Energy Prospectus

Some news last week that will impact global supply & demand for crude oil:

On 3/31/2018, Reuters reported growth in China's manufacturing sector picked up more than expected in March as authorities lifted winter pollution restrictions and steel mills cranked up production as construction activity swings back into high gear. The official Purchasing Managers' Index (PMI) released on Saturday rose to 51.5 in March, from 50.3 in February, and was well above the 50-point mark that separates growth from contraction on a monthly basis. The findings add to a growing amount of data which suggest that China's economy has carried more momentum into the first quarter from last year than analysts had expected, which should keep synchronized global growth on track for a while longer even as trade tensions build.

On 3/27/2018, Reuters reported OPEC and Russia are working on a long-term deal to cooperate on oil supply curbs that could extend controls over world oil supplies by major exporters for many years to come. Saudi Crown Prince Mohammed bin Salman told Reuters that Riyadh and Moscow were considering extending an alliance on oil curbs that began in January 2017 after oil prices crashed. “We are working to shift from a year-to-year agreement to a 10-20 year agreement,” the crown prince told Reuters in an interview in New York. Russia, never a member of OPEC, has worked alongside OPEC during previous oil gluts, dating back to 1990, but a 10-20 year deal between the two would be unprecedented.

On 3/27//2018, Reuters reported China's new crude oil futures contract enjoyed a successful first day of trading in Shanghai, most likely exceeding the wildest hopes of its backers, but much of the hard work of building a viable benchmark still has to be done. The new contract, launched on Monday by the Shanghai International Energy Exchange (INE), attracted interest from Western oil traders as well as domestic investors. Some 20 million barrels of oil changed hands on the first day, with the first deal going to global trader Glencore (GLEN-NC), and other participants included major merchants Trafigura, Freepoint Commodities and Mercuria.

On 3/26/2018, Reuters reported Venezuela's state-run oil firm PDVSA plans to shut an oil upgrader in April for major maintenance work, requiring higher imports of diluents for its extra heavy oil output, according to an internal report seen by Reuters. The country increasingly relies on purchases of diluents to make its heavy oil exportable because its own production of light crude has fallen in recent years. PDVSA's refining output also is declining amid maintenance outages and a lack of spare parts. The planned maintenance work would sharply increase naphtha imports to 83,000 b/d in April from 64,500 b/d in March, according to the document. The 150,000 b/d Petromonagas oil upgrader, a joint venture with Russia's Rosneft (ROSN-NC) located at Venezuela's Orinoco Belt, was partially halted from November through mid-December for an earlier maintenance project.

Raymond James 4/2/2018:

One year ago, we predicted that global oil and gas capital spending in 2017 would increase by more than 10%, led by an expected
50+% increase in U.S. public company spending. Based on our recently finalized capital spending survey (encompassing roughly 70%
of global upstream oilfield investment), it now appears that 2017 public company global oilfield spending rose by a smaller-than expected
5%. With the recent surge in oil prices, 2018 global budgets are now projecting a 12% increase in global oil and gas
spending. The surprising thing about the announced budgets from publicly traded oil and gas companies is that U.S.-focused public
companies are only budgeting a 12% increase in 2018 spending despite a greater than 50% increase in cash flows! So far, the U.S.
public E&Ps’ newfound focus on free cash flow and value over volume is not just lip service – it is actually showing up in early
budgets. Of course, if oil prices remain in the mid-$60s, there is clearly room to flex up spending as the year progresses, since many
of these budgets were set on the assumption of mid-$50s oil. More importantly for U.S. spending, these public U.S. company
budgets only capture about 40% of total U.S. oilfield spending (with the remaining amount coming from private operators and
majors/multinationals). When we look at overall U.S. oilfield spending in 2018, we still expect a much more robust 40% increase
in overall spending backed by a 60% increase in industry cash flows.

RJ is forecasting that global oil demand will exceed supply by 800,000 barrels per day in 2018, primarily because of a big drop in production from long-range non-U.S. projects. This is the result of massive reduction in capex spent on long lead time projects around the world. This will draw down OECD crude oil stocks, which will go below the 5-year average within a few months.

RJ Conclusion
"After investment cutbacks by the global oil and gas industry resulted in austerity of unprecedented proportions, capital spending is
in its second year of recovery, but the recovery is muted. Based on our survey of operators from around the world – a holistic look at
all of the important geographies, comprising three-quarters of global upstream investment – we estimate that 2017 global spending
was up 5%, half as much as originally budgeted. In 2018, spending is set to rise 12% according to our survey. Unlike last year, when
U.S.-centric companies led global spending recovery with a 52% jump in spending, this year’s increases are much more evenly
distributed, with the larger U.S. E&Ps following through on their promises of capital discipline. The big picture is that global spending
is still down by nearly half from peak 2013 levels, and sustaining global oil supply growth will ultimately require further spending
recovery, an uncertain prospect as more management teams take a cautious approach to capital allocation."

TPH Comments on Demand 4/2/2018:

Even after a sizeable -1.6% revision (-325mbpd) to the initial weekly data, the EIA reported remarkably strong US refined product demand growth of +6.3% in Jan'18, the highest single monthly growth rate in nearly 5 years. Much of the gains came in two areas. Distillate demand posted a stunning +16.2% y/y growth rate (from +10.7% originally) in the month, which is likely partially a function of solid US macro indicators in areas like industrial production, truck tonnage, and Class 8 tractor truck sales. In addition, the volatile “Other oils” category also came in unusually strong at +14.6%. Gasoline demand rose +2.8% y/y, a nice turnaround from declining demand the past two months, although not as high as the +3.8% initial estimate. The only areas that declined were jet (-0.4%) and fuel oil (-26.1%). Overall a highly encouraging start to the year.

EIA data released on Friday showed US gasoline exports rose an impressive +205mbpd y/y to 1.13mmbpd in Jan'18. This marks easily the highest January on record and almost exactly double levels from five years ago. Most of the growth came from Mexico and Canada, while exports to South America were almost flat y/y. Strong export demand helps explain the unusually high 92% US refinery utilization rate in the month. On the other hand, distillate exports declined -25mbpd y/y to 1.12mmbpd in Jan. Volumes to Mexico rose to record levels of 419mbpd, however, volumes fell to almost every other region with notable softness in South America. This weakness primarily hit Gulf Coast flows, as West Coast distillate exports were at new records of 165mbpd (+38mbpd y/y).