies
23Sensitivity: Confidential
• EU wide policy changes:
– Market Stability Reserve review
– 2050 Climate debate
– Increase climate target in light of Paris Agreement
• National climate policy measures:
– Growing momentum in coal phase-out across Europe
– German coal phase-out
Mid-term and long-term: National and EU-wide policies
24Sensitivity: Confidential
German coal phase-outPower mix without coal in 2038
25Sensitivity: Confidential
• A German shut-down of power plants will make significant reduction in power sector emissions
– 2020-2030: 250 Mt lower emissions
• Reduced demand for EUAs would have a bearish impact on prices
• Current setup of the MSR is not sufficient to counteract the
• Voluntary cancellation of EUAs would partially offset the the bearish effect
– Coal Commission recommends EUA cancellation to be fully exploited
– We estimate a maximum of 170 Mt for the closures 2020-2030 can be cancelled
How will EU ETS cope with German coal phase-out?
26Sensitivity: Confidential
10
12
14
16
18
20
22
24
26
28
30
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
EU
A p
rice
, e
uro
/t
2019-2020: Annual shortages in focus, front running of EUA hedges to weigh on prices.
2021-2027:Effects of lower MSR intake at 12%, higher prices lead to more abatement,drop in power sector emissions due to renewables.
2028-2030:Power sector emissions continue to fall, abatement costs are higher, additional abatement needed in industry sectors.
Carbon price forecast to 2030: calmer waters ahead
2019 Q2: €25/t2019: €23/t2020: €24/t
27Sensitivity: Confidential
10
12
14
16
18
20
22
24
26
28
30
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
EU
A p
rice
, e
uro
/t
What if?
MSR review?
Nuclear phase out?Electric vehicles?
Energy efficiency improvements?
Coal phase-out?
Renewables growth?
Brexit?
Brexit?
Review of climate ambition?
Thank You
30Sensitivity: Confidential
Commodities Outlook Series 2019
31Sensitivity: Confidential
Commodities Outlook Series 2019
32Sensitivity: Confidential
Commodities Outlook Series 2019
No Giveaways Here
33Sensitivity: Confidential
No Giveaways Here
Bruce AlwayManager - Metals and Mining
Refinitiv
METALSBase Metal Fundamentals sour as macro headwinds grow
June 6, 2019
36Sensitivity: Confidential
• Introduction
• Macro and the Business Cycle
• Commodity Trading Advisor (CTA) signals
• Options – where does the market think prices are going?
• Metals Poll – where do analysts think prices are going?
• China Trade
• Copper Supply Forecast
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37Sensitivity: Confidential
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38Sensitivity: Confidential
Base Metal Futures Contracts – Average Cumulative Returns
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Macro and the Business Cycle
40Sensitivity: Confidential
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Commodity Trading Advisor (CTA) signals
50Sensitivity: Confidential
CTA Signals
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Basis Friday’s LME close we are in proximity to
further CTA sell triggers.
1766 on ali, 5833/5725 on copper, 1774 for lead,
2505 for zinc.
As we highlighted over the past couple of weeks the
recent sell-off was largely driven by a reversal from
long to short position across the metals in the CTA
community.
If you want to get on the mailing list for this weekly
newsletter email [email protected]
Options
52Sensitivity: Confidential
LME Options
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53Sensitivity: Confidential
LME Options
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54Sensitivity: Confidential
LME Options – Nickel & Aluminium
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11800
12000
12200
12400
12600
12800
13000
13200
0
2000
4000
6000
8000
10000
12000
14000
16000
Feb 2019 Mar 2019 Apr 2019 May 2019
US
$ T
ON
NE
S
LO
TS
T
ON
NE
S
NICKEL
OPEN CALLS OPEN PUTS CLOSE (RHS)
1760
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
0
10000
20000
30000
40000
50000
60000
70000
Feb 2019 Mar 2019 Apr 2019 May 2019
US
$ T
ON
NE
S
LO
TS
T
ON
NE
S
ALUMINIUM
CALLS PUTS CLOSE
55Sensitivity: Confidential
LME Options – Copper & Zinc
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5600
5700
5800
5900
6000
6100
6200
6300
6400
6500
6600
0
5000
10000
15000
20000
25000
30000
35000
40000
Feb 2019 Mar 2019 Apr 2019 May 2019
US
$ T
ON
NE
S
LO
TS
T
ON
NE
S
COPPER
CALLS PUTS CLOSE
2400
2450
2500
2550
2600
2650
2700
2750
2800
2850
2900
0
5000
10000
15000
20000
25000
30000
35000
Feb 2019 Mar 2019 Apr 2019 May 2019
US
$ T
ON
NE
S
LO
TS
T
ON
NE
S
ZINC
CALLS PUTS CLOSE
56Sensitivity: Confidential
Copper Options - Front 3 Months on major exchanges
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0
5000
10000
15000
20000
25000
30000
35000
SHFE COMEX LME
LO
TS
T
ON
NE
S
COPPER - SHFE/COMEX/LME end May 2019
CALLS PUTS
Metals Poll
58Sensitivity: Confidential
Reuters Metal Poll
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Nickel Aluminium Copper Lead Tin Zinc
YTD PRICES vs 2019 POLL mean median
59Sensitivity: Confidential
Reuters Metal Poll
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Nickel Aluminium Copper Tin Lead Zinc
YoY 2020 vs 2019 POLL mean median
China Trade
61Sensitivity: Confidential
China Trade Data
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62Sensitivity: Confidential
China Trade Data – Refined Copper
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-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Tonnes
Refined Copper - Imports
2017 2018 2019
Jan-Apr Mt Change YoY
2017 1.01
2018 1.17 16%
2019 1.13 -3%
63Sensitivity: Confidential
China Trade Data – Copper Concentrates
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Jan-Apr Mt Change YoY
2017 5.67
2018 6.21 9%
2019 7.24 17%
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Tonnes
Copper Concentrate - Imports
2017 2018 2019
64Sensitivity: Confidential
China Trade Data – Copper Scrap
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Jan-Apr Mt Change YoY
2017 1.20
2018 0.74 -38%
2019 0.52 -30%
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Tonnes
Copper Scrap - Imports
2017 2018 2019
65Sensitivity: Confidential
China Trade Data – Refined Zinc
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Jan-Apr Mt Change YoY
2017 0.11
2018 0.17 64%
2019 0.22 27%
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Tonnes
Refined Zinc - Imports
2017 2018 2019
66Sensitivity: Confidential
China Trade Data – Zinc Concentrates
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Jan-Apr Mt Change YoY
2017 0.91
2018 1.06 16%
2019 0.97 -8%
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Tonnes
Zinc Concentrates - Imports
2017 2018 2019
Copper Supply Forecast
68Sensitivity: Confidential
Copper Supply
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69Sensitivity: Confidential
Copper Supply
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-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
0
5,000
10,000
15,000
20,000
25,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% c
ha
ng
e
To
nn
es (
'00
0s)
Copper Mine Output % change (RHS)
0
20
40
60
80
100
120
140
160
To
nn
es (
'00
0s)
70Sensitivity: Confidential
Incentive Price for Copper
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71Sensitivity: Confidential
Copper Projects >70Top 50 projects range from 350ktpa to 20ktpa; top 10 projects account for 45% of total new capacity
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0
500
1000
1500
2000
2500
3000
3500
4000
2019 2020 2021 2022 2023
ton
ne
s/ T
ho
usa
nd
s
Pipeline Copper Projects
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2019 2020 2021 2022 2023
Pipeline Projects by Status
Prefeasibility Feasibility Under Construction Initial Ramp-up
Thank You
73Sensitivity: Confidential
Commodities Outlook Series 2019
Alex PearceLead Analyst - Oil Research
Refinitiv
European Refined Product Trends & OutlookAlex Pearce – Lead Analyst, Oil Research
Jun 4, 2019
76Sensitivity: Confidential
European Refined Product Outlook
Agenda
Overview for Crude
Refinitiv Trade Flows
European Gasoline Outlook
– US outages create European opportunities
– West African stocks spell trouble for summer demand
European Jet Outlook
– Increasing flow from Arab Gulf & Asia
– Global slowdown could impact aviation demand
European Diesel Outlook
– Russian supplies compete with the East
– Diesel balanced in near term, but IMO 2020 looms
Refining Outlook
IMO 2020
Conclusions & Questions
77Sensitivity: Confidential
European Refined Product Outlook
Refinitiv Crude OutlookDemand outlook improved but not enough to rise prices significantly
Supply Outlook Demand Outlook
2 million bbls of OPEC supply cuts
since Nov-18
We estimate only 1 million bpd of additional demand in 2019
20
30
40
50
60
70
80
90
Jan-16 Oct-16 Jul-17 Apr-18 Jan-19 Oct-19
$/b
bl
Brent WTI
Price Forecast
Recent price rally unlikely to be sustainable 2019 avg. $69.50/bbl
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
US China Europe Japan India MiddleEast
mill
ion
bp
d
22.5
23
23.5
24
24.5
25
25.5
Source: Refinitiv Oil ResearchSource: Refinitiv Oil Research
Source: Refinitiv Oil Research
78Sensitivity: Confidential
European Refined Product Outlook
Refinitiv Trade Flows
Tracking Vessels Making Assessments
Model-based assimilation of data on vessel locations and cargoes combined with systematic analyst review of
outputs across clean, dirty, LNG, LPG and bulk tankers.
Collect Data
Vessel characteristics, historic and
current positions, fixtures, port
inspections, customs data
Create best view of current and historic tracks using AIS and algorithms, route profiling
Underway or discharged, single or
multiload, cargo and volumes,
mitigating missing data using analyst
expertise
Flow Creation Flow Updated Throughout Lifecycle Flow Discharge
79Sensitivity: Confidential
European Refined Product Outlook
Gasoline Trade FlowsEurope is a key exporter to the US and West Africa
Source: Eurostat
8.7 mmt (+28%)
10.5 mmt (+17%)
1.1 mmt (+15%)
1.2 mmt (-77%)
80Sensitivity: Confidential
European Refined Product Outlook
US Refinery Outages Opens Transatlantic ArbCapitalising on export opportunities
4.6
4.8
5
5.2
5.4
5.6
5.8
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct
-18
Nov-1
8
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
mill
ion b
pd
United States FCC Available Capacity
Source: IIR
Gasoline margins were languishing in Europe and
Asia for most of Q1 on oversupply and weaker
demand, plunging margins to 7-year lows.
Sellers were thrown a lifeline as a string of refinery
issues in the US opened the arbitrage, causing a
resurgence in prices and margins.
FCC outages (gasoline producing refinery units)
dropped sharply in April.
The issues have now largely been resolved which has
begun to curb import demand.
81Sensitivity: Confidential
European Refined Product Outlook
Europe Gasoline Margins Tied to US Inventory ChangesCapitalising on export opportunities
US Gasoline Inventory Net Change vs. NWE EBOB Crack
Source: EIA, Refinitiv
US stocks drew down sharply in the wake of the
outages, European stocks meanwhile were
burgeoning from an abundance of cheap sweet crude.
Cracks rose steadily across March and April on the
arbitrage, before slowing as inventory drawdowns
slowed.
US refiners now gearing up to produce more gasoline
following completion of turnarounds, although stocks
remain below typical seasonal levels.
Recent inventory data already shows a steep rebuild
of stocks, as domestic production and imports reverse
losses
-$4
-$2
$0
$2
$4
$6
$8
$10
$12
$14
30 N
ov 1
8
07 D
ec
18
14 D
ec
18
21 D
ec
18
28 D
ec
18
04 J
an 1
9
11 J
an 1
9
18 J
an 1
9
25 J
an 1
9
01 F
eb 1
9
08 F
eb 1
9
15 F
eb 1
9
22 F
eb 1
9
01 M
ar
19
08 M
ar
19
15 M
ar
19
22 M
ar
19
29 M
ar
19
05 A
pr
19
12 A
pr
19
19 A
pr
19
26 A
pr
19
03 M
ay 1
9
10 M
ay 1
9
-10
-8
-6
-4
-2
0
2
4
6
8
10
$/b
bl
mill
ion b
bls
US Gasoline Inventory Change NWE EBOB Crack
82Sensitivity: Confidential
Unplanned US outages push April gasoline exports
from NWE to record highs.
Physical flows correlate with EBOB-RBOB spread
when accounting for 1 month lag as traders fix arbs.
Exports slow in May and June as US capacity comes
back online forcing European sellers to look
elsewhere for supply.
Prices for gasoline have also risen in Germany and
ARA following Russian pipeline contamination, with
run cuts tightening supplies and making the arbitrage
less attractive.
European Refined Product Outlook
Northwest European Gasoline to USCapitalising on export opportunities
NWE to US Gasoline Trade Flows
Source: Refinitiv Oil Research
-10
-5
0
5
10
15
20
25
0
200
400
600
800
1000
1200
1400
1600
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct
-18
Nov-1
8
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
cts/
gal
kt
ARA Scandinavia
United Kingdom France
Others EBOB-RBOB Spread +1M
83Sensitivity: Confidential
West African demand more sporadic as purchasing
mainly price driven.
NWE gasoline cargoes routed to West Africa increase
when demand from the US tapers off and vice versa.
Fewer barrels headed to WAF from NWE during April
as rising US prices diverted supplies across Atlantic.
Flows from ARA storage make up the bulk of exports
to West Africa as spot demand and larger vessels
more frequent.
European Refined Product Outlook
West African Gasoline DemandCapitalising on export opportunities
NWE to West Africa Gasoline Trade Flows
Source: Refinitiv Oil Research
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct
-18
Nov-1
8
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
kt
ARA Scandinavia United Kingdom
France Others US Exports
84Sensitivity: Confidential
European Refined Product Outlook
West African Gasoline DemandCapitalising on export opportunities
West Africa Imports by Origin
Source: Refinitiv Oil Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct
-18
Nov-1
8
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
NWE Other
Nigeria Demand
Source: JODI
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Imports Demand Closing Stocks
85Sensitivity: Confidential
European Refined Product Outlook
European Gasoline OutlookCautious outlook for European gasoline
ARA Gasoline Inventories Gasoline Cracks
Strong draw Q1 but coming from
higher base
Resurgent cracks risk tipping summer stocks into oversupply,
IMO 2020 effect?
400
600
800
1000
1200
1400
1600
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
k m
t
Week
5Y Range 2019 2018
0
2000
4000
6000
8000
10000
12000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
2019 2018 2017
Cumulative US Gasoline Imports
US gasoline imports have been below seasonal average so far
Source: Insights Global
Source: Refinitiv Oil Research
Source: EIA
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18Gasoline Crack NWE Curve
Gasoline Crack Sing Curve
Gasoline Crack US Curve
86Sensitivity: Confidential
European Refined Product Outlook
Jet Trade FlowsEurope is a major importer of jet from the East
Source: Eurostat
14.6 mmt (+18%)
2.7 mmt (+37%)
811 kt (-73%)
87Sensitivity: Confidential
Europe a key destination for jet produced in the Arab
Gulf, India and North Asia and is steadily increasing.
Typically Asia draws in jet for kerosene heating
demand during winter months, while air travel
demand in Europe pulls more barrels West.
Diesel margins have outperformed jet which has kept
focus on refiners to maximise road fuel production,
tightening prompt supplies.
More spot vessels heading around the Cape instead
of Suez due to market in contango.
China also exporting more jet to Europe on increased
export quotas.European Refined Product Outlook
Jet Arbitrage From East of SuezSwing supply from East increasing
AG/Asia to NWE Jet Trade Flows
Source: Refinitiv Oil Research
600
800
1000
1200
1400
1600
1800
kt
East of Suez Jet To NWE
88Sensitivity: Confidential
However, demand outlook for jet fuel growth this year
wavering in the face of global economic slowdown.
March revenue per passenger kilometer (RPK) rose
just 3.1% year-on-year, the slowest growth of any
month in the last nine years (IATA).
Europe second largest market (26.7%) after Asia-
Pacific (34.4%) in terms of passenger airline revenue,
but concerns over GDP growth, Brexit weighing on
growth.
High profile airline closures also reflective of capacity
versus demand, which may impact jet fuel demand for
rest of year.
European Refined Product Outlook
Air Travel Demand Growth SlowingGlobal economic slowdown dragging on jet demand
Air Travel Demand Growth by Region
Source: IATA
0%
2%
4%
6%
8%
10%
12%
2013 2014 2015 2016 2017 2018 2019F
RPK %
Y-O
-Y
Global North America Europe Asia-Pacific
89Sensitivity: Confidential
European Refined Product Outlook
European Jet OutlookBearish outlook for European jet
ARA Jet Kero Inventories Jet Cracks
Open arb resulting in counter
seasonal stock building
Supplies keep pressure on front of cracks curve (contango)
200
300
400
500
600
700
800
900
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
k m
t
Week
5Y Range 2019 2018
Total East Exports
Flows from AG/Asia declining despite summer approaching
$12
$13
$14
$15
$16
$17
$18
$19
$20Jet Crack NWE Curve Jet Crack Sing Curve
0
1
2
3
4
5
6
Jan Feb Mar Apr May Jun Jul
mill
ion
to
ns
2018 2019
Source: Insights Global
90Sensitivity: Confidential
European Refined Product Outlook
Diesel Trade FlowsEurope is a major importer of diesel from Russia, East and US
Source: IIRSource: Eurostat
22.3 mmt (-3%)
5.4 mmt (-30%)
11.4 mmt (+31%)
1.1 mmt (-42%)
91Sensitivity: Confidential
Russian dominance to supply majority of diesel to
NWE is under threat from increasing capacity in Arab
Gulf/Asia.
Flows tracking indicates that imports East of Suez
exceeded Russian arrivals during April and May.
Maintenance and Russian pipeline issues has opened
up opportunity to supply more diesel from the East as
softer demand in Asia keeps focus on Europe.
US flow has remained weak on poor arbitrage
economics but increased gasoline output could push
more barrels across Atlantic over summer.
European Refined Product Outlook
Diesel Supply CompetitionCompetition intensifies as Russian output dips
Russia/East Diesel Flows to NWE
Source: Refinitiv Oil Research
0
200
400
600
800
1000
1200
1400
1600
1800
kt
Arab Gulf India Russia
92Sensitivity: Confidential
European Refined Product Outlook
European Diesel OutlookBalanced outlook for diesel
ARA Diesel/Gasoil Inventories Diesel Cracks
Stocks fairly balanced in ARA as
tepid demand meets steady inflows
Cracks under pressure although effect of IMO2020 clearly priced in
1000
1500
2000
2500
3000
3500
4000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
k m
t
Week
5Y Range 2019 2018
$13
$14
$15
$16
$17
$18
$19
$20
$/b
bl
NWE Diesel Crk MED Diesel Crk
ARA Diesel Crk
Arbitrage
-$13
-$12
-$11
-$10
-$9
-$8
-$7
-$6
$/t
on
Diesel EW Spr
Arb Closing
Arb Opening
East Arb more workable towards year end, slumps in 2020
Source: Refinitiv Oil ResearchSource: Refinitiv Oil Research
Source: Insights Global
93Sensitivity: Confidential
Refining OutlookEuropean margins are enjoying support, Asia weak
NWE Margins US PADD3 MarginsSingapore Margins
NWE Slate margins back to 2018 levels supported by healthy gasoline, distillate margins
Asia margins are pressured by glut of light distillate
production from Chinese teapot refineries
-2
0
2
4
6
8
10
12
14
16
18
20
22
1 221
2019 2018 2017
0
2
4
6
8
10
12
14
16
18
20
22
1 221
2019 2018 2017
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
2
4
6
8
10
12
14
16
18
20
22
1 221
2019 2018 2017
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
US margins pressured by higher heavy oil prices for
coking
Source: Refinitiv Oil Research Source: Refinitiv Oil ResearchSource: Refinitiv Oil Research
94Sensitivity: Confidential
European Refined Product Outlook
IMO2020To Scrub Or Not To Scrub?
HSFO vs 0.5% Scrubber Payback
$280
$285
$290
$295
$300
$305
$310
$315
$/t
on
$460$465$470$475$480$485$490$495$500$505
$/t
on
$155$160$165$170$175$180$185$190$195$200$205
$/t
on
HSFO
0.5%
Spread
$/ton Spread
Co
ns
um
pti
on
0
1
2
3
4
5
6
Year
s
40 tons/day 80 tons/day
($3.5m Scrubber)
• International Maritime
Organization (IMO) have
agreed on a sulfur cap for
vessels that reduce
permissible sulfur burned by
ships from 3.5% to 0.5%
from Jan 1, 2020.
• Options are to install a
“scrubber” to clean high
sulfur fuel oil (HSFO) or burn
more expensive 0.5%
distillate marine fuel.
• Extra demand for 0.5%
impacting price of refined
products and light low sulfur
crudes.
Source: Refinitiv Oil Research
95Sensitivity: Confidential
• OPEC cuts and sanctions on Iran and Venezuela have been effective at cutting supply despite rising
US output, however this is against a background of reducing global demand.
• Gasoline outlook for European refiners favorable in near term but more challenging over the
summer, with recent rally in cracks losing steam and increased risks of tipping back into stock builds
if US and WAF demand doesn’t pick up soon.
• Jet arbitrage has been open for some time resulting in a bearish outlook for the summer, global
demand for jet fuel also looking uncertain.
• Diesel more balanced with steady imports from the East offsetting losses from maintenance,
however tepid demand could threaten fundamentals if US exports pick up and/or Asian demand
weakens.
European Refined Product Outlook
Conclusions
Thank You
97Sensitivity: Confidential
Commodities Outlook Series 2019
Thank You