4 February 2013

Market Outlook Issue # 14

Outlook The Crude Oil and Refined Product Markets have strengthened over the month of January with pressure being put on stocks due to the ongoing tensions in the Middle East, terrorist attacks in Algeria and decreases in OPEC crude oil production. In regards to the OPEC decreases, Saudi Arabia is claiming the decreases are due to the drop in Asian demand coupled with the extra capacity of the Seaway pipeline, which increases crude flow to the US Gulf Coast. Versus the media claiming the decreases are due to the low crude prices that oil producing nations are receiving. Lowering the supply tends to increase the price. The US Economy is playing its part in affecting the US/NZD exchange rate. The US has added 157,000 jobs in January and has seen a gain in consumer confidence and better than envisaged strength in manufacturing. The European central bank is expected to keep its benchmark interest rate at 0.75% and the Bank of England to keep their interest rate at 0.5%, in respective announcements last Tuesday. The Peoples Bank of China deputy governor said that Chinas economy is expected to grow 8% in 2013. The IMF sees the global economy likely to grow 3.5% in 2013. Factors affecting Crude Oil market - Momentum Over the last month Brent crude prices have risen by US$3/bbl and finished last week at US$115.55/bbl. The Brent forward price curve has continued to be backwardated in the near term with March contracts trading US90c below February. Prices further out drop by around $10/bbl by end 2013.

Factors affecting Crude Oil market Fundamentals According to the published statistics for January 2013, US crude stocks fell by approximately 6 million barrels as the extra capacity on the Seaway pipeline reduced congestion in the Cushing/ Midwest region. Factors affecting Refined Products Market Fundamentals US product stocks revealed that Gasoline and Gasoil (Diesel) stocks had risen by 6 million barrels respectively over the month of January 2013.

4 February 2013

Market Outlook Issue # 14

No change to the demand for high octane gasoline in Asia so the significant premium for 95/97 octane gasoline continues over the base grades. The forward price curve for gasoline continues to be backwardated for the next few months. With near month refining margins for gasoline rising at US$14/bbl versus Dubai since last reported in December though it is expected to drop to US$10/bbl by the 3rd quarter. Kerosene supplies have risen due to the drop in demand in Japan as on range forecast for February show warmer than expected temperatures. Last week Jet versus Dubai was stronger (US$21/bbl) than previously reported and it is expected to decrease slightly by the end of 2013. Gasoil (diesel) refining margins versus Dubai continue to remain at high levels of around US$20/bbl and are expected to remain at these levels for 2013. By the end of January the Benchmark FOB Singapore 10ppm prices (a diesel grade) had peaked at three month highs driven by supply concerns ahead of the planned refinery turnarounds in Asia in the coming weeks/months. F: Fundamentals (supply & demand) / M: Momentum (sentiment) Figure 1: Brent Oil & Gas Oil month average and futures contracts
$135 $130 $125 U S D / b b l $120 $115 $110 $105 $100 $95 $90 $85

Brent Oil (Mth Average) Gas Oil (Mth Average)

Brent Oil Futures Gas Oil Futures

Source: Bloomberg & Production.investis.com

4 February 2013

Market Outlook Issue # 14

Currency Factors The NZD/USD has been range bound between .8270-.8480, and is currently .8480, and trying to move higher. The NZD has been stronger, based on market perception that the global financial crisis risks have decreased over the last month. The NZD is at a crossroads, being at the top of recent monthly ranges of .8470, and risking going higher to .8770. 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. The two competing themes continued this month: Market perceptions on world growth risks improved, with world share markets improving. Despite this global 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 weaker US recovery, Australia reducing interest rates, parts of Europe in recession, and Chinese economic activity falling below market expectations 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 Factors Affecting NZD/USD 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. Likely Impact

Fair value long term Fair value short term

Interest Rates 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) has signalled that the OCR (Official Cash Rate) which is currently 2.5% will not go lower unless overseas economic risks deteriorate. In contrast Australia is expected to reduce interest rates. Commodities NZ commodity prices have been trending lower, especially dairy prices. A wide spread drought in USA has increased grain and corn food prices, and has stabilised the fall in NZ export prices, and will continue to provide a boost to NZD sentiment due to being a food exporter.

4 February 2013

Market Outlook Issue # 14

Risk aversion Current market sentiment is in favour of risk and investing. Before Christmas markets were focussed on three key areas of risk: US political negotiations on government spending (Fiscal Cliff) European sovereign debt issues and banking system, and Chinese economic data and flow on effect to commodity prices.

All these factors are perceived to have improved, or are seen as less disruptive to investors. Monetary Policy Stimulus packages from world Central Banks (in the form of Quantitative Easing) have increased. Japan joined USA and Europe in 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 has moved to top of recent ranges to .8480. NZD has support at .8230, so if it remains above this level, the risk is that the NZD will move higher to .8770. If the NZD/USD rate drops below .8230 then it is likely to move lower to .7850.

Technical Analysis

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