1. January 25, 2007 The Role of Speculation in Energy Markets Kyle Dickard Managing Director, Global Commodity Analysis

2. 2 Quotes on Speculation Market Manipulation Defined Benefits of Speculation in the Energy Markets Hedgers, Speculators and Investors Speculation and Volatility Potential Impacts of Speculation on Price Other Drivers of Price Movements Market Responses to Price and Shape of the Curve Changes in Historical Relationships Conclusion Overview

3. 3 “Overwhelmingly, academic research has shown that speculation actually reduces price volatility and that speculation increases availability of market information. Recent CFTC data supports the research by showing that physical commodity futures markets with higher non-commercial participation have lower overall volatility.” “Our bill would give regulators the information needed to expose oil traders engaging in market speculation or manipulation.” Quotes on Speculation

4. 4 “Any planned operation, transaction, or practice that causes or maintains an artificial price. Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices and putting out false information in order to distort prices.” CFTC Market Manipulation

5. 5 Benefits of Speculation in the Energy Markets Counterparty for Hedgers Accept Risk Add Volume Provide Broad Market Information Create Liquidity Reduce Volatility

6. 6 Hedgers, Speculators and Investors New Participants Pension Funds University Endowments Hedge Fund Investors Financial Institutions Commodities as an Asset Class

7. 7 Speculation and Volatility Crude Oil Futures and Options Commercial and Non Commercial Positions 1995 - Current

8. 8 Potential Impacts of Speculation on Price Estimated $100B from investors enters markets 40% allocated to crude oil Incremental demand of 1MM barrels per day Strong uptrend in prices

9. 9 NYMEX Crude Oil Prices and Total Open Interest Positions 1995 - Current Potential Impacts of Speculation on Price

10. 10 Other Drivers of Price Movements Lack of investment in energy infrastructure Asian and North American demand Lack of investment in exploration and production Limited potential for OPEC swing production Threat of disruption in producing regions Terrorism premium North American natural gas fundamentals

11. 11 Market Responses to Price and Shape of the Curve Stimulate additional production of both natural gas and crude oil Increase in inventories Scale back of consumption Finance production and storage to meet future demand Oil Rigs and NYMEX WTI PriceNatural Gas Rigs and NYMEX NatGas Price

12. 12 Changes in Historical Relationships Traditionally, there was an inverse relationship between crude oil price and inventory High inventories meant low prices and vice versa Recently, we have seen high inventories AND high prices

13. 13 Changes in Historical Relationships Relationship between crude oil inventory and price appears to have changed in 2004 Gulf War points illustrate price increase on PERCEPTION of future supply disruption

14. 14 Changes in Historical Relationships Relationship between crude oil inventory and shape of the curve remains relatively unchanged Strongest incentive to store when inventories are the highest and vice versa

15. 15 Market Responses to Price and Shape of the Curve Global demand outpaces supply Spare refining capacity declines over time Global Spare Refining Capacity (Capacity – Refinery Runs)

16. 16 Contango shape of the forward curve Adequate supplies in the near term Supply concerns in the future Market Responses to Price and Shape of the Curve

17. 17 Conclusion Speculators are Necessary Meet the needs of hedgers Provide liquidity Reduce volatility Potential Causes of Price Movements Investors enter energy markets Lack of investment in energy infrastructure Crude Oil Futures and Options Commercial and Non Commercial Positions 1995 - Current

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