Outlook for 2011 Oil Markets Why Oil Prices

Outlook for 2011 Oil Markets: Why Oil Prices Will Stay in the Double Digits David Knapp, Chief Energy Economist Energy Intelligence Group New York Energy Forum, February 3, 2011 Powerful Thinking for the global energy industry

Outline § On the Non-Sequitur of “Physical vs. Paper” § Oil Demand, the Global Economy, Prices & Anti-Oil Policies § Oil Supply, Non-Opec Growers vs. Decliners, Opec Non-Crude § The Residual Calls on Opec and Saudi Crude Oil § Inventories Levels and Asia’s Absorptive Capacity § The Evolution of 2011 Crude Oil Prices and Differentials Oil Market Outlook 2

The Non-Sequitur of “Physical vs. Paper” • Direction of causation with oil prices not provable either way • Third factors interacting with both (economy, currency) • Interrelationships between physical & paper are complex • Common psychology underlies both • Pricing power between crude & product markets ebbs & flows -- for both physical and paper markets Oil Market Outlook 3

Oil Demand Issues § Uneven economic growth across countries and sectors German and US strength on currency/stimulus at the expense of PIIGS § Relatively weak OECD economic & demand growth Jobless recoveries, debt crises, diminished stimulus, plus anti-oil policies for environmental & energy security reasons § Strong growth in Asia, led by China (but w/ policy uncertainty) Mideast Gulf also a significant contributor but not like summer Other non-OECD a mixed bag (FSU/CEE vs. Lat. Am) § Overall global demand growth for 2011 only 1. 4 million b/d Oil Market Outlook 4

Demand’s Mixed Bag

Oil Supply Issues § Recovery and new fields give temporary non-Opec boost Brazil, Colombia, Ghana, Canada oil sands, India § Ongoing growth in Opec NGLs & Other Qatar, Saudi Arabia, UAE, Nigeria § Biofuels growing, but not as fast § Big uncertainties about Russia and China § Opec Mideast Gulf adds in Q 3, offset to US Gulf storms Oil Market Outlook 6

Non-Opec Grows Moderately

“Unintentional” Opec Crude Growth § Iraq contracts bring early fruit § Nigerian politics less intrusive § Angola fixes technical issues § Saudis, UAE, Qatar need associated gas § But, Venezuela and Iran could get worse Oil Market Outlook 8

Opec Growth Only Part Market-Driven

More Supply Than Needed

The Evolution of 2011 Balances § Big surplus expected in Q 1, over 1. 5 million b/d § Supply stays ahead of demand in Q 2 § Biggest deficit in Q 3, but not that big Mideast Gulf heat meets “normal” US Go. M storms § Q 4 runs a half Q 3 deficit, offering price support § Small build for the year not too threatening but stocks are already high Oil Market Outlook 11

Sloppy Oil Market Balances 12

Oil Inventory Issues § Days of forward OECD demand cover less relevant but still Opec’s barometer, still too high § Extra oil expected to be going to non-OECD to support higher demand to build base stocks § Non-OECD strategic stocks also growing China aggressive program could depend on price § Asian absorptive capacity has its limits Oil Market Outlook 13

Growing Share for Non-OECD *Oil at Sea, Independent commercial storage and floating inventories, , in million bbl. 14

2011 Outlook for Crude Prices 15

2011 Quarterly Price Outlook 16

2011 Monthly Price Outlook Title 17

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SUPPLEMENTAL DETAIL ON 2011 NON-OPEC OIL SUPPLY

So. & Cent. America Leads

FSU Chips In

It’s Ghana Be An Up Year For Africa

North America -- Losers Winning

North Sea Declines Continue

Asia Loses Ground Despite China Carryover

Not Much Help From The Others