forecast to $90 - fuller treacy money · forecast to $90 middle distillate demand is growing...
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MORGAN STANLEY & CO. INTERNATIONAL PLC+
Martijn Rats, CFAEQUITY ANALYST
+44 20 7425-6618
Amy Sergeant, CFARESEARCH ASSOCIATE
+44 20 7677-6937
Martijn Rats is head of the European Oil & GasResearch team and lead analyst on key stocksincluding Royal Dutch Shell, BP, Total and Eni. He isalso the strategist for Morgan Stanley Research’s oilprice forecasts.
Crude OilCrude Oil
The Coming Scramble for MiddleDistillates – Raising Oil PriceForecast to $90Middle distillate demand is growing strongly and inventoriesare approaching 5-year lows. On top, the new IMO regulationsshould add another ~1.5 mb/d to demand by 2020. We foreseea scramble for middle distillates that will drive crack spreadshigher and drag oil prices with it.
Middle distillate inventories are approaching 5-year lows as demand grows
strongly: Since 2011, middle distillate demand – i.e. diesel and jet fuel – has
grown at a trend rate of ~0.6 mb/d y/y, accelerating to ~0.8 mb/d y/y in recent
quarters. The global refining system, however, is struggling to keep up with this.
Inventories have been falling and are close to 5-year lows already.
IMO regulations to boost demand by another ~1.5 mb/d by 2020: In response to
the IMO's upcoming regulation, we see most shipping companies switching to
lower sulphur fuels – see Countdown to IMO 2020, also published today. This
should move ~1.5 mb/d of fuel oil demand into the middle distillate pool.
Oil supply growth is dominated by NGLs and condensate, from which refiners
cannot make middle distillates: Global oil supply increased 0.4 mb/d in both
2016 and 2017, according to the IEA. However, NGLs and condensate accounted
for 0.5 mb/d of this, and these liquids do not yield any middle distillates. Instead,
middle distillates require crude oil, in a ratio of 1.8 barrels of crude for every 1
barrel of middle distillate. Production of crude oil, however, already declined in
2016, and again in 2017.
On current demand trends, crude oil supply would need to increase 5.7 mb/d by
2020 – it is unlikely this can be delivered: Three years of trend growth would
add 1.7 mb/d to global middle distillate demand over 2017-20. Another 1.5 mb/d
from new IMO regulations would bring total demand growth to 3.2 mb/d. To
produce this, refiners would likely need to process an incremental 3.2 * 1.8 = 5.7
mb/d of crude oil by 2020. We see global crude production re-accelerating again,
but falling well short of this level. Since 1984, crude oil production growth over a
3-year period has reached this level only once.
Prices will need to move to invalidate this scenario – gasoil to $850/tonne and
Brent to $90 by 2020e: We argue that middle distillate prices will need to rise
to a level where demand slows. We suspect this will be the case when gasoil
reaches ~$850/tonne, around 25-30% above today's level. We estimate this will
drive Brent higher to ~$90/bbl. The historical analog for this is 2H07/1H08, when
tightness in middle distillates also dragged crude prices higher.
Exhibit 1: We raise our Brent price forecast to $90/bblby 2020
$/bbl Old New Old New Old New2Q18 72.5 75.0 5.0 6.5 67.5 68.53Q18 75.0 77.5 5.0 6.5 70.0 71.04Q18 72.5 77.5 5.0 6.5 67.5 71.01Q19 65.0 80.0 3.0 7.0 62.0 73.02Q19 65.0 80.0 3.0 7.0 62.0 73.03Q19 65.0 82.5 3.0 7.0 62.0 75.54Q19 65.0 85.0 3.0 7.0 62.0 78.01Q20 65.0 90.0 3.0 7.0 62.0 83.02Q20 65.0 90.0 3.0 7.0 62.0 83.03Q20 65.0 90.0 3.0 7.0 62.0 83.04Q20 65.0 90.0 3.0 7.0 62.0 83.0LT 65.0 70.0 3.0 7.0 62.0 63.0
Brent Spread WTI
Source: Morgan Stanley Research
Exhibit 2: Middle distillate inventories in countries thatreport on a weekly basis are already at the bottom oftheir 5Y range
120
140
160
180
200
220
240
1 5 9 13 17 21 25 29 33 37 41 45 49
Inventories - Distillate (mln bbl)
5-yr range 5-yr average 2017 2018
Source: EIA, PJK, IE, PAJ
Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisreport.+= Analysts employed by non-U.S. affiliates are not registered withFINRA, may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company, public appearances and trading securities held bya research analyst account.
1
May 15, 2018 09:00 PM GMT
Global Oils Team
MORGAN STANLEY & CO. INTERNATIONAL PLC+
Martijn Rats, CFA Equity Analyst +4420 7425-6618 [email protected]
Amy Sergeant, CFA Research Associate +4420 7677-6937 [email protected]
Robert Pulleyn Equity Analyst +4420 7425-4388 [email protected]
Igor Kuzmin Equity Analyst +4420 7425-8371 [email protected]
Sasikanth Chilukuru, CFA Equity Analyst +4420 7425-3016 [email protected]
MORGAN STANLEY & CO. LLC
Drew Venker, CFA Equity Analyst +1212 761-3729 [email protected]
Benny Wong Equity Analyst +1212 761-9626 [email protected]
MORGAN STANLEY ASIA (SINGAPORE) PTE.+
Mayank Maheshwari Equity Analyst +656834-6719 [email protected]
MORGAN STANLEY ASIA LIMITED+
Andy Meng, CFA Equity Analyst +8522239-7689 [email protected]
MORGAN STANLEY C.T.V.M. S.A.+
Bruno Montanari Equity Analyst +5511 3048-6225 [email protected]
MORGAN STANLEY AUSTRALIA LIMITED+
Adam Martin Equity Analyst +613 9256-8904 [email protected]
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE
restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
2
The Coming Scramble for Middle Distillates
Oil supply/demand balances: A case of ‘too much aggregation’
Most oil supply/demand balances add a range of products on the demand side –
naphtha, gasoline, diesel, fuel oil, etc – and several liquids on the supply side too, such
as crude oil, condensate, NGLs, biofuels, etc. The implicit assumption is that refiners can
make the products the world needs from the oil that is available. In reality, however,
this is not always the case.
Over the next few years, we expect tightness in one particular product – middle
distillate – to lead to strength in one particular liquid, crude oil, and especially those
crudes that look like Brent.
Aggregate supply/demand balances do not necessarily suggest this. However, we think
this effect is strong enough to drive Brent to $85 by end 2019 and $90/bbl by 2020.
The middle distillate market is already tight – demand is growing 0.6 mb/dper year and inventories are falling
Middle distillates is a group that consists of broadly three products: jet fuel/kerosene,
gasoil/diesel and heating oil. Collectively, they power trucks, planes, trains, cranes,
bulldozers, ships, heavy machinery, etc. They are the fuel of Emerging Market industrial
growth and international trade.
With a healthy economic backdrop, and trade growing at a robust pace, middle distillate
demand has already been growing strongly. Trend growth since 2012 has been ~575
kb/d per year, and this has accelerated recently, running at +800 kb/d year over year in
recent quarters.
Global refiners are already struggling to keep up with this demand. At the end of
February, visible inventories – i.e. those in OECD countries, reported via the IEA, and 40
non-OECD countries, reported via JODI – stood at 22.4 days of demand, down 11% y/y
and 5% below the five-year average.
More timely weekly data is available for the US, the Antwerp-Rotterdam-Amsterdam
(ARA) region, Japan and Singapore only. However, their data suggest that the trend has
continued: middle distillate inventories have fallen another 17% since the end of
February, in aggregate. In all four regions, stocks are well below their five-year averages,
and collectively, they are already close to the bottom end of the historical range. For
comparison, gasoline stocks globally are still well above historical norms.
Morgan Stanley’s economics team sees steady economic growth and expansion of
international trade continuing. Against that backdrop, we start our analysis with the
assumption that underlying middle distillate demand will also continue to grow at the
trend rate of ~575 kb/d per year.
Exhibit 3: Oil price forecasts – old vs. new
$/bbl Old New Old New2Q18 72.5 75.0 67.5 68.53Q18 75.0 77.5 70.0 71.04Q18 72.5 77.5 67.5 71.01Q19 65.0 80.0 62.0 73.02Q19 65.0 80.0 62.0 73.03Q19 65.0 82.5 62.0 75.54Q19 65.0 85.0 62.0 78.01Q20 65.0 90.0 62.0 83.02Q20 65.0 90.0 62.0 83.03Q20 65.0 90.0 62.0 83.04Q20 65.0 90.0 62.0 83.0LT 65.0 70.0 62.0 63.0
Brent WTI
Source: Morgan Stanley Research
3
What's new in this report?
This report is the culmination of three analyses: first, rather than looking at the oil
market through the perspective of a traditional supply/demand balance, we
approach it the way a refiner would. We ask the question, can refiners make the
products we need from the oil that is available? This throws up some unexpected
answers. Second, we incorporate our detailed analysis of the upcoming IMO
regulations – see also Countdown to IMO: Not Plain Sailing. This suggests a major
dislocation in the product market with demand shifting from one category to
another. This does not show up in a traditional, high-level balance, but
nonetheless has major implications for refiners, and hence crude demand. Finally,
we use the conclusions from Hidden Tensions in the Oil Market, in which we argue
that new oil supply is increasingly light and comes with lower middle distillate
yields. By combining these three factors, we arrive at the conclusion that the
market for crude – especially those grades with the characteristics of Brent – will
remain tight.
On the back of this, we publish three other reports assessing the equity
implications: Oil & Gas: Impact of $90 Brent on the Majors; All Cylinders Firing;
'Dreamland' Beckons For Oil Services; Time to Increase E&P Exposure.
Exhibit 4: Trend growth in middle distillatedemand is a healthy 575 kb/d per year...
31
32
33
34
35
36
37
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Thou
sand
s
Global middle distillate consumption (mb/d)
~575 kb/d per year
Source: IEA, Morgan Stanley Research
Exhibit 5: ...and after a pause in 2016, demandhas re-accelerated to ~800 kb/d y/y recently
-400
-200
-
200
400
600
800
1,000
1,200
3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q17
YoY Middle Distillate Demand Growth (kb/d)
Source: EIA, PJK International, IE Singapore, PAJ, Genscape, MorganStanley Research
Exhibit 6: Monthly data show global middledistillate inventories already tight...
20
21
22
23
24
25
26
27
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Middle Distillate Stocks in Days of Next 12 M Demand
Range 13-17 2017 2018 Avg
Note: charts shows monthly data for all OECD countries as well asanother 40 non-OECD countriesSource: IEA, EIA, JODI, Xinhua news agency, Thomson ReutersDatastream, Morgan Stanley Research
Exhibit 7: ...and more timely weekly datasuggest this continued in March/April
120
140
160
180
200
220
240
1 5 9 13 17 21 25 29 33 37 41 45 49
Inventories - Distillate (mln bbl)
5-yr range 5-yr average 2017 2018
Note: chart shows weekly data for US, ARA region, Japan and SingaporeSource: EIA, PJK International, IE Singapore, PAJ, Genscape, MorganStanley Research
4
On top, new regulations from IMO should add 1.5 mb/d to middle distillatedemand by 2020
Actual middle distillate demand, however, looks set to accelerate significantly from the
trend rate of the last several years. At the start of 2020, new regulations from the
International Maritime Organisation will come into effect that should add another 1.5
mb/d to middle distillate demand that year.
Through its new regulations, the IMO is trying to address the significant amount of
sulphur that the global shipping industry emits. Ships account for just ~5% of global oil
demand but ~40% of oil-based sulphur emissions. One large cruise liner emits as much
sulphur as 380 million cars.
The source of all this sulphur is High Sulphur Fuel Oil (HSFO) – the proverbial 'bottom
of the barrel', which accounts for ~70% of bunker fuel used by ships and contains
roughly 3.5% sulphur. From the start of 2020, ships can only use HSFO if they have
installed an Exhaust Gas Cleaning System (EGCS, or ‘scrubber’). Ships without scrubbers
will either need to use LNG or fuel with less than 0.5% sulphur.
In a separate report Countdown to IMO 2020, which we also publish today, we analyse
each of the options available to shippers. In short, we see limited conversion to LNG, and
take-up of scrubbers has also been relatively modest. With time running out – just 19
months remain – this is unlikely to change. Instead, we find that the vast majority of
shipping companies are simply planning to use compliant fuels. This can either be Marine
Gasoil (MGO), which contains 0.1% sulphur, or a 0.5% Very Low Sulphur Fuel Oil
(VLSFO), which will likely be a blend of MGO and 1% sulphur fuel oil.
MGO, however, is a middle distillate – it is close to the diesel that goes into cars or
trucks. In Countdown to IMO 2020, we estimate that the IMO’s new regulation will
destroy 2.7 mb/d of HSFO demand but at the same time create – conservatively –
around 1.5 mb/d of extra middle distillate demand, both for direct use and blending.
If underlying middle distillate demand continues at ~0.58 mb/d over the next three
years, and this is compounded by another 1.5 mb/d with the IMO regulation, total middle
distillate demand would rise by 0.58 x 3 + 1.5 = 3.2 mb/d between 2017 and 2020.
Exhibit 8: According to various consultants, IMO will create an incremental ~1.5 mb/d of MGOdemand - a middle distillate. This is 0.7 mb/d of outright demand and 0.8 mb/d for blending withLSFO.
(mln bpd) CE Delft IEA IHS
WoodMacBase Case (70%
Compliance)WoodMac
Full Compliance Average2016
Bunker Demand 5.5 3.8 5.0 5.0 5.0 4.9of which Fuel Oil 4.0 3.1 4.0 3.7 3.5 3.7of which VLSFO/MGO blend (0.5% sulphur) 0.0 0.0 0.0 0.0 0.0of which MGO (0.1% Sulphur) 1.3 0.8 1.0 1.3 1.5 1.2of which LNG 0.2 - - - 0.2
20202020 Bunker Demand 6.0 4.0 5.0 5.3 5.3 5.1of which High Sulphur Fuel Oil 0.6 1.3 1.0 1.7 0.3 1.0
HSFO >0.5% (scrubbed) 0.6 0.4 0.3 0.3 0.4Non-compliance 0.0 0.6 1.4 0.0 0.5
of which VLSFO/MGO blend (0.5% sulphur) 4.3 1.0 3.0 1.2 1.2 2.1of which MGO (0.1% Sulphur) 0.8 1.7 1.0 2.4 3.7 1.9of which LNG 0.3 0.05 0.1 0.1 0.1
Impact in 2020Change in HSFO demand -3.4 -1.8 -3.0 -2.0 -3.2 -2.7Change in VLSFO/MGO blend demand 4.3 1.0 3.0 1.2 1.2 2.1Change in MGO 0.1% demand -0.5 0.9 0.0 1.1 2.2 0.7
No. of scrubbers by 2020 3800 3000 2000 914 914 2126
Large shift
Source: CE Delft, IEA, IHS, Wood Mackenzie, Morgan Stanley Research
5
Most 'oil' supply growth in recent years has been NGLs and condensates,which yield little middle distillate
There is a mismatch however between growth in middle distillate demand and the type
of production that is growing on the supply side.
According to the IEA, total oil liquids production increased 0.4 mb/d in both 2016 and
2017. However, 90% of this – or 0.36 mb/d per year across 2016 and 2017 – came from
Natural Gas Liquids, and condensates accounted for another 0.14 mb/d.
NGLs and condensates are molecules that consist of short strings of carbon atoms –
typically just 2-6 carbon atoms per molecule. Middle distillate molecules are typically
much longer, i.e. 10-15 carbon atoms per molecule. Refiners can obtain middle distillate
molecules broadly in two ways: 1) distill them from crude oil, or 2) using cokers and
crackers, break even larger hydrocarbon molecules from the heavier part of the barrel
down until they have the right length. What they can’t do however – or at least not on a
large scale – is stick smaller molecules together into larger ones.
This means that the molecules in NGLs and condensate are simply too short to make
middle distillates. They count as ‘supply growth’ in IEA statistics, and compete with
crude oil in gasoline and in the petrochemical industry, but they do not help satisfy the
world’s need for middle distillate.
Instead, middle distillates require crude oil – to make an extra barrel ofdistillate, refiners need 1.8 barrels of extra crude
Although some middle distillate can be obtained from biodiesel and Shell’s Pearl GTL
facility in Qatar, the vast amount of the world’s middle distillate requirement is
produced from crude oil.
In 2017, refiners extracted ~36 mb/d of middle distillate from ~83 mb/d of crude oil – i.e.
1 barrel of middle distillate for every 2.3 barrels of crude, or a ‘middle distillate yield on
crude’ of 43%.
At the margin however, the global refining system is already performing better. New
refineries that have come on-stream in recent years have been optimised for middle
distillate production. The result of this is quantified in Exhibit 11, which plots global
crude oil processed by refineries against their total middle distillate output. In recent
years, refiners needed just 1.8 extra barrels of crude to produce 1 incremental barrel of
Exhibit 9: All supply growth in 2016/17 camefrom NGLs and condensate which yield nomiddle distillate; crude oil supply declined...
Source: IEA, Morgan Stanley Research
Exhibit 10: ...and now crude oil itself is gettinglighter; above API 40, middle distillate yieldtypically falls off
0
10
20
30
40
50
60
70
0 10 20 30 40 50 60 70 80API gravity
Indicative middle distillate yield (%)
US shale growth
Source: Company crude assay data collected by Morgan StanleyResearch
6
middle distillate – a marginal yield of 56%.
Altogether, this should create incremental crude demand of ~5.7 mb/d overthe next three years
With strong demand for middle distillates, refiners will probably try to maximize output
– and hence increase their middle distillate yield. Although individual refiners probably
have the capacity to change this by several points, we do not see the incremental yield
of the entire system improving much beyond 0.56, for three reasons:
First, margins – or ‘crack spreads’ – have already given an incentive to optimise for
middle distillate for some time. For example, the Ultra-Low Sulphur Diesel crack (ULSD)
in Europe is currently $12.6/bbl compared to just $9.6/bbl for gasoline. This difference
has existed for some time now and this is the case in the US and Asia too. Many refiners
have already had an incentive to optimise for middle distillate for some time.
Second, new crude production is super-light. In our recent note, Hidden Tension
Building in the Oil Market, we pointed out that all incremental production growth in the
US – the fastest source of production growth globally – is from crude with API gravity
above 40 degrees. In fact, the fastest growing category is 45-50 degrees API. On top, the
seaborne oil market is also only growing in crude with API 40+. Those grades are rich in
naphtha and gasoline blending components, but have somewhat lower middle distillate
yield. For refiners to increase their middle distillate yield whilst the global crude slate is
moving towards super-light crudes will be difficult, we expect.
Third, incremental refining capacity is less complex. To make enough middle distillate,
we expect that the global refining system will need to run at high levels of utilisation.
Complex refineries with high middle distillate yields are already profitable and are
running, on the whole, full out already. Incremental capacity exists in less profitable,
simpler refineries. We suspect that more of those will need to run too, but typically,
their middle distillate yield is lower.
Exhibit 11: In recent years, refiners have extracted an incremental 0.56 barrels of middle distillatefor every 1 barrel of extra crude they processed
32.0
32.5
33.0
33.5
34.0
34.5
35.0
35.5
36.0
75 76 77 78 79 80 81 82Crude input to refineries (mb/d)
Middle distillate output (mb/d)
0.56
Source: IEA, Morgan Stanley Research
7
If the marginal middle distillate yield stays around 0.56, and demand for middle
distillate indeed grows by 3.3 mb/d over 2017-17, refiners would need to increase crude
oil intake by 3.2 / 0.56 = 5.7 mb/d over the next three years.
Historically, growing production at this rate has rarely been achieved
This would be a very large amount, and we suspect that production of crude oil would
struggle to keep up with this.
Exhibit 12 shows global production growth of crude oil over any three-year period since
1984. On only one occasion has growth exceeded 5.7 mb/d over three years. The 30-year
average is 2.7 mb/d, it peaked in recent years at 4.5 mb/d during 2012-15, and over the
last two years, crude oil production has actually declined by (0.3) mb/d.
We expect that production of crude oil will re-accelerate again over the next few years
but struggle to reach the required 5.7 mb/d. On our estimates, US crude oil production
growth reaches 2.8 mb/d over the next three years, and Brazil and Canada add a further
1.6 mb/d during 2017-20. However, declines elsewhere reach 815 kb/d, led by China,
Mexico, Colombia and Indonesia. OPEC output rises by a small 0.2 mb/d, on our
estimates, assuming that the declines in Venezuela moderate.
However, after the collapse in investment since 2014, we do not see crude production
growth reaching 5.7 mb/d over the three years 2017-20. On our estimates, it continues to
be stuck at 3.5 mb/d – already high by historical standards, especially after such a large
decline in upstream capex.
Oil prices and refining margins would need to increase simultaneously –Brent to $90/bbl
So how is this likely to play out? In our view, the key to future oil prices does not lie in
broad supply/demand balances – at least not at the moment. Instead, it lies in refining
economics.
At the moment, a relatively complex refinery in Northwest Europe generates a gross
margin per barrel of ~$6/bbl. It makes $9-10/bbl on gasoline and $10-15/bbl on middle
distillates, but loses money on naphtha and fuel oil. The left part of Exhibit 17 breaks
this margin down more precisely, and weighs the individual product cracks according to
their share of the output, yielding the overall margin of ~$6/bbl.
Exhibit 12: Global crude and condensatesupply growth has rarely exceeded 4 mb/dover any three-year period
-2-1-123456789
1987 1992 1997 2002 2007 2012 2017
Thou
sand
s
Crude and condensate production - 3-year growth (mb/d)
5.7 mb/d
Source: IEA
Exhibit 13: Observable refinery runs continueto grow strongly...
4546474849505152535455
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec5Y Range 2017 2018 5Y Avg
Refinery Runs - US, Europe, Japan, China, India, S.Korea, Brazil, Taiwan (mb/d)
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
Source: IEA, Morgan Stanley Research
Exhibit 14: ...and at least in the OECD, refineryutilisation is already high
92.0%
82%
84%
86%
88%
90%
92%
94%
96%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
OECD refinery utilisation, after outages (%)
Source: IEA, Morgan Stanley Research
8
We think this will likely change as follows:
First, HSFO prices will need to fall drastically. Given the decline in demand from the
shipping industry, we expect that HSFO will need to compete against coal and LNG in
power generation. As discussed in more detail in Countdown to IMO 2020, we peg the
2020 price of HSFO broadly in between the thermal equivalent level of these other two
fuels, which suggests a price of ~$185/tonne, down from ~$380/tonne currently.
Second, middle distillate prices will need to rise substantially. We suspect that the
global refining system will struggle to make sufficient amounts of middle distillate. This
implies that prices will need to rise to a level where some demand destruction will need
to take place. During 2011-14, gasoil prices struggled to break $950/tonne – see Exhibit
15. In real terms, this would be around $1,050/tonne in 2018 in today's US$. However,
the US dollar has also strengthened ~20-25% since then. Adjusted for this, we suspect
that gasoil demand would start to falter if prices exceeded $850/tonne in today’s
economy. Gasoil will likely trade up around this level by 2020, in our view, with jet and
ULSD at small premia to that.
Third, we estimate a future price of LSFO at ~$500/tonne. This would yield a price of
$700/tonne in a 44/56 mixture with MGO at $850/tonne, only slightly higher than
where HSFO was in 2011-14, which was then the main bunker fuel.
Fourth, the overall refining margin will need to stay high to incentivise 'max runs': The
global refining system is already running at a high level of utilisation. However, to
maximise middle distillate output, we expect that this will eventually need to go higher.
To incentivise max runs, the overall refining margin would need to rise. The Northwest
European complex refining margin we show in Exhibit 17 has historically fluctuated
between $3/bbl at the bottom and $14/bbl at the top. We estimate it will need to be
~$10/bbl by 2020.
Then, we make two other smaller assumptions, i.e. that the naphtha cracks spread will
be ~$(4)/bbl in 2020, and the gasoline crack spread will be ~$10/bbl – both broadly in
line with historical averages, and not too far from current levels.
Implication: Brent trades up to $90/bbl. For all of the above to be true at the same
time, we argue Brent would need to rally to $90/bbl. We expect that refiners will – and
can afford to – bid it up to this level. A lower price would either lead to unusually high
refining margins, or middle distillate prices that are not high enough to slow down
Exhibit 15: In today's USD$, and adjusted forthe strength of the USD, gasoil struggled tobreach $850/tonne in 2011-14
0
200
400
600
800
1,000
1,200
1,400
Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17
Gasoil 0.1% sulphur ARA FOB barges ($/tonne)
Nominal price FX and inflation adjusted
Note: red dotted line shows assumption for 2020Source: Platts, Bloomberg, Morgan Stanley Research
Exhibit 16: The previous occasion of severemiddle distillate tightness was in 2007/08when it drove Brent to $140/bbl
20
40
60
80
100
120
140
160
05
101520253035404550
Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10
Brent oil price vs Diesel crack spread ($/bbl) - 2005-10
ULSD crack spread Brent oil price (RHS)
Source: Platts, Morgan Stanley Research
9
demand. A higher price would likely kill off refining margins, which would lead the
refining system to run lower throughput and hence produce an insufficient amount of
middle distillates.
A price of $90/bbl would be well above long-run marginal cost – we do not think the oil
market needs this price to balance supply and demand in the very long run. However,
the strength in demand for middle distillates specifically, combined with the dislocation
introduced by the IMO and the global crude slate rapidly getting lighter, should produce
this result over the next few years, we believe.
Also, it is worth noting that the last period of severe middle distillate tightness occurred
in late 2007/early 2008 and arguably was the critical factor that drove up Brent prices
in that period – see Exhibit 16.
Inevitably, high oil prices would lead to a supply response, including from US shale.
However, given the requirement for crude oil to grow +5.7 mb/d over the next three
years, compared to our production forecast of +3.5 mb/d – already an acceleration from
(0.2) mb/d over last two years – we expect the crude oil market to remain
undersupplied and inventories to continue to draw. This will likely underpin prices, we
believe.
Where could we be wrong? Risks to our view
Oil prices have historically been erratic and volatile, and our forecast is also subject to
several significant uncertainties. We highlight four in particular:
First, the marginal middle distillate yield. In our view, this is one of the most important
yet least discussed numbers in the global oil market. If our estimate of a stable 0.56 is
incorrect, our estimate for crude oil demand would likely be different too.
Second, economic growth. We assume that middle distillate demand will continue to
grow at its recent trend rate largely because our colleagues in our economics team
forecast the same for global economic growth. However, the current phase of expansion
is already unusually long. A recession would likely mean that we are overstating middle
distillate demand growth.
Exhibit 17: We think fuel oil cracks need to fall, middle distillate cracks need to rise and overallmargins need to go higher; in this scenario, we expect refiners will – and can afford to – bid upBrent-like crudes to ~$90/bbl
Weight Price Price Crack Weight Price Price Crack
Unit % $/tonne $/bbl $/bbl % $/tonne $/bbl $/bbl
Brent -100% 73.6 -100% - 90.0 -
Naphtha 6% 630 70.8 2.7- 6% 765 86.0 4.0-
Gasoline 26% 693 83.2 9.6 26% 833 100.0 10.0
Jet 10% 697 88.4 14.8 10% 921 116.7 26.7
ULSD 36% 641 86.0 12.4 36% 865 116.0 26.0
Gasoil 9% 626 83.9 10.4 9% 850 113.9 23.9
LSFO 0% 399 62.8 10.8- 5% 500 78.7 11.3-
HSFO 10% 383 60.3 13.2- 5% 185 29.1 60.9-
Refining margin 5.7 10.2
Current Future
Note: italic = forecast numberSource: Platts, Morgan Stanley Research estimates ('Future')
10
Third, the IMO may delay the implementation of its regulation. This appeared quite
likely two years ago. However, after several reiterations by the IMO, the likelihood of
this now seems very low. Still, it is possible that even our $90/bbl understates the
effect that the IMO’s regulation will have on oil prices – for a period, it could go
meaningfully higher. In that case, the IMO could delay, or slow down, the
implementation, which would have implications for middle distillate demand.
Finally, OPEC policy. Many OPEC countries produce crudes that are rich in middle
distillates. If higher prices lead to a rapid acceleration in OPEC production – something
we currently do not expect – our price forecast could also be at risk.
The Bull Case
There are several risks that could drive oil prices higher than this:
First, prices may incorporate a further premium for geopolitical risk: Our forecasts do
not reflect any premium for this. However, as discussed in The Return of the
Geopolitical Risk Premium (Oct 23, 2017), lower stocks and continued tightness in the
supply/demand balance increase price sensitivity to this, and there are several 'hot spots'
on the horizon.
Second, shale production growth may underwhelm: With US shale production now
facing a number of constraints, including infrastructure bottlenecks in the Permian,
inflationary pressures and labour market tightness, as well as a growing mismatch
between what US shale companies produce and what US refiners process (see Hidden
Tension Building in the Oil Market), production growth may underwhelm.
Third, flows into oil could be even higher: With all the main crude curves shifting into
backwardation, this offers a strong buy signal, while the positive roll yield helps to
enhance returns (see The Power of Backwardation).
The Bear Case
Similarly, there are several risks to the downside too:
First, we may have overestimated OPEC's resolve given the recent rally: With Brent
prices now > $75/bbl, perhaps compliance with the agreement will start to slip.
Second, higher oil prices hurt refinery margins and demand: Oil demand surprised
positively in the last 2-3 years as prices were relatively low and economic growth was
robust. However, at some level, higher oil prices could start to weigh on demand. We
think our price forecasts and demand estimates are internally consistent, but it is
possible that we underestimate the sensitivity. If demand starts to soften, our price
expectations may be too high.
Third, we may be misreading US shale: US shale has mostly surprised on the upside in
the last several years. We were seeing signs of decelerating growth last year but the
latest data from the EIA indicates strong growth again. It is possible that technological
progress will once again outweigh operational obstacles.
11
Balance Overview
Exhibit 18: Global Balance Summary (mmb/d)
2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 2017 2018 2019 2020
Demand 96.1 96.5 97.9 98.3 98.4 97.8 98.4 99.3 100.3 100.3 99.6 101.1 103.2 1.6 1.8 1.5 2.2
OECD 46.9 47.0 47.0 47.6 47.9 47.4 47.9 47.3 47.9 48.2 47.8 48.0 48.8 0.5 0.5 0.2 0.7
US 50 19.7 19.5 20.0 19.9 20.1 19.9 20.2 20.2 20.1 20.2 20.2 20.3 20.7 0.2 0.3 0.2 0.3
Euro 5 8.2 8.3 8.4 8.5 8.3 8.4 8.3 8.4 8.6 8.3 8.4 8.4 8.6 0.2 0.0 0.0 0.2
Non-OECD 49.3 49.5 50.9 50.7 50.5 50.4 50.4 52.0 52.5 52.1 51.7 53.0 54.5 1.1 1.4 1.3 1.4
China 11.8 12.5 12.6 12.2 12.6 12.4 12.7 12.7 12.9 13.0 12.8 13.2 13.7 0.6 0.4 0.4 0.5
India 4.6 4.6 4.8 4.5 4.8 4.7 4.9 5.0 4.7 5.0 4.9 5.0 5.2 0.1 0.2 0.1 0.1
Non-OPEC Supply 57.4 57.7 57.7 58.3 58.9 58.1 59.0 59.1 60.1 61.1 59.8 61.6 62.7 0.8 1.7 1.7 1.1
US 12.5 12.7 13.0 13.1 14.0 13.2 14.2 14.5 14.8 15.4 14.7 15.9 16.8 0.7 1.5 1.2 0.9
Canada 4.5 4.9 4.5 4.9 5.1 4.8 5.0 4.8 5.1 5.4 5.1 5.4 5.4 0.4 0.3 0.3 0.0
Russia 11.3 11.5 11.3 11.3 11.3 11.4 11.3 11.3 11.3 11.4 11.4 11.6 11.7 0.0 0.0 0.2 0.2
OPEC NGLs/Condensates 6.8 6.8 6.9 6.9 6.9 6.9 6.9 7.0 7.1 7.1 7.0 7.2 7.4 0.1 0.2 0.2 0.2
Call on OPEC Crude 32.0 31.9 33.3 33.1 32.6 32.8 32.4 33.2 33.2 32.0 32.7 32.3 33.2 0.8 0.0 -0.4 0.9
OPEC Crude 32.8 32.1 32.3 32.7 32.3 32.3 32.0 32.1 32.1 32.1 32.1 32.2 32.6 -0.5 -0.3 0.1 0.4
Implied stock build/(draw) 0.8 0.1 -1.0 -0.4 -0.3 -0.4 -0.4 -1.0 -1.0 0.0 -0.6 -0.1 -0.6 -1.2 -0.2 0.5 -0.5
2017 2018 YoY Change YoY Change
Source: EIA, IEA, Rystad, Morgan Stanley Research estimates (2018-20)
Exhibit 19: Global Balance (mmb/d)
-1.5
-1.0
-0.5
-
0.5
1.0
1.5
2.0
2.5
90
92
94
96
98
100
102
Implied stock build/(draw) Demand Supply
Source: EIA, IEA, Rystad, Morgan Stanley Research estimates (e)
12
Oil Price Forecasts
Exhibit 20: Bull, base and bear case estimates for Brent and WTI at end of period
($/bbl) Bear case Base case Bull case2Q18 63.5 68.5 73.53Q18 66.0 71.0 76.04Q18 66.0 71.0 76.01Q19 63.0 73.0 83.02Q19 63.0 73.0 83.03Q19 65.5 75.5 85.54Q19 68.0 78.0 88.01Q20 68.0 83.0 98.02Q20 68.0 83.0 98.03Q20 68.0 83.0 98.04Q20 68.0 83.0 98.0LT 53.0 63.0 73.0
($/bbl) Bear case Base case Bull case2Q18 70.0 75.0 80.03Q18 72.5 77.5 82.54Q18 72.5 77.5 82.51Q19 70.0 80.0 90.02Q19 70.0 80.0 90.03Q19 72.5 82.5 92.54Q19 75.0 85.0 95.01Q20 75.0 90.0 105.02Q20 75.0 90.0 105.03Q20 75.0 90.0 105.04Q20 75.0 90.0 105.0LT 60.0 70.0 80.0
WTI
Brent
Source: Morgan Stanley Research estimates
Exhibit 21: Price forecast chart for Brent
77.5
85.0
90.0
0
20
40
60
80
100
120
140
2013 2014 2015 2016 2017 2018 2019 2020
Brent price target ($/bbl)
Source: Morgan Stanley Research estimates
13
Supply – Demand Overview
Exhibit 22: OECD Demand Growth (annual, mmb/d)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18
Source: IEA
Exhibit 23: Non-OECD Demand Growth (annual, mmb/d)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18
Source: IEA
Exhibit 24: Non-OPEC Supply Growth (annual, mmb/d)
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18
Source: IEA
Exhibit 25: OPEC Supply Growth (annual, mmb/d)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18
Source: IEA
14
Key Agency Revisions (2018)
Exhibit 26: Oil Demand Growth 2017-18 (mmb/d)
1.50
1.79
1.60
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18
IEA EIA OPECSource: EIA, IEA, OPEC
Exhibit 27: Non-OPEC Supply Growth 2017-18 (mmb/d)
0.60
1.10
1.60
2.10
2.60
3.10
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18
IEA EIA OPEC
2.55
1.80
1.72
Source: EIA, IEA, OPEC
Exhibit 28: Call on OPEC 2018 (mmb/d)
31.0
31.5
32.0
32.5
33.0
33.5
34.0
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18IEA EIA OPEC
32.55
32.1
32.4
Source: EIA, IEA, OPEC
Exhibit 29: Change in the Call on OPEC 2017-18 (mmb/d)
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
-
0.20
0.40
0.60
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18
IEA EIA OPEC IEA EIA OPEC
-0.32
-0.88
-0.40
Source: EIA, IEA, OPEC
15
US Shale Monitor
Exhibit 30: 12-month forward WTI has rarely fallen below the average shale break-even
0
20
40
60
80
100
120
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
12m Forward WTI Prices vs Average Shale Breakevens ($/bbl)
WTI 12m Average Breakeven
Source: Rystad, Morgan Stanley Research
Exhibit 31: The rate at which the rig count grows moves together with the spread between 12-monthforward WTI over the average wellhead break-even of US shale
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Monthly Change in Rig Count vs 12m WTI/Estimated ShaleBreakeven
12m WTI / Breakeven Change in Rig Count (RH Axis)
Source: Rystad, Morgan Stanley Research
16
Prices & Differentials
Exhibit 32: Crude Prices ($/bbl)
77.3
0
10
20
30
40
50
60
70
80
90
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17
Source: Bloomberg
Exhibit 33: Angola vs Brent ($/bbl)
0.25
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17Cabinda Girassol
Source: Platts, Bloomberg
Exhibit 34: WTI vs Brent ($/bbl)
6.4
-2
-1
0
1
2
3
4
5
6
7
8
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17
Source: Bloomberg
Exhibit 35: Sweet vs Sour: Discount per 1% of Sulphur Content($/bbl)
-2.2
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Source: Platts, Bloomberg
Exhibit 36: Dubai vs Brent ($/bbl)
4.05
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17
Source: Bloomberg
Exhibit 37: Heavy - Light: Premium per Degree of API Gravity($/bbl)
0.13
-
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Source: Platts, Bloomberg
17
Crude Oil Forward Curves and Time Spreads
Exhibit 38: Brent Forward Curve ($/bbl)
55
60
65
70
75
80
Mo01 Mo07 Mo13 Mo19 Mo25 Mo31Current -4 wks -13 wks
Source: Bloomberg
Exhibit 39: Brent Time Spreads ($/bbl)
0.40.4
-1.5
-1.0
-0.5
0.0
0.5
1.0
May-15 Nov-15 May-16 Nov-16 May-17 Nov-171m-2m 1m-12m
Source: Bloomberg
Exhibit 40: WTI Forward Curve ($/bbl)
50
55
60
65
70
75
Mo01 Mo07 Mo13 Mo19 Mo25 Mo31Current -4 wks -13 wks
Source: Bloomberg
Exhibit 41: WTI Time Spreads ($/bbl)
0.30.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17Mo01 vs Mo02 Series2
Source: Bloomberg
Exhibit 42: Dubai Forward Curve ($/bbl)
50
55
60
65
70
75
BalMo Mo06 Mo12 Mo18 Mo24 Mo30 Mo36Current -4 wks -13 wks
Source: Bloomberg
Exhibit 43: Dubai Time Spreads ($/bbl)
0.40.4
-1.5
-1.0
-0.5
0.0
0.5
1.0
May-15 Nov-15 May-16 Nov-16 May-17 Nov-171m-2m 1m-12m
Source: Bloomberg
18
Oil vs Other Things
Exhibit 44: Brent Crude vs Inverse TWD
0
20
40
60
80
100
120
140
Jan-13 Aug-13 Feb-14 Sep-14 Apr-15 Oct-15 May-16 Nov-16 Jun-17 Dec-17 Jul-18
Brent ($/b) USD index
Source: Reuters
Exhibit 45: Brent Crude vs Inflation vs Base Metals
1.00
1.30
1.60
1.90
2.20
2.50
2.80
20
40
60
80
100
120
140
Jan-13 Aug-13 Feb-14 Sep-14 Apr-15 Oct-15 May-16 Nov-16 Jun-17 Dec-17 Jul-18
Brent ($/b) Base Metals Spot Price Index Inflation Expectations (RHS)
Source: Bloomberg
19
Refining Margins
Exhibit 46: Rotterdam – Brent Cracking ($/bbl)
0
2
4
6
8
10
12
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
Exhibit 47: Rotterdam – Brent Hydroskimming ($/bbl)
-2
-1
0
1
2
3
4
5
6
7
8
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
2015 2016 2017 2018Source: Thomson Reuters
Exhibit 48: USGC – WTI Cracking ($/bbl)
0
5
10
15
20
25
30
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
Exhibit 49: USGC – Brent Cracking ($/bbl)
0
5
10
15
20
25
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
20
Exhibit 50: Med – Urals Cracking ($/bbl)
-1
1
3
5
7
9
11
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
Exhibit 51: Med – Urals Hydroskimming ($/bbl)
-2
-1
0
1
2
3
4
5
6
7
8
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
Exhibit 52: Singapore – Dubai Cracking ($/bbl)
0
2
4
6
8
10
12
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
Exhibit 53: Singapore – Dubai Hydroskimming ($/bbl)
-3
-2
-1
0
1
2
3
4
5
6
7
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 522015 2016 2017 2018
Source: Thomson Reuters
21
Product Cracks
Exhibit 54: Gasoline US vs WTI ($/bbl)
(15)(10)(5)
-5
10152025303540
- 30 60 90 120 150 180 210 240 270 300 330 360
2014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 55: Diesel US vs WTI ($/bbl)
-
5
10
15
20
25
30
- 30 60 90 120 150 180 210 240 270 300 330 3602014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 56: US Fuel Oil Crack ($/bbl)
(25)
(20)
(15)
(10)
(5)
-- 30 60 90 120 150 180 210 240 270 300 330 360
2014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 57: Gasoline NWE vs Brent ($/bbl)
-
5
10
15
20
25
30
35
- 30 60 90 120 150 180 210 240 270 300 330 3602014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 58: Diesel NWE vs Brent ($/bbl)
-
5
10
15
20
25
- 30 60 90 120 150 180 210 240 270 300 330 3602014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 59: Fuel Oil NWE vs Brent ($/bbl)
(25)
(20)
(15)
(10)
(5)
-- 30 60 90 120 150 180 210 240 270 300 330 360
2014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 60: Gasoline Singapore vs Brent ($/bbl)
-
5
10
15
20
25
- 30 60 90 120 150 180 210 240 270 300 330 3602014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 61: Gasoil Singapore vs Brent ($/bbl)
-
5
10
15
20
25
- 30 60 90 120 150 180 210 240 270 300 330 3602014 2015 2016 2017 2018
Source: Platts, Bloomberg
Exhibit 62: Fuel Oil Singapore vs Brent ($/bbl)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
-
2
- 30 60 90 120 150 180 210 240 270 300 330 360
2014 2015 2016 2017 2018
Source: Platts, Bloomberg
22
European Product Crack Forward Curves
Exhibit 63: Gasoline Crack NWE Forward Curve ($/bbl)
4
5
6
7
8
9
10
11
12
13
14
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr MayCurrent -1 month -3 month
Source: Bloomberg
Exhibit 64: ULSD 10ppm Crack Forward Curve ($/bbl)
10
12
14
16
18
20
22
Jun Sep Dec Mar Jun Sep Dec MarCurrent -1 month -3 month
Source: Bloomberg
Exhibit 65: Naphtha Crack NWE Forward Curve ($/bbl)
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0Jun Aug Oct Dec Feb Apr
Current -1 month -3 month
Source: Bloomberg
Exhibit 66: Jet Kero Crack NWE Forward Curve ($/bbl)
10
12
14
16
18
20
22
24
Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec MarCurrent -1 month -3 month
Source: Bloomberg
Exhibit 67: Gasoil 0.1% Crack NWE Forward Curve ($/bbl)
7
9
11
13
15
17
19
21
Jun Sep Dec Mar Jun Sep Dec MarCurrent -1 month -3 month
Source: Bloomberg
Exhibit 68: Fuel Oil 3.5% Crack Forward Curve ($/bbl)
-30
-25
-20
-15
-10
-5
0Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
Current -1 month -3 month
Source: Bloomberg
23
Global Stocks – Monthly
Exhibit 69: Total Liquid Stocks (bln bbls)
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Total Liquid Stocks (bln bbls)
5Y Range 2017 2018 Avg
Source: IEA, JODI, Xinhua
Exhibit 70: Historical Global Liquids Stock Change (LatestMonth)
-40
-30
-20
-10
-
10
20
30
40
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
MoM Change in Global Liquids Stocks in February ofEach Year (mln bbls)
Source: IEA, JODI, Xinhua
Exhibit 71: Total Crude Stocks (bln bbls)
1.5
1.6
1.7
1.8
1.9
2.0
2.1
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
s
Total Crude Stocks (bln bbls)
5Y Range 2017 2018 Avg
Source: IEA, JODI, Xinhua
Exhibit 72: Historical Global Crude Stock Change (LatestMonth)
-10
-5
-
5
10
15
20
25
30
35
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
MoM Change in Global Crude Stocks in February ofEach Year (mln bbls)
Source: IEA, JODI, Xinhua
Exhibit 73: Total Product Stocks (bln bbls)
1.7
1.8
1.9
2.0
2.1
2.2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
s
Total Product Stocks
5Y Range 2017 2018 Avg
Source: IEA, JODI, Xinhua
Exhibit 74: Historic Global Products Stock Change (LatestMonth)
-50
-40
-30
-20
-10
-
10
20
Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
MoM Change in Global Product Stocks in February ofEach Year (mln bbls)
Source: IEA, JODI, Xinhua
24
OECD Stocks – Monthly
Exhibit 75: OECD Total Liquid Stocks (bln bbls)
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
Exhibit 76: OECD Americas Total Liquid Stocks (bln bbls)
1,200
1,300
1,400
1,500
1,600
1,700
1,800
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
Exhibit 77: OECD Total Crude Stocks (bln bbls)
900
950
1,000
1,050
1,100
1,150
1,200
1,250
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
Exhibit 78: OECD Europe Total Liquid Stocks (bln bbls)
800
850
900
950
1,000
1,050
1,100
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
Exhibit 79: OECD Total Product Stocks (bln bbls)
1,100
1,200
1,300
1,400
1,500
1,600
1,700
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
Exhibit 80: OECD Asia Oceania Total Liquid Stocks (bln bbls)
350
370
390
410
430
450
470
Jan Mar May Jul Sep Nov
Range 2013-17 2017 2018 Average
Source: IEA
25
Global Stocks – Weekly
Exhibit 81: Total Oil (US, Japan, ARA, Singapore)
1,1001,1501,2001,2501,3001,3501,4001,4501,5001,5501,600
1 5 9 13 17 21 25 29 33 37 41 45 49
5-yr range 5-yr average 2017 2018
400
450
500
550
600
650
700
750
Source: EIA, PAJ, Genscape
Exhibit 82: Crude (US, Japan, ARA)
400
450
500
550
600
650
700
750
1 5 9 13 17 21 25 29 33 37 41 45 49
5-yr range 5-yr average 2017 2018
Source: EIA, PAJ, PKJ, IE
Exhibit 83: Gasoline (US, Japan, ARA, Singapore)
200
220
240
260
280
300
1 5 9 13 17 21 25 29 33 37 41 45 49
5-yr range 5-yr average 2017 2018
Source: EIA, PAJ, PKJ, IE
Exhibit 84: Distillates (US, Japan, ARA, Singapore)
120
130
140
150
160
170
180
190
200
1 5 9 13 17 21 25 29 33 37 41 45 49
5-yr range 5-yr average 2017 2018
Source: EIA, PAJ, PKJ, IE
26
US Stocks – Weekly
Exhibit 85: US Crude – Total (mmb)
300
350
400
450
500
550
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
Exhibit 86: US Crude – Cushing (mmb)
0
10
20
30
40
50
60
70
80
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: wEIA, Reuters
Exhibit 87: US Gasoline (mmb)
180
190
200
210
220
230
240
250
260
270
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
Exhibit 88: US Distillate (mmb)
100
110
120
130
140
150
160
170
180
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
27
EIA – Crude Oil
Exhibit 89: Crude Oil Stocks (mmb)
300
350
400
450
500
550
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
Exhibit 90: Crude Oil Production (mmb/d)
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18Weekly Data Monthly Data
Source: EIA, Reuters
Exhibit 91: Net Crude Imports (mmb/d)
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 92: Crude Runs (mmb/d)
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
28
EIA – Gasoline
Exhibit 93: Gasoline Stocks (mmb)
180
190
200
210
220
230
240
250
260
270
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
Exhibit 94: Long-term Gasoline Stocks (mmb)
150
170
190
210
230
250
270
Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
Source: EIA, Reuters
Exhibit 95: Gasoline Product Supplied (mmb/d)
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
9.8
10.0
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 96: Gasoline Product Supplied (% YoY)
-15%
-10%
-5%
0%
5%
10%
15%
2008 2010 2012 2014 2016YoY % Change 4-Week Average
Source: EIA, Bloomberg
29
Exhibit 97: Gasoline Production (mmb/d)
8.0
8.5
9.0
9.5
10.0
10.5
11.0
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 98: Gasoline Imports (mmb/d)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 99: Gasoline Stocks Days of Supply (4 wk avg)
20
22
24
26
28
30
32
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Bloomberg
Exhibit 100: Gasoline Yield (%)
50%
55%
60%
65%
70%
75%
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
30
EIA – Distillate
Exhibit 101: Distillate Stocks (mmb)
100
110
120
130
140
150
160
170
180
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2012-16 2017 2018 Average
Source: EIA, Reuters
Exhibit 102: Long-term Distillate Stocks (mmb)
80
100
120
140
160
180
200
Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
Source: EIA, Reuters
Exhibit 103: Distillate Product Supplied (mmb/d)
2.5
3.0
3.5
4.0
4.5
5.0
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 104: Distillate Product Supplied (% YoY)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2008 2010 2012 2014 2016YoY % Change 4-Week Average
Source: EIA, Bloomberg
31
Exhibit 105: Distillate Production (mmb/d)
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 106: Distillate Exports (mmb/d)
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 107: Distillate Stocks Days of Supply (4 wk avg)
20
25
30
35
40
45
50
55
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
Exhibit 108: Distillate Yield (%)
27%
28%
29%
30%
31%
32%
33%
34%
1 5 9 13 17 21 25 29 33 37 41 45 49Range 2017 2018 Average
Source: EIA, Reuters
32
Positioning
Exhibit 109: Managed Money Crude Positioning ('000 lots)
(600)
(400)
(200)
-
200
400
600
800
1,000
1,200
1,400
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Longs Shorts Net
Source: ICE, CFTC, Reuters
Exhibit 110: Producer/Merchant Crude Positioning ('000 lots)
(3,000)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
500
1,000
1,500
2,000
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Longs Shorts Net
Source: ICE, NYMEX, CFTC, Reuters
Exhibit 111: Net Long Positioning – Gasoline ('000 lots)
(200)
(150)
(100)
(50)
-
50
100
150
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Managed Money Producer
Source: NYMEX, CFTC, Reuters
Exhibit 112: Net Long Positioning – Distillate ('000 lots)
(500)
(400)
(300)
(200)
(100)
-
100
200
300
400
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Managed Money Producer
Source: ICE, CFTC, Reuters
33
Supply/demand balance
Exhibit 113: Global Demand and Non-OPEC Supply (mb/d)
2015 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 2015-16 2016-17 2017-18 2018-19 2019-20
Demand
OECD 46.4 46.7 46.1 47.3 47.4 46.9 47.0 47.0 47.6 47.9 47.4 47.9 47.3 47.9 48.2 47.8 48.0 48.8 0.5 0.5 0.5 0.2 0.7
US50 19.5 19.5 19.5 19.9 19.8 19.7 19.5 20.0 19.9 20.1 19.9 20.2 20.2 20.1 20.2 20.2 20.3 20.7 0.2 0.2 0.3 0.2 0.3Europe 5 8.1 8.1 8.1 8.3 8.2 8.2 8.3 8.4 8.5 8.3 8.4 8.3 8.4 8.6 8.3 8.4 8.4 8.6 0.1 0.2 0.0 0.0 0.2Japan 4.1 4.4 3.7 3.8 4.2 4.0 4.3 3.6 3.7 4.1 3.9 4.4 3.6 3.6 4.1 3.9 3.8 3.8 -0.1 -0.1 0.0 -0.1 0.0Canada 2.4 2.3 2.3 2.5 2.4 2.4 2.4 2.3 2.5 2.5 2.4 2.4 2.3 2.5 2.5 2.4 2.4 2.4 0.0 0.0 0.0 0.0 0.0Mexico 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9 2.0 1.9 1.9 1.9 1.9 1.9 0.0 -0.1 0.0 0.0 0.0Other 10.2 10.3 10.4 10.8 10.8 10.6 10.5 10.7 11.1 11.1 10.8 10.8 10.8 11.2 11.2 11.0 11.1 11.3 0.3 0.3 0.2 0.1 0.3
Non-OECD 48.5 48.6 49.6 49.4 49.4 49.3 49.5 50.9 50.7 50.5 50.4 50.4 52.0 52.5 52.1 51.7 53.0 54.5 0.7 1.1 1.4 1.3 1.4
China 11.6 11.8 12.0 11.6 11.9 11.8 12.5 12.6 12.2 12.6 12.4 12.7 12.7 12.9 13.0 12.8 13.2 13.7 0.2 0.6 0.4 0.4 0.5India 4.2 4.7 4.6 4.4 4.6 4.6 4.6 4.8 4.5 4.8 4.7 4.9 5.0 4.7 5.0 4.9 5.0 5.2 0.3 0.1 0.2 0.1 0.1Russia 3.4 3.5 3.4 3.7 3.6 3.5 3.3 3.5 3.8 3.6 3.6 3.5 3.9 4.2 4.1 3.9 4.0 4.2 0.1 0.0 0.4 0.1 0.2Brazil 3.2 3.0 3.1 3.1 3.1 3.1 3.0 3.0 3.2 3.1 3.1 3.0 3.1 3.2 3.1 3.1 3.2 3.2 -0.1 0.0 0.0 0.1 0.1Middle East 6.5 6.0 6.4 6.7 6.2 6.3 6.0 6.5 6.7 6.1 6.3 6.1 6.6 6.8 6.2 6.4 6.6 6.7 -0.2 0.0 0.1 0.1 0.1Other 19.6 19.7 20.1 19.9 20.1 19.9 20.1 20.4 20.4 20.3 20.3 20.2 20.7 20.7 20.6 20.5 21.0 21.4 0.3 0.4 0.3 0.5 0.4
Total demand 95.0 95.4 95.7 96.7 96.8 96.1 96.5 97.9 98.3 98.4 97.8 98.4 99.3 100.3 100.3 99.6 101.1 103.2 1.2 1.6 1.8 1.5 2.2
Supply
Non-OPEC Crude + Condensate 46.9 46.6 44.9 45.4 46.4 45.8 46.4 45.8 46.0 46.8 46.2 47.3 47.1 47.6 48.8 47.7 49.1 49.9 -1.0 0.4 1.4 1.4 0.8
United States 9.4 9.1 8.8 8.7 8.8 8.9 9.0 9.1 9.3 9.9 9.3 10.2 10.5 10.7 11.1 10.6 11.4 12.1 -0.6 0.5 1.3 0.9 0.7- Shale production 5.9 5.7 5.4 5.3 5.4 5.4 5.5 5.7 5.9 6.6 5.9 6.8 7.0 7.3 7.5 7.2 8.2 9.2 -0.5 0.5 1.3 1.0 1.0
- Alaska 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.4 0.0 0.0 0.0 0.0 0.0
- Other Lower 48 3.0 3.0 2.9 2.9 2.9 2.9 3.0 2.9 2.9 2.8 2.9 2.8 2.9 3.0 3.0 2.9 2.8 2.5 -0.1 0.0 0.0 -0.1 -0.3
Canada 3.7 3.8 3.1 3.8 4.0 3.7 4.1 3.7 4.0 4.1 4.0 4.1 4.0 4.3 4.5 4.2 4.6 4.6 0.0 0.3 0.3 0.3 0.1Mexico 2.3 2.2 2.2 2.1 2.1 2.2 2.0 2.0 1.9 1.9 1.9 1.9 1.8 1.8 1.8 1.8 1.7 1.6 -0.1 -0.2 -0.1 -0.1 -0.1UK 0.9 1.0 1.0 0.9 0.9 0.9 1.0 0.9 0.9 0.9 0.9 1.0 1.0 0.9 1.0 1.0 1.0 1.1 0.0 0.0 0.1 0.1 0.0Norway 1.6 1.7 1.6 1.6 1.8 1.6 1.7 1.6 1.6 1.6 1.6 1.6 1.6 1.5 1.6 1.6 1.6 1.8 0.0 0.0 0.0 0.0 0.2Russia 10.7 10.9 10.8 10.9 11.2 11.0 11.1 11.0 10.9 10.9 11.0 11.0 11.0 10.9 11.0 11 11 11 0.2 0.0 0.0 0.2 0.1China 4.2 4.1 4.0 3.8 3.8 3.9 3.8 3.8 3.7 3.7 3.8 3.7 3.7 3.6 3.7 3.6 3.5 3.3 -0.3 -0.1 -0.1 -0.1 -0.2Kazakhstan 1.7 1.7 1.6 1.5 1.8 1.6 1.8 1.8 1.8 1.8 1.8 1.9 1.8 1.8 1.9 1.9 1.9 1.9 0.0 0.2 0.1 0.0 0.0Azerbaijan 0.8 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.8 0.7 0.7 0.0 0.0 0.0 0.0 0.0Brazil 2.4 2.3 2.4 2.6 2.7 2.5 2.6 2.6 2.6 2.6 2.6 2.6 2.8 2.9 3.1 2.9 3.4 3.6 0.1 0.1 0.2 0.5 0.3Colombia 1.0 0.9 0.9 0.8 0.8 0.9 0.8 0.9 0.9 0.9 0.9 0.8 0.9 0.9 0.8 0.9 0.8 0.8 -0.1 0.0 0.0 0.0 -0.1Indonesia 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.8 0.7 0.7 0.1 0.0 0.0 0.0 0.0Other 7.3 7.2 6.9 7.0 7.0 7.0 6.9 6.8 6.9 6.8 6.8 6.8 6.6 6.7 6.7 6.7 6.5 6.3 -0.3 -0.2 -0.1 -0.2 -0.2
Source: IEA, Morgan Stanley Research estimates
34
Supply/demand balance (cont'd)
Exhibit 114: OPEC supply (mb/d)
2015 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18 3Q18 4Q18 2018 2019 2020 2015-16 2016-17 2017-18 2018-19 2019-20
Supply (cont'd)
NGLs 6.2 6.4 6.6 6.4 6.5 6.5 6.6 6.7 6.7 7.0 6.8 6.9 6.9 6.9 7.1 6.9 7.2 7.4 0.3 0.3 0.2 0.3 0.2Unconventionals* 0.5 0.5 0.5 0.4 0.4 0.5 0.4 0.5 0.5 0.4 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 -0.1 0.0 0.0 0.0 0.0Biofuels 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.4 2.3 2.4 2.5 0.0 0.0 0.0 0.1 0.0Processing gains 2.3 1.9 2.5 2.7 2.3 2.3 1.9 2.4 2.8 2.4 2.4 2.1 2.5 2.9 2.4 2.5 2.5 2.5 0.1 0.1 0.1 0.0 0.0
Total non-OPEC supply 58.1 57.7 56.7 57.2 57.9 57.4 57.7 57.7 58.3 58.9 58.1 59.0 59.1 60.1 61.1 59.8 61.6 62.7 -0.7 0.8 1.7 1.7 1.1
OPEC NGLs 6.6 6.6 6.8 6.9 6.8 6.8 6.8 6.9 6.9 6.9 6.9 6.9 7.0 7.1 7.1 7.0 7.2 7.4 0.2 0.1 0.2 0.2 0.2Call on OPEC crude + Dstock 30.3 31.0 32.2 32.7 32.0 32.0 31.9 33.3 33.1 32.6 32.8 32.4 33.2 33.2 32.0 32.7 32.3 33.2 1.7 0.8 0.0 -0.4 0.9
OPEC 31.8 32.3 32.5 32.9 33.4 32.8 32.1 32.3 32.7 32.3 32.3 32.0 32.1 32.1 32.1 32.1 32.2 32.6 1.0 -0.5 -0.3 0.1 0.4
Saudi Arabia 10.1 10.2 10.3 10.6 10.6 10.4 9.9 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.2 10.4 0.3 -0.5 0.0 0.2 0.2Iran 2.8 3.1 3.6 3.7 3.8 3.6 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.4 3.3 0.7 0.2 0.0 -0.4 -0.1Iraq 4.0 4.3 4.3 4.4 4.6 4.4 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.7 4.9 0.4 0.1 0.0 0.2 0.3UAE 2.9 2.9 3.0 3.1 3.2 3.0 3.0 2.9 2.9 2.9 2.9 2.8 2.9 2.9 2.9 2.9 3.0 3.1 0.1 -0.1 -0.1 0.1 0.1Kuwait 2.8 2.9 2.9 2.9 2.9 2.9 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.8 2.8 0.1 -0.2 0.0 0.1 0.0Neutral Zone 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.0 0.0Qatar 0.7 0.7 0.7 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.0 0.0 0.0 0.0 0.0Angola 1.8 1.8 1.7 1.7 1.6 1.7 1.6 1.6 1.7 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.6 1.5 -0.1 -0.1 -0.1 0.0 0.0Nigeria 1.8 1.7 1.5 1.3 1.5 1.5 1.4 1.5 1.6 1.6 1.5 1.7 1.8 1.8 1.8 1.8 1.8 1.8 -0.3 0.1 0.2 0.1 0.0Libya 0.4 0.4 0.3 0.3 0.6 0.4 0.7 0.7 0.9 1.0 0.8 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.0 0.4 0.2 0.0 0.0Algeria 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 0.0 -0.1 0.0 0.0 -0.1Ecuador 0.5 0.5 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.0 0.0 0.0 0.0 0.0Venezuela 2.5 2.4 2.3 2.2 2.1 2.2 2.1 2.0 2.0 1.8 2.0 1.6 1.5 1.4 1.3 1.4 1.3 1.2 -0.2 -0.3 -0.5 -0.2 -0.1Gabon 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0Equatorial Guinea 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0
Implied stock build/(draw) 1.5 1.3 0.4 0.2 1.4 0.8 0.1 -1.0 -0.4 -0.3 -0.4 -0.4 -1.0 -1.0 0.0 -0.6 -0.1 -0.6* Unconventionals excluding Canadian oil sands production, which are included under crude+condensateSource: IEA, Morgan Stanley Research estimates
35
The following countries mentioned in this Report are generally the subject of sanctions programs administered or
enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union
and/or by other countries and multi-national bodies: Iran (comprehensive sanctions), Venezuela and Russia (targeted
sanctions). The information herein in relation to Iran is provided strictly as germane to overall oil and gas market
conditions. Nothing in this report should be construed as a recommendation in relation to investment in or in relation
to Iran or any Iranian-source petroleum products. Users of this report are solely responsible for ensuring that their
investment activities in relation to any sanctioned countries or sanctioned companies are carried out in compliance
with applicable sanctions.
36
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Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) thatare the subject of the debt research report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). MorganStanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent ofbuy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Researchcontains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer thecontents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell astock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of April 30, 2018)The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside ourratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (seedefinitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspondEqual-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
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COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIALINVESTMENT SERVICES
CLIENTS (MISC)STOCK RATINGCATEGORY
COUNT % OFTOTAL
COUNT % OFTOTAL IBC
% OFRATING
CATEGORY
COUNT % OFTOTAL
OTHERMISC
Overweight/Buy 1168 38% 305 40% 26% 550 39%Equal-weight/Hold 1337 43% 371 49% 28% 641 46%Not-Rated/Hold 53 2% 5 1% 9% 7 0%Underweight/Sell 539 17% 83 11% 15% 207 15%TOTAL 3,097 764 1405
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investmentbanking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly100 percent.Analyst Stock RatingsOverweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index or the average total return of theanalyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index or the average total returnof the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index or theaverage total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index or the average total return of theanalyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broadmarket benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad marketbenchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad marketbenchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe -MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Important Disclosures for Morgan Stanley Smith Barney LLC CustomersImportant disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith BarneyLLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website atwww.morganstanley.com/online/researchdisclosures. 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