12 November 2012

Market Outlook Issue # 11

Oil Market Factors Factors Affecting Crude Oil and Refined Product Markets Overall Trend: Market has stayed fairly static in the last few weeks even though there have been some events which could have made an impact. Some examples were Hurricane Sandy (where 70% of the US East Coast refineries were shutdown though most restarted within a few days), continued weak economic data out of the Eurozone, pre and post impacts from the US Elections and the change in Chinese leadership in early 2013. We expect Brent crude to trade in the US$105-115/bbl range absent of any major economic or political developments. Crude Oil M Over the last two weeks Brent crude prices have stayed flat and finished last week at $109.40. According to the latest statistics US crude stocks decreased by 2.1 million barrels as a result of a drop in imports and this may be attributable to Hurricane Sandy. The Brent forward price curve has continued to be backwardated in the near term with December contracts trading US74c below November. Prices further out drop by around $5/bbl by end 2013. Products F US product stocks revealed a build of 1Mb in Gasoline while Gasoil (Diesel) were flat. This was mostly driven by Hurricane Sandy. Demand for high octane gasoline in Asia continues to be robust leading to a significant premium for 95/97 octane gasoline over the base grades. The forward price curve for gasoline continues to be backwardated for the next few months. With near month refining margins for gasoline improving to US$9/bbl, previously US$5/bbl versus Dubai though it is expected to drop further to US$5/bbl by early 2013. Likely Impact on prices

12 November 2012

Market Outlook Issue # 11

F Kerosene supplies are long with subdued Asian demand though this should be temporary as market is expected to tighten as we head towards the northern winter. Late last week Jet versus Dubai was at its lowest level (US$18/bbl) since mid-July and over US$5/bbl lower than the high on 11 October. Gasoil (diesel) refining margins versus Dubai continue to remain at high levels of around US$17/bbl. With the forward price curve being held up by the increased kerosene demand with the northern winter approaching and is showing a contango through to end 2013.

F: Fundamentals (supply & demand) / M: Momentum (sentiment)

Figure 1: Brent Oil & Gas Oil month average and futures contracts
$135 $130 $125 U S D / b b l $120 $115 $110 $105 $100 $95 $90 $85

Brent Oil (Mth Average) Gas Oil (Mth Average) Source: Bloomberg & Production.investis.com

Brent Oil Futures Gas Oil Futures

12 November 2012

Market Outlook Issue # 11

Macro-Economic Indicators Credit rating agency Fitch have said that if progress to reduce the US$1.1Tn US deficit is not made quickly they may downgrade their rating of US government debt. The European manufacturing index (PMI) showed contraction in EU manufacturing output. It fell to 45.4 in October, down from 46.1 inSeptember. The European Commission cut its Euro-Zone 2013 growth forecast to a mere 0.1%, down from the 1% they predicted in May. Chinese customs data showed October exports rose 11.6% year on year, which beat market expectations of 9%. The rise in exports is the strongest since May. Chinas October trade surplus also came in above market expectation at $32b against the forecast of $26.9b. This is the largest surplus in 45 months. Currency Factors The NZD/USD has been range bound between .8100-.8350, and is currently .8145. The world continues to focus on the four major concerns affecting world growth outlooks: Risk of European recession and countries requiring financial support US fiscal cliff uncertainty on US economy and potential to derail any economic recovery and investor confidence Risk of Middle East conflict and uncertainty, and Risk of lower growth in China, from lower world growth, and the flow on effect on commodity prices. The two competing themes continued this month: Global growth momentum remains weak, which suggests NZD should be weaker. Fundamental currency valuations suggest NZD should be weaker due to lower world growth outlooks from weaker US recovery, slower Australia economy, parts of Europe in recession, and Chinese economic activity falling below market expectations NZD strength based on investor perceptions around the holding of commodity currencies like the NZD, to participate in being linked to a higher growth Asia/Pacific region, currency diversification, higher relative interest rates and higher food commodity prices Factors Affecting NZD/USD Overall: The NZD has been weaker, based on market perception that the global financial crisis risks have increased over the last month, with the lower growth from China and Australia. The NZD appears overvalued on local economic conditions, but the risk is the NZD/USD will move higher based on global currency moves and offshore buying of NZD.
Likely Impact

12 November 2012

Market Outlook Issue # 11

Fair value long term Fair value short term 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 & economic growth) suggest NZD/USD fair value is below current levels.

Interest Rates NZ has higher interest rates relative to rest of world which creates demand for the NZD. Offshore investors are buying NZ bonds to diversify part of their investments into higher interest rate economies (such as NZ and Australia). Commodities NZ commodity prices have been trending lower, especially dairy prices. A wide spread drought in USA has increased grain and corn food prices, and has stabilised the fall in NZ export prices, and will continue to provide a boost to NZD sentiment due to NZ being a food exporter. Risk aversion Current market sentiment is neutral to weak (lower Europe and US growth rates, and reduced economic activity reports from China). Economic data releases in October have been mixed, with weaker European data, but stronger USA data. Major market focus is on US fiscal cliff due in December 2012, and flow on effect to market confidence and US economic growth. Stimulus packages from world Central Banks (in the form of Quantitative Easing) have been launched. Further stimulus from China, in the form of greater government spending will add further support for economic growth. This stimulus will provide short term support for investor sentiment and provide a boost to the NZD. NZD/USD. NZD has support at .8060/.8120, so if it remains above this level, the risk is that the NZD will move higher to .8350/.8500. If the NZD/USD rate drops below .8060 then it is likely to move lower to .7850

Monetary Policy

Technical Analysis

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