David worked at BP for 19 years. During this period, he was book leader for the

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1 David North PVM Smart Learning David worked at BP for 19 years. During this period, he was book leader for the European gasoline trading group, the North Sea Crude equity team and the UK and European Natural Gas trading books. After BP, David moved to Klesch and Co., a private equity firm which specialises in distressed asset acquisition, and was instrumental in establishing a metals and energy trading platform which allowed Klesch to expand it s portfolio of energy-intensive businesses. Most recently, David worked at RWE as Head of Physical Oil Trading, moving RWE s capability in this area from that of a paper-only player to a company able to compete in global physical markets. David specialises in identifying optionality within portfolios or trading propositions and establishing the ability to harvest and monetise it.

ICE BRENT NX Characteristics and Value David North

3 Areas to Cover Background and history Changes and rationale Possible value shift Knock-on effects

4 Genesis of Brent Contract Evolved from 15 day Brent partials First traded June 1988 open outcry on IPE floor June 2002, Forties and Oseberg added to contract Move to 21 day nomination (from 15 day) Jan 2003 tolerance cut to 1pct 2007 Ekofisk added to contract

5 Genesis of Brent Contract (cont) 2007 Sulphur de-escalator introduced (following Buzzard field introduction) Continued decline in Brent and Forties production sees Platts move to a 25 day dated window to increase available cargoes Brent nomination changes to 25 days to match up with Platts ICE Introduce Brent NX to mirror changes in underlying (starting 12/12 contract)

6 Effects on Futures Market Expiry of futures originally set to mirror 15 day calendar cash out price of futures set on last day of trading before nominations To remain real, futures must reflect the underlying (hence moves to BFO and BFOE) With move to 25 days nomination, current calendar too far removed from natural expiry

7 Brent Index The index is calculated as an average of the following elements: 1. A weighted average of first month cargo trades in the 21- day BFOE market. 2. A weighted average of second month cargo trades in the 21 day BFOE market plus or minus a straight average of the spread trades between the first and second months. 3. A straight average of designated assessments published in media reports. Trading day is from 0930 to 1930 GMT

8 Value ICE Brent NX and ICE Brent have identical settlement mechanisms ICE Brent NX and ICE Brent settle off exactly the same instrument The only difference is that of timing Does that timing confer any value difference?

9 Possible Value Shift (1) Each contract settles at an average of BFOE prices on expiry day Thus each contract should be valued at equal to a BFOE contract for that month owned on that day Does earlier ownership of a BFOE cargo imply any value difference? Very possibly...

Possible Value Shift (2) 1.6 1.4 1.2 Dec Dated Available for NX Available for Brent 1 0.8 0.6 0.4 0.

10 Possible Value Shift (2) Dec Dated Available for NX Available for Brent Available for Brent 01-Dec 06-Dec 11-Dec 16-Dec 21-Dec 26-Dec Available for NX Dec Dated 31-Dec

11 Possible Value Shift (3) In graphic, Blue line shows the value of all December dates Red line shows the value of all December dates available to a holder of BFOE cargo at NX expiry Green line shows the value of all December dates available to a holder of BFOE cargo at Brent expiry In this case the average value available to the NX holder is 25 cents/bbl better than a Brent holder However is average value relevant?

29-Dec 31-Dec Possible Value Shift (4) 0-0.2-0.4-0.

12 01-Dec 03-Dec 05-Dec 07-Dec 09-Dec 11-Dec 13-Dec 15-Dec 17-Dec 19-Dec 21-Dec 23-Dec 25-Dec 27-Dec 29-Dec 31-Dec Possible Value Shift (4) Dec Dated Available for NX Available for Brent

13 Possible Value Shift (5) In graphic, Blue line shows the value of all December dates Red line shows the value of all December dates available to a holder of BFOE cargo at NX expiry Green line shows the value of all December dates available to a holder of BFOE cargo at Brent expiry In this case the average value available to the NX holder is 25 cents/bbl lower than a Brent holder However is average value relevant?

14 Possible Value Shift (6) In each case, value is different by 1/6 th of a month s structure Valued this way, Brent NX is more valuable in backwardation, ICE Brent more valuable in Contango However... Would you ever see those early dates in a backwardated market? Very likely to see early dates in a contango market It may therefore be that we could rely on a discount for Brent NX in Contango, but not on a premium in backwardation

15 Possible Value Shift (7) EFP (difference between BFOE and futures value) will be zero to the respective futures contract at expiry. Value of Brent NX vs ICE Brent is therefore the value of an EFP to ICE Brent futures 10 days before expiry. This value can be positive or negative depending on the state of the physical market. This logic is really a short-circuit to previous calculations.

16 Possible Value Shift (8) Significant open interest held in current contract beyond Dec 12 How much of that will migrate? Will one class migrate more readily than another? For example, a strategic hedger may be comfortable to stick with the old contract, a spec player may wish to migrate Are the longs more mobile than the shorts?

17 Clear shift in DFL values Dated to Front Line For any given period you lose around 1/3 rd of the current first Front Line month and gain around 1/3 rd of the current last Front Line month All intervening months are common

18 Dated to Front Line (Cont) Thus Cal 13 DFL should shift by roughly 1/3 rd of Feb/Feb spread (current vs NX) 1q 13 DFL should shift by roughly 1/3 rd of Feb/May spread Any value differential between Brent NX and ICE Brent will of course impact value Visit smartglobaltrading.com for position and value shift calculator

Recent oil market volatility

Recent oil market volatility Dave Ernsberger Global Head of Energy Pricing S&P Global Platts March 15, 2018 Recent trends and structural volatility in physical benchmarks Interpretations of recent volatility