Thomson Reuters Market Analysis:

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1 Thomson Reuters Market Analysis: US Impact of Lifting Iranian Sanctions May 2015 Oil Research & Forecasts Houston CONTENTS SUMMARY... 2 OIL PRICE FORECAST... 3 Brent Forecast... 3 WTI Forecast... 4 Refined Product Margins... 4 Other Considerations... 5 CONTACT LIST... 6 Joshua Starnes Director of Oil Analysis, Americas joshua.starnes@thomsonreuters.com +01 (713)

2 May 4, 2015 Summary The possibility of a nuclear deal with Iran and lifting of Iranian sanctions could see as much as 1 million more barrels of oil per day entering the global supply balance by the end of With supply levels from Saudi Arabia unlikely to decrease during that period Thomson Reuters Oil Research & Forecast predicts a 13% drop in the average Brent spot price in 2016 if Iranian oil does re-enter the market place. Continued supply concerns in the US which have kept WTI price depressed relative to Brent are likely to shield the American crude market from a depression in Brent spot price. Primary impact is likely to be felt in a tightening in the Brent/WTI spread from minus $8/b to minus $5/b on average in This will tighten trade-month margins for refined products, particularly in PADD I, and likely widen spreads between New York Harbor and US Gulf Coast refined product markets. 2

3 Oil Price Forecast BRENT FORECAST On April 2, delegates from the United States and United Kingdom announced that the P5+1 (the United States, United Kingdom, France, China, Russia and Germany) had reached a framework agreement with Iran to curb economic sanctions in return for major reductions in The negotiating countries have until June 30 to work out the details of a comprehensive deal, assuming no further extension is called for. If a deal is reached and sanctions are lifted, the global oil supply balance could see as much as 1 million barrels per day (bpd) returned which have been missing since the most recent round of sanctions began in The US Energy Information Administration has estimated that the increase in global supply could lop $5-15/barrel off the average 2016 daily price. The exact timeframe for new Iranian barrels to enter the international oil marketplace has yet to be determined (see below); however, we believe the most likely scenario will see pricing impacts taking place within the first thirty days of the announcement of an agreement. The primary impact will be felt in 2016 (presuming a deal is announced during the current summer) along with a deepening of the contango in Brent and WTI forward curves through the rest of 2015 as the market attempts to price in new supply ahead of actual barrels arriving. Figure 1: Brent Forward Curve Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 $65/b $60/b $55/b Thomson Reuters Oil Research & Forecasts predicts 2015 Brent price to average $56.55/b due to downward price pressure in H2 if Iranian sanctions are lifted that year. This is a 2% decrease from our previous 2015 forecast which predicted an average Brent price at $57.86/b. Figure 2: Brent Price Forecast Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Baseline Brent WTI Spread 2015 $56.55/bbl $51.54/bbl $5.01/bbl 2016 $61.01/bbl $56.33/bbl $4.68/bbl Current expectations are that the earliest Iran can begin deliveries will be December 2015, with volumes limited to approximately 200,000 b/d due to the technical requirements of restarting shuttered fields. Volumes are expected to scale up over the next 12 months to approximately 900,000 b/d by the end of By that point our forecast predicts those volumes will have been largely priced into the market as the new supply is absorbed and higher priced barrels are forced out. We are forecasting a 2016 Brent price of $61.01/b, a 13% decline from our baseline forecast of $70.22/b (which presumes no major increase in supply). Figure 3: Delayed Impact Forecast With Iranian Supply Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 December Impact July Impact 3

4 These predictions do not change noticeably even if price only begins to react once physical barrels enter the market place. In such a simulation 2016 calendar price rises to $63.36/b with the contango pushed further into 2016, eventually reaching price parity with our July Impact simulation by the end of WTI FORECAST Market impact is likely to be concentrated on Brent spot and futures prices. With the majority of new Iranian barrels likely to head east toward India and China and US storage levels continuing to swell, WTI spot price simulations react more strongly to slowing in US unconventional production in H Thomson Reuters Oil Research & Forecast predicts a 2015 WTI average price of $51.54/b and a 2016 calendar average of $56.33/b if Iranian sanctions are lifted. This is a 1% and 3% decrease, respectively, from our baseline forecasts of $52.06/b for 2015 and $58.11/b for Figure 4: WTI Forecast Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 WTI Forecast Primary impact is instead felt on the WTI/Brent spread which will begin to tighten back towards Q levels with volatility in the spread decreasing through H and into We are forecasting a 2015 average of minus $5.50/b and a 2016 average of minus $5.22/b in the spread with the differential holding firm until Q when US production decrease begins to deviate substantially form global supply balances. This marks a 31% decline in our previous WTI/Brent forecast of minus $8/b for Figure 5: WTI/Brent Spread Forecast Jan 15-Apr 15-Jul 15-Oct WTI/Brent Spread Though US crude price impact is likely to be limited by ongoing supply issues, the resulting squeeze on the WTI/Brent spread will decrease refined product margins, particularly for East Coast refiners. REFINED PRODUCT MARGINS As with the crude curves, we predict a deepening of the contango for both ULSD and RBOB forward curves centered on H and a steady decline in trade month/run month margins for both the ULSD and RBOB. If the WTI/Brent spread hovers around minus $5/b for 2016 we are predicting a 61 percent decline in the trademonth margin (from 39.3 cents/gallon to 15 cents/gallon) for RBOB and a 15 percent decline in the trade-month margin for ULSD (from 56.8 cents/gallon to 47.9 cents/gallon). Figure 6: Trade-Month Margins Sep-15 Jan-16 May-16 Sep-16 RBOB Margin ULSD Margin Source: EIA, Thomson Reuters Oil Research & Forecasts 4

5 Brent margins decline even faster with RBOB trade month/run month margins falling 84 percent, from cents/gallon to 2.9 cents/gallon, and ULSD trade month/run month margins dropping 21 percent, from 45.2 cents/gallon to 35.4 cents/gallon. Figure 7: RBOB Brent vs WTI Margins Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 RBOB/Brent Source: EIA, Thomson Reuters Oil Research & Forecasts Figure 8: ULSD Brent vs WTI Margins RBOB/WTI Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 ULSD/Brent ULSD/WTI Iranian negotiators have called for an immediate lifting of all sanctions on day one of the agreement, though no negotiators from the Group of 5+1 have shown any inclination to grant that request with most observers suggesting a phased roll out of sanctions lifting over the course of H2 2015, dependent on Iran taking steps to meet its end of any potential agreement, is the most likely scenario. The US Congress is currently considering a bill to require President Obama to give Congress a 60 day review period from the time of any agreement during which no sanctions may be lifted. If after that period Congress is unconvinced Iran is holding up its end of the bargain it can disapprove the agreement. The legislation has the tacit approval of the White House and seems likely to pass in some fashion though it is still under debate. However, sponsors seem to have enough support to surmount a Presidential veto, the President can also choose to veto Congressional disapproval of the agreement and it is not clear that anti-agreement forces have enough votes to overcome such a veto. The bill is further limited to affecting relief of Congressional based sanctions, not sanctions imposed by other means, which could potentially allow the Administration to allow some barrels into the market even if unable to lift congressionally imposed sanctions. In our current best case scenario, no Iranian barrels are allowed to flow until August Technical limitations on Iranian production also constrain how quickly Iran can ramp up export levels, with experts citing December before the country can reach reasonable limits, a date which is also based on the expectation of a mid-summer agreement. If an agreement is not reached by the June 30 deadline but talks are extended as they were twice in 2014, impact timelines will also be further extended into the future. Source: EIA, Thomson Reuters Oil Research & Forecasts Note: Trade-month margins are the difference between second-month refined product futures price and promptmonth crude futures price. OTHER CONSIDERATIONS These forecasts are predicated on a number of highly mutable factors surrounding the potential lifting of sanctions on Iran, including a final deal being reached before the June 30 deadline, the possibility for a further extension beyond the June 30 deadline and an exact time frame for sanctions to be lifted and barrels to begin rolling out. 5

6 CONTACT LIST Joshua Starnes Director of Americas, Oil Research & Forecasts Telephone: +01 (713) Krista Kuhl Senior Analyst, Oil Research & Forecasts Telephone: +01 (713) Wajih Choudhury Senior Analyst, Oil Research & Forecasts Telephone: +01 (713) Alex Garcia Senior Analyst, Oil Research & Forecasts Telephone: +01 (713) Shoko Tsuruga Analyst, Oil Research & Forecasts Telephone: +01 (646) Nicholas Kouchoukos Head of Oil & Gas Research & Forecasts Telephone: +44 (0) Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content is prohibited without the prior written consent of Thomson Reuters. "Thomson Reuters" and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.