War Room 24 Jan 2012 Got Oil?

War Room Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome

Got Oil? Oil Technicals Oil Fundamentals Macro – Iran, the West + Asia

OIL – TECHNICALS HiddenLevers

Oil Shocks + Recessions - Link 1974 – 1980 – 1990 – 2000 (even 2000!) – 2008  no coincidence

Oil – Technical Outlook Short Term - autumn rally from $75 to $100 - heavy resistance at 100usd mark - oil not backing down from 100usd - as below, so above – 125usd Oil Long Term - 115usd – Arab spring double top - correction pattern since then - solid support at 92/93usd - break of 92 = oil likely revisits 74usd and below

Oil – Technical Outlook EU sanctions against Iran baked in usd on WTI today (24/Jan) usd on Brent (24/Jan) - Fourth loss in five sessions What does this tell you? EU debt overshadows the Iran soap opera!

OIL – FUNDAMENTALS HiddenLevers

Oil Trends: WTI Oil vs Brent Oil WTI and Brent diverged in 2011, but spread has narrowed

Oil: Top 5 Producers and Consumers US consumption roughly equals other top 5 combined Top 5 Oil Producers: 1. Russia M bpd 2. Saudi Arabia - 10M bpd 3. USA - 7.5M bpd 4. Iran – 4.2M bpd 5. China – 4.1M bpd Top 5 Oil Consumers: 1. USA – 19.1M bpd 2. China – 9.1M bpd 3. Japan – 4.5M bpd 4. India – 3.3M bpd 5. Russia – 3.2M bpd Source: BP Stat. Review of World Energy 2011

Oil Fundamentals: Demand US Demand Trends International Demand: China + India Auto Markets Latest EIA / IEA Global Demand Projections

US Oil Demand Trends Oil Consumption down since 2005 (pre-recession) Vehicle-miles down since 2007 Source: US DOT and EIA

Oil Demand: China + EM Auto China became #1 auto market in 2009, but still has only 1 cars per 25 people (US almost 1:1) Source: E2AF.com (Nikkei Business Publications)

Oil Demand: China + EM Auto 400M cars = 6M bpd oil = 1.5x Iran's production China now world's largest auto market 25 people/car in China today 65 people/car in India today ~1 person/car in US If China and India rise to 5 people/car, that's 400M additional cars Source: NYU Econ Dept, HiddenLevers

Global Oil Demand Projections EIA projects 30M bpd demand increase by 2035

Oil Fundamentals: Supply US Supply Trends: US growth, Bakken Shale Global Supply Analysis Marginal Price of Production Today

US Oil Supply Growth US production has risen 1.6M bpd from 2008 lows Bakken growth accounts for 400k bpd of growth If US surpassed old peak over 11M bpd, would still have to import 8M bpd

Global Supply Analysis HiddenLevers analyzed world production data in 2009 and 2011 Classified countries into post-peak or still growing 2009: 14 Countries Growing With 40% of world oil production 2011: 12 Countries Growing With 22% of world oil production Source: HiddenLevers, BP Statistical Review of World Energy

Oil Supply: Marginal Production Cost What does Oil really cost? Saudi Arabia: $20/bbl Exxon Mobil: $71/bbl CERA Research: $60-90 for new offshore, oil sands, etc Source: SEC 10-K Filings, Cambride Energy Research Associates Chart depicts CERA-estimated production costs for various regions

OIL – 2012 MACRO SITUATION HiddenLevers

Dec 2011 US Decoupling – Dream Killers Europe – counterparty risk Deflation – USD too strong for growth China hard landing – 50% of world econ growth Iran + Oil – oil shocks lead to recession

Embargo against Iran -“EU sanctions aimed at avoiding conflict” – British Foreign Secretary William Hague - China + India + Russia not joining sanctions = sanctions pitting Asia against the West Who consumes Iran’s oil? China20% Japan17% India16% South Korea9% Asia total70+ % EU20% Source: Bureau of Labor Statistics EU sanctions ineffective!

Consequences: 1.Israel armed conflict just as likely as US 2.China = ex factor – Darth Vader dilemma 3.200usd potential (WTI) 4.Safety in CAD? Scenarios – Iran blockade vs Armed conflict Consequences: 1.World issue, not just the US: 1/3 of seaborne oil, 1/5 of total oil trade 2. Blockade requires a US government response 3.US war ships already in gulf – more coming usd potential (WTI) Scenario: Iran Blockade of Straits of Hormuz: Current ProjectedImpact Oil$100$12525% Airline Traffic Growth1.24%-3%-4.24% DOD Budget Growth2.10%3%1% Tanker Rates$18700$940-95% Durable Goods12.1%12.5%0.4% Scenario: Armed Conflict with Iran Current ProjectedImpact Oil$100$19090% Airline Traffic Growth1.24%-11%-12% DOD Budget Growth2.10%5.38%3.28% Tanker Rates$18700$940-95% Durable Goods12.10% %

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