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  • Karvy Comtrade Research reports are available on Thomson Reuters, ISI Emerging Markets, FACTSET

    Karvy Comtrade Ltd.

    Energy Quarterly Outlook Q4 2010

  • Karvy Comtrade Research reports are available on Thomson Reuters, ISI Emerging Markets, FACTSET

    TECHNICAL RECOMMENDATIONS

    CRUDE OIL

    STAY SHORT WITH STOP LOSS ABOVE $US87

    NATURAL GAS

    Short term: Natural gas NYMEX: Sell below $3.50 TP $3.13-3.00 SL $3.90

    Long term: Natural gas NYMEX: Buy at $2.80-3.00 TP $4.12 then $5 SL $1.90

    Short term: Natural gas MCX: Sell at `168-170 TP `140 SL `186

    Long term: Natural gas MCX: Buy at `130-135 TP `195 then `210 SL `117

    SUMMARY:

    Third quarter of CY 2010 was the official hurricane season, which was

    expected to fuel the energy prices this year. But, it failed to impact the oil market to a larger

    extent as effect of tropical storms was very little. Weakness in economic growth also kept

    the oil market under pressure. Energy producing companies drilled more oil on speculation

    that summer driving season would create more demand for energy products. However,

    demand could not match with the supply due to slower growth of major world economies

    thereby resulting to bearish trend for the crude oil prices. During the quarter, natural gas

    futures prices fell drastically whereas crude oil prices showed a mixed trend. In Q4 CY10,

    crude oil futures may show a positive trend but a rally could be limited by rising inventory

    level and on economic concern whereas natural gas prices are likely to show a recovery on

    winter demand.

  • Karvy Comtrade Research reports are available on Thomson Reuters, ISI Emerging Markets, FACTSET

    CRUDE OIL

    Crude oil futures prices movement formed a reverse V-shape in first two months of last

    quarter and fell by 1% from penultimate quarters close on MCX. However, NYMEX

    crude oil futures displayed a different direction wherein prices improved a tad on

    depreciating dollar index. In September, dollar index depreciated by -6%, whereas

    Indian rupee appreciated by 4.5%, making MCX oil futures to recover in a lower pace

    than NYMEX oil price. Active hurricane season in North Atlantic and US summer driving

    season failed to create more demand for the oil. In our last quarterly report, we had

    presented a bearish outlook and market moved as per our expectation at the beginning

    of the quarter. However, later it recovered tracking firm equity market. Prices climbed

    to three month high in August, but it lasted for one week only. Build up in inventory and

    dissipating hurricanes threat led the oil prices to fall from the monthly high in August.

    Higher volatility was seen in September for oil price movement with upward bias.

    Table 1: Crude oil price change (*Data collected till Sep 29, 2010)

    Commodity July Aug Sep QTD YTD

    NYMEX Crude Oil 0.04 -0.09 0.08 0.03 -0.02

    MCX Crude Oil 0.04 -0.06 0.02 -0.004 -0.06

    Source: Bloomberg & KCTL Research

    Table 2: USD INR movement Currencies JUL AUG SEP

    INR 0% 1% -5%

    DOLLAR -5% 2% -6%

    Figure 1: Crude oil price movement

    Source: Bloomberg & KCTL Research

    The US benchmark WTI Light Sweet Crude Oil futures prices climbed more than 4% in

    July. NYMEX oil price made a monthly high of $78.95/bbl while on MCX it climbed to

  • Karvy Comtrade Research reports are available on Thomson Reuters, ISI Emerging Markets, FACTSET

    `3654. Future contract prices traded higher the most in beginning of August. Oil prices

    climbed $83/bbl in NYMEX by rising more than 12% from opening of third quarter.

    Similarly oil prices increased to `3796 with a rise of more than 11%. However, the

    trend could not continue and prices fell to two months low in August end declining by

    more than 13%. High volatility in oil prices is witnessed in the month of September. Oil

    future contracts made a high of `3618 and a low of `3336 in September.

    Figure 2: Crude Oil price & Hurricane Season

    Source: National Hurricane Centre ,Bloomberg

    Hurricane season in North Atlantic region runs between June and November. About 30% of US crude oil production comes from Gulf of Mexico. Hence, occurrence of

    storms and hurricane in this region will disturb the supply and production of oil. The

    National Oceanic and Atmospheric Administration (NOAA) had projected 14-23 named

    storm for the current season. In last four months, more than 13 storms (6 hurricanes

    and 7 storms) have appeared. Figure 2 shows impact of hurricane and storm on the

    crude oil price movement. Crude oil prices showed a marginal rise in July as Hurricane

    Alex, Storm Bonnie and Colin hit the Gulf of Mexico and had a very little effect on

    production. As a result of hurricane, oil prices surged by more than 12% on NYMEX and

    by more than 7% on MCX. As the effect of hurricane started easing, prices tumbled in

    the beginning of August. Crude oil prices rose once again in September following

    production threat by Hurricane Igor and Julia. Crude oil production between June and

    August average at 47,000 barrels per day in US, which was about half of EIAs forecast of

    96,000 barrels per day. There are still ten named storms to appear in north Atlantic,

    which may disrupt oil supply and production. Hence, oil prices may take positive

    cues.

    Calendar Spread: The spread difference increased more than 51 percent in the last quarter. In the month of July, prices of near month contract increased more than far

    month contract which made spread to fall. Thereafter prices spread difference started

    rising the most as prices of near month contract fell the most in comparison to far

  • Karvy Comtrade Research reports are available on Thomson Reuters, ISI Emerging Markets, FACTSET

    month contract. However, spread fall from quarterly high as prices of near month

    contract increased more than far month contract. As we are expecting prices to rise

    slowly, this may push the spread in a higher side. However, a pull back can be seen in

    later period.

    Figure3: Spread chart

    Source: Bloomberg & KCTL

    Major Economy

    Crude oil prices are often seen as being connected with inflation as a cause and effect.

    Crude oil is considered as major input for the economy as most of the countries are

    dependent on import of energy. It not only used for fueling engines but also being used

    in manufacturing sector. Hence, an increase in crude oil price will ultimately lead to rise

    in input, which translates into higher price for end products (means higher inflation).

    Being the world largest economy, US are also largest producer and consumer of crude

    oil. Let us have a brief review of US economic performance in last quarter. The US

    Federal Reserve has indicated that employment rate in US is growing at much lower

    pace than expected. Industrial production increased but at a slower pace in last quarter.

    Consumer confidence increased slower-than-market expectation and the same trend is

    likely to continue in this quarter. Unemployment rate continued to remain cause of

    concern as it still above 9%. The US manufacturing activity has picked up in the last

    quarter and remains above 50. However, Institute for Supply Management (ISM)

    manufacturing index declined significantly during the quarter and Consumer price

    index grew by only 0.1%.

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    China, the second largest oil consumer overtook Japan as the second largest economy

    last quarter. Chinese GDP is at 7.4% of the world economy. Manufacturing in China

    recovered in the month of August and Foreign Direct Investment in China climbed to

    29.2% in July. Indian economy continued to exhibit strong growth in third quarter, as

    both manufacturing and service expanded. The second quarter growth rate of Japan

    (third largest oil consumer) is recorded only 0.40%. Japanese exports are likely to

    advance and economic growth may remain in weak despite sizeable stimulus efforts.

    The Euro-zone second quarter GDP growth stood at 1%. Only 7 of the banks failed in the

    stress test, which is indicating potential for European economy to grow. However, retail

    sales of Euro-zone declined and unemployment rate remains at 10% for the fifth

    consecutive month.

    Thus a slow growth of major economies is witnessed in the last quarter. However;

    economic growth rate of the US is forecast to increase by 2.6% and 2.3% for 2010 and

    2011 respectively. This data are revised from 2.8% and 2.5%. However, Euro-zone

    growth for 2010 is expected to increase 1.2% from 0.8% forecasted previously. China

    growth rate will remain unchanged from 9.5%.

    Dollar Index and Oil price Movement

    The Dollar Index, which measures the dollar aginst six currencies has a negative

    corelation with international crude oil price movement. The oil in international market

    is priced in US dollars, hence, crude oil price movement carry a negative correlation

    with the dollar. Historically, it is proven that whenever dollar index increases the crude

    oil prices fall and vice versa. In July, dollar index slipped by 4% while crude oil prices

    rose by more than 9% on weekly basis. In August, dollar index climbed to 83.29 lvels,

    which led the