Oil & Gas/Chemicals GLOBAL

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1 Oil & Gas/Chemicals GLOBAL NOMURA INTERNATIONAL (HK) LIMITED NEW THEME Action We expect oil prices to peak this summer as the loss of Libyan crude capacity and increased seasonal demand, alongside a potential increase in Japanese demand, play out. Post the summer peak, prices could moderate as strong fundamentals face reduced global liquidity, which have partly driven prices higher in recent years. Catalysts The MENA crisis remains the key risk to oil prices. Further disruptions, beyond Libya, could lead to spikes in oil prices. In the longer term, new supply from Iraq could be a swing factor. Anchor themes While we expect fundamentals to remain sound in 2012F-13F, liquidity could dry up with tighter monetary policies. A potential increase in investments in the sector due to the current high oil price environment could threaten supply-demand dynamics in 2013F and beyond. As such, oil prices could be capped in the longer term. Oil price forecast We are raising our 2011F Brent oil price forecast to US$110/bbl from US$99/bbl and maintaining our 2012F forecast of US$/110/bbl while introducing our 2013F oil price forecast at US$110/bbl. Nomura Oil price estimates (US$/bbl) 2011F 2012F 2013F Brent Source: Bloomberg, Nomura estimates Oil on stranger tides Oil prices could spike in the near term We expect oil prices to stay volatile with a potential to spike higher this summer. Fundamentals will likely tighten in the next few months on increased demand and reduced supply. The potential rise in Japan s oil demand for power generation during its peak power demand season is an added feature to this year s seasonal demand upswing as we head into the summer driving season. Effects of the lost Libyan crude capacity will likely have a more profound impact on sweet crude as European refiners return from the maintenance season in the coming months. Demand remains resilient Fundamentals will likely remain strong as we move into 2012F and 2013F, driving OPEC spare capacity down further to average 4.4mmbbl/d in 2013 from the current 5.3 mmbl/d, in our view. On the demand side, we do not expect a significant impact on demand growth due to current high oil prices. Price elasticity of demand appears to be relatively inelastic, in particular in the growing non-oecd regions which have been the drivers of oil demand growth over the past few years. Analysts michael.lo@nomura.com Cheng Khoo cheng.khoo@nomura.com Saurabh Bharat saurabh.bharat@nomura.com Sanat Satyan sanat.satyan@nomura.com Emerging supply risks The current high oil price environment could intensify investments into the sector which might lead to higher-than-expected supply in 2013 and beyond. As an early indicator, rig counts have picked up over the past few months and if it is sustained at current levels, additional supply beyond our current estimates could emerge in 2013 and beyond. Moreover, Iraq could be a major swing factor as the timing of its new capacity could change the supply landscape. As events unfold, a clearer picture will emerge but as of current estimates, we see stronger fundamentals through to 2013F, noting the risk to the downside. Reduced global liquidity could cap oil prices Expectations of a stronger US dollar and further monetary tightening measures could dry out new fund flows into the oil markets in the next two years. As such, oil price upside is limited, in our view, as negative financial factors could offset strong fundamentals in the next two years. We are pencilling in a reduction in geopolitical risk premium over the coming year, which could lead to lower oil prices after the summer. Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 29 to 32. Nomura 1

2 Contents Oil prices to peak in the near term 3 The loss of Libyan crude supply to boost sweet crude premium 3 Japanese oil demand to increase this summer 5 Seasonal demand upswing in US and Europe 6 Oil demand from refineries to increase in the coming months 7 Fundamentals continue to remain strong 9 Demand growth to remain strong 9 Demand destruction likely to be minimal 12 OPEC spare capacity continues to fall 14 Iraq supply could be a big swing factor in 2013F & beyond 15 Early indicators point to intensifying investments 16 Inventory could continue to fall 17 Fund flows to negatively influence oil prices in the longer term 19 OPEC to support higher oil prices 22 Long-term price remains at US$75/bbl 23 Nomura 2

3 Near-term outlook Oil prices to peak in the near term On top of stronger demand growth from a recovering global economy and abundant liquidity in the near term, we foresee several events that could affect oil markets in the next few months. Sweet light crude, such as Brent, will likely be affected the most. The loss of sweet Libyan crude supply is a major concern in Europe as most refiners are not well equipped to take in sour crude. As European refiners come out of the maintenance season, demand for sweet crude will likely increase. In Asia, Japanese demand for sweet crude will likely also increase as we move into the peak summer electricity demand season. Environmental regulations stipulate that oil-fired generators can only take in sweet crude / fuel oil of below 0.5% sulphur content, which could push sweet crude benchmark, such as Brent, higher. Also, as we approach summer, the demand for transportation fuel will likely increase heading into the driving season. On top of these near-term demand drivers, geopolitical risk remains an uncertainty. The loss of Libyan crude supply to boost sweet crude premium The shut-in Libyan crude supply capacity of 1.8mmbbl/d is more significant if quality is taken in account. Although Libyan crude capacity accounts for only 2% of the world s total supply, it represents 7% of the total world s sweet crude capacity, according to Eni World Oil & Gas Review Libyan crude capacity represents 7% of total world sweet crude capacity The loss of Libyan crude is causing European refiners to scramble for alternative crude. In 2010, Libya exported 73% of its oil to Europe, with Italy being the major importer. The majority of these European refiners are simple refineries with limited upgrade facilities and their dependency on sweet crude is particularly high as they are not well equipped to process sour grade crude. Exhibit 1. Libya oil infrastructure (2010) Production mmb/d Exports mmb/d Production Capacity 1.80 Crude exports 1.31 Production 1.58 Prod by company mmb/d (%) Export by region mmb/d (%) NOCs-National Oil Corp Italy Other smaller NOCs France IOCs-Eni Germany Wintershall Spain Total United Kingdom Marathon Greece Conocophillips United States Repsol Austria Suncor Energy Ireland OMV Rest of OECD Hess China Occidental Total Others Total Exhibit 2. Libya sweet crude production capacity as percentage of global sweet crude production 93% Libya production capacity 7% Rest of World sweet crude production Source: International Energy Agency, Eni, Nomura Research Source: International Energy Agency, Company data, Nomura Research Oil of a similar quality to Libyan crude is getting a boost from replacement demand. This has caused the price differential between sweet and sour grade crudes to widen significantly over the past month. As we move into the high summer demand months, we believe demand for sweet crude will likely increase, causing sweet crude, such as Brent, to trade at a higher value than its sour counterparts. Nomura 3

4 Exhibit 3. World crude production by sulphur content (kbbl/d) World 73,580 73,701 74,003 72,225 Exhibit 4. Sweet-Sour spread (Brent Dubai crude) (US$/bbl) 12 Sweet 23,124 23,780 23,269 22,826 Medium Sour 6,681 7,646 8,103 8,382 8 Sour 38,525 37,012 37,531 35,573 Unassigned production 5,250 5,263 5,100 5,443 (Percentage) 4 Sweet Medium Sour Sour Unassigned production Note: Sweet refers to crude with sulphur content less than 0.5%, Medium sour between 0.5% and 1.0% and Sour greater than 1.0% (4) Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Source: Eni World Oil & Gas Review 2010 Source: Bloomberg Exhibit 5. World major crudes by quality Source: Eni World Oil & Gas Review 2010 The strong demand from Japan for sweet crude (for power generation), coupled with the lower sweet crude supply from Libya, have been the key factors behind the rise in the sweet-sour price differential. We believe that the spread could widen as we move into the summer season, as demand for sweet crude further increases. Nomura 4

5 Japanese oil demand to increase this summer The devastating earthquake and tsunami that hit Japan on 11 March has had a profound impact on Japanese power supply. The lost nuclear power in Fukushima amounts to 9.7GW of power generation capacity, which is unlikely to be operational this summer. In Japan, oil-fired power plants have always been used as a swing supplier. In 2009, only 30% of oil-fired capacity was used, producing just over 100TWh of electricity with 175kbbl/d of oil. We estimate oil demand for power generation of 171kbbl/d due to lost nuclear capacity in addition to 180kbbl/d of seasonal growth in 3Q11 over 2Q11 We have attempted to outline the implications for oil demand using the Kobe earthquake in 1995 and the multiple nuclear generators shutdown in 2007 as reference points. On our assessment, oil demand will likely increase in the near term as oil-fired power generators will likely be utilized for shut-in nuclear capacity as a replacement. We believe the increase should counteract any immediate demand shortfall. Using fuel substituted in 2007 as a reference, we find oil demand could increase by 171kbbl/d, or 3.9% of total Japanese annual demand. However, if oil is solely used as the replacement fuel, oil demand could increase by 248kbbl/d, or 5.6% of total demand, on our estimates. Exhibit 6. Japan oil demand for electricity generation Exhibit 7. Japan total electricity demand (mmb/d) Prior 5 Year Range Prior 5 Year Average ,000 90,000 (GWh) mmb/d 80, J F M A M J J A S O N D 70,000 60,000 Prior 5 Year Range Prior 5 Year Average J F M A M J J A S O N D Note: Delta denotes average estimates for the quarter Source: Federation of Electric Power Companies of Japan, Nomura estimates Source: Federation of Electric Power Companies of Japan, Nomura Research Japanese power demand increased from a low of 73GWh in May to a summer peak of 92GWh by July, representing an increase of 26%. In order to cope with the power generation lost and the increase in summer power demand, we expect oil demand to increase. Based on the increase in oil demand for power generation in 2010, an additional 180kbbl/d could be needed in 3Q11F over 2Q11, on our estimates. This is on top of what is needed to replace the lost nuclear power generation capacity of some 171kbbl/d. We have assumed that Japan would be able to increase power generation from other thermal sources such as coal and LNG in our calculations. If the entire summer demand were to be powered solely by oil, the increase would amount to 400kbbl/d in 3Q over 2Q, based on 2010 demand figures. Furthermore, as businesses regain traction after the earthquake, power demand will likely pick up over the next few months. This likely additional demand from Japan will further strain the already stretched demand and supply fundamentals of sweet light crude, since Japanese oil imports need to follow the strict environmental regulations, which mandates a 0.5% limit on sulphur content in fuel oil for burning for power production. Japan could face difficulties in pursuing the required grade of crude / fuel oil for power generation. Over the past few years, Indonesia, which used to export the preferred grade to Japan, has limited exports given stronger domestic demand. As such, lowsulfur fuel oil (LSFO) that meets government requirements could be difficult to procure. Nomura 5

6 We believe there is a possibility that the Japanese government may need to increase its limit during the current crisis to ensure Japan is fully powered. Even if the Japanese government relaxes the limit, power plants owners might be reluctant to use higher sulphur content crude before extensive testing as it could damage the generators. The process of switching to higher sulphur crude for burning could be a lengthy one. Moreover, numerous small-scale generators are being installed in Tokyo by a British company with a combined capacity of 200MW. This could generate additional diesel demand over the summer should there be a rolling power blackout. We can also expect to see more installations over the coming months to ensure a regular power supply to business. Seasonal demand upswing in US and Europe The coming summer driving season in the US has historically led to a significant rise in gasoline demand in the summer. As we move into the US summer driving season in the coming weeks, we expect to see a rise in gasoline consumption. However, we believe growth will likely be moderate, as the increase in US gasoline consumption from the economic recovery could be countered by higher gasoline prices compared with last year. North America total demand rises by an average 0.3mmbbl/d in 3Q over 2Q, while OECD Europe rises by an average 0.4mmbbl/d Exhibit 8. North America total product demand (mmb/d) Prior5 Year Range Prior 5 Year Average Exhibit 9. OECD Europe total product demand (mmb/d) Prior5 Year Range Prior 5 Year Average mmb/d mmb/d J F M A M J J A S O N D 13 J F M A M J J A S O N D Note: Dotted line denotes 5-year average for the quarter excluding 2008 Source: IEA, Nomura Research Note: Dotted line denotes 5-year average for the quarter Source: IEA, Nomura Research Despite public outrage in the US on high gasoline prices, gasoline consumption remains almost inelastic to price changes in the US. Gasoline demand continues to follow its seasonal pattern with total gasoline demand up by 0.2mmbbl/d from December 2010 to April this year, while at the same time, oil prices increased by 34% from US$91.8/bbl to US$123.0/bbl. Even during 2008, when oil price crossed US$100/bbl, gasoline demand increased during the first eight months of the year before hitting the financial crisis in September. Based on a five-year average, 3Q demand is generally the highest followed by 2Q with the peak demand coming in summer months of July and August. On a q-q basis, 3Q demand is, on average, higher than 2Q demand by 0.4%. Longer term, we do not expect gasoline demand to increase as much as it did in previous years, as fuel substitutions and rising engine efficiencies will reduce the actual demand for gasoline, but we believe that the seasonal demand pattern will likely remain in place. Nomura 6

7 Exhibit 10. North America gasoline demand versus price in 2008 Exhibit 11. North America gasoline demand (cents/gallon) US Regular Grade Motor Gasoline retail price North America Gasoline Demand (mmb/d) (mmb/d) Prior5 Year Range Prior 5 Year Average mmb/d Impact of financial crisis mmb/d Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec J F M A M J J A S O N D Note: Dotted line denotes average for the months Jan-Mar & Apr-Aug Source: IEA, Nomura Research Note: Dotted line denotes 5-year average for the quarter excluding 2008 Source: IEA, Nomura Research Furthermore, looking at North American demand in total, 1Q11 North America oil demand is up 0.4mmbbl/d or 1.6% y-y (primarily led by diesel), despite oil prices rising 37.1% y-y. The recovering economy is driving demand growth despite higher prices. Moreover, in the Energy Information Administration s (EIA) latest Summer Fuels Outlook released in April 2011, the US EIA expects this summer s gasoline consumption to increase by 0.5% y-y to 9.3mmbbl/d, despite an expected gasoline price increase of 40% y-y to US$3.86/gallon. The EIA also believes that the US economic recovery will likely boost gasoline and diesel fuel consumption this season. In addition, we foresee a similar pickup in OECD Europe demand. Based on a fiveyear average, European demand picks up from the seasonal low of 14.4mmbbl/d in May to the peak of 15.5mmbbl/d in September, representing an increase of 1.1mmbbl/d. On a quarterly basis, 3Q demand for OECD Europe is on an average 430kbbl/d higher than 2Q demand. The seasonal swing in demand, particularly in Europe, could increase the demand for sweet crude. This will likely keep Brent oil prices high during the summer season. Oil demand from refineries to increase in the coming months According to the International Energy Agency (IEA), refinery turnaround this year peaked in March and some 2.0mmbbl/d of refining capacity will slowly resume operation from April to July. As more refiners come out from a turnaround, we could see a further boost in crude demand in the near term. Europe is of particular interest as some 1.0mmbbl/d of refining capacity will come back on line from April to July. This represents approximately 8% of total refinery throughput in Europe and could further increase demand for light sweet crude, in our opinion. Refinery turnaround this year peaked in March and some 2.0mmbbl/d of refining capacity will slowly resume operation from April to July Nomura 7

8 Exhibit 12. Global refinery turnaround Exhibit 13. European refinery turnaround Source: IEA Source: IEA Nomura 8

9 Longer-term demand outlook Fundamentals continue to remain strong Fundamentals will likely remain strong as we move into 2012F and 2013F, and we estimate OPEC spare capacity will come down further over the next two years. However, as we move past summer months, prices could moderate, despite stronger fundamentals, as we could see reduced financial demand for commodities along with a potentially slow unwinding of geopolitical risk premium. The end of QE-2, the start of monetary tightening measures and the potential appreciation of the US dollar will likely weigh on oil prices. Fundamentals will likely remain strong as we move into 2012F and 2013F As such, we believe that financial intervention through monetary tightening and expectations of rate hikes could offset upward pressure on oil prices in 2012F due to tightening fundamentals. For 2013F, we believe that rate hikes could further reduce the attraction of commodities investments. Furthermore, the high oil price environment could intensify investment into the sector which could increase oil supply, above our current estimates, in 2013 and beyond. As an earlier indicator, we have seen a pick-up in rig counts over the past few months and if rig counts are sustained at current levels, it could create additional supply in 2013F and beyond. As events unfold, a clearer picture will emerge but as of current estimates, we continue to see stronger fundamentals through to 2013F, noting the risk to the downside. On the downside, we see support around US$80-90/bbl levels as the recent increase in the Saudi government s spending has caused their break-even oil prices to move higher to US$84/bbl from US$60s/bbl levels. Demand growth to remain strong Over the past year, since our last forecast revision, we have seen further upward revisions in GDP forecasts by various agencies including Nomura, despite rising oil prices. The IMF recently revised its 2011F global growth forecast to 4.4% from 4.3% in April 2010, while Nomura revised up its in-house forecast to 4.3% from 4.0% in October Oil demand growth over the next few years could be led by faster growing non-oecd consumption, with China being the key driver of rising demand In addition, global oil demand increased by 2.3mmbbl/d, or 2.6% y-y in 1Q11, despite a 37.0% rise in oil prices. However, we remain conservative in our estimates and forecast for an annual increase of only 1.8mmbbl/d in 2011F, up 2.0% y-y. Exhibit 14. Global oil demand by region, 1Q11 versus 1Q10 Change 1Q11 vs 1Q10 Change 1Q10 vs 1Q09 1Q11 1Q10 1Q09 (mmbbl/d) (%) (mmbbl/d) (%) North America Europe (0.00) 0.0 (0.75) (5.1) Pacific (0.04) (0.5) OECD (0.49) (1.1) FSU Europe (0.05) (6.3) China Other Asia Latin America Middle East Africa (0.07) (2.1) Non OECD Global Demand Brent crude price (US$/bbl) Source: IEA, Nomura estimates Nomura 9

10 Continuing with the trend of past years, we believe oil demand growth over the next few years would be led by faster growing non-oecd consumption, with China being the key driver of rising demand. Exhibit F global demand change Exhibit F global demand change Global demand Total non-oecd Total OECD China Other Asia Middle East Latin America OECD-North America Africa FSU OECD-Europe non-oecd Europe OECD-Pacific (mmb/d) Global demand Total non-oecd Total OECD China Other Asia Middle East OECD-North America Latin America Africa FSU OECD-Pacific OECD-Europe non-oecd Europe (mmb/d) Source: IEA, Nomura estimates Source: IEA, Nomura estimates Chinese oil demand continues its upwards trajectory We estimate that Chinese demand will increase by 0.6mmbbl/d in 2011F and a further 0.6mmbbl/d in 2012F on the back of strong GDP growth of 9.8% and 9.5%, respectively (based on Nomura s economic forecasts). Economic activity continued to expand in the first two months of 2011 as industrial production growth accelerated to 14.4% y-y in 1Q11 from 13.3% in 4Q10. We estimate that Chinese demand will increase by 0.6mmbbl/d in 2011F and a further 0.6mmbbl/d in 2012F We have seen a similar pick-up in Chinese oil demand in 1Q11. Total Chinese oil demand increased by 0.9mmbbl/d, 10.3% y-y during the quarter, while diesel demand, which is driven mainly by industrial activities, increased by 0.4mmbbl/d or 13.8% y-y in 1Q11. We estimate that diesel demand will increase by 0.3mmbbl/d in 2011 or 9.0% y- y, which accounts for nearly half of this year s Chinese demand growth. Strong industrial production data as well as a robust Purchasing Managers Index (PMI) suggest that the recovery is underway. While China s PMI fell to 52.9 in April from 53.4 in March, it has stayed above the boom-bust line of 50 for 26 consecutive months, suggesting that the manufacturing sector is in a solid expansion stage. Also, the output and forward-looking new orders components remained high at 55.3 and 53.8 in April, respectively. Exhibit 17. China oil demand Exhibit 18. China PMI (mmb/d) Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2013F Source: Nomura estimates Source: Nomura Economics Research Nomura 10

11 India demand holds strong India s GDP is expected to rise by 8.0% in 2011F and a further 8.3% in 2012F, according to Nomura economic estimates. We believe demand for transportation fuels, driven by population growth and rising income per capita, especially in urban areas, will continue to be the main driver of oil demand growth. In addition, farming and industrial activities have contributed to support gasoil demand so far this year. Demand for transportation fuels and rising income per capita, especially in urban areas, will continue to drive oil demand growth in India Year-to-date, India s oil demand growth is up 3.7% y-y on 8.3% growth in gasoline and 5.8% growth in distillate demand. Moreover, strong car sales up 19.4% y-y in March after 21.3% y-y in February could continue to drive strong gasoline demand growth. Exhibit 19. India gasoline demand Exhibit 20. India distillate demand (kb/d) Prior 5 Year Range Prior 5 Year Average ,400 1,200 (kb/d) Prior 5 Year Range Prior 5 Year Average , J F M A M J J A S O N D 600 J F M A M J J A S O N D Source: Thomson Reuters, Nomura Research Source: Thomson Reuters, Nomura Research Led by India, we estimate Other Asia will see robust oil demand growth of 0.3mmbbl/d in each of 2011F and 2012F, up 2.4% y-y each year, respectively. Robust Middle East demand With oil prices remaining at the current elevated levels for an extended period, coupled with the increasing focus on infrastructure spending following protests in the region, we believe Middle Eastern demand could pick up significantly over the next few years. Middle Eastern demand has increased by 0.3mmbbl/d so far this year and we estimate demand will reach 7.7mmbbl/d and 7.9mmbbl/d in 2011F and 2012F, respectively. We estimate that Middle East demand will reach 7.7mmbbl/d and 7.9mmbbl/d in 2011F and 2012F Nomura 11

12 Demand destruction likely to be minimal In order to estimate demand destruction, we look at studies conducted by the IMF, both in 2000 and in its recent World Economic Outlook published in April We note that the findings of both the studies are quite similar; indicating that the price elasticity of oil demand remained similar over the past decade, despite the increased use of substitute fuels. The IMF estimates that a 10% rise in oil price impacts demand growth by only 0.2% in the current year. Even in the longer term, a 10% permanent increase in oil prices reduces oil demand by about 0.7% after 20 years. In addition, the growing importance of emerging market economies appears to have reduced world oil demand price elasticity (in absolute terms), as the point estimate of the short-term price elasticity for the Non-OECD group is much lower than for OECD countries, according to IMF. IMF estimates that a 10% rise in oil price impacts demand growth by only 0.2% in the current year On the assumption that oil prices stay at our assumed oil price of US$110/bbl, up 38% y-y, the IMF formula would suggest that it would knock 0.8% off the oil demand growth rate vs last year. This would put 2011 s growth at 2.7% or 2.4mmbbl/d, which is above our conservative estimate of 2.0% or 1.8mmbbl/d growth. Exhibit 21. IMF estimated change in oil demand on 10% change in oil price (%) Short term Long term OECD (0.25) (0.93) Non-OECD (0.07) (0.35) Combined OECD & Non-OECD (0.19) (0.72) Source: IMF World Economic Outlook April 2011 Exhibit 22. IMF estimate of oil price impact on GDP in 2000 Scenario: Permanent US$5/bbl (18% of 2000 oil price) increase in oil price from baseline (Percent deviation from baseline) World GDP (0.2) (0.3) (0.3) (0.2) (0.1) Industrial Countries (0.2) (0.3) (0.3) (0.2) (0.1) United States (0.3) (0.4) (0.4) (0.2) (0.1) Euro Area (0.2) (0.4) (0.4) (0.2) (0.1) Japan (0.1) (0.2) (0.3) (0.2) (0.1) Other Industrial Countries (0.1) (0.2) (0.2) (0.2) (0.1) Developing Countries (0.1) (0.2) (0.2) (0.2) (0.2) Source: IMF, 2000 According to our economists, in the years leading up to the global financial crisis most macro-econometric models grossly overestimated the negative impact of rising oil prices on Asian growth. For example, in 2004 the Asian Development Bank estimated that a US$10/bbl rise in the oil price would subtract 0.8 percentage points from Asia ex-japan s GDP growth. In fact, Asia s GDP growth rate steadily rose from 8.4% in 2004 to 10.8% in 2007, despite the oil price surging from an average of US$38/bbl to US$97/bbl. Asia s GDP growth slowed to 7.2% in 2008, but our economics team attributes that more to the financial crisis than to high oil prices. According to our economists, models usually simulate supply-side shocks to oil prices, but the demand side is playing an increasingly important role a dominant role, driven by emerging economies, according to recent work at the IMF. So while the impact will vary across countries, the recent rise in oil prices is likely to have a much smaller overall impact on Asian GDP growth than most models suggest, but a larger impact on CPI inflation, as firms find it easier to pass on their higher costs to spendthrift consumers without losing market share, and workers demand higher wages given low unemployment rates. The recent rise in oil prices is likely to have a smaller impact on Asian GDP growth, but a larger impact on CPI inflation Nomura 12

13 In Europe, our European economists believe that if oil prices were to hover around US$120/bbl, that the impact on GDP growth would be limited. But the pain would be much greater if oil prices jumped to US$150/bbl. They believe that there will only be a 0.1% reduction on Euro Zone GDP on a 10% increase in oil price. Exhibit 23. Asia Pacific GDP impact Model simulation impact of US$10/bbl oil price rise GDP growth Trade Balance CPI Inflation Country (% points) (% of GDP) (% points) China (0.8) (0.1) 0.5 Hong Kong (0.6) (0.8) 0.3 India (0.8) (0.7) 1.7 Indonesia Korea (0.6) (0.8) 0.8 Malaysia (0.9) Philippines (1.9) (0.9) 1.4 Singapore (1.7) (1.3) 1.3 Taiwan (0.4) (0.6) 0.3 Thailand (2.2) (1.2) 1.5 Thailand (2.2) (1.2) 1.5 Asia ex-japan (0.8) (0.4) 1.1 Nomura economic estimates for 2011F (% y-y) Real GDP CPI Inflation Asia ex-japan, Australia, NZ Exhibit 24. Euro GDP forecast change due to 10% increase in oil price Source: Nomura Economics Research Source: Asian Development Bank, Nomura Economics Research Furthermore, oil prices are not the sole determinate of GDP; various factors such as stronger-than-expected global economic growth, led our economics team to revise up its GDP growth forecast to 4.3% for 2011F and 4.6% in 2012F from 4.0% and 4.4%, respectively in October last year, despite an increase in base oil price assumptions. Similarly, the IMF has increased its global GDP forecast to 4.4% in 2011F from the April 2010 level of 4.3% while assumptions on oil price (simple average of Brent, WTI and Dubai) increased to US$107.16/bbl in 2011 from US$83.0/bbl earlier. Nomura 13

14 Longer-term supply outlook OPEC spare capacity continues to fall While demand has outpaced supply over the last year, we believe there might be new supply growth, beyond our estimates, going into 2013F as the high oil prices entice new investments into the sector. However, based on current estimates, OPEC spare capacity will likely trend lower in the coming two years as demand growth continues to exceed supply growth; we estimate that OPEC spare capacity will average 4.8mmbbl/d in 2012F and fall to 4.4mmbbl/d in 2013F from 5.3mmbbl/d this year. We estimate that OPEC spare capacity will average 4.8mmbbl/d in 2012F and fall to 4.4mmbbl/d in 2013F from 5.3mmbbl/d this year We expect total OPEC crude production capacity to increase modestly, from 35.1mmbbl/d currently to 35.9mmbbl/d by end-2012f. The capacity growth is driven by announced projects, which are only expected to mitigate the production decline from existing fields. As a result, OPEC spare capacity, which reached a peak of 6.7mmbbl/d in 2009, is expected to fall to average of 4.8mmbbl/d in 2012F before bottoming out in 2013F. We have not factored in the effect of the current Libya crisis in this estimate. Exhibit 25. Oil supply Exhibit 26. Peak supply online on line till 2015F (mmb/d) 3.0 OPEC NGL growth (RHS) Total OPEC capacity growth (LHS) Non OPEC Production growth (LHS) Global demand growth (LHS) (mmb/d) 3 6,000 5,000 (kbbl/d) , , ,000 (1.0) (1) 1,000 (2.0) F 2012F 2013F (2) Africa Asia China FSU Latin America OECD Asia Pacific OECD Europe OECD North America OPEC Non OPEC Middle East Source: IEA, Nomura estimates Source: IEA, Nomura estimates If we remove the Libyan capacity from OPEC, it will yield a current spare capacity of close to 4.0mmbbl/d. If we assume that the Libyan capacity is to remain off line for the remainder of the year and half of its capacity to resume operation in 2012F before full production in 2013F, OPEC spare capacity will likely hover around the mmbbl/d mark in the coming few years. On a fundamental basis, we believe this would effectively lead to a more stable oil price environment as spare capacity remains almost unchanged. Exhibit 27. OPEC production & capacity (mmb/d) (mmb/d) Exhibit 28. OPEC spare capacity as % of oil demand 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 OPEC Crude Production Capacity OPEC crude capacity excluding libya OPEC spare capacity excluding Libya 3Q09 1Q10 3Q10 1Q11E 3Q11E 1Q12E 3Q12E 1Q13E 3Q13E OPEC Crude Production OPEC Spare Capacity 0.0% Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 3Q11F 4Q12F Source: IEA, Nomura estimates Source: IEA, EIA, Nomura estimates Nomura 14

15 Exhibit 29. OPEC s falling compliance Exhibit 30. OPEC crude production (mmbbl/d) (%) 120 OPEC 11 complaince Rate (LHS) OPEC 11 production (RHS) (mb/d) Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Source: IEA Note: Chart includes Libyan crude capacity Source: IEA, Nomura Research Iraq supply could be a big swing factor in 2013F & beyond Seven years after the overthrow of the Saddam Hussein regime, Iraq witnessed significant interest in its oil sector from international oil companies (IOCs), which have been keen to grab a piece of the pie and ensure their presence in a country that possesses the third-largest proved reserves of oil in the world, of about 115bn barrels. The government undertook two rounds of bidding in and has already awarded some of its most prolific super giant fields to major IOCs. The two rounds promise to raise headline production to over 12.0mmbbl/d from the current 2.75mmbbl/d. In the past, development in Iraq has rarely gone according to plan, and delays have been a constant feature. While we are optimistic about Iraq becoming a more prominent producer of oil in the long term, we believe there are significant challenges that would need to be overcome. For now, we estimate that Iraq s production capacity can reach 3.1mmbbl/d by end-2011, 3.2mmbbl/d in 2012 and 3.4mmbbl/d in 2013 from 2.75mmbbl/d currently. We estimate that Iraq s production capacity could reach 3.1mmbbl/d by end-2011f, 3.2mmbbl/d in 2012F and 3.4mmbbl/d in 2013F from 2.75mmbbl/d currently The ramp-up of Iraq s oil production capacity will likely be delayed due to a combination of political instability, lack of export routes, lack of equipment & personnel and security issues. However, the current high oil price environment could be an added incentive for Iraq to align its resources to ensure oil production comes on as soon as possible. Although we are pencilling in 3.4mmbbl/d by 2013F, we do recognize that the Iraqi government has a higher expectation of some 6.0mmbbl/d. In the event that Iraq can deliver production above our expectations, it could alter the fundamental picture and weigh on oil prices. Exhibit 31. Iraq production capacity estimates Exhibit 32. Iraq capacity additions by fields (mmb/d) Iraq prod capacity as per licensing rounds 14.0 (mmb/d) Nomura Estimates IEA Najmah Qayara Badrah Others Garraf Halfaya Majnoon West Qurna - 2 Nassiriyah Zubair West Qurna - 1 Rumaila F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 0.0 Current Capacity Round I Round II Kurdistan Source: IEA, MEES, Nomura estimates Source: IEA, MEES, Nomura Research Nomura 15

16 Early indicators point to intensifying investments We believe that rig count is an early indicator of future supply growth and it serves as an indication of investment level in the oil markets. Over the past few months, we have seen an increase in rig count, which we believe could be an indication that investments are picking up in the sector. The global rig count increased to an all-time peak of 2,140 rigs in Feb 2011 and since the MENA crisis started in late January, Saudi Arabia has added as many as 12 rigs to its portfolio. This has increased its rig count to some 35 rigs. Should this be the start of a new uptrend in global and Saudi Arabian rig deployment, we could see a significant increase in production capacity in the coming few years. Our analysis suggests that there is approximately a month lag between global rig count and its peak effect on oil supply Since not all drilling efforts are successful, there is no absolute relation between future oil supply and the number of rigs. Moreover, even if the drilling were to be successful, the supply condition would not be reflected immediately, as successful wells need time to come on-stream. Although new drilled wells in an undeveloped field could take years to start production, wells in developed fields that have ample supporting infrastructure available (pipelines, etc.) could start producing in a relatively shorter time frame. We conducted an analysis to gauge the lag at which there is a maximum correlation between supply and the number of rigs. This would serve as a measure of how long it would take for the increasing number of rigs to affect oil supply. Exhibit 33. Global oil rig count 2,500 2,000 1,500 1, Exhibit 34. Saudi Arabia oil rig count Jan-01 Nov-01 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Jan-01 Nov-01 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Source: Baker Hughes, Nomura Research Source: Baker Hughes, Nomura Research Our analysis suggests that there is approximately a month lag between global rig count and its peak effect on oil supply. Based on our analysis, if rig counts are sustained at the current level, it could push 2013 global supply (non-opec crude + OPEC capacity) up by approximately 3.2mmbbl/d from 2010 average. This is above our current estimate of 2.6mmbbl/d, (up 1.1mmbbl/d in non-opec supply and up 1.5mmbbl/d in OPEC capacity). This analysis serves as a check on potential supply but it is far from accurate. As such, we do not incorporate this supply analysis into our demand-supply model as it represents a very simplistic view of the supply picture. If rig counts are sustained at the current level, it could push 2013 global supply up by nearly 3.2mmbbl/d from 2010 average Nomura 16

17 Exhibit 35. Rig counts (-2years) vs global oil supply (OPEC Capacity + Non-OPEC supply) (mmb/d) y = ln(x) R² = Exhibit 36. Non-OPEC Rig count vs. supply (R Square) (Global Rig Count) (Lag in months) Source: Baker Hughes, IEA, Nomura estimates Source: Baker Hughes, IEA, Nomura estimates Inventory could continue to fall While both crude and product inventories continue to remain near their five-year averages, OECD inventories have shown a downward trend as demand rebounded in 2010, outpacing supply growth. OECD industry crude inventory currently stands at 979mmbbl, 0.7% higher than its five-year average but 5.6% lower than its peak in April 2010, while product inventories are at 1,412mmbbl, 0.6% higher than the five-year average but 5.8% lower than the peak in September OECD inventories have shown a downward trend as demand rebounded in 2010, outpacing supply growth Exhibit 37. OECD onshore crude inventory days (industry + strategic) Exhibit 38. OECD onshore product inventory days (industry + strategic) (Days of demand cover) Prior5 Year Range Prior 5 Year Average (Days of demand cover) Prior5 Year Range Prior 5 Year Average J F M A M J J A S O N D 25 J F M A M J J A S O N D Source: IEA, Nomura Research Source: IEA, Nomura Research For 2011F, we could see crude inventory drop further as global demand continues to be the key driver behind the destocking process in 2011F. Furthermore, the backwardation nature of oil futures curve is also skimming excess inventories from the storage terminals, especially from the more costly offshore storage. Nomura 17

18 Exhibit 39. Global crude floating storage Exhibit 40. Global oil product floating storage 100 (mmb) 60 (mmb) Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Mideast Gulf Asia Pacific Med NW Europe US Gulf Coast West Africa Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Mideast Gulf Asia Pacific Med NW Europe US Gulf Coast West Africa Source: Bloomberg, Gibson, Nomura Research Source: Bloomberg, Gibson, Nomura Research Nomura 18

19 Impact of fund flows Fund flows to negatively influence oil prices in the longer term Based on an IMF study, the results of their econometric analysis confirm that global liquidity conditions have some influence on the evolution of crude oil prices. The impact of excess liquidity with low real interest rates does not necessarily imply financial speculation, but it is likely to have magnified the price pressures stemming from supply-demand imbalances. As QE-2 draws to an end by June 2011, liquidity could tighten in the market causing reduced fund flow into commodities Exhibit 41. QE-2 Exit timeline Source: Nomura economics team However, as QE-2 draws to an end by June 2011, liquidity could tighten in the market causing reduced fund flow into commodities. Further monetary tightening measures in 2012F in the US and a possible rate hike by 1Q13 could cause the US dollar to appreciate and further reduce liquidity and the appeal of commodities investments. Our in-house FX team is forecasting for the US Dollar Index to appreciate to 76.8 from the current 73.0, up 5.2% by the end of 2011F. Exhibit 42. Benchmark policy interest rates expectations (% end of period) F 2012F Global United States Euro Area United Kingdom Japan China India Source: Nomura Economics estimates In fact, barring the US and Japan, most major economies, including the Euro Area, China and India, have already begun the monetary tightening by raising their benchmark policy interest rates in a bid to curb the rising inflation. Globally, our economics team expects benchmark policy rates to rise from 3.08% at the end of 2010 to 3.77% by the end of 2011 and rise further to 4.25% by the end of As such, we believe that the reduced liquidity as well as the potential appreciation of the US dollar will likely reduce investment into commodities and could cause funds to withdraw from the oil market over the coming two years. This will likely weigh on oil prices. Nomura 19

20 Exhibit 43. Commodity ETP AUM Exhibit 44. Commodity ETP fund flow ($bn) $7.0 $5.0 $3.0 $1.0 -$1.0 -$3.0 (bn) (bn) Weekly ETP Fund Inflows Cumulative Inflow(rhs) $80 $70 $60 $50 $40 $30 $20 $10 $0 Jan-09 Mar-09 May-09 Aug-09 Oct-09 Dec-09 Mar-10 May-10 Jul-10 Oct-10 Dec-10 Feb-11 Apr-11 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates Since our last report dated 12 October, Oil Never Sleeps, QE-2 has led to a significant increase in funds inflow into the oil markets. We continue to track fund flows through commodities exchange-traded-products (ETP). Based on our ETP fund flow analysis, some US$20bn has entered the commodity market since the beginning of QE-2. Also, as many as 20 new ETP have been launched since the beginning of this year, compared to 66 launched in Moreover, the Commodity Futures Trading Commission (CFTC) net long managed money has continued to increase rapidly YTD, as the rising inflation and increasing geopolitical tension prompt investors to favour buying commodities over other asset classes. Some US$20bn has entered the commodity market since the beginning of QE-2 Exhibit 45. CFTC net long managed money contracts on WTI crude oil (Contracts) 320, , , , , ,000 80,000 40,000 Managed money net long (LHS) WTI price (RHS) (US$/bbl) Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Source: CFTC, Bloomberg, Nomura Research The continual weakness in the US dollar has helped as investors seek to hedge against the decline. As such, the correlation between the US dollar index and oil prices has remained strong. The strong correlation is further evidence, we believe, that if the US dollar appreciates, oil prices could weaken. Nomura 20

21 Exhibit 46. US$ index 90 Exhibit day rolling correlation between oil price and currencies 1.0 Dollar Index Euro World ex-euro (0.5) 70 (1.0) Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Source: Bloomberg, Nomura FX team estimates Source: Bloomberg, Nomura Research Nomura 21

22 OPEC budget break-even OPEC to support higher oil prices With the political crisis in the MENA region impacting many of the OPEC members, we have seen announcements and pledges of increased government spending on infrastructure. In particular, Saudi Arabia has pledged to spend a total of US$130bn in the two packages that it announced on February 24 and March 18 this year. We note that majority of the additional expense is on building 500,000 homes, which could take two to three years. As a result, we allocate US$45bn of the expense to This has led to a steep rise in the break-even oil price for the oil-dependent economy of the country to balance its budget from our earlier estimate of US$63/bbl to US$84/bbl. Such additional spending, in our view, will lead the OPEC countries to remain more inclined towards maintaining higher oil prices. Announcements and pledges in the MENA region have increased government spending on infrastructure, raising break-even oil prices Exhibit 48. Break-even oil price of middle-east OPEC producers (US$/bbl) Saudi Arabia Qatar Kuwait UAE Iran Iraq Source: Bloomberg, Nomura estimates Nomura 22

23 Long-term oil price outlook Long-term price remains at US$75/bbl Intense short-term demand/supply inelasticity implies that other factors can intervene with oil prices, such as inventories, speculators, etc. However, a sustainable or longterm price level should be set largely by fundamentals. We look at the upstream oil and gas field machinery and the equipment index as well as the support activities for oil and gas operations index of the US Bureau of Labor Statistics (BLS) as one of the indicators for upstream costs. In addition, we track the IHS CERA upstream capital and operating cost indices as another indicator of upstream costs. Upstream costs of oil & gas drilling and extraction remain well below their 2008 peak levels While the upstream costs showed a constant rise from 1985 to 2008, both capital and operating costs declined at the end of Although all these costs have begun to recover, we note that upstream costs of oil and gas drilling and extraction remain well below their 2008 peak levels. Also, while field machinery and equipment costs have increased in 2011 YTD, support activity costs have remained flat since June 2009, after dropping by 10% in 1H09, coinciding with the low oil prices prevailing in the period. Moreover, IHS CERA cost indices also indicate that costs remain well below their peak 2008 levels. Using these inputs, we estimate that a Brent price of US$75/bbl is needed to earn a mid-cycle 10% to 12% nominal return on capital. However, we are cognizant that we have used historical averages rather than forecasts for the input data and a change in the economic scenario could lead to changes in input prices. Exhibit 49. US PPI sub-indices for oil & gas industry Exhibit 50. IHS CERA cost indices (Index) Oil & Gas extraction Drilling oil & gas wells Support activities for oil and gas operations Oil & gas field machinery & equipment Upstream Capital Costs Index Upstream Operating Costs Index Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 Source: US Bureau of Labour Statistics, Nomura Research Source: IHS CERA, Bloomberg As such, we have also looked at some of the recent major M&A deals in the oil and gas space over the past few years as we believe that this is one of the best indicators to ascertain what the industry perceives as the value of a barrel of oil. Looking at some of the recent M&A deals, such as CNOOC and Total s acquisition of Tullow Oil s Uganda assets and Total s acquisition of a stake in Novatek, we estimate that the long-term implied oil price could be between US$70/bbl and US$80/bbl in order to give the companies fair 10-12% returns on capital. Based on recent M&A deals, we estimate that long-term implied oil price could be US$70-80/bbl in order to give the companies a fair 10-12% return on capital Nomura 23

24 Exhibit 51. Estimated long-term oil price from recent M&A deals (US$/bbl) Break-even price Brent price Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Source: Nomura estimates In addition, we estimate that the majority of probable new developments have a breakeven oil price below US$70/bbl for a 10-15% IRR, although there are wide differences in breakeven prices between the projects which could range from US$15 to US$120/bbl, under current development plans. This reflects the variations in the cost of the developments and the differences in fiscal terms, which depend on the project and its location. Exhibit 52. Break-even oil price for deepwater oil exploration Exhibit 53. Estimated Break-even oil price Break-even price, $/bl Produced MENA Other Conventional Oil Deep Water and Ultra deepwater CO2 - EOR EOR Arctic Heavy Oil and Bitumen Oil Shale Gas to Liquids Coal to Liquids 20 0 Resources (billion barrels) Source: Woodmac Source: IEA, Nomura estimates Nomura 24

25 Appendix Exhibit 54. Nomura Real GDP growth forecast Real GDP (% y-y) F 2012F Global United States Western Europe Euro Area United Kingdom EEMEA Asia Pacific Japan 3.9 (0.5) 3.1 Australia China India South Korea Source: Nomura Economics team Exhibit 55. Nomura FX forecast (end of period) 1Q11 2Q11F 3Q11F 4Q11F 1Q12F End 2012F US Dollar Index DXY Rest of World Index= G10 Euro EUR Japanese Yen US$/JPY British Pound GBP Swiss Franc CHF Australia Dollar AUD Norwegian Krone EUR/NOK Swedish Krona EUR/SEK Asia Chinese Renminbi CNY Indian Rupee INR Korean Won KRW 1,097 1,060 1,040 1,020 1, LatAm Brazilian Real BRL Mexican Peso MXN Source: Nomura FX team estimates Nomura 25

26 Exhibit 56. Major OPEC crude capacity coming online until 2015 (kbbl/d) Year Project Country Peak capacity Total 2009 Shaybah Phase I Saudi Arabia 250 Khurais Saudi Arabia 1,200 Khursaniyah Saudi Arabia 250 Akpo Nigeria 180 Others total 2, Kushk-Hosseinieh Iran 300 Rhourde El Baguel Algeria 125 Hassi Messoud EOR Algeria 200 Nasr/Umm Loulou UAE 190 Upper Zakum UAE 200 Others total 1, Gbaran/Ubie Phase I Nigeria 160 Pazflor (Block 17) Angola 200 Others total 1, PSVM (Block 31) Angola 150 Pazflor (Block 17) Angola 200 Kizomba D-Satellites (Block 15) Angola 125 Rumaila Iraq 275 Usan Nigeria 180 Bosi Oil Nigeria 120 Junin Block 2 Venezuela 200 Others total 1, Block 208 Algeria 165 Burgan, PNZ Kuwait 240 Manifa Saudi Arabia 900 Zakum expansion UAE 175 Junin Venezuela 640 Others total 2, total 6,922 Source: IEA, OPEC, Thomson Reuters, Nomura estimates Nomura 26

27 Nomura Oil supply-demand balance Exhibit 57. Global Oil supply-demand table Change, 10 vs 09 Change, 11 vs 10 Change, 12 vs 11 Change, 13 vs 12 mm bls/d Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2F Q3F Q4F 2011F Q1F Q2F Q3F Q4F 2012F 2013F mmb/d % mmb/d % mmb/d % mmb/d % Demand North America Europe (0.1) (0.4) Pacific OECD FSU Europe (0.0) (3.4) China Other Asia Latin America Middle East Africa Non OECD Total demand % increase y-y Supply North America (0.1) (0.7) (0.1) (0.7) Europe (0.4) (8.5) (0.0) (0.9) (0.1) (3.2) (0.2) (5.0) Pacific (0.0) (5.9) (0.0) (0.8) (0.0) (1.1) OECD (0.2) (1.2) (0.3) (1.4) FSU (0.1) (0.7) Europe (0.0) (2.1) (0.0) (1.4) (0.0) (25.6) China Other Asia (0.1) (2.0) (0.1) (1.4) Latin America Middle East (0.1) (6.7) Africa (0.0) (1.0) (0.1) (1.9) Non OECD (0.1) (0.4) Processing gains Other Biofuels Non OPEC (0.3) (0.5) OPEC 11 crude Iraq crude OPEC NGLs Total supply Call on OPEC crude* Implied stock change - m bls/d Implied stock change - m bls OECD stock change - m bls (1.2) 0.3 (0.1) (1.3) (1.2) (0.6) (0.0) 15 (108) 104 (7) (115) (113) (55) (2) 94 (62) (34) (45) (6) (28) (50) Note: Demand estimates are Nomura estimates and 2011 supply estimates are IEA estimates. *Call on OPEC crude from Q onwards is total demand minus Non OECD supply and OPEC NGLs, such that the implied stock change in forecast years is zero. Source: IEA, Nomura estimates Exhibit 58. Brent crude price forecast (US$/bbl) 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F F 2012F 2013F Brent Source: Bloomberg, Nomura estimates Nomura 27

28 Nomura 28