Market Issues. The change to 3:15 pm Eastern Time in Platts Americas oil assessments: a year in review.

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1 ] Market Issues The change to 3:15 pm Eastern Time in Platts Americas oil assessments: a year in review The change to 3.15 pm Eastern Time in Platts Americas oil assessments: a year in review 2 The change to 3:15 2 The year in review 2 Physical market participation and liquidity 3 USGC distillate 3 USGC gasoline 3 Futures market liquidity 4 Conclusion 5 LATEST UPDATE: July 21 The McGraw Hill Companies

2 The change to 3:15 pm Eastern Time in Platts Americas oil assessments: a year in review On June 1, 29, Platts made a major change to its Americas oil assessment processes, aligning all price inputs to 3:15 pm Eastern Time. Although the move was carefully planned and executed, some market participants feared that it could cause a fall in liquidity in both the physical and futures markets. A year after the move, Platts has completed a detailed study of the impact of the change, which shows not only that these fears failed to materialize, but that the revised methodology has brought a number of benefits, including: A greater number of participants in the market-on-close process used to assess physical oil markets Increased liquidity in physical oil markets during the MOC process Increased liquidity on related futures markets, both in overall terms and around the new key time of 3:15 pm ET THE CHANGE TO 3:15 Platts made the decision to align all the price inputs used in its Americas oil assessment processes namely the futures basis, differentials and outright prices at 3.15 pm Eastern Time in order to strengthen the quality of the assessments, to bring them fully into line with our stated methodology, and also to harmonize the assessment practices in the Americas to the same standard employed by Platts elsewhere in the world, including Europe and Asia. In essence, the change resulted in Platts basing its 3:15 pm ET physical assessments on futures inputs from the same time, rather than using futures prices from 2:3 pm ET as had previously been the practice. The change was first proposed on February 16, 29, and was formally announced as a concrete change on May 5, with an implementation date of June 1, 29. From the outset, the proposal prompted several concerns from people in the market, including the possibility that there would be a dearth of liquidity in the futures market at 3:15 pm ET as compared with the ample liquidity at 2:3 pm ET. Concern also was raised about a potential loss of liquidity in the physical markets. These concerns were initially addressed in Platts papers published in June 29 and July 29, where Platts analyzed the physical and futures market activity to determine if there had indeed been any fall in liquidity or market participation. Those three studies showed compellingly that liquidity at around 3:15 pm ET was rich and that, at times, liquidity in oil product futures markets at 3:15 ET could be significantly higher than at around 2:3 pm ET. Moreover, in the physical market, Platts had also seen a rise in the number of companies participating in the price discovery process. In 21, Platts has also seen a significant increase in liquidity in many key refined product markets. THE YEAR IN REVIEW A year since the change was made, Platts has now conducted a thorough review of developments over the intervening period, allowing us to assess the impact of the 3.15 pm ET alignment, to look at liquidity in physical and futures markets and to compare the Americas oil markets with those in other global trading centers. Data we have gathered show very clearly a pattern of growing physical trade since June 29, with record levels of liquidity seen in our MOC processes in April and May 21. In addition, the analysis also shows a shift in trading behavior in the futures markets over the past year. The data reveal a sudden surge in futures trade at or around 3:15 pm ET for NYMEX crude, RBOB gasoline and heating oil futures immediately after the change by Platts on June 1, followed by continued and steady growth. Before the changes to Platts methodology, futures trade at around 3:15 pm ET was extremely thin, but the June 1 switch caused a dramatic change. On certain days, there has been more than three times as much trade in RBOB and heating oil futures at around 3:15 pm ET as there is at the time of the official NYMEX settle at 2:3 pm ET. 2

3 In addition, in 21 it has become apparent that this increase in liquidity has spread, and now spans not only the last minute before 3:15 pm ET but a wider four-minute period preceding and following 3:15 pm ET. Again, futures volumes for oil products during this four-minute period eclipse the four minutes around the 2:3 pm settle on most occasions. Platts is providing the data supporting these findings in an Excel attachment. Please visit this link to view the data in an Excel spreadsheet. PHYSICAL MARKET PARTICIPATION AND LIQUIDITY In the year following the 3:15 pm ET alignment, participation and liquidity in both the US Gulf Coast gasoline and distillates markets has increased markedly, hitting record levels at times, most recently in the distillates markets. The US Gulf Coast, the country s main refining center, has more active gasoline and distillates markets than the other regional hubs on the US West Coast, US Midwest and US Atlantic Coast and sometimes even surpasses the trading liquidity seen in other global trading centers. USGC distillate In the USGC distillate market, a total of 8.6 million barrels of gasoil, jet, and diesel traded in the Platts Market on Close assessment process in April (49,524 b/d on average), and a further million barrels in May, making the last two months the most active since Platts launched its MOC methodology in November 26. A record 38 transactions, or 95, barrels, traded during the USGC distillates MOC process on April 8. Two critical factors contributed to this substantial increase in liquidity the introduction of ewindow technology in January 21 which has increased efficiency in the transfer of information in the marketplace by enabling a faster data entry process and a steady increase in new participants this year. Graph 1: US Gulf Coast distillate activity hits record highs USGC Distillates MOC Activity -- May 29 to May 21 To provide some global context to these USGC statistics, in Singapore a total of million barrels traded in the gasoil and jet cargo assessment processes in April, while in Europe some million barrels traded in the gasoil, jet, and ultra low sulfur diesel (ULSD) barge assessment processes and 9.26 million barrels in the cargo assessment processes for the same products. Note that the size of the transactions typically traded in the European distillates cargo market is 3, mt, or around 225, barrels, while the typical USGC distillates transaction is a much smaller pipeline batch of 25, barrels so the USGC market needs to be much more active in terms of the number of trades in order to rival the total volume seen in Europe in the way it is doing. Graph 2: USGC distillate competes with its active global counterparts Global MOC Distillates Liquidity, April 21 Volume (million barrels) European distillate cargoes USGC gasoline European distillate barges Singapore distillates In the case of US Gulf Coast gasoline, 2.8 million barrels traded during the MOC assessment process in April, the second highest level since the November 26 MOC launch. In September 29, a record high of million barrels of USGC gasoline traded during the MOC. Gasoline liquidity declined seasonally in the fourth quarter of 29, but rebounded in early 21 to levels comparable to pre-alignment (May 29). The introduction of ewindow technology in this market in October 29 to facilitate the data transfer process of bids, offers and trades has also brought efficiency and helped to boost liquidity. Graph 3: US Gulf Coast gasoline liquidity remains robust USGC Gasoline MOC Activity May 29 to May 21 USGC distillates 45, Barrels/day (average) 18, Barrels/day (average) 36, 15, 27, 18, 12, 9, 6, 9, 3, May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 3

4 Again, to give these figures a global context, 1.11 million barrels traded during the Singapore motor gasoline assessment process in April, and 1.37 million barrels traded during the European gasoline barge and cargo assessment processes in April. Graph 4: USGC gasoline liquidity exceeds its global counterparts Global MOC Gasoline Liquidity, April 21 Volume (million barrels) European gasoline (barge & cargo) Singapore gasoline USGC gasoline Participation in the US markets is also ample when compared globally. For USGC distillates, 23 companies participated by posting bids, offers, or expressing an interest in taking out a position during the assessment process in April, compared with 18 companies in Singapore gasoil and jet and 38 companies in European gasoil, jet and ULSD. For gasoline, 2 companies participated in the USGC gasoline assessment process in April, compared with 13 in Singapore and 13 in Europe. In total, when comparing US Gulf Coast participation in January through May of 21 with May 29, before the 3:15 pm alignment, the number of participants has increased In May 29, 3 companies participated in the USGC gasoline and distillates assessment processes, compared with 37 from June 29 through May 21. Several companies have entered the USGC gasoline and distillates MOC processes as participants this year, including Reliance USA, Mercuria, and IPC USA. A list of these participants can be found in the appendix of this paper. The growth in US gasoline participation since June 1, 29 has also spread to ethanol, a market closely related to gasoline. Since the 3:15 pm ET implementation, the number of participants in US ethanol assessment processes has grown to 14 companies as of May 21, compared to 5 companies in May 29. These are very clear signs of a successful transition to the 3:15 ET price standard since June 1, 29, with the price discovery processes more robust than before the alignment of physical and futures prices. FUTURES MARKET LIQUIDITY In order to analyze the impact on futures market activity of the switch to 3:15 pm in Platts assessments processes, we have taken NYMEX electronic futures trade data detailing crude, heating oil and RBOB futures volumes at around 2:3 pm ET and 3:15 pm ET for four different months May 29 before the Platts change, June 29 immediately after the change, and the two most recent months of April and May 21. Prior to the June 1 launch, stakeholders in the refined products markets were concerned that the lack of liquidity in futures trade at 3:15 pm ET would continue after the Platts change, which would affect their ability to hedge their pricing exposure effectively. However, analysis of the data shows an immediate, dramatic rise in liquidity at around 3:15 pm ET after June 1, with a subsequent steady increase in the following quarters. As illustrated in the graphs below, liquidity in the minute leading to 3:15 pm ET is robust, with RBOB trade, for instance, exceeding the liquidity in the minute leading to 2:3 pm ET. The total volume of trade in the minute preceding 3:15 pm ET has continued to exceed the volume in the minute preceding 2:3 pm ET. On certain days in April 21, RBOB futures activity in the minute leading up to 3:15 pm ET was as much as tenfold the minute preceding 2:3 pm ET. Graph 5: RBOB futures activity at 3:15 pm ET exceeds 2:3 pm ET post June-1 NYMEX Front-Month RBOB (Average of Daily Lots) 35 2:29-2:3 3:14-3: May-9 June-9 April-1 May-1 It is also extremely noteworthy that in April and May of this year, liquidity in the two minutes preceding and following 3:15 pm ET (3:13-3:17) now matches or exceeds the liquidity in the same time interval around the settlement (2:28-2:32 pm ET) for RBOB and distillates. In other words, the new liquidity at 3:15 pm is not wholly concentrated in the last minute before that time, but spread out over a period of several minutes. The data suggest that overall futures volume has, so far, increased as a result of Platts move to align differentials and futures at 3:15 pm ET in the Americas, defying expectations prior to June 1 that overall futures volume would be fragmented, and possibly reduced, by the move. 4

5 Graph 6: RBOB liquidity for the four minute interval beats settle liquidity in 21 NYMEX Front-Month RBOB (Average of Daily Lots) Graph 8: Heating oil activity at 3:15 pm ET matches 2:3 pm ET in 21 NYMEX Front-Month Heating Oil (Average of Daily Lots) :28-2:32 3:13-3: :28-2:32 3:13-3: May-9 June-9 April-1 May-1 May-9 June-9 April-1 May-1 In the case of heating oil, volume in front-month futures at 3:15 pm ET was virtually non-existent prior to the June 1 launch. Following the launch, front-month futures volume in the minute preceding 3:15 pm ET increased significantly and now competes with the volume in the minute prior to 2:3 pm ET. Graph 7: Heating oil volume at 3:15 pm competes with 2:3 pm ET as total volume increases NYMEX Front-Month Heating Oil (Average of Daily Lots) 35 2:29-2:3 3:14-3: The overall number of crude lots done on an average basis in the minute leading to 3:15 pm ET is greater than the volume of heating oil or RBOB, although it does not match the volume at 2:3 pm ET in the same way as the refined product markets. The NYMEX crude oil contract is very large, with volumes tending on average to be close to 1 times bigger than in the products futures contracts. In detail, the average volume traded on the front-month crude contract in the minute preceding 3:15 pm ET has increased from just 61 lots in May, to 365 lots in April 21. Graph 9: Crude liquidity at 3:15 pm ET in April and May 21 grows relative to 2:3 pm ET NYMEX Front-Month Crude (Average of Daily Lots) ,5 2:29-2:3 3:14-3:15 May-9 June-9 April-1 May-1 2, 1,5 1, 5 When examining the four minute interval surrounding both timestamps, heating oil futures liquidity at 3:15 pm ET matches up well and on certain days exceeds the activity seen at 2:3 pm ET. This is similar to the pattern seen in RBOB, with robust liquidity for heating oil seen at the minute preceding and the minute following 3:15 pm ET. May-9 June-9 April-1 May-1 CONCLUSION Crude oil futures volume at 3:15 pm ET has also steadily increased relative to volume traded at the 2:3 pm ET settlement since June. In April 21, the crude oil volume at 3:15 pm ET accounted for 16% of the total volume between 2:3 and 3:15 pm ET, compared to 3% in May 29. On April 22, a total of 1,66 lots traded in the minute preceding 3:15 pm ET the highest volume seen at that time since the June 1 switch. The move by Platts to align physical and futures price inputs has resulted in increased liquidity in both physical and futures oil markets in the US, and a greater number of participants in Platts market-on-close price assessment processes since the introduction of the change in June 29. In the physical markets, the volume traded during the assessment process has increased remarkably in 21, compared 5

6 with both historical levels and with similar product markets in Singapore and Europe. Liquidity records have been broken for both gasoline and distillates in April 21, and the upward momentum continues. Participants June 29-May 21 May 29 In the futures markets, a clear change in behavior can be seen since the June 1 alignment and right up to April and May 21. Volumes have increased demonstrably and rapidly, with a surge of activity at 3:15 pm ET on all three NYMEX contracts. In the case of the refined products, futures volume at 3:15 pm ET has matched and, at times, even surpassed the volume at the 2:3 pm ET settlement time. And despite the growth in futures trade at 3:15 pm ET, the volume at 2:3 pm ET for crude, RBOB and heating oil futures also appears to remain sufficiently healthy for market participants. Concerns that futures activity would fail to materialize at 3:15 have been unwarranted so far. The data from a year s worth of trading activity indicate that market participants have quickly adjusted to the new alignment of Platts assessment processes. Some market participants report that they see the expansion of futures trade at 3:15 as a natural consequence of the physical hedging needs of the marketplace. Platts naturally remains focused on its core competence of analyzing and assessing physical markets. This process has been aided by the rise in liquidity to record levels seen over the past 12 months, which helps to make the price discovery process more robust and the assessments more truly reflective of market value. APPENDIX: LIST OF US GULF COAST GASOLINE AND DISTILLATE PARTICIPANTS Here is a side-by-side list of market participants in the Platts Americas Market on Close assessment process for crude oil and refined products for June 29-May 21 (37 total participants) and May 29 (3 total participants): APEX Astra Atlantic Cargill Chevron Citgo Colonial Oil ConocoPhillips Flint Hills Resources George E. Warren Glencore Great Island Hess Hetco IPC USA Koch Supply & Trading Louis Dreyfus Lukoil Mabanaft Marathon Mercuria Metroplex Morgan Stanley Musket Noble Northville Petrocom Reliance Saracen Shell Statoil Total Trafigura Valero Vitol Wawa Westport APEX Astra Atlantic Cargill Chevron Colonial Oil ConocoPhillips George E. Warren Glencore Great Island Hess Hetco Koch Supply & Trading Lukoil Mabanaft Marathon Merrill Lynch Morgan Stanley Noble Northville Petrocom Saracen Sempra Shell Statoil Total Trafigura Valero Vitol Wawa Westport 6