February 2013 - Torbjørn Kjus

Oil Market Outlook

– The Fat Lady Has Started To Sing- “Sad but true” for Norway but not all “Doom and Gloom”- A dream come true for the US

February 2013 - Torbjørn Kjus

“Hey, I’m your life I’m the one who took you there Hey, I’m your life And I no longer care”

Quote: Hetfield, Ulrich, Alan – “Sad but true”

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

The Limit Of Oil Production Is Being Reached - Not- In 1919 the US had produced 4 billion barrels of oil and the US Bureau of Mines though the country would run out of oil by 1930- By 2012 the US has produced about 205 billion barrels

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•Carl Beal (US Bureau of Mines in 1919):“The limit of production in this country is being reached, and although new fields undoubtedly await discovery, the yearly output must inevitably decline, because the maintenance of output each year necessitates the drilling of an increasing number of wells. Such an increase becomes impossible after a certain point is reached, not only because of a lack of acreage to be drilled, but because of the great number of wells that will ultimately have to be drilled.»

The statement above could have been stated now about sceptics to shale oil production in the US, but it was written in 1919.

•MIT professor Morris Adelman:

•“In the United States in 1930, proved reserves were 13 billion barrels. Over the next 60 years, the United States, without Alaska, produced 130 billion barrels. The inventory turned over ten times.”


The Fat Lady Has Started To Sing – “Sad But True”- “Hey, I’m your life – I’m the one who took you there - Hey, I’m your life and I no longer care”

Metallica – “Sad but true”

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More Normal For Oil Prices To Trend Lower Than Higher

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Historical oil prices in real terms (BP Stats) Return to lower real term prices?

Source: BP Statistical Review, DNB Markets

100-year period of oil prices trending lower

Formation of OPEC in 1960•Oil prices politicised•Electronic oil trade – easy access•Oil as a separate asset class•Emerging market economic growth


Trend Line Demand Growth Weakening On High Prices- We do not believe the world is about to return to the latest 30-year long trend line oil demand path which started in 1983

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)Global Oil Demand - Price Matters

Oil price change (real terms) Global oil demand Fwd looking oil demand DNB

Source: BP Statistical Review, DNB Markets

Supply shock:•Yom Kippur

Supply shock:•Iran vs Iraq•Revolution in Iran

Demand «shock»:•China and emerging markets•Weak non-OPEC supply growth


Peak Oil Has Already Happened- At least when talking about demand in the developed world – and a large chunk of this looks structural and not cyclical

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•JBC claims European oil demand would have been 1 million b/d higher now than ten years ago without a 20% efficiency improvement in the car fleet.

•Efficiency improvement in the European transportation sector set to knock off a further 0.5 million b/d by 2020 according to the JBC transport model.

•In Britain the MPG for new cars on the road has increased from 36 MPG to 47 MPG since 2001.

OECD Oil Demand (kbd) 2005 2012 ChangeLPG and Ethane 4776 4787 11Naphtha 3274 3187 -87Motor Gasoline 14836 13870 -966Jet and Kerosene 4263 3672 -591Diesel 8519 9546 1027Other Gasoil 4590 2983 -1607Residual Fuels 4504 2779 -1725Other Products 5124 4472 -652Total Products 49888 45297 -4591


GDP Growth In OECD No Longer Provide Growth In Oil Demand- The high and rising oil price has started irreversible negative effects on demand for refined oil products in advanced economies

y = 0.5492x + 33004R² = 0.9221

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Advanced Economies GDP vs Oil Demand(Yearly data 1980-2005)

Source: DNB Markets, BP stats, IMF

y = 0.3364x + 36484R² = 0.6984

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Advanced economies GDP (PPP) Advanced Economies Oil Demand

Source: BP stats, DNB Markets, IMF


Overdose "You're a habit I don't wanna break just write on my graveI overdosed on you"(AC/DC - Let there be rock)

The US has however been on a very good track in recovering from it's addiction to oil after it's overdose. The country has recently turned into a net oil products exporter.


US Fuel Efficiency Standards To Significantly Improve By 2025-CAFE-standards to reach 49.6 MPG by 2025

Source: Annual Energy Outlook – EIA June 27 2012

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Passenger cars Passenger cars new CAFE Light Trucks Light Trucks new CAFE


The Huge US Oil-Gas Spread Provides Substitution Possibilities-General Motors will soon produce dual fuel pick ups and trucks that can switch between gasoline and CNG

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Henry Hub WTI 1st monthSource: Reuters


How Large Is This Change In US Crude Output Really?- Last year Texas was still below Norwegian crude oil production – Not anymore…

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Norway Monthly Crude Oil Production

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Texas crude oil production Norway crude oil productionSource: US DOE, IEA


Texas & North Dakota Is Where It Has Happened So Far- Growth in North Dakota started in 2008 while Texas was two years later in the cycle

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Conventional vs Unconventional- Moving to the “kitchen” instead of the “living room” (Source: USGS)


Technology Has Unlocked Gas & Oil In Shale Source Rock


North American Shale Crude Production Growing Very Quickly- Total liquids output in US/Canada set to grow from 14.7 million b/d to 21.7 million b/d (up 7 million b/d) – Canadian shale crude up from 0.2 million b/d to 0.6 million b/d – Canadian oil sands up from 1.8 million b/d to 3.0 million b/d

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Non-Shale Crude & Condensate


Type Curve Have Similar Shapes Across Plays- Source: PIRA Study – Road to US energy independence


But Decline Rates Per Well Not Interesting In This Industry- One horizontal rig will increase its contribution even if decline rates per rig is very high – this is like traditional process industry


US Recoverable Shale Oil Reserves - 113 billion barrels- Source: PIRA Study – Road to US energy independence


US Shale Resources vs Other Resources- US shale resources larger than conventional reserves in Kuwait/UAE/Russia

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(Source BP stats and PIRA shale study)


Reserves Growth Set To Accelerate?- There is already visible reserves growth but will the shale oil revolution lead to an acceleration in coming years?

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We Are Starting To See The Effect On US Crude Imports Now- US crude imports has started to drop but this is just the beginning

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World Population By Country (Sources 2009-2011)

54% of the world:•China (1.34b)•India (1.2b)•Indonesia (238m)•Pakistan (176m)•Bangladesh (150m)•Japan (127m)•Philippines (94m)•Vietnam (87m)•Thailand (67m)•Burma (50m)•South Korea (49m)•Nepal (29m)•Malaysia (28m)•North Korea (24m) •Taiwan (23m)•Sri Lanka (20m)•Cambodia (13m)

USA (311m)

Brazil (191m)

Nigeria (158m)

Russia (142m)

•Germany (82m)•France (66m)•UK (62m)•Italy (61m)•Spain (46m)•Poland (38m)•Romania (21m)

Kenya (39m)

Egypt (80m)

Ethiopia (80m)

Congo (68m)

South Africa (50m)

Mexico (112m)

Iran (75m)Turkey (74m)

Colombia (46m)

Morocco (32m)

Sudan (43m)

Tanzania (43m)

Ukraine (46m)

Argentina (40m)

Canada (34m)

Australia (23m)

Algeria (36m)

Saudi (27m)

Peru (29m)

Venezuela (29m)

Iraq (31m)

Yemen (22m)


Non-OECD Oil Demand Will Continue To Grow - We do however expect the growth rate to decrease in the current decade

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Source: IEA


Chinese Growth In Oil Imports Stalling??- Where is the accelerating growth in Chinese crude oil imports??

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Source: China OGP, Xinhua News, The Chinese General Administration & Customs, National Bureau of Statistics


Chinese Oil Demand Growth To Favor Personal Consumption- Oil products more tilted towards industrial production and the investment cycle may grow much slower in coming years

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Look What The Chinese Have Done With Wind Power- Increase from zero to 1 million b/d (211 TWh) in 5 years…

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•Installed wind capacity to increase by 30% in China in 2013 (from 63GW to 81 GW)

•Will equal about 211 TWh (1 million b/d) with a 30% utilization factor

•Total German electricity consumption is about 600 TWh


OPEC Spare Capacity Reduced Since 2009 - This is the flip side of the increased Saudi production

Source: IEA Monthly Oil Market Reports

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Core OPEC (Saudi/UEA/Kuwait) Rest of OPECSource: IEA, DNB Markets


MENA: Sex Ratio – Unemployment - Young Population- A recipe for social unrest

Source: International Labor Organization, UN Population Division, Gapminder

Skewed Sex Ratio in The Middel East

Very Young Population In MENA

Low Labor Force Participation In MENA


Saudi Requires Higher Oil Prices To Balance The Budget- Saudi exports assumed to be: 2013-2017 in million b/d: 8.3 – 8.0 – 7.8 – 7.5 – 7.3

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Annual Break Even 4% Spendin g Growth (cu rre nt rate)

12% Spending Growth (10 year avg) No spending growthSource: PIRA, IMF


Long Term Oil Price Forecast(The forecast is for the average of the rolling 1st month ICE Brent future contract)

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Possible range FWD (nominal)Forecast nominal HistoricalForecast real (2012 USD)Source: Reuters, DNB Markets

Historical HistoricalNominal $/b Real (2011) $/b

2001 24.9 31.12002 25.1 31.32003 28.5 35.32004 38.1 46.62005 55.0 62.82006 66.2 72.72007 72.7 78.52008 98.7 101.62009 62.6 64.72010 80.4 82.02011 110.8 110.82012 111.7 111.7

Forecast ForecastNominal $/b Real (2012) $/b

Q1-13 112 112Q2-13 109 109Q3-13 105 105Q4-13 103 1032013 107 1072014 102 1002015 100 962016 98 922017 96 892018 94 852019 92 812020 90 78


Backup


Global Supply-Demand Trends-12 month moving average based on the latest monthly data suggest decreasing ‘Call on OPEC’ in coming years- Last year the situation was different (see the graph to the left)

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Global Oil Supply vs Demand(latest 12-month mavg)

Total supply historical Total global oil demand historical

Total supply trend fwd Total global oil demand trend fwdSource: IEA, DNB Markets

Current Trend Line Figures Trend Line Growth 2012 2013 2014 2015 2012-15 changeOECD demand -0.9% 46.1 45.7 45.3 44.9 -1.2Non-OECD demand: 3.3% 43.7 45.2 46.6 48.2 4.4Total demand 89.8 90.9 91.9 93.0 3.2Demand change: 1.0 1.1 1.1 1.1Non-OPEC (incl. non-core OPEC) 2.1% 75.6 77.2 78.9 80.6 4.9Call on core-OPEC crude 14.2 13.6 13.0 12.5 -1.7Change in Call on core-OPEC crude -0.6 -0.6 -0.6


The Hydraulic Fracturing Technique


The Most Expensive Barrels Risk Being Pushed Out By Shale Oil- How expensive will it be to develop oil projects in the Barents Sea?

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Marginal Supply vs Oil Price(If OPEC spare capacity not large enough to push Non-OPEC marginal supply out of the market)

OPEC Middle East SupplyNon-OPEC Onshore SupplyNon-OPEC Offshore SupplyNon-OPEC Deepwater, Oil Sands, GTL, CTL, Biofuel Supply, Arctic (Barents Sea)OPEC Spare CapacityNo Shale LiquidsDemand

Source. DNB Markets

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Marginal Supply vs Oil Price(Large OPEC Spare Capacity could bring prices down)

OPEC Middle East SupplyNon-OPEC Onshore SupplyNon-OPEC Offshore SupplyOPEC Spare CapacityShale LiquidsNon-OPEC Deepwater, Oil Sands, GTL, CTL, Biofuel Supply, Arctic (Barents Sea)Demand

Source. DNB Markets

The most expensivebarrels risk being pushed outof the market.The best example of thisin real life is Shtokman in the Barents sea.


Source: DNB Markets, IEA, Rystad Energy, Goldman Sachs 360 projects - March 2012, Harvard Kennedy School – Belfer Center

Existing Projects Will Cover Most Of The Oil Need By 2020

•Net need of new barrels by 2020 in million b/d: 17+6 =23? 11+6 =17?, 10+6 =16?

•Lost supply from decline rates:

•17 million b/d (2.5%)- source Rystad Energy

•11 million b/d (1.6%)- Harvard report.

•10 million b/d (1.5%) IEA WEO 1212 (page 102).

•Trend line demand growth (1.5%) will almost be cut in half (0.8%): 6 million b/d.

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Global Liquids supply (excl. biofules and processing gains)

Below trendline demand growth

Lost output

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Source: IEA, Rystad Energy, DNB Markets

•How much can supply increase?:

•Rystad Energy: 27 million b/d

•GS top 360: Estimated growth in world oil liquids supply from the worlds top 360 projects 2011-2020 (page 41): 38-12 =26 million b/d. (18 million b/d if adjusting for normal project slippage)

•Harvard study: 29 million b/d.

Conclusion:

•The gap (23-17-16 ??) by 2020 will be covered by existing projects. No need for new discoveries to cover the gap by 2020.


Investments Cannot Continue @ 50% Of GDP Growth In China- The consumption part of GDP growth must soon start to climb – Zero growth in China's investments will halve the GDP growth

China: GDPPercent change y/y

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Short Term


Fundamental Balances DNB Markets vs IEA, OPEC, EIADNB Markets World Oil Supply-Demand Balance: 2008 Change 2009 Change 2010 Change 2011 Change 2012 Change 2013OECD Demand 48.1 -2.1 46.0 0.6 46.6 -0.4 46.2 -0.4 45.8 -0.3 45.4Non-OECD Demand 37.7 1.2 38.9 2.1 41.1 1.3 42.4 1.4 43.7 1.2 45.0Total Demand 85.8 -0.9 84.9 2.7 87.7 0.9 88.5 1.0 89.5 0.9 90.4

Non-OPEC Supply 49.2 0.6 49.8 1.0 50.8 0.1 50.9 0.6 51.5 1.0 52.5OPEC NGL's and non-conventional oil 4.5 0.4 4.9 0.5 5.4 0.4 5.8 0.4 6.2 0.3 6.5Global Biofuels 1.4 0.2 1.6 0.2 1.8 0.0 1.9 0.0 1.9 0.2 2.0Total Non-OPEC supply 55.1 1.2 56.3 1.7 58.0 0.5 58.6 1.0 59.5 1.4 61.0

Call on OPEC crude (and stocks) 30.6 -2.0 28.6 1.0 29.6 0.3 30.0 0.0 30.0 -0.5 29.5OPEC Crude Oil Supply (Last known number dragged fwd) 31.6 -2.5 29.1 0.1 29.2 0.6 29.9 1.5 31.4 -0.7 30.6Implied World Oil Stock Change 1.0 0.5 -0.4 -0.1 1.4 1.2

IEA World Oil Supply-Demand Balance (Jan 2012): 2008 Change 2009 Change 2010 Change 2011 Change 2012 Change 2013OECD Demand 48.4 -2.1 46.3 0.6 46.9 -0.4 46.5 -0.4 46.1 -0.4 45.7Non-OECD Demand 38.1 1.0 39.1 2.0 41.1 1.2 42.4 1.4 43.7 1.3 45.0Total Demand 86.5 -1.1 85.4 2.6 88.0 0.8 88.9 1.0 89.8 0.9 90.8

Non-OPEC Supply 49.2 0.6 49.8 1.0 50.8 0.1 50.9 0.6 51.5 0.8 52.3OPEC NGL's and non-conventional oil 4.5 0.4 4.9 0.5 5.4 0.4 5.8 0.4 6.2 0.3 6.5Global Biofuels 1.4 0.2 1.6 0.2 1.8 0.0 1.9 0.0 1.9 0.2 2.0Total Non-OPEC supply 55.1 1.2 56.3 1.7 58.0 0.5 58.6 1.0 59.5 1.3 60.8

Call on OPEC crude (and stocks) 31.3 -2.2 29.1 0.9 30.0 0.3 30.3 0.0 30.3 -0.3 30.0OPEC Crude Oil Supply (Last known number dragged fwd) 31.6 -2.5 29.1 0.1 29.2 0.6 29.9 1.5 31.4 -0.7 30.6Implied World Oil Stock Change 0.3 0.0 -0.8 -0.4 1.1 0.7

OPEC World Oil Supply-Demand Balance (Jan 2012): 2008 Change 2009 Change 2010 Change 2011 Change 2012 Change 2013OECD Demand 48.4 -2.1 46.3 0.6 46.9 -0.4 46.5 -0.4 46.1 -0.2 45.9Non-OECD Demand 37.7 0.8 38.5 1.7 40.2 1.3 41.5 1.2 42.7 1.0 43.7Total Demand 86.1 -1.3 84.8 2.3 87.1 0.9 88.0 0.8 88.8 0.8 89.6

Non-OPEC Supply (Incl all Biofuel) 50.4 0.7 51.1 1.2 52.3 0.1 52.4 0.6 53.0 0.9 53.9OPEC NGL's and non-conventional oil 4.1 0.2 4.3 0.7 5.0 0.4 5.4 0.3 5.7 0.3 6.0Total Non-OPEC supply 54.5 0.9 55.4 1.9 57.3 0.5 57.8 0.9 58.7 1.2 59.9

Call on OPEC crude (and stocks) 31.6 -2.2 29.4 0.4 29.8 0.4 30.2 -0.1 30.1 -0.4 29.7OPEC Crude Oil Supply (Last known number dragged fwd) 31.2 -2.5 28.7 29.2 29.9 31.4 30.6Implied World Oil Stock Change -0.4 -0.7 -0.6 -0.3 1.3 0.9

EIA World Oil Supply-Demand balance (Jan 2012): 2008 Change 2009 Change 2010 Change 2011 Change 2012 Change 2013OECD Demand 47.6 -2.2 45.4 0.7 46.1 -0.3 45.8 -0.7 45.1 -0.1 45.0Non-OECD Demand 38.2 0.7 38.9 2.1 41.0 1.5 42.5 1.3 43.8 1.2 45.0Total Demand 85.8 -1.5 84.3 2.7 87.1 1.2 88.3 0.6 88.9 1.2 90.1

Non-OPEC Supply (Incl all Biofuel) 49.7 0.8 50.5 1.3 51.8 0.2 52.0 0.5 52.5 1.4 53.9OPEC NGL's and non-conventional oil 4.5 0.3 4.8 0.8 5.5 -0.3 5.3 0.3 5.6 0.2 5.8Total Non-OPEC supply 54.1 1.1 55.2 2.1 57.3 -0.1 57.2 0.8 58.0 1.6 59.7

Call on OPEC crude (and stocks) 31.7 -2.6 29.1 0.7 29.8 1.3 31.1 -0.2 30.8 -0.5 30.4OPEC Crude Oil Supply (Last known number dragged fwd) 31.3 -2.2 29.1 0.1 29.2 0.6 29.9 1.5 31.4 -0.7 30.6Implied World Oil Stock Change -0.4 0.0 -0.5 -1.2 0.5 0.3


Oversupplied Market In 2013 If OPEC (Saudi) Do Not Cut

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Fundamentals (Supply vs Do Still Matter For Oil Prices

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2013 Oil Price Scorecard – Brent Forecast Maintained @ 107 $/b2013 Oil Price Scorecard Comments Oil Price Weight

Overall Outlook

There will be powerful forces working in different directions for the oil market in 2013. Geopolitics and increased liquidity poured into the system from central banks should pose positive elements for oil prices but fundamentally the market will not look strong. After the change of the millennium we have seen two incidents of a decreasing 'Call on OPEC' (2000-02 and 2008-09). Oil prices fell back in both cases. Since we believe the 'Call on OPEC' will decrease significantly in 2013 the average oil price should be falling compared with 2012. We do however still believe it will trade above 100 $/b, supported by the mentioned geopolitical and liquidity factors.

Average price

107 $/ b

Fundamentals

Global Fundamental Balance We forecast 'Call on OPEC' will decrease by 0.7 million b/d on a combination of strong growth in non- OPEC supply (particularly from North- America) and weaker net oil demand growth. BEARISH HIGH

Crude vs Product Balance (Margins) More refinery capacity will be added next year than net growth in global oil demand. IEA estimate that more than 4 million b/d of capacity will be added in 2013 if we include desulphurization capacity, upgrading units and CDU expansions. Most of the additions will be in Asia, the Middle East and Former Soviet Union (FSU). BEARISH MEDIUM

OECD Stock levels OECD stock levels are high when measured in days of demand coverage. Unless OPEC cuts back output next year, OECD stocks will continue to grow. BEARISH LOW

OPEC Spare Capacity Since we believe there will be a need for OPEC to cut production next year and since we believe Saudi Arabia will defend oil prices in the 80- 100 $/b range, the implication of lower output from OPEC is higher spare capacity. In addition the production capacity is expected to grow in Iraq, Libya and Angola. BEARISH MEDIUM

US Oil Statistics - Fundamentals US oil demand is expected to fall 0.1 million b/d next year while liquids supply is expected to grow 0.7 million b/d on the back of the new shale liquids industry. This means US crude imports should continue to decrease, hence making more crude oil available for other consumers. BEARISH MEDIUM

Global Demand Growth

We believe global oil demand growth will be weak also in 2013. A high oil burden normally provides less "bang for the buck" with respect to the intensity factor vs economic growth. Instead of growing 0.5 percent for every percent growth in global GDP, we believe 2013, just as 2012, will offer significantly lower oil demand growth per unit GDP- growth than the long- term average of 0.5. Chinese oil demand growth has been weak so far in 2012 and with expectations of weaker economic growth next year there is probably no reason to expect trendline growth of Chinese oil demand in 2013 either. We think net global oil demand will grow only 0.7% in 2013 which is very similar to 2012. Chinese oil demand is expected to grow 366 kbd next year vs 271 kbd in 2012. This is meaningfully weaker than the ten- year average growth of 500 kbd. European oil demand will continue to fall, next year by 0.4 million b/d, slightly less than in 2012. OECD Asia oil demand growth, which has been so strong in 2012 (+358 kbd ytd) due to oil used in the power sector in J apan, is expected to fall to about zero in 2013. That could even prove to be optimistic as the 2012- numbers have been inflated by all the nuclear outages (and if many of these reactors return to service next year, oil demand in J apan will start falling). Total OECD demand is expected to fall 0.5 million b/d next year while total non- OECD demand is expected to rise by 1.2 million b/d, providing net global oil demand growth of 0.6 million b/d. We still forecast decent demand growth in Asia, Latin America and most of the Middle- East, but the expected weakness in OECD offsets much of the demand growth in non-OECD.

BEARISH MEDIUM

OPEC Supply We think OPEC will reduce its production meaningfully in 2013, both since Saudi Arabia will cut its output to balance the market but also since the Iranian conflict is not set to be resolved and hence Iranian capacity is not set to be fully restored in 2013. BULLISH LOW

Non-OPEC Supply

Non- OPEC production including biofuels is expected to increase by 1.1 million b/d in 2013. 70% of this growth is expected to come in North- America, due to the shale liquids revolution. OPEC NGLs production is expected to increase by 0.3 million b/d. This is normally added to the non- OPEC supply category since it is not part of OPEC's production target system. This means total non- OPEC production including OPEC NGLs is expected to increase by 1.4 million b/d. We do not expect unplanned supply outages caused by accidents, strikes, security issues, technical problems and weather to be as high in 2013 as we have seen in 2012. The largest part of the unplanned outages in 2012 was due to reduced production in Sudan/South- Sudan, Syria, Yemen and the UK (the Buzzard field). The largest reduction in outage is expected from South- Sudan which we estimate will see a gradual return during 2013 starting in February to reach pre- conflict level if above 300 kbd by the end of next year.

BEARISH MEDIUM

Political Risk

I raq, I ran, Nigeria, Venezuela, US, Russia, Israel, MENA, etc

The largest risk is connected to Iran's nuclear program and the fact that EU has decided an oil embargo vs the country and US has imposed financial sanctions. Officials in Iran have threatened to close the strait of Hormuz where 35- 40% of the worlds traded oil passes through. We do not think Iran will choose to close the strait. It is rational to threat to close it but irrational to carry through with it. Iran does not have the military muscles to match the US fifth fleet which is based in Bahrain. We always believed there was only a very small chance that Israel would attack Iran in 2012, even though it seemed several players placed some bets on that to happen. Now after the US elections there is however a larger chance for a physical attack since the US will need to be part of this to make any action successful. There is also constant risk for output disruptions in the whole of Middle- East/North- Africa as the "Arab spring" is not at all over in our view. The continuous demonstrations in Egypt illustrate the point. The on- going unrest in Syria, which some view as a proxy war between Iran and Saudi, risks spilling over in a wider sunni- shiite conflict that could threaten stability in the whole region. We hence believe geopolitical risk still justifies a sizeable price premium in the oil market for 2013.

BULLISH HIGH

Other Factors

Financial Money Flow

The US has had its quantitative easing (QE) nr 1, nr 2 and nr 3. All have been supportive for oil prices. Also the European LTRO- program launched last December was positive for oil prices. Generally any increased liquidity is short term positive for oil prices. The final solution to the European debt crisis could end up being that the ECB will have to help European countries inflate out of the debt problem. This could be serious trouble for the real economy and physical oil demand but could still (temporarily) support oil prices through financial demand for oil (both through increased investment in paper oil and as a hedge vs inflation). We believe the US "fiscal cliff" will be "solved" by last minute compromises between republicans/democrats and that could cause a liquidity rally as we start 2013. The rally will however be relatively short lived as weak global oil fundamentals start making their negative impact on the market.

BULLISH MEDIUM


Monthly Oil Price Scorecard-Please read on paper or zoom in on screen

Monthly Scorecard Comments Oil Price Weight

Overall Outlook

Tight North-Sea fundamentals compete with weak global oil fundamentals. At the same time the geopolitical risk related to I ran’s nuclear ambitions are very high, as the EU this week tightened sanctions. Also the Syrian civil war is adding to the contagion risk for the Sunni-Shiite conflict in the Middle East. Speculative positions are however again very high and there is a risk that players soon might take profit on the large Brent-WTI spread. I f such a profit taking on the spread becomes large it risks pushing the flat price of Brent into profit taking modus where machine trade kicks in. I f that happens we could see another flush out similar to the one we saw in May-June earlier this year.

BEARISH

Fundamentals

Global Fundamental Balance

Even with Iranian production down by almost 1 million b/d since last year to 2.63 million b/d (and 0.6 million b/d down since May) the global fundamental balance is looking over supplied. The key mitigating factor is that Libya is currently producing 1.4 million b/d more than a year ago and Iraq is up more than 0.4 million b/d since last year. It is easy to imagine how weak the balance would look if the shut in Iranian barrels should come back into the market. Saudi would then need to cut output significantly if the kingdom wants to protect prices above 100 $/b. It is however not our base case that the Iranian barrels are returning to the market within the next half a year and our methodology is to keep the last known OPEC production level flat in our forward looking supply- demand model.

BEARISH HIGH

Refinery Margins (Crack Spreads)

Both complex and simple margins saw an astonishing rally from August into September. Refiners have struggled with financing inventory levels this year (Banks are increasingly sceptical to refiners in Europe) and have as a consequence drawn down product stocks to very low levels. This has happened on both sides of the Atlantic. When we then had the Hurricane Isaac shutting down a lot of US refinery capacity in September just after the big accident at Venezuela’s largest refinery on August 25 (the Amuay refinery with a capacity of 645 kbd) margins rallied. Refineries in both US and Europe are however now in the process of returning from planned maintenance and margins are quickly deteriorating. Cracking margins in Rotterdam based on Brent have already fallen from 13 $/b to 8 $/b the last three weeks while Hydro Skimming margins are down from 11 $/b to 5 $/b in the same period. In Europe the gasoline crack spread based on Brent is down from 22 $/b to 10 $/b the latest two weeks. Margins in the US GOM have also collapsed in recent weeks. A Brent based cracking margin in the GOM is down from 13 $/b to only 3 $/b during the last two weeks. Singapore margins have also seen some weakness recently but have not fallen as much as in US/Europe. We are still not at run cut levels in any region but the extreme margin strength is gone for now.

NEUTRAL MEDIUM

OECD Oil Stock Levels

Total oil stocks in the OECD based on forward demand coverage was estimated at 58.8 days in last week’s IEA monthly report. This is higher than last year and close to the top of the 5- year range. Crude stocks have drawn down since J une but are still above both last year and the 5- year range. Product stocks have on the other hand built since J une but are still below both last year and the 5- year range. OECD gasoline stocks are lower than last year but almost spot on the 5- year average, while middle distillate stocks are below the 5- year range. Crude stocks in Europe have built from extremely low levels at the start of 2012, but have according to Euroilstocks built 16 million barrels so far this year and are now much higher than last year and are again into the 5- year range. In Europe there are however still low inventories of gasoline, middle distillates and residual fuel, according to the latest Euroilstocks data. In the US we are still in a situation with low gasoline and middle distillate stocks, while crude stocks are above the 5- year range.

NEUTRAL MEDIUM

US Oil Statistics - Fundamentals

As mentioned above US crude stocks are still very high. This is mainly a consequence of the shale oil revolution that is taking place in the US. This summer US crude stocks were at the highest level since 1991, but have since drawn somewhat down, mainly due to the Hurricane Isaac which shut in 14 million barrels in the GOM that would otherwise have been produced. US domestic oil production is up 0.7 million b/d vs last year based on a 4-week moving average on the weekly US production data from the EIA. If we use the latest monthly fully revised production data, which is from J uly, the year on year growth is 0.8 million b/d of crude oil output. Texas output growth is up 0.5 million b/d vs last year while North Dakota is up 0.25 million b/d. Last week the August number for North Dakota production was reported by the state authorities and production was up 27 kbd from J uly to stand at 701 kbd in August. The monthly growth rate in output of 27 kbd is the 4th highest growth month recorded. The average number of horizontal rigs working in the Bakken field decreased from 183 in J uly to 179 in August, so there are in other words no visible signs that fewer rigs are limiting production growth so far. As we have earlier emphasized the August data confirms that each rig is still becoming gradually more efficient. We are still early in the learning curve in the shale oil industry. US oil demand is currently down 464 kbd vs last year in the latest weekly data set (using a 4- week moving average). This is down 2.45% vs last year. To put it short, the US fundamental balance continues to weaken and the country will need gradually lower imports of oil. Year on year crude imports into the US is currently down 517 kbd on a 4- week moving average basis and we believe it will continue to decrease in the coming years.

BEARISH HIGH

Other Important Factors And News

IEA released its yearly Medium Term Oil Market Outlook last Friday. The report, as before, focuses on the medium term oil market outlook (the next five years). The agency revised down its estimated demand growth and now expects larger growth in both North American and Iraqi production than last year’s report. Quote from the report: “The result is a noticeable more comfortable oil supply/demand balance by the end of the forecast period than previously expected and than has been the case through most of the last decade. The ‘call on OPEC and stock changes’ is expected to average below current OPEC production levels, while OPEC spare capacity is forecast to return to more comfortable levels than the sometimes razor- thin cushion that had worried market participants in recent years.” As our regular readers will know, we have advocated this view of a weaker medium to longer term supply/demand balance since April. The Chinese oil trade data was recently reported and crude imports increased from 4.4 million b/d in August to 4.9 million b/d in September. By face value that could look like a strong number, but the fact is that the August imports was exceptionally low, and we have to go back to October last year to find a number as low as 4.9 million b/d which was the September imports number. Year on year growth in crude imports was hence negative also for September, despite the large growth vs August. It is worth remembering that Chinese crude imports were above 6 million b/d in April/May, just to put things in perspective. According to a Reuters poll the top 12 Chinese refineries are set to cut runs by 4 percent in October vs September due to planned maintenance and slack demand. The 12 refineries represent a third of Chinese capacity and plan to run 130 kbd less crude in October according to the survey. Hence we should not expect strong oil demand growth numbers to be reported from China in the coming month (the detailed October oil demand numbers for China can be calculated around 22 November).

BEARISH MEDIUM

OPECTotal OPEC crude production fell from 31.7 million b/d in August to 31.2 million b/d in September according to the latest IEA monthly report posted last Friday. Production in Iraq and Libya was up 110 kbd but that was not enough to offset a drop in Nigeria (- 240 kbd), Iran (- 220 kbd) and Saudi Arabia (- 100 kbd). We expect all OPEC countries except Saudi Arabia to continue to maximise their production in the coming months. Moving into next year we believe Saudi will have to start throttling back output if the kingdom wants to maintain crude prices above 100 $/b.

NEUTRAL MEDIUM

Non-OPEC

Year on year total non- OPEC supply was only up 0.1 million b/d in September. South- Sudan was down 347 kbd, Syria down 130 kbd, Norway down 265 kbd, UK down 227 kbd, Azerbaijan down 128 kbd, Kasakhstan down 128 kb, Indonesia down 105 kbd. Many of these lost barrels are caused by outages/maintenance and not by structural decline. We expect to see lower decline in UK/Norway in 2013 and South- Sudan and Kazakhstan are probably on the positive side by the end of 2013. It is also probably worth looking at non- OPEC in a more sophisticated way that the IEA classification. The split between OPEC and non- OPEC makes sense in order to separate countries that constantly produce as much as they can from countries that sometimes cut output to protect prices. However, the only countries that should be included among countries that are real swing producers are Saudi/UAE/Kuwait (which we call core- OPEC). If we look at non- OPEC this way (that is all the countries that do not voluntarily cut output from time to time) one can note that year on year output is up about 1.5 million b/d in September and that is including the almost 1 million b/d lost Iran production. This means that non- OPEC production growth (including the OPEC countries that are not a part of core- OPEC) is twice as strong as global oil demand growth in September which came in at 0.7 million b/d.

BEARISH MEDIUM

SeasonalsTemperature Outlook Normal, or warmer than normal temperatures forecasted in the key heating oil regions for next week. NEUTRAL MEDIUMHurricanes & Other Weather The tropical storm Rafael might hit the US northeast later this week, but is forecasted to head outwards in the Atlantic. NEUTRAL MEDIUM

North Sea Field maintenance and outage

The Buzzard field which is part of the Forties stream which again normally sets the Brent quote is still in maintenance and is set to return 3- 4 days later than expected (October 19 or 20) according to a Reuters source. Forties production started the year at almost 0.5 million b/d but scheduled loading for November is just 0.28 million b/d which is in fact 30 kbd lower than in October. The total loading program for BFOE (Brent/Forties/Oseberg/Ekofisk) in November is a low 0.78 million b/d, which is down 90 kbd vs an already low October program. To illustrate how low this number is it is worth mentioning that in November 2011 the loading program for BFOE barrels was 1.06 million b/d. It adds to the low supply in the North Sea that cargoes are still leaving the region for Korea due to the trade agreement with that country (3% lower tax).

BULLISH HIGH

Political Risk

I raq, I ran, Nigeria, Venezuela, US, Russia, I srael, China, etc

The EU decided on Tuesday to tighten the sanctions vs Iran’s shipping, banking and industry sectors. EU’s foreign policy chief Catherine Ashton said she hoped that turning up the heat vs Iran would persuade the country to make concessions and that negotiations could resume. The new sanctions mark one of the toughest moves against Iran to date. The widening sanctions are already doing significant damage to the Iranian economy. According to Reuters, riots have broken out in Tehran this month in protest at the collapse of the rial currency which has lost two thirds of its value against the dollar during the last 15 months. This has created accelerating inflation which is said to now be about 25%.

BULLISH HIGH

Other factors

Hot Money Net Exposure (Speculators)

Non- Commercial net oil positions on the NYMEX were 410 million barrels in the first week of May. Then the WTI price was 106 $/b. By the first week of J uly the net positions had been sold off by 164 million barrels to 246 million barrels and the WTI price fell to 87 $/b. Since then the net positions have been rebuilt to 372 million barrels (+126 million barrels) and the WTI price has risen by 5 $/b to 92 $/b. For the Brent market the same numbers were 115 million barrels net long positions for Money Managers on ICE London in the first week of May. The Brent price was then 120 $/b. These net positions were reduced to only 53 million barrels by the first week of J uly and the Brent price dropped to 100 $/b. Since then the Money Managers on ICE London have rebuilt their positions to 106 million barrels and the Brent price has risen to 114 $/b. Bottom line is that financial players have rebuilt almost all their positions in the Brent market and have also rebuilt a large chunk of the net length on the NYMEX. This fact adds to the downside risk for oil prices. For the Brent market there is extra downside risk connected to the fact that the Brent- WTI spread has risen from 12 $/b to 21 $/b since J uly. The risk is that some players who have large gains on this spread in their books may decide to take profit (before it is too late) and then Brent would be pushed lower, maybe to such an extent that it could unleash a flat price sell- off (machine trades kicking in) similar to what we saw in May.

BEARISH MEDIUM

Market Psychology/Sentiment The market sentiment is very unstable at the moment. We are in a struggle between weak global oil fundamentals that competes with strong north-sea fundamentals and geopolitical risk. Also the QE3 in the US adds to the appetite for investor money entering the oil market. It however looks like much of this QE3-effect was taken out in front of the actual money printing this time, a bit unlike what happened during QE1 and QE2.

NEUTRAL MEDIUM

Technicals/Price Trends The crude contracts are looking ok and are hovering around their short term moving averages. There is however downside risk related to the NYMEX gasoline contract which has fallen below all its moving averages. NEUTRAL LOW


Modeled Brent Price Based On Time Spread- Has provided early market signals several times.

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Building risk premium due to Arab spring

Weak macro economy, European debt crisis

Iran tensions lead to a risk premium


Source: PIRA

Brent, Forties, Oseberg Ekofisk (BFOE) Loading Programs- Structural production decline still on-going. In addition about 160 kbd (equals 20% of the current BFOE program) on average has left for South Korea in 2012 due to the EU free trade agreement (which gives South Korean refiners a 3% discount).

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Modeled Dubai Price Based On Time Spread- Has provided early market signals several times.

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Dubai Market (Asia) Is Weakening- Is it giving us an early warning signal?

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ICE Brent Futures Net Length Brent 1st MonthSource: Reuters

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Source: PIRA

Brent vs LLS Starting To Trade Structurally In Favour Of Brent- Over time this will push more West-African barrels towards Europe.

Monthly Brent vs LLS 31/10/1987 - 28/02/2013 (GMT)

Line, =BrentvsLLS, 30/11/2012, 1.210 Price

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Oslo, Sales & Trading London, Sales Oslo, Research

Nils Fredrik Hvatum +47 24 16 91 59 André Rørheim +44(0) 20 7621 6082 Torbjørn Kjus +47 24 16 91 66

Fredrik Sagen Andersen +47 24 16 91 48 Singapore, Sales Karl Magnus Maribu +47 24 16 91 57

Jesper Meyer Hatletveit +47 24 16 91 53 Seng Leong Ong +65 622 480 22

Nils Wierli Nilsen +47 24 16 91 61 New York, Sales

Ane Tobiassen +47 24 16 91 44 Kenneth Tveter +1 212 681 3888

Erik Warren +47 24 16 91 46

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Documents

February 2013 - Torbjørn Kjus