Dr. Giovanni Serio--Head of Market Analyst of BP Singapore PTE Limited

Introduction:

Head of Market Analysis, at BP IST Global Oil, Singapore. The Market Analysis team is responsible for fundamentals analysis in support of Global Oil BP IST trading activity, including crude oil, fuel oil and refined products. Before moving to Singapore, Dr. Serio was heading the Market Analysis Team in London. Prior to joining BP, he was a senior economist at Goldman Sachs' Commodities Research Team. He has also worked as economist at the Development Economics Research Group of the World Bank and at the Economic Research unit of the Italian Central Bank. He holds a Ph.D. in Economics from New York University.

Summary:

The capacity bottlenecks that had characterized the oil supply chain in the past decade have largely been resolved downstream but persist upstream. The rapid expansion in transportation capacity as well as refining capacity and complexity have left the downstream business largely oversupplied. We believe that the most significant bottlenecks remain upstream. The main challenge is to find oil rather than transport and refine it. Therefore, when reading market signals, it is more important to pay attention to upstream signals rather than refinery profitability and crack products. Despite the promising developments in shale oil, it is not clear that these bottlenecks will be resolved in the near-term.

Two important examples of how some traditional downstream market signals may be distorted in the current environment are gasoil cracks and gasoil/residual-fuel-oil correlation.

Traditionally gasoil cracks have been very well correlated to crude oil prices. This correlation is due to a number of factors but also encouraged by the constraints in the refining system, As refining capacity continues to expand especially around units that can maximize gasoil production, the correlation is becoming weaker. As in 2011, environments of high crude oil prices but low gasoil cracks can become more common.

Similarly the negative correlation between gasoil and residual fuel oil prices has traditionally be driven by some upgrading bottlenecks in the refining system. As the bottlenecks are resolved and upgrading capacity expands, the correlation has become less pronounced.