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 prices

Oil Report

Incessant speculation over possible military action against Iran has kept crude oil prices firmly above USD100 per barrel. Oil prices increased by 2.6% to USD105.11 per barrel during the review period (16 Feb 2012-15 March 2012). Irans decision to halt oil supplies to Britain and France as a pre-emptive measure ahead of European Union plan to stop importing oil from Iran from July 2012, has put further upward pressure on crude oil prices. Meanwhile, headways made in European debt crisis have also helped to boost oil prices. Greece is undergoing 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 improvement in sentiments, the Italian 10-year bond yields have come down to 4.89% compared to 7.26% in November 2011. Positive news has also emanated from other side of the Atlantic with US economy creating 227,000 jobs in February. The US economy has added around 734,000 jobs in the three months till February which has pushed down the unemployment rate to 8.3%. Oil Price Movement
120 110 100 90 1,500 1,400 1,300 1,200 120 110 100 1.35 90 1.30 1.50 1.45

1.40

80
70
Apr-11

1,100
1,000
Mar-12

80
70
Apr-11

1.25
Nov-11

Nov-11

Jun-11

Jun-11

Jan-12

May-11

May-11

Jan-12

Jul-11

Jul-11

1.20
Mar-12

Feb-12

Dec-11

WTI

S&P500

WTI

USD/EUR

Source: OPEC, EIA, Bloomberg & Global Research

Production witnessing an upsurge

Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) 2295-1270 Umar Faruqui, ACCA Financial Analyst ufaruqui@global.com.kw Tel: (965) 2295-1438 Global Investment House www.globalinv.net Oil production has been on the rise since 3Q11 after unrest in Libya resulted in decline in production in 2Q11. 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 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 production which 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. Going forward, we expect OPEC oil production to stay at least at these levels if not increase further. A decline in Iranian exports and consequentially its production is likely to be made up by other OPEC members especially Libya as its oil production recovers further. Saudi Arabia, as the largest swing producer 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 any shortfall as a result of the sanctions.

Dec-11

Aug-11

Sep-11

Aug-11

Sep-11

Feb-12

Oct-11

Oct-11

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Oil Report

Oil Prices at a Glance

130 125 120

115
110 105 100

Source: Bloomberg

Selected Crude Oil Types

Jan 12 111.76 112.82 110.21 113.08 111.28 113.01 111.77 112.00 110.65 107.77 113.03 104.11 111.43 120.41 109.86 110.02 108.04 110.58 100.30 109.91 -10.28 0.72 Feb 12 117.48 118.01 116.21 122.36 120.26 120.51 116.51 116.79 116.99 109.26 119.31 112.44 120.36 126.31 116.17 114.42 112.36 119.56 102.35 118.50 -17.21 3.39 Change Feb/Jan 5.72 5.19 6.00 9.28 8.98 7.50 4.74 4.79 6.34 1.49 6.28 8.33 8.93 5.90 6.31 4.40 4.32 8.98 2.05 8.59 -6.93 2.67 Year 2011 96.47 97.31 95.83 101.79 99.72 100.20 95.67 95.01 96.34 83.71 98.80 87.41 101.17 102.45 96.03 92.46 90.56 99.97 89.44 97.43 -10.52 3.93 2012 114.62 115.41 113.21 117.72 115.77 116.76 114.14 114.39 113.82 108.52 116.17 108.28 115.89 123.36 113.01 112.22 110.20 115.07 101.33 114.20 -13.74 2.06

OPEC Reference Basket Arab Light Basrah Light Bonny Light Es Sider Girassol Iran Heavy Kuwait Export Marine Merey Murban Oriente Saharan Blend Minas Dubai Isthmus T.J. Light Brent West Texas Intermediate Urals Differentials WTI/Brent Brent/Dubai
Source: OPEC Monthly Oil Report

March 2012

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

Global Research - Kuwait

Oil Report

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 production which 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.

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

120

Start of unrest in Libya

30

OPEC Production Cut of 2.2mn barrels

100

28 80

60 26 40

3Q-08

4Q-08

3Q-09

4Q-09

2Q-10

3Q-10

4Q-10

2Q-11

3Q-11

20

24

1Q-09

2Q-09

1Q-10

1Q-11

4Q-11

OPEC Production (RHS)

OPEC Price (LHS)

Source: Bloomberg,OPEC & Global Research

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)

10 9 8

7
6 5 4

3
2 1 0 2Q11 3Q11 4Q11 Jan-12 Feb-12

Saudi Arabia

Iran

Libya

Nigeria

Source: OPEC Monthly Oil Report

March 2012

Feb-12

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Oil Report

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.
Non-OPEC Oil Supply growth (mnbpd)
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
North America Western Europe Latin America FSU China Total Non -Opec

-0.2 -0.4 -0.6

2007

2008

2009

2010

2011

Source: OPEC & Global Research

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) North America Western Europe OECD Pacific Total OECD Other Asia Latin America Middle East Africa Total DCs FSU Other Europe China Total "Other regions" Total Non-OPEC production Processing gains Total Non-OPEC supply Previous estimate Revision Source: OPEC Monthly Oil Report 2010 14.99 4.39 0.6 19.99 3.70 4.67 1.78 2.59 12.73 13.22 0.14 4.12 17.48 50.2 2.1 52.3 52.3 0.01 1Q11 15.29 4.31 0.49 20.09 3.69 4.70 1.80 2.61 12.81 13.32 0.14 4.22 17.68 50.57 2.13 52.7 52.77 -0.07 2Q11 15.2 4.06 0.49 19.75 3.54 4.68 1.68 2.60 12.49 13.25 0.14 4.19 17.58 49.83 2.13 51.96 51.96 0.00 3Q11 15.53 3.85 0.5 19.88 3.58 4.73 1.70 2.60 12.62 13.23 0.14 4.08 17.44 49.94 2.13 52.07 52.08 -0.01 4Q11 15.95 4.06 0.53 20.54 3.61 4.86 1.53 2.54 12.54 13.23 0.14 4.04 17.4 50.48 2.13 52.61 52.77 -0.16 2011 15.5 4.07 0.5 20.07 3.61 4.74 1.68 2.59 12.61 13.26 0.14 4.13 17.53 50.21 2.13 52.34 52.4 -0.06 Change 11/10 0.51 -0.33 -0.10 0.08 -0.09 0.08 -0.10 0.00 -0.12 0.03 0.00 0.01 0.04 0.00 0.03 0.03 0.10 -0.07

March 2012

Global Research - Kuwait

Oil Report

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 by 0.16mnbpd. Many European countries are adopting austerity measures to bring fiscal stability.
World Oil Dem and growth (m nbpd)
2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 2007 2008 2009 2010 2011 North America Western Europe Total OECD Middle East China Total DC's World

Source: OPEC & Global Research

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) North America Western Europe OECD Pacific Total OECD Other Asia Latin America Middle East Africa Total DCs FSU Other Europe China 2010 23.76 14.58 7.82 46.16 10.18 6.18 7.28 3.36 27.00 4.14 0.69 8.95 1Q11 23.81 14.18 8.35 46.34 10.33 6.16 7.32 3.42 27.24 4.13 0.69 9.13 13.95 87.52 87.52 0.00 2Q11 23.35 14.11 7.12 44.58 10.52 6.34 7.38 3.39 27.62 3.97 0.65 9.54 14.15 86.35 86.33 0.02 3Q11 23.61 14.78 7.73 46.12 10.37 6.51 7.71 3.25 27.84 4.39 0.69 9.37 14.44 88.40 88.38 0.02 4Q11 23.43 14.30 8.35 46.08 10.64 6.42 7.41 3.42 27.91 4.45 0.76 9.60 14.81 88.80 89.00 -0.20 2011 23.55 14.34 7.89 45.78 10.47 6.36 7.46 3.37 27.65 4.24 0.69 9.41 14.34 87.77 87.82 -0.04 Volume -0.21 -0.24 0.07 -0.38 0.28 0.18 0.18 0.01 0.66 0.09 0.00 0.46 0.55 0.83 0.88 -0.05 % -0.90 -1.65 0.91 -0.83 2.78 2.96 2.43 0.40 2.43 2.24 0.29 5.13 4.02 0.95 1.01 -0.06

Total "Other regions" 13.79 Total w orld Previous estimate Revision 86.95 86.94 0.01

Source: OPEC Monthly Oil Report

March 2012

Global Research - Kuwait

Oil Report

Oil Inventories
US Commercial Crude Oil Stocks (mn barrels)
370

US Gasoline Stocks (mn barrels)

240

360 350
340 330 320

230
220 210

200
190

Apr-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jun-11

Jan-11

May-11

Feb-11

Jan-12

Jul-11

Feb-12

Mar-11

Apr-11

Aug-11

Oct-11

Nov-11

Sep-11

Dec-11

Jan-11

Jun-11

May-11

Jan-12 Jan-12 Dec-11 Dec-11

Jul-11

US Distillate Stocks (mn barrels)

180

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

1,140 1,120

160

1,100
140 1,080 1,060 120

1,040
100 1,020

Nov-11

Jun-11

Jan-11

May-11

Mar-11

Feb-11

Jan-12

Jul-11

Dec-11

Aug-11

Sep-11

Feb-12

Apr-11

Oct-11

May-11

Nov-11

Jun-11

Jan-11

Mar-11

Feb-11

Jul-11

Feb-12
Jan-12 Feb-12

Feb-11

Mar-11

Apr-11

OECD Europe Total Oil Stocks (mn barrels)

1,460 1,440

Japan Commercial Oil Stocks (mn barrels)

180 175

1,420 1,400
1,380 1,360 1,340 160

170
165

1,320
Apr-11 Aug-11
May-11

155
Sep-11
Jan-11 Jun-11

Mar-11

Feb-11

Oct-11

1,300

Jul-11

Oct-11

Apr-11

Source: Bloomberg, EIA,OPEC & Global Research

March 2012

May-11

Nov-11

Aug-11

Sep-11

Jan-11

Jun-11

Feb-11

Mar-11

Jul-11

150

Sep-11

Aug-11

Oct-11

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Oil Report

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March 2012

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