9 July 2012

Market Outlook Issue # 2

Oil Market Factors
Factors Affecting Crude Oil and Refined Product Markets Overall Trend: Poor demand for products particularly in the key European, US and Chinese markets combined with a plentiful supply of crude is applying continued downward pressure on oil prices. Increased Middle East oil production and record high crude stock levels in the US will prevent any sudden price rises unless there is a sudden escalation in tension around Iran. Crude Oil M Brent crude prices rallied last week to end at around US$98/bbl after trading as low as US$89 in late June. The recent price recovery was driven by the renewed demand optimism following the financial rescue package agreed for the Euro banks. Supply/Demand fundamentals are still shaky and dont support significant price rises as demand continues to be lacklustre in key markets and supply remains healthy. The strikes by oil workers in Norway have impacted the supply of Brent crude however the Norwegian Government is expected to put considerable pressure on workers and management to resolve this issue. This strike has the potential to shut-in up to 2 million bbl/d of production. In spite of the strike in Norway the market remains flush with oil especially in the Middle East and the US. US crude stocks have fallen slightly over the last week but new domestic supplies associated with Shale Gas production is forcing traditional imports of West African light sweet crude to be redirected East to Asia. The Brent forward price curve has returned to backwardation with September contracts now trading US25c below August. Prices further out continue to drop by around $2/bbl by end 2013. Demand for direct burning crude for power generation in Japan has increased significantly due to the shutdown of the nuclear power plants. Japan imported 32% more crude in last 12 months compared to the previous year. The Brent / WTI differential is continuing to narrow and is currently trading at around US$13/bbl and predicted to fall further as flows on the reversed Seaway pipeline increase. Poor demand in the US is also capping WTI prices. Products Likely Impact on prices

Market Outlook 9 July 2012

9 July 2012

Market Outlook Issue # 2

F Prompt gasoline refining margins in the US continue to be supported based on potential Hurricane season outages and the shutdown of the Motiva refinery. US stocks of Mogas are low and traders are looking to cover their short positions in case of supply disruptions. Forward projections expect these margins to come off rapidly as the storm season passes and as shut-in production come back on stream. The short term nature of the US price spike is unlikely to flow into Asian markets where poor demand is keeping margins tight. Naphtha prices are still low relative to gasoline due to ample supplies and this is providing a source of cheap blending components for low RON gasoline. Supplies of high RON gasoline in Asia is still relatively tight leading to a significant premium for 95RON gasoline. Asia typically relies on the Reliance refinery in India for its marginal high RON barrels and the extra freight adds to the price differential. The forward price curve for gasoline continues to be highly backwardated which supports the fundamental view that the market appears overheated at present with plentiful supply and poor demand in all regions. Gasoil (diesel) refining margins have increased slightly back into the US$15/bbl range in Asia due to seasonal Northern hemisphere demand patterns. Forward prices for Gasoil are relatively flat through 2012.

F F

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)

Brent Oil Futures Gas Oil Futures

Source: Bloomberg & Production.investis.com

Market Outlook 9 July 2012

9 July 2012

Market Outlook Issue # 2

Macro-Economic Indicators & Outlook
Reports on China's GDP, industrial production and retail sales this week will help gauge the outlook for the world's No 2 economy. A Reuters poll showed economists forecast China's economy grew by 7.6% in the second quarter from a year earlier, which would be its worst performance since the 2008-09 financial crisis and the sixth consecutive quarter of slower growth. Friday's monthly US employment numbers fell short of economists' expectations, as only 80,000 jobs were created in June, less than the expected 100,000, while the unemployment rate held steady at 8.2%. Europe's central bank cut its key rate to a record low of 0.75%. The ECB's move did little to help sentiment in the Eurozone as investors had hoped for new measures to control the region's crisis that is slowly but surely eroding economic strength, including that of its powerhouse, Germany. Source. NBR

Currency Factors
The NZD/USD ranged from .75 to the high of .80 in June. The first week of July has seen an elevated range of between .80 to .81. The main reasons for forecasting NZD weakness still remain: o Offshore investor fear over Europe-led global slowdown and worldwide coordinated recession, o Lower commodity prices for NZ exports, and o Lower NZ interest rates.

Fair value long term Fair value short term Interest Rates

Factors Affecting NZD/USD Overall: The NZD has a weakening bias with the focus on offshore negative sentiment on economic developments and falling commodity prices. 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. Market forward pricing has shifted with pricing expectations showing the Reserve Bank of NZ increasing the official cash rate (OCR) in 2012 by %. (Current OCR 2.5%)

Likely Impact

Market Outlook 9 July 2012

9 July 2012

Market Outlook Issue # 2

Commodities Downward pressure on the NZD/USD due to weaker food prices (particularly diary). Commodity indexes are all weaker. The CRB global commodity price index fell over 2% on Friday and NZ dairy prices slipped 5.9% last week. Risk aversion Current market sentiment is weak (lower Europe and US growth rates, and reduced economic activity reports from China). This negative sentiment has driven NZD weakness. This weeks Chinese data (GDP figures to be released Friday) will be important in setting the tone for the NZD in coming weeks. Signs of a faster than expected slowdown in Chinese activity would see the NZD underperform. NZD/USD. The risk remains of pressure on the NZD, suggesting that it will struggle to sustain bounces above .80 with the potential to pullback toward .78. AUD has being moving in a range between .97-1.02 with a downward bias, similar to the NZD. In current risk aversion environment AUD is vulnerable to periods of trending weakness, and will require a string of positive data from offshore (especially China) to break this negative sentiment.

Technical Analysis

AUD/USD

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. GDP: The total market value of all final goods and services produced in a country in a given year.

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

Market Outlook 9 July 2012