18 March 2013

Market Outlook Issue # 17

Oil market factors

Factors Affecting Crude Oil and Refined Product Markets Overall Trend: Over the last two weeks the market has remained largely unchanged as data from the two largest oil consumers countered each other. China reported disappointing economic data with inflation tracking higher than expected, at 3.2 per cent in February (up from a year earlier). Annual industrial production grew 9.9 per cent in the first two months of the year which was below an expectation of a 10.6 per cent gain. This was countered by an unexpected drop in United States unemployment benefits (the four-week moving average for new claims at its lowest level in five years). Also the Paris-based International Energy Agency (IEA) cut its crude demand growth forecasts, saying that global demand for oil would grow at 0.9 per cent (820 thousand barrels per day (bpd)) this year in contrast with a 1.4 million bpd growth average for non-recessionary years. We expect Brent crude to continue to trade in the US$105-115/bbl range absent of any major economic or political developments. Crude Oil F F Over the last two weeks Brent crude prices have stayed largely unchanged and finished last week at US$109.82/bbl (decrease of US$0.41/bbl). According to the latest published statistics for March 2013, US crude stocks increased by approximately seven million barrels as many stateside refineries are closed for winter maintenance. The start of March-April refinery maintenance season has begun in the United States, Europe and Asia, restricting demand for crude. The Brent forward price curve has continued to be backwardated in the near term with April contracts trading US25c below March. Prices further out drop by around $7/bbl by the third quarter. Products In the last two weeks US product stocks for Gasoline (petrol) have dropped a further four million barrels. In the last two weeks US product stocks for Gasoil (Diesel) stocks have fallen by four million barrels. No change to the demand for high octane gasoline in Asia so the significant premium for 95/97 octane gasoline continues over the base grades. The forward price curve for gasoline continues to be backwardated for the next few months, with near month refining margins falling to US$13/bbl versus Dubai crude and is still expected to drop to US$8bbl by thethird quarter. Kerosene (Jet) premiums are still low as demand is listless and supply abundant as the high stock levels are being maintained as the arbitrage to the West Likely Impact on prices

F F

F F F

F F

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Market Outlook Issue # 17

remains shut. Jet refining margins versus Dubai crude are slightly weaker (US$19/bbl) than previously reported though it is expected to increase slightly by the third quarter. Gasoil (diesel) demand is also weak in Asia as supply is ample and this is reflected in the refining margins versus Dubai crude which has fallen (US$19/bbl) though its expected to increase slightly to US$20/bbl by the third quarter. 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

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

Brent Oil Futures Gas Oil Futures

Macro-Economic indicators
The US economy is performing above expectations marked by a decrease in unemployment and a rise in retail sales and business inventories. The US beat expectations by increasing jobs by 23,000 last month which led to a drop in the unemployment rate to a four year low of 7.7%. US Retail sales rose 1.1% in February, the largest increase since September and well above forecasts of a 0.5% increase. US business inventories rose 1% in January, the most since May 2011. However, the European Unions statistics office reported industrial production in the Eurozone dropped 0.4 per cent in January. There are further concerns in the Eurozone as Cyprus delays a vote on austerity measures that are part of their proposed bailout.

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Market Outlook Issue # 17

Chinas February Manufacturing PMI was 50.1, down from 50.4 in January and lower than the historical February average of 51.9.

Currency factors
The NZD/USD has been lower over the last fortnight, as it was unable to move more than .8500, and is currently .8230. The market sentiment has moved to being slightly negative, due to New Zealand drought conditions, USD strength and offshore investor concerns over the European economy. The two competing themes continued this month: Global economic growth momentum remains weak, which suggests NZD should struggle to move higher. Fundamental currency valuations suggest NZD should be weaker due to lower world growth outlooks from a weak US recovery, Australia reducing interest rates, 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.

Foreign exchange factors

Factors Affecting NZD/USD Overall: The NZD has been slightly weaker, based on market perception that drought conditions will slow the New Zealand economy and global financial crisis risks have increased over the last month. The NZD is at a crossroads, being at the top of recent monthly ranges of .8534, and risking a move lower in the range to .8100. 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. 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. 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). The Reserve Bank (RBNZ) has changed their outlook by signalling that the OCR (Official Cash Rate) which is currently 2.5% can move in either direction based on: the level of the NZD dollar, economic effect of drought in NZ, and overseas economic developments. In contrast Australia is expected to reduce interest rates. Likely Impact

Fair value long term Fair value short term Interest Rates

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Market Outlook Issue # 17

Commodities NZ commodity prices have been stable with small price increases. In NZD terms, export commodity prices are 23% lower than the March 2011 highs. Relative high prices will continue to provide a boost to NZD sentiment due to being a food exporter. NZ drought conditions have pushed up milk prices, due to reduced supply volumes. The market continues to be focussed on three key areas of risk: Monetary Policy US economic data releases, to see if US economy is improving, European sovereign debt issues and banking system, and Chinese economic data and flow on effect to commodity prices.

Risk aversion

Technical Analysis

Stimulus packages from world Central Banks (in the form of Quantitative Easing) have increased. Japan joined USA and Europe in quantitative easing. 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 is at a major crossroads. It failed to move higher above .8470, and has fallen below .8270, which suggests it will move lower to .7850. NZD has support at .8220, and so if it can move higher above .8270 again, it can move to .8350. If the NZD/USD rate remains below .8270 then it is likely to move lower to .7850.

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. Arbitrage: The simultaneous purchase and sale of an asset in order to profit from a difference in the price.

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