Oil Report 032012

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Global Research

Sector-Oil

March 2012

Oil Market Report

WTI prices increase by 2.6% to USD105.11 per barrel in the review period Increase in geo-political risk keep oil prices high Positive news emanating out of US and Europe OPEC production (ex Iraq) increases to 28.3mnbpd in February 2012 Increase in geo-political risk and headway in European debt crisis pulls up pricesIncessant speculation over possible military action against Iran has kept crude oil prices firmly aboveUSD100 per barrel. Oil prices increased by 2.6% to USD105.11 per barrel during the review period (16Feb 2012-15 March 2012). Irans decision to halt oil supplies to Britain and France as a pre-emptivemeasure ahead of European Union plan to stop importing oil from Iran from July 2012, has put furtheupward pressure on crude oil prices.

Meanwhile, headways made in European debt crisis have also helped to boost oil prices. Greece isundergoing the largest sovereign debt restructuring ever. The private creditors have agreed on the

bond swap deal which has cleared the way for the USD160bn bailout. In a further sign of improvemenin sentiments, the Italian 10-year bond yields have come down to 4.89% compared to 7.26% inNovember 2011. Positive news has also emanated from other side of the Atlantic with US economycreating 227,000 jobs in February. The US economy has added around 734,000 jobs in the threemonths till February which has pushed down the unemployment rate to 8.3%.

Oil Price Movement

Source: OPEC, EIA, Bloomberg & Global Research

Production witnessing an upsurgeOil production has been on the rise since 3Q11 after unrest in Libya resulted in decline in production in2Q11. OPEC production (ex-Iraq) has reached 28.3mnbpd in February 2012 compared to 26.5mnbpd

in 2Q11, an increase of 6.8% during the period. With oil prices hovering at high levels, there is alwaysan incentive for oil producers to increase their production to maximize revenues. However, this timearound most of the increase has been due to faster than expected recovery in Libya oil productionwhich has contributed around 58.0% to the overall growth during this period. In addition, Saudi Arabiawhich jacked up its production to make up for the shortfall has kept its production at high levels.

Going forward, we expect OPEC oil production to stay at least at these levels if not increase further. Adecline in Iranian exports and consequentially its production is likely to be made up by other OPECmembers especially Libya as its oil production recovers further. Saudi Arabia, as the largest swingproducer with an estimated spare capacity of 2.7mnbpd will play a key role in stabilizing oil supplies.

According to media reports, US is pressing Saudi Arabia to boost its oil output to make up for anyshortfall as a result of the sanctions.

OilR

ep

ort

Faisal Hasan, CFA

Head of [email protected]: (965) 2295-1270

Umar Faruqui, ACCAFinancial [email protected]: (965) 2295-1438

Global Investment Housewww.globalinv.net

1.2

1.2

1.3

1.3

1.4

1.4

1.5

70

80

90

100

110

120

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

W TI USD/EUR

1,000

1,100

1,200

1,300

1,400

1,500

70

80

90

100

110

120

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

W TI S&P500

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Global Research - Kuwait Oil Report

March 2012 2

Oil Prices at a Glance

Selected Crude Oil Types

Change Year

Jan 12 Feb 12 Feb/Jan 2011 2012

OPEC Reference Basket 111.76 117.48 5.72 96.47 114.62

Arab Light 112.82 118.01 5.19 97.31 115.41

Basrah Light 110.21 116.21 6.00 95.83 113.21

Bonny Light 113.08 122.36 9.28 101.79 117.72

Es Sider 111.28 120.26 8.98 99.72 115.77

Girassol 113.01 120.51 7.50 100.20 116.76

Iran Heavy 111.77 116.51 4.74 95.67 114.14

Kuwait Export 112.00 116.79 4.79 95.01 114.39

Marine 110.65 116.99 6.34 96.34 113.82

Merey 107.77 109.26 1.49 83.71 108.52

Murban 113.03 119.31 6.28 98.80 116.17

Oriente 104.11 112.44 8.33 87.41 108.28

Saharan Blend 111.43 120.36 8.93 101.17 115.89

Minas 120.41 126.31 5.90 102.45 123.36

Dubai 109.86 116.17 6.31 96.03 113.01

Isthmus 110.02 114.42 4.40 92.46 112.22

T.J. Light 108.04 112.36 4.32 90.56 110.20

Brent 110.58 119.56 8.98 99.97 115.07

West Texas Intermediate 100.30 102.35 2.05 89.44 101.33

Urals 109.91 118.50 8.59 97.43 114.20

Differentials WTI/Brent -10.28 -17.21 -6.93 -10.52 -13.74

Brent/Dubai 0.72 3.39 2.67 3.93 2.06

Source: OPEC Monthly Oil Report

Source: Bloomberg

100

105

110

115

120

125

130

16-Feb

17-Feb

18-Feb

19-Feb

20-Feb

21-Feb

22-Feb

23-Feb

24-Feb

25-Feb

26-Feb

27-Feb

28-Feb

29-Feb

1-Mar

2-Mar

3-Mar

4-Mar

5-Mar

6-Mar

7-Mar

8-Mar

9-Mar

10-Mar

11-Mar

12-Mar

13-Mar

14-Mar

15-Mar

WTI OPEC Kuwait

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March 2012 3

OPEC Production and Spare Capacity

Production witnessing an upsurge

Oil production has been on the rise since 3Q11 after unrest in Libya resulted in decline in production in 2Q11. OPEC oil

production has reached 28.3mnbpd in February 2012 compared to 26.5mnbpd in 2Q11, an increase of 6.8% during the period.

With oil prices hovering at high levels there is always an incentive for oil producers to increase their production to maximize

revenues.However, this time around most of the increase has been due to faster than expected recovery in Libya oil productionwhich has contributed around 58.0% to the overall growth during this period. In addition Saudi Arabia which jacked up its

production to make up for the shortfall has kept its production at high levels.

Saudi Arabia to play a key role

We have given production trends of selected countries in the following graph. It will be interesting to see how the graph shapes

up for the rest of the year. We expect production in Libya to increase further and move closer to the pre-revolution production

levels of 1.55mnbpd. On the contrary, Iran production is likely to get affected as sanctions take a bite on its exports. Meanwhile

Nigeria saw protests and strikes after it abolished fuel subsidies. In addition, with the worsening law and order situation in the

African country might have an effect on oil production. Keeping in mind the different factors that are playing out together, Saudi

Arabia, as the largest swing producer, will have to play a fine balancing act.

Production trends of selected countries (mnbpd)


OPEC Production (mnbpd) and OPEC Quarterly Oil Prices (USD)

Source: Bloomberg,OPEC & Global Research

24

26

28

30

20

40

60

80

100

120

3Q-08

4Q-08

1Q-09

2Q-09

3Q-09

4Q-09

1Q-10

2Q-10

3Q-10

4Q-10

1Q-11

2Q-11

3Q-11

4Q-11

Feb-12

OPEC Production (RHS) OPEC Pr ice (LHS)

OPEC ProductionCut of 2.2mn barrels

Start of unrest

in Libya

0

1

2

3

4

5

6

7

8

9

10

2Q11 3Q11 4Q11 Jan-12 Feb-12

Saudi Arabia Iran L ibya Nigeria

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March 2012 4

Non-OPEC Supply

Non-OPEC supply growth slowed down drastically to 0.03mnbpd in 2011 after a strong increase of 1.13mnbpd in 2010. The

slow growth was due to delayed ramp-up in some fields, unplanned shutdowns, adverse weather and political problems in

countries such as Yemen and Syria. North America has been the major source of non-OPEC supply increase while Western

Europe has seen the largest decline in its production.

Lower than expected Non-Opec supply; an understated factor in 2011

Oil supply increased by 0.03mnbpd in 2011 which is far lower than an increase of 0.41mnbpd estimated at the start of the year.

This lower than expected increase in non-OPEC oil supply goes some distance to explain the high oil prices in 2011 despite the

economic uncertainty in the backdrop of the European debt crisis. Though, political upheaval played a significant factor in the

spike in oil prices, we believe that the reduction in Non-OPEC supply maintained an upward pressure on crude oil prices.

(Oil supply mnbpd) 2010 1Q11 2Q11 3Q11 4Q11 2011 Change 11/10

North America 14.99 15.29 15.2 15.53 15.95 15.5 0.51

Western Europe 4.39 4.31 4.06 3.85 4.06 4.07 -0.33

OECD Pacif ic 0.6 0.49 0.49 0.5 0.53 0.5 -0.10

Total OECD 19.99 20.09 19.75 19.88 20.54 20.07 0.08

Other Asia 3.70 3.69 3.54 3.58 3.61 3.61 -0.09

Latin America 4.67 4.70 4.68 4.73 4.86 4.74 0.08

Middle East 1.78 1.80 1.68 1.70 1.53 1.68 -0.10

Af rica 2.59 2.61 2.60 2.60 2.54 2.59 0.00

Total DCs 12.73 12.81 12.49 12.62 12.54 12.61 -0.12

FSU 13.22 13.32 13.25 13.23 13.23 13.26 0.03

Other Europe 0.14 0.14 0.14 0.14 0.14 0.14 0.00

China 4.12 4.22 4.19 4.08 4.04 4.13 0.01

Total "Other regions" Total 17.48 17.68 17.58 17.44 17.4 17.53 0.04

Non-OPEC production 50.2 50.57 49.83 49.94 50.48 50.21 0.00

Processing gains 2.1 2.13 2.13 2.13 2.13 2.13 0.03

Total Non-OPEC supply 52.3 52.7 51.96 52.07 52.61 52.34 0.03

Previous estimate 52.3 52.77 51.96 52.08 52.77 52.4 0.10

Revision 0.01 -0.07 0.00 -0.01 -0.16 -0.06 -0.07


Non-OPEC Oil Supply growth (mnbpd)

Source: OPEC & Global Research

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

North America WesternEurope

Latin Ameri ca FSU Ch ina To talNon-Opec

2007 2008 2009 2010 2011

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March 2012 5

World Oil Demand

World oil demand continued to recover, though at a slower pace. World oil demand increased by 0.9mnbpd in 2011 after a

strong increase of 1.6mnbd in 2010. European sovereign debt crisis, Arab Spring and Earthquake in Japan were the major

factors which kept a lid on world oil demand growth. The recovery in 2011 and 2010 came after a steep decline in 2009 by

1.4mnbpd and a slight decline in 2008. The decline in 2008 was the first decline in oil demand since 1983 reflecting the impact

of the global financial crisis and the ensuing recession. The global financial system is going through turbulence with debt crisis in

Europe taking a centre stage. The impact of the crisis manifested itself in the Western Europe oil demand which decreased by0.16mnbpd. Many European countries are adopting austerity measures to bring fiscal stability.

Reflecting back on 2011

World oil demand is expected to have increase by 0.95% to 87.7mnbpd in 2011. This is significantly lower than 1.43% growth

expected by OPEC at the start of the year. However, this lower demand was offset by lower Non-Opec supply as mentioned in

the previous section. Bulk of the world oil demand growth is expected to have come from China. With the Chinese economy

growing at 9.2% in 2011, it was no surprise that contributed around 55.0% to the overall world oil demand growth.

Oil demand (mnbpd) 2010 1Q11 2Q11 3Q11 4Q11 2011 Volume %

North America 23.76 23.81 23.35 23.61 23.43 23.55 -0.21 -0.90

Western Europe 14.58 14.18 14.11 14.78 14.30 14.34 -0.24 -1.65

OECD Pacif ic 7.82 8.35 7.12 7.73 8.35 7.89 0.07 0.91

Total OECD 46.16 46.34 44.58 46.12 46.08 45.78 -0.38 -0.83

Other Asia 10.18 10.33 10.52 10.37 10.64 10.47 0.28 2.78

Latin America 6.18 6.16 6.34 6.51 6.42 6.36 0.18 2.96

Middle East 7.28 7.32 7.38 7.71 7.41 7.46 0.18 2.43

Af rica 3.36 3.42 3.39 3.25 3.42 3.37 0.01 0.40

Total DCs 27.00 27.24 27.62 27.84 27.91 27.65 0.66 2.43

FSU 4.14 4.13 3.97 4.39 4.45 4.24 0.09 2.24

Other Europe 0.69 0.69 0.65 0.69 0.76 0.69 0.00 0.29

China 8.95 9.13 9.54 9.37 9.60 9.41 0.46 5.13

Total "Other regions " 13.79 13.95 14.15 14.44 14.81 14.34 0.55 4.02

Total world 86.95 87.52 86.35 88.40 88.80 87.77 0.83 0.95

Previous estimate 86.94 87.52 86.33 88.38 89.00 87.82 0.88 1.01

Revision 0.01 0.00 0.02 0.02 -0.20 -0.04 -0.05 -0.06


World Oil Demand growth (mnbpd)

Source: OPEC & Global Research

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

NorthAmerica

WesternEurope

Total OECDMiddle East China Total DC's World

2007 2008 2009 2010 2011

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March 2012 6

Oil Inventories

US Commercial Crude Oil Stocks (mn barrels) US Gasoline Stocks (mn barrels)

US Distillate Stocks (mn barrels) US Total Crude and Petroleum Stocks Excl.SPR (mn barrels)

OECD Europe Total Oil Stocks (mn barrels) Japan Commercial Oil Stocks (mn barrels)

Source: Bloomberg, EIA,OPEC & Global Research

320

330

340

350

360

370

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

190

200

210

220

230

240

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

100

120

140

160

180

Jan-11

Feb-

11

Mar-

11

Apr-

11

May-

11

Jun-11

Jul-

11

Aug-

11

Sep-

11

Oct-

11

Nov-11

Dec-

11

Jan-12

Feb-

12

1,020

1,040

1,060

1,080

1,100

1,120

1,140

Jan-

11

Feb-11

Mar-11

Apr-11

May-11

Jun-

11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-

11

Dec-11

Jan-

12

Feb-12

1,300

1,320

1,340

1,360

1,380

1,400

1,420

1,440

1,460

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11 150

155

160

165

170

175

180

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

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March 2012 7

Disclaimer

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Oil Report 032012