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1 : Daily Focus: Oil should recover from the sell off 10 May 2011 Focus: We view the recent oil sell-off as a correction after the very sharp upward move since February; the long-term bullish trend remains intact. Nevertheless, last week s oil selloff sacrificed much of the price gains stemming from MENA region unrest. While the contagion risk to other major oil producers seems subdued, the geopolitical situation in this region remain heated. Therefore, the market is still heavily exposed to supply shocks induced by geopolitical risks. The base metals have recovered from Monday s late sell-off but have failed to move much beyond yesterday s intraday highs. While the Chinese trade data was broadly positive, the metals are treading water ahead of the next round of Chinese data released overnight. In the meantime, exogenous factors such as equity markets and the dollar appear to be in charge of short term price direction. Strategists Walter de Wet, CFA* Walter.DeWet@standardbank.com Leon Westgate* Leon.Westgate@standardbank.com James Zhang* Jinzhong.Zhang@standardbank.com Marc Ground, CFA* Marc.Ground@standardbank.com have continued to rebound from last week s sell-off. Helped along by renewed concerns over the Eurozone debt situation (after Greece s credit rating downgrade by S&P), gold and silver made steady gains in New York. Oil recovered strongly yesterday despite the euro weakening after Greece s further downgrade. Front-month WTI gained $5.53/bbl, to close at $102.55, while frontmonth Brent jumped by $6.77/bbl, to settle at $115.90/bbl. RBOB was again the best performer among the oil complex, as June RBOB contracted was settled 31.66c/g above June Heat, the highest since May Following flat prices, the term structures for WTI and Brent also strengthened. Commodity price data (9 May 2011) Base metals LME 3-month Open Close High Low Daily change Change (%) Change in cash Cash Settle settle Cash - 3m Aluminium 2,624 2,611 2,620 2, % 2, Copper 8,940 8,895 8,970 8, % 8, Lead 2,331 2,301 2,330 2, % 2, Nickel 24,795 24,375 24,770 24, % 24, Tin 30,000 29,795 30,200 29, % 30, , Zinc 2,180 2,164 2,185 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q3' % ICE EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /0.0 Silver /-1.0 Platinum 1, , , , , /4.0 Palladium /1.5 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 10 May 2011 Focus: Oil should recover from the sell-off We view the recent oil sell-off as a correction after the very sharp upward move since February, rather than a reversal of the upward trend. In fact, the long-term bullish trend remains intact. Nevertheless, last week s oil sell-off sacrificed much of the price gains stemming from MENA region unrest. While the contagion risk to other major oil producers seems subdued, the geopolitical situation in this region remain heated, with the Libyan civil war ongoing and tensions in Syria and Yemen running high. Therefore, the market is still heavily exposed to supply shocks induced by geopolitical risks. More importantly, the developments in the oil market during Q1:11 have diminished the efficacy of three factors that usually protect the oil market from supply shocks: oil inventories, OPEC s spare production capacity and spare capacity in the refining system. Consequently, oil prices are likely to have become more prone to upward spikes in the event of further supply shocks. This adds to the upward pressure (stemming from the continuous growth in global oil demand as the global economy recovers) on oil prices. On inventories, despite the seasonal build in US crude inventories, the total commercial inventories for both crude and oil products in the US have declined from a 5-year seasonal high in early March, to 41.6MB below the seasonal level last year, as of last week s DOE inventory report, which is also only 17.8MB above 5-year average (Figure 1). Of the 17.8MB, 13MB can be attributed to the excessive crude inventories at Cushing. These much reduced oil inventories will make the market much more sensitive to any supply disruptions, as exhibited in the recent rally of Nymex RBOB prices. As the PADD1 gasoline inventories touched a 5-year Figure 1: US total commercial oil inventories Sources: CFTC; Standard Bank low, the June RBOB/Heat spread rallied by more than 22c/g during the past 10 days. OPEC spare capacity has been much reduced as Saudi is trying to fill the 1.5mbd supply gap left by Libya, as the country appears to have fallen into a prolonged civil war. The earthquake in Japan has also reduced the spare capacity in the global refining system, particularly the reduction in the refining capacity for high sulphur crude. This is important because most of the incremental crude supply will be high sulphur grades. In summary, we expect oil to recover from the recent sell-off because of tightening supply and demand fundamentals. In addition, abundant global liquidity and continuous economic recovery in many developed countries should also support the oil market. By James Zhang Base metals The base metals have recovered from Monday s late sell-off but have failed to move much beyond yesterday s intraday highs. While the Chinese trade data was broadly positive, the metals are treading water ahead of the next round of Chinese data released overnight. In the meantime, exogenous factors such as equity markets and the dollar appear to be in charge of short term price direction. The Chinese trade balance expanded much more than expected, due to a combination of steady exports and reduced imports. This suggests that domestic demand is being impacted by monetary tightening, but also that they are in a position to let the Yuan appreciate. The key inflation and growth data is released overnight however, which will likely set the tone for the rest of the week. The Chinese copper import/export figures were neutral if not towards the more positive end of the spectrum. While unwrought copper imports declined, falling 13.7% m-o-m to 262.7kt, this was to be expected following the clampdown on financing activity and the ongoing lack of SHFE-LME arbitrage. The stock figures arguably now better reflect the true underlying demand picture, however, against the backdrop of increased domestic production, helped by much better availability of concentrates, and the fact that SHFE inventories of metal have continued to fall (implying the domestic production is being used) the lower refined figure is not overly negative in terms of Chinese demand. Scrap copper imports were virtually unchanged at 380 kt. In other news, China has announced it will look to close outdated metal capacity this year, including 600 kt of aluminium smelting capacity, 291 kt of copper, 585 kt of zinc, 337 kt of zinc and 1,857 kt of ferroalloys. Of the figures, lead stands out the most, in terms of the size relative to domestic output. While the cuts may potentially lead to short term supply issues, this will depend on how aggressively the measures are implemented. The longer term impact is negligible as the cuts allow more efficient operations to fill the gap and run at a higher capacity utilisation rate. By Leon Westgate 2

3 Daily 10 May 2011 have continued to rebound from last week s sell-off. Helped along by renewed concerns over the Eurozone debt situation (after Greece s credit rating downgrade by S&P), gold and silver made steady gains in New York trade, hampered somewhat by a stronger dollar in relation to the euro. On the Asian markets, gold and silver s momentum began to fade, as persistent investor selling emerged. Platinum enjoyed good support during the early part of the Asian session, although these gains turned quickly to losses as poor Japanese leading and coincident indicators reignited concerns over auto-sector demand as the economy rebuilds after the earthquake. With the resurfacing of Eurozone sovereign debt concerns, we expect to see continued appetite for gold and silver and, given the recent sell-off, expect to see a return of investor as well as physical buying in search of value. Gold support is at $1,498 and $1,481. Resistance is at $1,523 and $1,531. Silver support is at $36.52 and $34.60, resistance is at $39.17 and $ The release of Chinese inflation figures will be closely watched. Consumer and producer inflation are both expected to moderate, which would ease concerns over further monetary tightening. However, we believe that pipeline inflation pressures remain and that continued tightening by the PBOC is most likely. The effect of this, from a liquidity perspective, would be viewed as negative for precious metals. However, we believe that such a negative reaction would be short-lived, as our analysis reveals that precious metals remain largely unaffected by Chinese monetary policy actions over the long term. Higher-than-expected inflation readings out of China might even result in some medium-term support for precious metals. Signs of continued pressures might see the market s preoccupation with rising global inflation resurface, and consequently see some inflation-hedge demand. Platinum support is at $1,785 and $1,774, resistance is at $1,804 and $1,811. Palladium support is at $721 and resistance at $741. By Marc Ground Oil recovered strongly yesterday despite the euro weakening after Greece s further downgrade. Front-month WTI gained $5.53/bbl, to close at $102.55, while front-month Brent jumped by $6.77/bbl, to settle at $115.90/bbl. RBOB was again the best performer among the oil complex, as June RBOB contracted was settled 31.66c/g above June Heat, the highest since May Following flat prices, the term structures for WTI and Brent also strengthened. The latest trade data from China reveals that China s net crude import from April rose by 3% m/m, to million tonnes, equivalent to 5.2mbd. The net import for oil products fell slightly to 1.2million tonnes in April from the 1.3million level in March. It appears that demand for oil is still strong in China despite the rapid increase in retail gasoline and diesel prices. Prior to the sharp fall in oil prices on the international market last week, it has been speculated that China might raise the retail fuel price again in May. Depending on how the crude price will pen out during the next few weeks, the price adjustment might be shelved for a bit longer. On the recent China s Oil Traders Conference in Shanghai, an official from China s central government acknowledged that potential supply shortages might be caused domestically if retail fuel prices failed to keep up with crude price rally on the international market. In the financial markets, S&P cut Greece s credit rating from BB- to B with further negative outlook, which weakened the euro. Overnight, China reported a trade surplus of $11.42 billion, with strong y/y growth in both imports and exports, which is likely to alleviate concerns over the negative impacts from China s policy tightening to some extent. China s inflation numbers and industrial productions are due to be released tomorrow, which will be closely watched by the market together with Thursday s US PPI, CPI and retail sales. As noted in the Focus section, we view the recent oil sell-off as a correction after the very sharp upward move since February, rather than a reversal of the upward trend. In fact, the long-term bullish trend remains intact. As the weak length in the market has been taken out, the market is building a foundation to attack new highs, barring any major economic upsets. As crude prices regain momentum, we expect distillate cracks to come under more pressure due to seasonal decline in demand and high inventories. By James Zhang 3

4 Daily 10 May 2011 Base metals Daily LME Stock Movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Cancelled warrants (mt) Cancelled warrants (%) Contract turnover Aluminium 4,596,875 4,600, ,450-3, , , ,751 Copper 468, ,175 2,900 1,475 1,425 91,050 16, ,577 Lead 312, ,450 1, , ,200 1, ,554 Nickel 115, , ,800 4, ,406 Tin 21,720 21, , ,828 Zinc 823, , ,600 8, ,406 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,670 16, Ali May' Copper 66,720 66, Cu May' % Zinc 16,680 16, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,601 59,844 15, , ,876 14, month 17,770 60,539 15, , ,785 14, futures pricing Price Change Price Change Price Change Price Change Price Change 1 month 2 month 3 month 6 month 1 year Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) 1, , , , , Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q3-11 Q4-11 Q1-12 Cal 12 Cal 13 API2 (CIF ARA) API4 (FOB RBCT) Forwards (%) 1 month 2 months 3 months 6 months 12 months Gold Silver USD Libor Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day MA 200-day MA Support Resistance Gold , , , , , , Silver Platinum , , , , , , Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Jun'11 Jul'11 Jul'11 Jul'11 Jun 11 Apr'12 Jun'11 Settlement 1, , , , , Open Interest 512, ,454 20,562 36,953 2, ,303 2,205 Change in Open Interest 4,448 5, Sources: Standard Bank; LME; Bloomberg 4

5 Daily 10 May 2011 Forecasts Base metals Base metals LME cash prices (US$/mt) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Aluminium 2, Copper 9, Lead 2, Nickel 26, Tin 29, Zinc 2, front-month prices Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg WTI ($/bbl) Brent ($/bbl) ICE Gasoil ($/mt) Nymex RBOB Gasoline (c/gal) API2 Coal Cif ARA ($/mt) API4 Coal Fob Richards Bay ($/mt) spot prices (US$/oz) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Gold 1,388 1,440 1,500 1,435 1,430 1,450 Silver Platinum 1,793 1,800 1,750 1,950 1,850 2,000 Palladium Rhodium 2,400 2,300 2,400 2,700 2,500 3,000 Source: Standard Bank 5

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