4 June 2013

Market Outlook Issue # 22

Oil market factors

Likely impact on prices

Factors affecting Crude Oil and Refined Product Markets Overall trend: Over the last two weeks the market has fallen mainly due to the increase in United States crude stocks which are expected to increase further as the Organisation of the Petroleum Exporting Countries (OPEC) is keeping its production target unchanged at 30 million barrels per day (bpd) for the remainder of 2013. We expect Brent crude to trade in the US$95-105/bbl range absent of any major economic or political developments. Crude Oil F Over the last two weeks (between 20 - 31 May) Brent crude prices have fallen by over four dollars and finished last week at US$100.39/bbl (a decrease of US$4.25/bbl). According to the latest published statistics for May 2013, US crude stocks have increased by two point seven million barrels and continue to be above the upper limit of the average range. They are at their highest level since Energy Information Administration (EIA) began collecting data in 1978. The sentiment for Brent remains weak, as consumption in Europe is down and Gasoline exports to the United States will fall as inventory levels are high. The Brent forward price curve is in backwardation with August contracts trading US32c below July. Prices further out remain backwardated and drop by around US$0.92/bbl by the fourth quarter. Products In the last two weeks US product stocks for Gasoline (petrol) have increased by one point five million barrels. The US Consumer Confidence Index, a survey of 5,000 US households gauging public opinion on the state of the economy, has jumped to 76.2 from an upwardly revised 69 in April; its highest level since February 2008. In the last two weeks US product stocks for Gasoil (Diesel) stocks have increased by one million barrels. No change to the demand for high octane gasoline in Asia therefore the significant premium for 95/97 octane gasoline continues over the base grades. The forward price curves for gasoline maintains a backwardated view, though near month refining margins have decreased to US$10/bbl versus Dubai crude, and is expected to weaken to US$7.90bbl by the fourth quarter. Asian margins have remained strong due to tight avails as Indonesia, Asias largest gasoline importer, has increased its buying programme. Kerosene (Jet) premiums have decreased as regional demand remains lacklustre amid ample supply as refineries are back from their planned turnarounds. With demand that poor cargoes are moving to the West amid poor economics. In response Jet refining margins versus Dubai crude have fallen to US$15/bbl and are expected to increase to US$17/bbl by the fourth quarter.

F F

F S

F F

4 June 2013

Market Outlook Issue # 22

F Gasoil (diesel) demand has decreased in the last few weeks as demand in Australia has slowed due to the arrival of winter weather and the arbitrage window to Europe remains shut. This is then reflected in the weaker Gasoil refining margins versus Dubai crude which are now at US$15/bbl (versus the previously reported US$17/bbl). This is expected to increase to US$17/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

Macro-Economic indicators
The OECD has forecast the Eurozone economy to contract by 0.6% in 2013, this is down from the 0.1% contraction forecast six month ago. The US economy grew by 2.4% in the first quarter of this year on an annualised basis just below the 2.5% forecast for the quarter. Signs show growth In China was stabilising again with the official purchasing managers' index (PMI) reported as 50.8 in May up slightly on the 50.6 reported for April and above the 50.0 forecast by analysts.

4 June 2013

Market Outlook Issue # 22

Currency factors
The NZD/USD has been lower again over the last fortnight, falling from a high of .8213 to a low of .7939. The market sentiment has moved to being positive for the USD, due to the market starting to anticipate the reduction/reversal of quantitative easing by the US Federal Reserve in 2013/14. If the recent string of positive US economic data releases continue, then the USD will strengthen. The NZD/USD looks like it may trade in a wide yearly range of .7800-.8800, with a smaller short term range of .7800-.8550. The 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. Stronger US economic data will cause USD strength, due to market perception of stronger economic data allowing the US Federal Reserve to start unwinding Quantitative Easing (QE), and 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 weaker but appears to be stuck in a wide range, depending on investor and trading sentiment towards commodity currencies and USD. The strong offshore investor interest will support the NZD on any dips to .7800/.8000, 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 bonds to diversify part of their investments into higher interest rate economies (such as NZ and Australia). The Reserve Bank (RBNZ) maintained their outlook meaning 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. Likely impact

Fair value long term Fair value short term Interest rates

In contrast Australia is expected to reduce interest rates.

4 June 2013

Market Outlook Issue # 22

Commodities 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 the flow on effect to commodity prices.

Risk aversion

Technical Analysis

Contrast developing in market, with market starting to factor in US reducing QE in 2013/2014, but expecting other Central Banks (Japan and Europe) to increase 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/USD having fallen from .8650 high point and gone through the .8380 support level means that it risks moving lower toward .7950. Resistance in the form of selling should be found at .8215 & 8250/8270, before moving lower to .7950 and .7500.

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. Crack spread: a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it.

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. z.co.nz