22 April 2013

Market Outlook Issue # 19

Oil market factors

Factors Affecting Crude Oil and Refined Product Markets Overall Trend: Over the last two weeks the market has weakened further as three international bodies United States Energy Information Administration (US EIA), Paris based International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have all published data where global oil demand growth has weakened due to the economic outlook for the United States and Europe. Supporting this is that commodities have had a broad sell off led by gold, due to disappointing Chinese economic data compounded by concerns about the global economy. We expect Brent crude to continue to trade in the US$95-105/bbl range absent of any major economic or political developments. Crude Oil F F Over the last two weeks Brent crude prices have fallen by approximately US$5/bbl to finish last week at US$98.74/bbl (decrease of US$5.22/bbl). Brent benchmark pushed lower due to weak oil fundamentals i.e. stronger North Sea output, increasing production out of Saudi Arabia, easing up of disruptions in Libya, and the restart of production in South Sudan after over a year of no output. According to the latest published statistics for April 2013, US crude stocks decreased by approximately one million barrels though still well above the upper limit of the average range for this time of year. The March-April refinery maintenance season continues in the United States, Europe and Asia, restricting the demand for crude. The Brent forward price curve has continued to be backwardated in the near term with June contracts trading US22c below May. Prices further out drop by around US$2/bbl by the fourth quarter. Products In the last two weeks US product stocks for Gasoline (petrol) have increased by one million barrels. In the last two weeks US product stocks for Gasoil (diesel) stocks have also increased by two 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.

Likely Impact on prices

F F

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Market Outlook Issue # 19

F The forward price curve for gasoline continues to be backwardated for the next few months, with near month refining margins remaining at US$8/bbl versus Dubai crude though is expected to weaken to US$6bbl by the fourth quarter. This drop is still attributed to plunging US gasoline prices and weakness in the European market. Kerosene (Jet) premiums continue to stay low as this reflects typical seasonal demand weakness after winter. Jet refining margins versus Dubai crude have weakened to US$15/bbl though it is expected to increase to US$18/bbl by the fourth quarter as oil demand gradually picks up from seasonal lows. Gasoil (diesel) demand is also weak in Asia as supply is ample and this is reflected in the refining margins versus Dubai crude which have fallen to US$15/bbl. However, it is expected to increase to US$18/bbl by the fourth quarter. F: Fundamentals (supply & demand) / M: Momentum (sentiment)

Figure 1: Brent Oil & Gas Oil month average and futures contracts
$145 $135 U S D / b b l $125 $115 $105 $95 $85

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

Brent Oil Futures Gas Oil Futures

22 April 2013

Market Outlook Issue # 19

Macro-Economic indicators
Euro Zone finance ministers have backed a 10 billion Euro bailout for Cyprus. Ireland and Portugal are to be given an additonal seven years to repay aid. US GDP data is due to be released on Friday. Expections are growth of 3.1% for the first quarter of this year. Growth for the previous quarter was 0.4%. The Chinese economy grew by 7.7% during the first quarter of this year, this was lower than the previous quarter which grew at 7.9% and below the 8% expected by analysts.

Currency factors
The NZD/USD has been range bound over the last fortnight, between .8350-.8500, with one major spike outside the range to .8676. The market sentiment has moved to being positive for the NZD, due to increased quantitative easing by offshore central banks, and positive NZ economic data releases (e.g. Fourth quarter GDP growth, increased commodity prices and trade data). This has led to strong interest from offshore investors to buy NZ bonds and hold NZD investments. 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 stronger but appears to be stuck in a range. The strong offshore investor interest will support the NZD on any dips to .8200, while sellers will emerge at .8550/.8650 again. 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 Likely Impact

Fair value long term Fair value short term Interest Rates

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Market Outlook Issue # 19

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. 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.

Commodities

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 having failed to maintain .8650 high point means that it risks moving lower toward .8165. If the NZD moves lower through .8380 support, then it will decline toward the .8300 level, enroute to the low .8165. If NZD stays above .8380, then it is likely to range trade between .8380-.8550.

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 purchase of assets on one market for immediate resale on another market in order to profit from a price discrepancy. 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