CAN WE CUT THE GLUT? IS DEMAND UP TO THE TASK OF

SHRINKING THE OIL OVERHANG?

Matthew Kohlman

Senior Managing Editor

Platts, Americas Refined Products

20 April 2016 2

• US crude and product stocks take turns reaching records

• Can US gasoline demand again save the day?

• Refinery margins slip for gas; will US drivers hit the road hard enough?

• Time for winter: Diesel demand turns to Latin America

• El Nino stalls US demand, but could reverse be true down south?

• Propane provides textbook case of exports thinning stocks

OUTLINE: OIL SUPPLY/DEMAND

Editorial and market assessments are conducted

with complete Independence & Impartiality

20 April 2016

PLATTS – AN INTRODUCTION

NOT JUST OIL

20 April 2016

NEWS, ANALYSIS, INSIGHT AND MORE

20 April 2016

PRICE ASSESSMENTS

Focus, Impact and Relevance

– Platts prices are referenced in

term contracts.

– Futures settlements are often

tied to Platts spot market

assessments.

– Derivatives “price out” against

Platts spot price assessments or

futures settlements.

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SUPPLY: CRUDE, PRODUCTS GLUT

• In last two years, record crude stocks (minus SPR) in spring led to

…

• … record product stocks in fall. But come this spring …

• … crude is at a record and products already near record.

1,0

00

bb

ls

Source: EIA

Average: Crude Products

2010 352.7 738.1

2011 348.7 711.8

2012 365.6 718.1

2013 377.1 728.5

2014 374.9 722.0

2015 461.5 791.3

Q1 2016 510.8 830.7

million barrels

SUPPLY: CRUDE, PRODUCTS LINE UP

TOGETHER

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• US reflecting global supply: floating storage, longer cargo trips, etc.

• Crude supply well-documented, with little relief: US shale, Iran, OPEC, Russia Source: EIA

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DEMAND: US CHEAP CRUDE = STRONG

MARGINS Supply – attractive margins

High cracks boost distillate output Gasoline takes lead in 2015

Demand – global growth Domestic demand

-Post-recession highs Exports swamp imports

-New USGC Export ULSD cargoes Competitive advantage -LatAm refinery troubles -MidEast, Russia slowly emerge Alternatives also slow to emerge

Natural gas? Biofuels? Solar?

USGC product cracks vs. LLS crude

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Gasoline vs. ULSD cracks

ULSD

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heat

gas

Source: Platts

• Gasoline dropped near $2/gal at the pump in early 2015, causing

drivers to drive more, and buy more SUVs, trucks, etc.

• Production jumps, stocks drop – called global savior for oil prices

• One-off? US prices drop below $2 by early 2016, but stocks high

DEMAND: GASOLINE TO RESCUE IN 2015

• Worry that stock-building is

behind the price rise

• Indications that true driving

season yet to begin

• New cars – even SUVs –

are 20% more fuel efficient

• EIA forecasts $2.04 avg,

and smaller rise in

consumption • 120,000 b/d more y-o-y

• 260,000 b/d in 2015

DEMAND: STORAGE TANKS, NOT CAR

TANKS?

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USGC conventional gas spot market (cts/gal)

Source: Platts

DEMAND: GASOLINE/DIESEL RECOVERY

• Gasoline and diesel demand

peaked in 2007

• Gasoline recovery is real –

July 2015 saw a return to

near 2007 levels for demand

• Distillate demand struggling

– slight recovery, but the

warm winter dropped

demand to multi-year low

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U.S. ProductSupplied of DistillateFuel Oil Mbbl/d

U.S. ProductSupplied of FinishedMotor GasolineMbbl/d

20 April 2016 12

Source: EIA

DEMAND: WINTER BLUES

• After two harsh winters

… El Nino appears

• Warm winter in US, and

much of world, cratered

demand, popped stocks

• Forecast for the follow-

up, La Nina, to further

disrupt commodities

• Demand otherwise tracks

GDP, which is tepid

14

US DISTILLATES DRIVE REFINERY

EXPANSIONS

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1990 2000 2005 2010 2014 2015

CDU

Vacuum distill

FCC

Cat Reforming

Hydro/Desulf

Linear(Hydro/Desulf)

Source: EIA

• Example: Valero system: 33% distillates in 2010 to 43% in 2015

– Distillates to be at 1:1 ratio with gasoline production

• New hydrocrackers at Port Arthur, TX, and St. Charles, LA MBD

• Distillates lead pack

• Top destinations are

France, Netherlands,

Chile, Ecuador,

Mexico

• Gasoline sees growth

• Top destinations are

Canada, Mexico,

Colombia, Panama

• US exports entire barrel

• Naphtha, LPGs, resid,

petcoke, and more

DEMAND: PRODUCT EXPORTS GOING

STRONG

20 April 2016 15

Source Platts cFlow

DEMAND: US PRODUCT EXPORTS

• Latin America has been

success story for US

exporters

• Over half of all distillates

• Not dependent on open arb

• Mostly done through tenders

• In 2015, heard 31 tenders for

Q1 and 45 in Q2

• In 2016, heard 40 tenders for

Q1, and talk of more in Q2

• Dry El Nino = less hydropower

DEMAND: LATIN AMERICAN WINTER

18

DEMAND: EXPORT PROPANE SHOWS WAY

• US propane market

looked vulnerable, with

seasonal stocks piling

up

• Then expanded export

facility opens at

Enterprise in December

• Despite warm winter –

and unlike distillates –

stocks drop sharply

20

FLAT PRICE DROPS, BUT SO DO

DIFFERENTIALS

• Jet ex: USGC spot price cut in half

• Differentials hit record low in 2015, and stay

weak

Source: Platts

Figures in cents/gal Left side (blue) is flat price Right side (red) is differential to NYMEX ULSD futures

Q&A