1. This document is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from i3 Consulting. Please note that this is a personal opinion and is not a recommendation to do any trading whatsoever based on this report. Any entity planning to take exposure should do their due diligence before taking any such action Model to predict oil prices Address : 477,Udyog Vihar Phase III Gurgaon (Haryana) -122001, India Tel : +91 124 4771800 Website : www.i3c.in, Email : info@i3c.in

2. Executive summary Oil price has a strong relationship with factors like world GDP growth, speculative trading, momentum indicators, dollar index and oil price as lead indicator of itself As against general perception, following factors do not impact the oil price or do not have an economically sustainable valid relationship for predicting future price of oil – (1) Demand supply mismatch, (2) Price for long term futures contract of oil (3) Oil Inventory levels of OECD and US Oil prices could well be modeled precisely using the above stated factors, however the market sometime deviates from its economic value due to higher speculative activity which is primarily driven by either driven by positions taken by financial players or owing to uncertain political environment, esp. US and the Middle East Our proprietary model predicts oil to be weaker in the next couple of quarters owing to negative outlook in world GDP growth, no major reason for higher speculative trading, and weak momentum indicators, however the market will turn itself – our models predict price to be in the range of USD 52-USD 57 by end of 2009 and in the range of USD 68 – USD 75 by end of 2010* * Please see assumptions before reading about price

3. GDP growth rate does impact oil price movements GDP growth with change in oil price

4. Demand supply mis-match does not result in long term shifts of oil price movements Portion of long speculative trading as percent of all long trading related to oil price movement Portion of short speculative trading as percent of all short trading related to oil price movement

5. Despite huge volatility in crude price… Monthly percent change in oil price Only 30% of monthly price variation is within +- 5% Co-efficient of variation is 31% suggesting 3 sigma confidence levels to be 200% of mean value

6. …Crude price are auto correlated, i.e. historical prices gives indication of future price movement Oil price as lead indicator of itself (4 months lead indicator)

7. The momentum indicators of trading are also predictive of price movement 6 months moving average related to spot oil price

8. We have created a transformed variable to capture the momentum and the directionality of bullishness in the market Higher clustering of price bands based on weaker / stronger momentum index Indexed momentum capturing its strength / weakness correlated to oil price movements

9. Dollar index has a strong correlation with crude price but economically its relationship seems to be unstable Despite the strong negative correlation of oil price with dollar index, it is a short term economic phenomenon which might undergo slight change once world economy and US economy starts improving giving different dynamics to global demand and dollar strength Dollar index correlated to oil price movement

10. Inventory levels of a country are economically dependent decisions based on oil price, however can give direction of short term oil price movements Oil inventory levels of OECDOil inventory levels of US

11. Futures contract barring 1 month contracts of oil do not provide forward looking guidance on price movements 1 month future contract price against spot 6 month future contract price against spot 18 month future contract price against spot Methodology Insight Objective of the exercise is to assess the ability of the futures market to estimate future spot prices effectively We compared the future prices applicable for a period with the spot price of that period for e.g. 6 months futures contract prices of Jan 2006 with spot price of August 2006 and so on One month futures market mimics near term future closely however the long term futures contract i.e. 6 months or 18 months futures miss the spot price by a big margin Futures market though brings in some semblance of sanity during extreme speculative environment and can be relied on to assess the directionality in the short run

12. Demand supply mis-match or its expectations in short runs are not huge and have very little relationship with oil price movement 3 months lead expectation of mismatch related to oil price movement Demand supply mismatch related to oil price

13. Relevant variables are combined together to predict the future oil price movement Dollar indexLead oil priceMomentum indicator Speculative interest Dollar index is negatively correlated with oil price movements. It makes business sense as any strenghtening of dollar should result in lower oil price, however its link in context of economic growth of EU/Asia vis-à-vis US can slightly impact the relationship Oil price as lead indicator is helpful in predicting its future price and is positively related to its future prices Indexed momentum indicator is positively related to the oil price movement Share of speculative interest in trading is positively correlated to the oil price movement World GDP growth World GDP growth is positively correlated to the oil price movement

14. Future prediction of oil price is dependent on following outlook Dollar indexMomentum indicator Speculative interest Dollar index is expected to move at hover at around 95/96 levels in the short run. It may move down to around 92 by Q1 2010 depending on improved performance by European economies Calculations reflects a weaker momentum right now which could dampen price in the short run and will be positive as we approach Q4 2009 There is no expectation of higher speculation in this time, however it is expected to start building up towards the end of Q4 2009 as oil demand moves up in winters World GDP growth World GDP will grow by an annualized rate of -1.3% in 2009 and 2.0% in 2010 respectively (this is a combination of forecasts from IMF and EIU)