The Outlook for Oil Markets in 2007 Head

The Outlook for Oil Markets in 2007: Head Fakes From Demand & Supply David Knapp Energy Intelligence The New York Energy Forum New York - Jan. 30, 2007

Key Oil Market Developments l Short Term Factors u Weather, accidents, financial markets u Short-term demand responses u Inventory rebalancing u Geopolitics (demoted, but not gone) u Non-Opec’s Recovery u Opec expansion

Issues for Short-Term Oil Markets l First of All, Don’t Forget Geopolitics, Geopolitics Weather l Price Outlook for 2007 l 2007 Supply-Demand-Inventory Balances l Short-Term Demand Issues l Non-Opec Supply’s Supply Final Last Hurrah l Opec’s Opec Challenge l Some Conclusions

Sellers’ Markets Will Survive l Sellers’ markets in 1920 s, 1940 s, 1970 s were sudden, brief, unstable and supply-led l Post-2000 market was demand-led, demand-led and emerged gradually and looks more durable l Late ‘ 06/early ‘ 07 not likely a reversal l Supply surge not apt to come to the rescue u Post-2007 Non-Opec unable u Opec unwilling

Oil Market Force Diamond Geopolitics, Weather, Accidents OECD Demand Elasticity vs. Non-OECD drivers “Peak Oil” vs. “Resource Nationalism” “China Thesis” and “Paper Oil” Q: What’s This Diamond Worth? A: Still $55 -$65 per barrel

Geopolitics Stay in the Forefront l Nigeria history is for sporadic not major outages u this disruption better organized, conditions ripe for generalized strife u new offshore fields help, but not safe either u l Iran u u l leadership less pragmatic, threat could last impact on oil market probably slow to come Others u Venezuela, Russia, West Africa, Middle East

Weather l Past u No US Hurricanes, mild autumn, late No. Hemisphere winter, big hit on Nor. Am. gas l Present u u El Nino vs. North Atlantic Oscillation Asian cyclones, North Sea storms l Future u u Severe 2007 Gulf of Mexico storms? Global warming responses

Price Outlook l Range of $50 -$60 for 2007 WTI u average $56 -$57; high early, summer low u about $10. 50 lower than 2006’s $67. l 2006 WTI up 17% after 38% jump in 2005 and 34% in 2004 l Fundamentals look weaker for 2007, with paper markets reflecting expected weakness l Up-shift in long-term oil band still being digested l For now, no return of late-2004 differentials explosion

Reasons for 2004/mid-06 Strength l Strong and unexpected demand surge l Storms & other non-Opec disruptions l Sporadic Iraqi Iraq exports l Tight Atlantic Basin sweet crude supplies l Supply threats in Nigeria, Iran, Venezuela l Growing long positions by traders and funds

Reasons for Post-July ’ 06 Weakening l Mild Northern Hemisphere summer/winter weather l Weaker OECD demand l Surging non-Opec supply l Credibility issues for Opec cuts l Market rotation out of commodities into equities l Diminished geopolitical concerns

2007 Outlook for Price Levels Source: Energy Intelligence Research.

Quarterly Oil Prices Outlook Source: Energy Intelligence Research.

Short-Term Demand l Weather dominates current Northern Hemisphere demand l Price impacts hit harder in OECD l Low North American natural gas prices hitting bottom of the barrel l US nuclear capacity utilization has been relatively high l Anti-oil policies, peer pressure may be having an effect l Economic, demographic drivers propel Non-OECD l Fewer options for substitution, less discretionary use

OECD Flat After 2006 Decline

Non-OECD Not Back On Fast Track

Short-Term Supply l 2004 -2006 special factors inhibited supply u Hurricanes Ivan, Katrina & Rita plus several others u leaks at offshore fields in No. Sea, Canada, Mars u BP pipeline corrosion at Prudhoe Bay l 2007 non-Opec supply spurt, final last hurrah l Opec capacity adds, membership expansion u Saudi Arabia, Nigeria, Kuwait, Libya, Algeria u Angola + (who’s next? )

2007 -- A Final Last Hurrah?

2006 Supply-Demand Balances Source, Oil Market Intelligence, January 2007

2007 Supply-Demand Balances Source, Oil Market Intelligence, February 2007, forthcoming

“Observed” Stock Changes l Evidence of stock draws since September, despite supply-demand surplus l Oil at sea has been highly variable l Non-OECD SPRs beginning to suck up oil l Contango helping keep independent commercial storage high l Geopolitics out of the headlines but still in tanks l Opec focus still on OECD commercial stocks

2005 Global Stock Changes Source, Oil Market Intelligence, January 2007

Opec’s Dilemma l Maintaining long term markets l Showing production discipline l Adding sufficient capacity to handle chronic geopolitical risks l Making reserve estimates credible l Dealing with global quality issues

Conclusions l 2007 is a transition year u non-Opec supply spurt is an illusion u demand reactions are temporary u Opec difficulties peak in 2007 l Sporadic physical market price bearish signals will continue in first half l Investors look to bullish 2008 and beyond by the second half of the year

SUPPLEMENT DETAILS on 2007 Non-Opec Oil Supply

2007 North American Oil Supply l new fields in Gulf of Mexico, PL repairs in Alaska l growth from Canada synthetics, East Coast, in situ bitumen

2007 North Sea Oil Supply l positive impact on UK of Buzzard, Tweedsmuir l Norway’s Alvheim plus Snohvit, Ormen Lange late in the year

2007 FSU Oil Supply l higher Russian upstream spending; nearly half of growth Sakhalin 1 l better performance at Kazakh’s Karachaganak, Tengiz l filling Azerbaijan’s BTC pipeline l undoing Yukos damage in Russia; full-year Sakhalin 2 from 2007 -08

2007 Non-Opec Africa Oil Supply l Changes exclude Angola, which joined Opec as of Jan. 1, 2007 l Sudan’s delayed pipeline expansion, new fields l Equatorial Guinea bouncing back

2007 S. & C. America* Oil Supply * Excluding Venezuela. l Brazil belatedly growing Campos Basin joined by Santos l Ecuador dealing with protest to new pipeline l Colombia, Argentina past their peaks

2007 Asian* Oil Supply * Excluding Indonesia. l dominated by sharp drop for China l small gains for Australia, Thailand, Vietnam, Malaysia

2007 Non-Opec Mideast Oil Supply l Oman and Syria seeing accelerating declines l some new fields in Yemen

2007 Other Europe Oil Supply