October Crude Oil. Quarter 4 - Outlook. KCTL Research Reports also available on Bloomberg with key KCTL <GO> & Reuters Knowledge

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1 October 2008 Crude Oil Quarter 4 - Outlook

2 Market Recapitulate In Q3 2008, after making a lifetime high of $ per barrel, oil prices have declined over 50% and are currently trading below $70 a barrel. Before a weak US dollar and escalating geopolitical tension have been the reasons for the uptrend in prices. Nevertheless, the unprecedented rally was stalled with prices reaching demand destruction levels. The higher oil production in Saudi Arabia combined with the lower demand response to extremely high prices and recent credit market problems, points to a lower route for the world economy growth and oil consumption levels. The economic slowdown in the US has paved its way through, negating the growth in other regions mainly the Euro-zone. With US and the Euro-Zone being the major energy consuming nations, the slowdown in these economies posed threat to the demand for the fossil fuel. In addition to this, appreciating US dollar against the Euro has led to the further sell off in the commodities arena. Sentiment that a slowdown in the global economy will dampen world oil consumption growth appears to be overshadowing supply concerns stemming from geopolitical events. As a result the disruption of Caspian export flows in August, continued tensions between Russia and Georgia, and Hurricane Gustav, Ike, failed to lend support to the declining oil prices. Demand Snapshot In million barrels per day Supply World Oil Balance Demand The EIA has trimmed its forecasts of demand for the fossil fuel in Q as the global demand for oil stood at mbpd. On the contrary, the production outpaced demand by 0.16 mbpd to stand at mbpd. Growth for 2008 is nearly 350,000bbl/d lower than September month s projection, reflecting the deteriorating global economic outlook. Global oil

3 consumption is projected to rise by about 300,000 barrels per day (bbl/d) in 2008 and by 800,000bbl/d in 2009 (compared with its year-earlier levels). In 2008 the OECD demand for the energy is likely to decline by almost 1.07 million barrels when compared to 2007, mainly contributed by the decline in consumption in US, Europe and Japan. In contrast, the Non OECD nations are likely to post an increase of 1.4 million barrels with expected gains in china and other Non OECD nations. patterns in these regions. With the OECD comprising of large energy consuming nations like USA, Europe, we expect that given the economic downturn demand growth is unlikely to be so optimistic. Growth in US Crude oil Demand QoQ in million bpd Growth in Oil demand by region Q Q Q Q Q Q3 2008(E) OECD Non OECD Q4 2008(E) The US oil demand in Q4 is projected to increase; however the economy being in the brink of recession, the growth in demand is possible to remain modest. According to the EIA, the demand for the OECD region is forecasted to increase by 3.5%in Q However with the crisis draining the money supply, the manufacturing, industrial and the GDP will be curbed, hence affecting the consumption

4 Robust supplies OPEC On the supply front the sharp rise in prices in the previous quarter called in for an increase in Saudi Arabian production of 500,000 barrels. However with the receding prices the OPEC now is signaling for a possible cut in the excess production. In 2008 the global oil supply is to average around million barrels. The OPEC production is likely to be trimmed down in the Q4, given the slump in prices. Its production in the Q3 averaged around 32.7 million barrels and is likely to be trimmed down to in current quarter. Given that the excess production comes from Saudi Arabia, the likely cut in production will depend solely at its execution. in million barrels OPEC Crude oil Production Q o Q Robust supplies Non-OPEC Given the supply disruption posted by the closure of Baku- Tbilisi-Ceyhan oil pipeline and the impacts of Hurricanes Gustav and Ike upon the U.S. Gulf of Mexico, the Non Opec supplies are likely to be revised downward. Hence the supply growth in 2008 is now expected to be negative for the first time since 2005.However in the Q4 the there is significant jump in the Non Opec supplies estimated. in million bpd QoQ growth in Non OPEC Supplies Q Q Q Q Q Q3 2008(E) Q4 2008(E)

5 Spiraling turmoil Apart from the demand and supply numbers the economic crisis and its impact on the global economies is a vital factor in determination of the energy prices. As this is the major cause for the instigation of the downtrend in prices. The extension of the recessionary fears and their implication on the global economies will have a serious impact on the energy consumption. In fact, the fuel consumption in most of the regions has been effected as the manufacturing, industrial and the economic growths are hit by the crisis. The credit crisis has squeezed the liquidity in the market thereby paralyzing the financial sectors of the many regions. The global equities have witnessed heavy losses and have plunged to yearly lows. The injection of funds into the market and the aggressive measures taken by the central banks are unable to uplift the investor confidence. Global growth rates The IMF has forecasted on an annual basis, the global growth to moderate from 5.0 per cent in 2007 to 3.9 per cent in 2008 and 3 per cent in 2009, which comes on the verge of the IMF's definition of "global recession". The IMF cautions that the recent financial turmoil is likely to depress economic prospects, with a "cascading series of bankruptcies, forced mergers and public interventions ". It adds "Recovery later in 2009 will be exceptionally gradual by past standards." The IMF scaled back its outlook for growth in Russia to 5.5 %,China's economy is expected to grow 9.3 %in 2009, down from the previous forecast of 9.8 %.The Indian Economy instead of growing 8% in 2009 as predicted in July, will now expand by 6.9 %. Slowing growth in advanced economies and financial turbulence will also sap momentum from emerging nations, the fund forecasts. World economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930 hence the outlook for the global growth looks dim. OPEC meeting With the prices falling below the yearly low levels of $72, it has indeed called in for a cut in production levels by the OPEC in the upcoming meeting in Vienna. The extra-ordinary meeting has been called in for, in October to discuss its concerns over the plummeting oil prices. Prices have dropped by over 50% from the higher levels in the previous quarter.

6 Finally, the OPEC reduced supplies by 1.5 million barrels in the extraordinary meeting on Oct 24 th Nevertheless even if the production is slashed we expect only a revival in the demand can cause an uptrend in prices. However with the supplies going off the market, this can to an extent limit the downside risk. Heating Season The official start of the Heating season falls in the Q4. Traditionally the heating season is the winter season in US which drives the demand for heating oil for commercial and residential consumption. The demand for distillate takes the forefront in this season.the weather condition also plays a role in demand determination. For the country as a whole for December through February the NOAA projects a 3.4 % warmer winter than the 30-year normal, but a 0.7 % cooler winter than last year. Any higher-than-expected colder temperatures result in increased consumption. Hence given the winter temperatures, yet to be predicted, the price of crude from which distillate is derived, will be influenced by the season. A colder than expected temperatures will increase the demand of heating oil, thereby checking the downtrend in oil prices. Economic Revival Measures The government support provided to the ailing financial system in way of bank debt guarantee, buying equity stakes in banks and extending bailout packages was aimed at increasing the liquidity in the markets. Though these measures are aimed at easing the markets, immediate revival cannot be guaranteed as the process will be time consuming. Nevertheless, the measures taken will provide relief to the markets in the short term, and initiate a step towards recovery. This might as well result lower than expected downturn in world economy, hence limiting the downside risk to oil prices. Fundamental Outlook Deepened credit crisis has in fact created a world wide recessionary fear. With liquidity crisis deepening further, the producers and processors are likely to get lesser access to the funds. The inflow of money in to commodities arena, as an investment demand, is likely to remain on the back seat in the coming days. U.S., China and India, which are crucial demand

7 drivers for the fuel, are likely to slowdown, and this can hurt the consumption levels drastically. Lower demand prospects in coming years followed by lower growth forecasts for developed and developing economies, we expect crude prices to remain on the lower side. However any further measures taken to revive the global economy are likely to result in pullback in prices. Technical Analysis Oil market has entered into an intermediate bear phase after breaching the support of $110. In our previous quarterly report, we forecasted prices to test $87 levels, which was 61.8% retracement support of $50-$ move. After breaching $87 levels, market fell further again and had breached the reaction high of $78 made on July 2006 and presently trading below $70 levels. Momentum indicators are near to oversold region in the daily as well as weekly Charts. Daily 14 days RSI is at 0.31 levels and weekly is at near 0.29 levels. At present scenario, market looks slightly oversold and prices are near the long term trend line support pegged at $62 levels. If market breaches and sustains below $62 then it may spend some time in the oversold territory and see a decline towards reaction low of $49.90 made on January 2007.Moving averages are also signaling weak market trend. Market is now trading below 50 and 100 Day s EMA and also below its short term 10 and 20 Day s EMA. At present situation, prices had has too much deviation from the mean values and any sudden pullback may be on cards. It is also near to the lower end of the Bollinger band seen in the weekly as well as Daily charts. However, the scenario is still very much bearish as it has already breached the crucial trend line support of $78. But one can expect a pullback or relief rally if it fails to breach the immediate support of $62. Support / Resistance levels Support Resistance $62,$57,$50 and $38 $78, $85 and $100,$112 Current Price: $64.15 Major Support: $62 and then $50 Major Resistance: $85 and $100

8 Technical Indicator Current Values Indication RSI (Daily and Weekly) 0.26, 0.27 Market is oversold EMA 50, 100 and 200 Day s EMA 95,105 and 106 Trend is weak but deviation from the mean is very high NYMEX Crude oil Future Bollinger Band (Daily and Weekly) Market is near to lower band of the Bollinger band both in weekly as well as in Daily charts. Indicators are suggesting prevalence of short term weak trend, but prices are at oversold territory and may signal a good pullback soon. NYMEX Crude oil Future Our View Relief rally towards $78 then $90 levels is on cards if market fails to sustain below $62. However, in medium term it may fall further towards $55-$50 after completing the relief rally.

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