23 July 2012

Market Outlook Issue # 3

Oil Market Factors
Factors Affecting Crude Oil and Refined Product Markets Overall Trend: Increased tension in the Middle East and hopes of economic improvement in Europe and the US have buoyed oil prices over the last week however underlying poor demand for products particularly in the key markets combined with a plentiful supply of crude is expected to apply downward pressure on oil prices. A rash of refinery outages in Asia is supporting product prices in the region however these are expected to reduce as these refineries return to production. Crude Oil M Brent crude continued its rally ending the week at around US$107/bbl. Supply concerns in the North Sea and escalating tensions in the Middle East supported price gains. Iranian sanctions have kicked in and are starting to impact on supply. Supply/Demand fundamentals are still shaky and dont support significant price rises. As expected the Norwegian Government called an end to the oil worker strikes affecting the Brent related (Oseberg and Heidrun) oil fields, however the impact of reduced production over June and July will take some time to work through. The Brent forward price curve remains backwardated with September contracts now trading US65c below August. Prices further out drop by around $4/bbl by end 2013. The market remains well supplied with oil. US crude stocks are still at historically high levels. Saudi Arabia has suggested reducing OPEC production to address the current oversupply however continued threats from Iran over disruptions to shipping in the Straits of Hormuz are likely to prevent any sudden supply policy changes. The newly opened pipelines bypassing the Straits would help to offset the impact of any Iranian action. Demand for direct burning crude for power generation in Japan has increased significantly due to the shutdown of the nuclear power plants however the expected summer temperature extremes have not been seen so far and electricity demand has been lower than forecast. The Brent / WTI differential is continuing to narrow and is currently trading at around US$13/bbl and predicted to fall further as flows on the reversed Seaway pipeline increase. Poor demand in the US is also capping WTI prices. In contrast the Brent/Dubai spread has widened due to excess production from the Middle East. Likely Impact on prices

Market Outlook 23 July 2012

23 July 2012

Market Outlook Issue # 3

Products F Lack of product stocks and seasonal Hurricane concerns in the US continue to support prompt product prices. US stocks of petrol are low and traders are looking to lock in cover for their short positions in case of supply disruptions. Asian markets are now also seeing significant premiums for prompt barrels due to a number of large refinery outages in the region and expected demand increases over the Ramadan holiday period. Naphtha prices have recovered slightly but are still low relative to petrol due to ample supplies and this is providing a source of cheap blending components for low octane petrol. Supplies of high octane petrol in Asia is still relatively tight leading to a significant premium for 95RON gasoline. Asia typically relies on the Reliance refinery in India for its marginal high RON barrels and the extra freight adds to the price differential. The forward price curve for petrol continues to be highly backwardated which supports the fundamental view that the market appears overheated at present with plentiful supply and poor demand in all regions. European demand for Jet fuel and seasonal increases in demand for diesel in Asia are supporting short term margins for both Jet and Diesel. Diesel refining margins have increased significantly in recent days due to refinery outages throughout Asia hitting a high of nearly US$19/bbl. Forward prices for Gasoil drop slightly but are relatively flat through 2012. F: Fundamentals (supply & demand) / M: Momentum (sentiment) Figure 1: Brent Oil & Gas Oil month average and futures contracts
$145 $135 U S D / $105 b b l $95 $85 $125 $115

F F F

Brent Oil (Mth Average)

Brent Oil Futures

Gas Oil (Mth Average)

Gas Oil Futures

Market Outlook 23 July 2012

23 July 2012

Market Outlook Issue # 3

Source: Bloomberg and Production.investis.com

Macro-Economic Indicators & Outlook

Chinas economic growth slowed to 7.6% in the three months ended June, the sixth consecutive decline, as Europes fiscal crisis weakened exports and a clampdown on domestic property speculation reduced demand. US retail sales dropped 0.5% in June, being the longest run of monthly consecutive declines since 2008. Eurozone finance ministers approved an agreement to provide aid to Spain. Investors still see Spain as high risk, Spanish 10-year government bond yields closed the week up 27 basis points at 7.19%. Greece discussions continue around a potential rescue package.

Currency Factors
The NZD/USD ranged from .75 to the high of .80 in June. In July it has remained at the top end of its recent range of between .7869-.8052. NZD/USD strength has come from: o More positive global risk sentiment from potential rescue packages to address European economic crisis. o Strong quarter of economic growth in New Zealand (1.1% for first quarter 2012) o Expectations that further rescue packages and measures will be announced from United States and European Central Banks, to support their economies. The main reasons for forecasting NZD weakness still remain: o Offshore investor fear over Europe-led global slowdown and worldwide coordinated recession, o Lower commodity prices from lower world growth, and o Lower NZ interest rates.

Fair value long term Fair value short term

Factors Affecting NZD/USD Overall: The NZD has a weakening bias with the focus on offshore negative sentiment on economic developments and falling global commodity prices. Based on the external trade balance the structural fair value estimate is that the long term NZD/USD is lower. Fair value factors (interest rates, commodities and economic growth) suggest NZD/USD fair value is below current levels.

Likely Impact

Market Outlook 23 July 2012

23 July 2012

Market Outlook Issue # 3

Interest Rates NZ has higher interest rates relative to the rest of world which creates demand for the NZD. Market forward pricing has continued to shift with pricing expectations showing the Reserve Bank of NZ increasing the official cash rate (OCR) in 2013 by %. (Current OCR 2.5%)

Commodities NZ commodity prices have being trending lower, especially dairy prices. A wide spread drought in USA has increased grain and corn food prices, which is likely to boost NZD sentiment due to being a food exporter. Risk aversion Monetary Policy Current market sentiment is weak (lower Europe and US growth rates, and reduced economic activity reports from China). Stimulus packages from world Central Banks (in the form of Quantitative Easing) is being expected by the market before the end of 2012. This stimulus will provide short term support for investor sentiment and provide a boost to the NZD. NZD/USD. The risk remains of pressure on the NZD, suggesting that it will struggle to sustain bounces above .80 with the potential to pullback toward .78.

Technical Analysis

Glossary: Contango: is a condition where forward prices exceed spot prices, so the forward curve is upward sloping. Backwardation: is the opposite condition, where spot prices exceed forward prices, and the forward curve slopes downward. GDP: The total market value of all final goods and services produced in a country in a given year.

Disclaimer: This publication has been provided for general information only and we recommend you seek professional advice before acting on this information. The information presented has been obtained from original and published sources believed to be reliable, but its accuracy cannot be guaranteed and are subject to change without notice. Actual events may differ materially from those reflected in this document. This document has been prepared by Z Energy Ltd, 3 Queens Wharf, Wellington 6140, New Zealand. http://www.z.co.nz

Market Outlook 23 July 2012