The Outlook for Oil Markets in 2007:The Outlook for Oil Markets in 2007:Head Fakes From Demand & Supply Head Fakes From Demand & Supply

David KnappDavid KnappEnergy IntelligenceEnergy Intelligence

The New York Energy ForumThe New York Energy ForumNew York - Jan. 30, 2007New York - Jan. 30, 2007

Key Oil Market DevelopmentsKey Oil Market Developments Short Term FactorsShort Term Factors

Weather, accidents, financial markets Short-term demand responses Inventory rebalancing Geopolitics (demoted, but not gone) Non-Opec’s Recovery Opec expansion

Issues for Short-Term Oil MarketsIssues for Short-Term Oil Markets First of All, Don’t Forget GeopoliticsGeopolitics, WeatherWeather

PricePrice Outlook for 2007

2007 Supply-Demand-Inventory BalancesBalances

Short-Term DemandDemand Issues

Non-Opec SupplySupply’s Final Last Hurrah

OpecOpec’s Challenge

Some ConclusionsConclusions

Sellers’ Markets Will SurviveSellers’ Markets Will SurviveSellers’ marketsSellers’ markets in 1920s, 1940s, 1970s were

sudden, brief, unstable and supply-ledPost-2000 market was demand-leddemand-led, and

emerged gradually and looks more durableLate ‘06/early ‘07 not likely a reversalnot likely a reversalSupply surge not apt to come to the rescue

Post-2007 Non-Opec unable Opec unwilling

Oil Market Force DiamondOil Market Force Diamond

Geopolitics, Weather, Accidents

OECD Demand Elasticity vs.

Non-OECD drivers

“Peak Oil” vs. “Resource Nationalism”

“China Thesis” and “Paper Oil”

Q: What’s This Diamond Worth?What’s This Diamond Worth?A: Still $55-$65 per barrel

Geopolitics Stay in the ForefrontGeopolitics Stay in the Forefront NigeriaNigeria

history is for sporadic not major outages this disruption better organized, conditions

ripe for generalized strife new offshore fields help, but not safe either

IranIran leadership less pragmatic, threat could last impact on oil market probably slow to come

OthersOthers Venezuela, Russia, West Africa, Middle East

Weather Weather PastPast

No US Hurricanes, mild autumn, late No. Hemisphere winter, big hit on Nor. Am. gas

PresentPresent El Nino vs. North Atlantic Oscillation Asian cyclones, North Sea storms

FutureFuture Severe 2007 Gulf of Mexico storms? Global warming responses

Price OutlookPrice OutlookRange of $50-$60 for 2007$50-$60 for 2007 WTI

average $56-$57; high early, summer low about $10.50 lower than 2006’s $67.

2006 WTI up 17% after 38% jump in 2005 and 34% in 2004

Fundamentals look weakerFundamentals look weaker for 2007, with paper markets reflecting expected weakness

Up-shift in long-termUp-shift in long-term oil band still being digestedFor now, no return of late-2004 differentialsdifferentials

explosion

Reasons for 2004/mid-06 StrengthReasons for 2004/mid-06 StrengthStrong and unexpected demanddemand surgeStormsStorms & other non-Opec disruptionsdisruptionsSporadic IraqIraqi exportsTight Atlantic Basin sweetAtlantic Basin sweet crude suppliesSupply threatsthreats in Nigeria, Iran, VenezuelaGrowing long positionslong positions by traders and

funds

Reasons for Post-July ’06 WeakeningReasons for Post-July ’06 Weakening

Mild Northern Hemisphere summer/winter weather weather

Weaker OECD demanddemandSurging non-Opec supplysupplyCredibility issues for OpecOpec cutsMarket rotationrotation out of commodities into

equitiesDiminished geopolitical concernsgeopolitical concerns

2007 Outlook for Price Levels2007 Outlook for Price Levels

Source: Energy Intelligence Research.Source: Energy Intelligence Research.

West Texas Intermediate

$30

$40

$50

$60

$70

$80Ja

n

Feb

Mar

Apr

May Ju

n

Jul

Aug

Sep

Oct

Nov

Dec

2007 2006 2005 2004

Quarterly Oil Prices OutlookQuarterly Oil Prices Outlook

Source: Energy Intelligence Research.Source: Energy Intelligence Research.

Short-Term Demand Short-Term Demand Weather dominates current Northern Hemisphere

demand Price impacts hit harder in OECD Low North American natural gas prices hitting bottom

of the barrel US nuclear capacity utilization has been relatively high Anti-oil policies, peer pressure may be having an effect Economic, demographic drivers propel Non-OECD Fewer options for substitution, less discretionary use

OECD Flat After 2006 DeclineOECD Flat After 2006 Decline

Non-OECD Not Back On Fast TrackNon-OECD Not Back On Fast Track

Short-Term Supply Short-Term Supply 2004-20062004-2006 special factors inhibited supply

Hurricanes Ivan, Katrina & Rita plus several others leaks at offshore fields in No. Sea, Canada, Mars BP pipeline corrosion at Prudhoe Bay

20072007 non-Opec supply spurt, final last hurrahOpecOpec capacity adds, membership expansionexpansion

Saudi Arabia, Nigeria, Kuwait, Libya, Algeria Angola + (who’s next?)

2007 -- A Final Last Hurrah?2007 -- A Final Last Hurrah?

2006 Supply-Demand Balances2006 Supply-Demand Balances

Source, Source, Oil Market IntelligenceOil Market Intelligence, January 2007, January 2007.

81

83

85

87

Dec.'04 Jun'05 Dec.'05 Jun'06 Dec.'06

(milli

on b

bl)

Global Oil Balance 2004-06

Stockdraw

Stockbuild

Supply

Demand

2007 Supply-Demand Balances2007 Supply-Demand Balances

Source, Source, Oil Market IntelligenceOil Market Intelligence, February 2007, forthcoming, February 2007, forthcoming.

““Observed” Stock ChangesObserved” Stock Changes Evidence of stock draws since September,

despite supply-demand surplus Oil at sea has been highly variable Non-OECD SPRs beginning to suck up oil Contango helping keep independent

commercial storage high Geopolitics out of the headlines but still in

tanks Opec focus still on OECD commercial stocks

2005 Global Stock Changes2005 Global Stock Changes

Source, Source, Oil Market IntelligenceOil Market Intelligence, January 2007, January 2007.

10.0

12.5

15.0

17.5

20.0

Dec. '04 Dec. '05 Dec. '06650

800

950

1,100

1,250

1,400

Million bbl (right axis)

Days' Supply (left axis)

World Usable Commercial Stocks 2004-06

Opec’s DilemmaOpec’s Dilemma Maintaining long term markets Showing production discipline Adding sufficient capacity to

handle chronic geopolitical risks Making reserve estimates credible Dealing with global quality issues

ConclusionsConclusions 2007 is a transitiontransition year

non-Opec supply spurt is an illusion demand reactions are temporary Opec difficulties peak in 2007

Sporadic physical market price bearish bearish signalssignals will continuecontinue in first half

Investors look to bullishbullish 2008 and beyond by the second halfsecond half of the year

SUPPLEMENT DETAILSon

2007 Non-Opec Oil Supply

2007 North American Oil Supply2007 North American Oil Supply

new fields in Gulf of Mexico, PL repairs in Alaska growth from Canada synthetics, East Coast, in situ bitumen

2007 North Sea Oil Supply2007 North Sea Oil Supply

positive impact on UK of Buzzard, Tweedsmuir Norway’s Alvheim plus Snohvit, Ormen Lange late in the year

2007 FSU Oil Supply2007 FSU Oil Supply

higher Russian upstream spending; nearly half of growth Sakhalin 1 better performance at Kazakh’s Karachaganak, Tengiz filling Azerbaijan’s BTC pipeline undoing Yukos damage in Russia; full-year Sakhalin 2 from 2007-08

2007 Non-Opec Africa Oil Supply2007 Non-Opec Africa Oil Supply

Changes exclude Angola, which joined Opec as of Jan. 1, 2007 Sudan’s delayed pipeline expansion, new fields Equatorial Guinea bouncing back

2007 S. & C. America* Oil Supply2007 S. & C. America* Oil Supply

Brazil belatedly growing Campos Basin joined by Santos Ecuador dealing with protest to new pipeline Colombia, Argentina past their peaks

* Excluding Venezuela.* Excluding Venezuela.

2007 Asian* Oil Supply2007 Asian* Oil Supply

* Excluding Indonesia. * Excluding Indonesia.

dominated by sharp drop for China small gains for Australia, Thailand, Vietnam, Malaysia

2007 Non-Opec Mideast Oil Supply2007 Non-Opec Mideast Oil Supply

Oman and Syria seeing accelerating declines some new fields in Yemen

2007 Other Europe Oil Supply2007 Other Europe Oil Supply