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

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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

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2019

2020

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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

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2.5

3

3.5

4

4.5

Jan

Feb

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Fro

nt-

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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)

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Still following gas?Fuel switching potential utilized front-mont, now holding up with front-year

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...but Brexit is still playing a part

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Brexit - All options still on the table

Flexible Brexit deadline 31 October

Deal with EU?

Hard Brexit?

New referendum?

New election?

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• 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

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200

250

0

5

10

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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

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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

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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

ingvild.sorhus@refinitiv.com

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Commodities Outlook Series 2019

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Commodities Outlook Series 2019

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Commodities Outlook Series 2019

No Giveaways Here

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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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Base Metal Futures Contracts – Average Cumulative Returns

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Macro and the Business Cycle

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Commodity Trading Advisor (CTA) signals

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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 bernd.sischka@Refinitiv.com

Options

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LME Options

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LME Options

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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

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6200

6300

6400

6500

6600

0

5000

10000

15000

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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

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2450

2500

2550

2600

2650

2700

2750

2800

2850

2900

0

5000

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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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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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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)

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To

nn

es (

'00

0s)

70Sensitivity: Confidential

Incentive Price for Copper

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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

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2000

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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

bruce.alway@refinitiv.com

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

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ec

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ec

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ec

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28 D

ec

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an 1

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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

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12 A

pr

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pr

19

26 A

pr

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03 M

ay 1

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ay 1

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$/b

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mill

ion b

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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

alex.pearce@refinitiv.com

97Sensitivity: Confidential

Commodities Outlook Series 2019

Thank You