Oil Market Update: The View from London May 18

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From Morgan Stanley's top energy sector analyst.
Martijn Rats, CFA
EQUITY ANALYST AND COMMODITIES STRATEGIST
May 18, 2019

Oil prices have managed to grind higher this week as supply issues and
geopolitical tensions have outweighed broader macro/demand concerns.

The situation in the Middle East remains fluid, with two Saudi Arabian oil
tankers reported to be among those attacked off the coast of the UAE over the
weekend (see Reuters). Two pumping stations in Saudi Arabia were reportedly
also attacked by drones later in the week (see Bloomberg), contributing to
uncertainty in the oil market.

Also,a number of supply outages are keeping the North Sea market tight. Brent
1-12 time spreads are back at $5.50/bbl,near the highs seen in Q2 2018,and front
spreads are at levels not seen since 2014. Equinor has extended the shutdown of
its Oseberg field, an oil leak has stopped loadings from the Statfjord facility, and
oil pipeline repairs have forced a shutdown of fields supplying the Flotta Gold
grade. These come on top of the ongoing effects of the oil contamination in the
Druzhba pipeline.

Venezuela has also seen another sharp drop in production, dropping to 500
kb/d from 800 kb/d in April, according to Argus.Falling exports and a lack of
storage have led to the shut in of three upgraders, which are used to process
very heavy crude from the Orinoco belt,according to Platts.

But not all indicators are pointing upwards. Inventories have been slow to
reflect current market tightness, with our high-frequency weekly report showing
seven consecutive weeks of builds.

Demand data is also looking weaker for March. We track eight 'early reporters'
covering just under half of global oil demand. In these countries, collective
demand fell YoY for the first time since early 2017. This was a combination of
slower growth in China and India, combined with declines elsewhere. The IEA
also revised down its global demand estimates for both 2018 and 2019 in its
latest Oil Market Report.

The OPEC/non-OPEC Joint Ministerial Monitoring Committee(JMMC) meeting
takes place in Jeddah, Saudi Arabia, this Sunday 19 May. The group will meet to
look at the overall compliance with the existing deal and look at the oil market
as a whole. The next OPEC/non-OPEC Ministerial Meeting will take place on 25-
26 June where production quotas for 2H will be decided.

Finally, our hedging monitor showed that US E&Ps remain significantly
under hedged versus last year. WTI time spreads are already very elevated, but
further hedging activity could keep them supported near current levels.

What we're watching next week: - OPEC, Non-OPEC Joint Ministerial Monitoring
Committee Meeting, Jeddah, Saudi Arabia, 19 May 2019.