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January 23, 2019 RBC Capital Markets, LLC

Michael Tran
Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard Commodity Strategist
(212) 266-4020
 Our inaugural Follow the Barrel publication focuses on analyzing trends in global physical

oil flow to ascertain whether fundamentals are improving or loosening. Helima Croft
 Satellite imaging data suggest that global oil inventories have drawn 27 mb since the Global Head of Commodity Strategy
(212) 618-7798
December peak. Are there further signs of physical tightness? We highlight key drivers
worth watching to assess whether global oil trade patterns are trending bullish or bearish.
Christopher Louney
 Atlantic Basin differentials, struggling Iranian exports, OPEC OSPs and Chinese crude Commodity Strategist
imports are bullish trade flow indicators to watch. The destination of outbound US oil (212) 437-1925
shipments, particularly for gasoline, is bearish, while VLCC tanker rates to Asia and Saudi
exports to traditional hubs like the US and China are paramount indicators to watch. Megan Schippmann
Associate Strategist
(212) 301-1531
Barrel Counting

Regional oil balances have ebbed and flowed through transient pockets of over and under supply
over recent months. While we believe that prices are headed higher, the purpose of this
publication is to highlight market drivers that can make for lumpy near term price action given the
often asymmetric pace of physical oil trade flows. Participants often look at the market dynamic
in an overly simplistic fashion, focusing on US production growth in a silo or independently
gauging the health of the global oil market by looking at Chinese demand. While those drivers
clearly move the dial, this is a static way at looking at a dynamic market. Working alongside RBC
Elements, our data science team, as well as our partner Orbital Insight, a satellite imagery platform
that utilizes geospatial data, we estimate that floating roof tank oil inventories have drawn 27 mb,
globally, since the December peak, which has helped push Brent into backwardation. Are physical
balances tighter than the market perceives? Local shocks could up-end markets around the world
given that the rules of global trade are completely being re-written in real time given tectonic
shifts in oil flow such as OPEC cuts, Iranian sanctions and US exports. As such, we see global trade
and how barrels flow as the most relevant determinant of whether fundamentals are tightening
or if barrels are having difficulty placing. In short, it boils down to the market’s ability to either
absorb the incremental barrel or price to move. As such, this is the inaugural in what will be a
regular Follow the Barrel publication where we highlight 10 drivers and charts worth watching
over time to assess whether global oil trade patterns are trending bullish or bearish.E 1
Figure 1: Global Floating Roof Tank Total Oil Inventories*

All values in USD unless otherwise noted.

Priced as of prior trading day’s market close,
ET (unless otherwise stated).

For Required Conflicts
Disclosures, please see
2,960 page 6.


Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
Source: RBC Capital Markets, Orbital Insight *7 Day Moving Average

E Learn more about RBC Elements on page 5.


Disseminated: January 23, 2019 00:15ET; Produced: January 22, 2019 19:57ET
Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

Atlantic Basin Physical Crude Differentials to Dated Brent – Market Ranking: Trending Constructive

$/bbl Atlantic Basin Diffs to Dated Atlantic Basin physical differentials are the foremost indicator
2.00 of the health of the global oil market. While we see price
upside this year, the market’s ability to absorb Atlantic Basin
1.50 crudes is critical to circumnavigating adverse price moves in
the event of oversupply. North Sea and West African
differentials are the best physical proxy of the market’s ability
to clear barrels given that these marginal crudes are the first
to reflect loosening or tightening fundamentals. Recent
0.00 outages in Libya and Russia have strengthened WAF
differentials and helped tighten Brent spreads. The question
-0.50 posed by the market is whether OPEC’s cuts are aimed at
cleaning up a slightly soggy market or a function of keeping up
2017 2018 2019 with weakening demand. In any case, if global fundamentals
Forties Ekofisk Qua Iboe Bonny Light tighten, barrels will clear and Atlantic Basin differentials will
rally in real time. The opposite is true if fundamentals weaken.
Iranian Crude Oil Production & Exports – Market Ranking: Bullish

The Trump Administration’s issuance of eight waivers in the mb/d 2018 Iranian Exports By Destination
face of Iranian sanctions was more impactful for sentiment 3.00

than for the physical market. Iranian crude exports fell to an

average of 1 mb/d in the months subsequent to sanctions 2.50
kicking in, marking a plunge of 600 kb/d from the three 2.00
months prior to November 4th. The drop in exports led to
sharp cuts to official selling prices in a futile attempt to 1.50
encourage buyers. Many countries have turned to alternate
suppliers, leaving little impetus for customers to resume 1.00
taking Iranian crudes, waiver or not. Lack of buyers has driven 0.50
domestic stocks to multi-year highs. The dearth of outlets has
resulted in production falling in relative lockstep with exports. 0.00
Waivers came at the detriment to sentiment, but physical Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
barrels have and will struggle to place in the months ahead. China India Japan S.Korea Taiwan
Other APAC Greece Italy Turkey Other
Saudi Crude Exports to US – Market Ranking: Neutral

kb/d Imports of Saudi Crude by US Refiner Saudi crude shipments to the US have fallen to multi-month
1,600 lows with additional reductions anticipated as shipments are
1,400 diverted to less visible regions. The Kingdom has already cut
1,200 total exports to 7.3 mb/d from Q4’18 levels of 7.8 mb/d. Shale
growth has clearly played a meaningful role in the reduction
of US imports, and shipments from the Kingdom have fallen
800 by nearly half to 720 kb/d last year relative to five years ago.
600 The number of US refiners that the Saudis trade with has
dwindled over the years. Last year, the Kingdom had 25 US
counterparts, down from 33 in 2012. Volumes have also
become increasingly concentrated, with 6 refiners taking 80%
0 of total Saudi shipments. Simply put, there are plenty of US
2012 2013 2014 2015 2016 2017 2018 refiners currently importing small and intermittent volumes.
Port Arthur Richmond Paulsboro Baytown Reducing exports without compromising meaningful market
El Segundo Carson Other
share means cutting shipments to smaller customers.

Source: RBC Capital Markets, Thomson Reuters, Bloomberg, IEA, EIA, Petro-Logistics SA

January 23, 2019 2

Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

Saudi OSP Relative to Key Competitors into Asia – Market Ranking: Neutral to Trending Constructive

The Saudis have recently been pricing their barrels less $/bbl OSP for Light Crudes to Asia
competitively into Asia relative to regional rivals. Light crudes $4.00
into the region are currently set at a premium of 70¢/bbl to $3.00
the Dubai benchmark, which compares to similar spec Iranian
crudes priced at a premium of 40¢/bbl or Iraqi barrels that are
flat to Dubai. All have slashed prices from the Q4’18 highs in $1.00
anticipation of refinery turnaround season, but the recent $0.00
Saudi hike in Official Selling Prices (OSP) to Asia is timed as
OPEC’s cuts begin to take hold. The price premium raises the
question of whether the Kingdom is purposely pricing itself -$2.00
out of the hyper-competitive region. The recent OSP hike can -$3.00
be interpreted as a signal highlighting tightening balances
rather than scraping for market share in a region saturated Saudi Iran Iraq
with light crude and negative gasoline margins, particularly as -$5.00
2014 2015 2016 2017 2018 2019
the Saudis look to cut exports further in the coming weeks.
Tanker Rates in Key Regions – Market Ranking: Neutral

$/day Arab Gulf to Asia VLCC Daily Rate Global tanker rates have been subject to significant volatility
100,000 over recent years. The Arab Gulf to Asia VLCC rate is indicative
OPEC output cuts in of the state of global trade. Elevated shipping rates suggest
both 2017 and 2019 increased OPEC volumes to Asia, while fledgling rates are a
sent shipping rates real-time indicator of weaker demand or production cuts.
plunging Daily VLCC rates rallied in both late 2016 and late 2018 thanks
60,000 to OPEC countries surging production ahead of agreed cuts.
Current rates will continue to slide as output cuts bite, but
40,000 cheap rates will shift the balance of the export trade to the US
for several reasons. First, US refinery maintenance season
means more barrels available for export, particularly if US-
China trade tensions ease. Second, debottlenecking the
Permian increases the availability of coastal crude and finally,
0 OPEC cuts mean an increased number of tankers available due
2015 2016 2017 2018 2019
to less work on traditional OPEC to Asia trade routes.
Saudi Crude Oil Exports to China – Market Ranking: Neutral
Concerns of tapering Chinese crude imports are misplaced % of Total Chinese Crude Imports by Key Country
given that inbound shipments grew by 830 kb/d to average 25%
9.2 mb/d last year. One can argue that firm levels in Q4’18,
including a record 10.5 mb/d in November, cleaned up soggy
balances when OPEC production surged. The Saudi-led market
share battle of 2014 was a failed experiment given how its
commanding position in China deteriorated from a 20% share 15%
earlier this decade to below 12%. Meanwhile, Russia became
the foremost player and is now the largest supplier to China. 10%
The Kingdom hit back late last year when China began phasing
out Iranian crudes. The first month of sanctions saw imports
from Iran drop to 390 kb/d from 700 kb/d normally. Saudi
capitalized on the opportunity by elevating China-bound Saudi Russia Angola
exports to a record 1.6 mb/d, 500 kb/d higher than the annual 0%
'10 '11 '12 '13 '14 '15 '16 '17 '18
average. Saudi will continue to seek to strategically place
barrels in the world’s largest demand growth center.
Source: RBC Capital Markets, Thomson Reuters, Bloomberg, Poten Partners, Petro-Logistics SA, Saudi Aramco, Chinese Customs General Administration, country reporting

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Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

Chinese Crude Oil Imports – Market Ranking: More Constructive than the Market Realizes
Despite well-publicized soft patches throughout late last kb/d Chinese Crude Imports by Region, YoY Chg
summer, Chinese crude imports surged last quarter. Q4’18 1,200
saw imports climb to record highs and increase by a blistering 1,000
rate of 1.1 mb/d relative to the same period in 2017. Despite
the big buying spree, bears were not convinced given that 800
satellite-imaging data suggest that Chinese oil stocks built by 600
27 mb during that quarter. However, the stockpiling was two-
fold, the pickup in buying came ahead of both sanctions snap 400
back on Iran and also in anticipation of the start-up of several 200
new domestic teapot refiners. In other words, the inventory
builds are not particularly bearish given that domestic refinery 0
runs remain firm and end-use demand remains strong
enough. Further, the latest round of data suggests that Jan'18 Mar'18 May'18 Jul'18 Sep'18 Nov'18
Chinese imports of Iranian crude have fallen to 390 kb/d since
Other US Russia OPEC ex Saudi Saudi
sanctions kicked in from last summer levels of some 700 kb/d.
US Gasoline Exports – Market Ranking: Bearish

kb/d US Gasoline Exports by Destination Our recent outlook highlighted weak gasoline fundamentals
1,200 as the biggest downside risk to the global oil market this year.
Canada While gasoline balances are weak globally, the US Gulf is
1,000 Central America geographically privileged to be in close proximity to refinery-
South America challenged areas in South and Central America. Abysmal
800 Other
utilizations have left the region structurally short refined
product and heavily reliant on US exports, meaning that the
US can often export its way out of surpluses. US gasoline
400 exports have surged to records north of 1 mb/d and Mexico
has accounted for nearly 60%, but the slowing in recent weeks
200 due to the Mexican government’s crackdown on theft has left
the US lacking release valves. Last week, the US sent a gasoline
0 cargo earmarked for Australia, which is an unusual and
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 expensive voyage and not a hotbed for gasoline demand
2010 2011 2012 2013 2014 2015 2016 2017 2018
growth. This red flag signals domestic saturation.

Signs of US Crude Export Bottlenecks – Market Ranking: Potentially Bearish WTI

US crude exports will grow meaningfully given the onslaught kb/d US Crude Exports by Key Region
of Gulf Coast offshore export projects scheduled for the 2,500 Asia ex China
coming years, but potential for near-term congestion hinges China
on the pace of US production growth. OPEC’s cuts will free up 2,000 Europe
VLCCs to service the US Gulf, particularly as domestic refiners Canada
South America/Carribean
head into maintenance. While this bodes well for US export Other
growth, the forward curve suggests that Permian congestion
will evolve into an export bottleneck. We estimate that US
Gulf exports clear when Houston trades at a $2/bbl discount
to Brent, so why does the spread widen to $3/bbl this year
and wider yet in 2020? This suggests the market anticipates 500
pipeline de-bottlenecking to result in an export logjam. Any
export gridlock will likely be short-lived, but intermittent 0
infrastructure challenges can plague the Gulf and have Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018
significant implications for US pricing relative to global peers.
Source: RBC Capital Markets, EIA, Chinese Customs General Administration, country reporting

January 23, 2019 4

Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

RBC Elements
RBC Elements is a primary research and data science team embedded within RBC’s Global Research division. The main focus of
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The team is involved in creating various machine learning and predictive modeling tools and processes, helping RBC Research
discover the information hidden in big data, and allowing the Research division to make smarter decisions and deliver
differentiated products to our clients. RBC Elements strives to augment the already available industry data with different
alternative data sources, and enhance data collection procedures to include information that is relevant.

The team is implementing different machine learning and data mining algorithms using state-of-the-art methods. Examples

• Machine learning techniques and algorithms, such as k-NN, Naive Bayes, SVM, Decision Forests, Clustering, Artificial Neural
Networks, and Natural Language Processing to find patterns in the past, and to predict the future.
• Feature selection techniques to find what matters most in the data.
• Statistical modeling and analysis, and statistical tests such as distributions, and regression/GLM.
• Developing hypotheses and making inferences using large amounts of data.

January 23, 2019 5

Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

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Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

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Follow the Barrel – Q1’19 Global Oil Trade & Flow Scorecard

Global Macro, Economics & Rates Strategy Research Team

RBC Europe Limited:
Vatsala Datta UK Rates Strategist +44 20 7029 0184
Cathal Kennedy European Economist +44 20 7029 0133
Peter Schaffrik Global Macro Strategist +44 20 7029 7076

Royal Bank of Canada – Sydney Branch:
Su-Lin Ong Head of Australian and New Zealand FIC Strategy +612-9033-3088
Robert Thompson Macro Rates Strategist +612 9033 3088

North America
RBC Dominion Securities Inc.:
Mark Chandler Head of Canadian Rates Strategy (416) 842-6388
Simon Deeley Rates Strategist (416) 842-6362

RBC Capital Markets, LLC:

Michael Cloherty Head of US Rates Strategy (212) 437-2480
Jacob Oubina Senior US Economist (212) 618-7795
Tom Porcelli Chief US Economist (212) 618-7788

Commodities Strategy Research Team

North America
RBC Capital Markets, LLC:
Helima Croft Global Head of Commodity Strategy (212) 618-7798
Christopher Louney Commodity Strategist (212) 437-1925
Michael Tran Commodity Strategist (212) 266-4020
Megan Schippmann Associate (212) 301-1531

January 23, 2019 8