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1 : Daily Focus: Physical oil market squeezed by high crude prices 28 February 2012 Focus: The recent strong rally in crude oil price has been largely driven by fears of major supply disruptions from the Middle East region in the event of military action over Iran s nuclear programme. This fear has prompted oil consumers to look for spot cargoes, which has pushed up the time spread in Brent at the front-end of the curve. Equally, if not more importantly, it has also attracted substantial speculative money, which has accelerated the recent rise in oil prices. Sentiment has turned positive ahead of the ECB s eagerly anticipated second LTRO on Wednesday, though quite how the market will react to a deviation from the billion consensus remains uncertain. The euro has nevertheless rallied against the dollar this morning while European equity markets have also strengthened, giving the base metals complex a boost heading into the afternoon. Turnover remains rather lacklustre, with the metals going with the flow for the time being. 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 After a good start to New York trading hours yesterday, off the back of a weakening dollar and expectations of growing liquidity (ECB s LTRO this Wednesday), we saw markets lose their resolve. Profit-taking was evident on TOCOM gold as the yen price took a dip. However, precious metals soon rebounded on risk-on trading. Oil gave back some of the gains yesterday amid signs of cracks appearing in many previously supportive. WTI and Brent lost $1.21/bbl and $1.30/bbl respectively. Oil products were also under pressure as demand is being crippled by high oil prices. Commodity price data (27 February 2012) Base metals LME 3-month Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash - 3m Aluminium 2,316 2,331 2,339 2, % 2, Copper 8,466 8,536 8,560 8, % 8, Lead 2,200 2,247 2,250 2, % 2, Nickel 20,175 20,155 20,300 19, % 19, Tin 24,000 23,705 24,185 23, % 23, Zinc 2,069 2,098 2,109 2, % 2, Energy Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil 1, , , , % API2 Q2' % Precious metals AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /1.5 Silver /0.0 Platinum 1, , , , , /3.5 Palladium /1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 28 February 2012 Focus: Physical oil market squeezed by high crude prices The recent strong rally in crude oil price has been largely driven by fears of major supply disruptions from the Middle East region in the event of military action over Iran s nuclear programme. This fear has prompted oil consumers to look for spot cargoes, which has pushed up the time spread in Brent at the front-end of the curve. Equally, if not more importantly, it has also attracted substantial speculative money, which has accelerated the recent rise in oil prices. Clearly, the oil market is rather tight, with the loss of almost all crude supply from South Sudan, Yemen and Syria, while Iranian supply is being hampered by sanctions, and Libya supply is yet to recover to its pre-war level. The tightness in supply has been reflected by the persistent backwardation at the frontend of Brent curve. However, the feared major supply disruption, caused by possible events such as a closure of the strait of Hormuz, remains a small probability. Meanwhile, the market appeared to have gone ahead itself in both flat prices and the time spread, both of which have weakened during the past two trading sessions. The impact on the physical market and real demand for physical oil has been rather pronounced. Price differentials for physical crude cargoes over dated Brent have weakened substantially, with Urals crude for the delivery to the Mediterranean coming off for about $1.50/bbl over the past two weeks (Figure 1). In addition, the time spread at the front-end of Brent curve has also started to weaken (Figure 2). Both developments in the physical crude price differentials and Brent structure are aligned with the rather squeezed refining margins, which has cooled demand from refineries. We believe that the weakness in the physical market will be transmit to a sizable correction in oil prices in the coming weeks. Base metals By James Zhang Figure 1: Price differentials for Urals vs. Dated Brent ($/bbl) Nov/11 Dec/11 Jan/12 Feb/12 Urals NW.E Urals Med Figure 2: Brent time spread ($/bbl) /01 15/01 29/01 12/02 26/02 Brent M1/M6 spread Sources: ICE; Bloomberg; Standard Bank Sentiment has turned positive ahead of the ECB s eagerly anticipated second LTRO on Wednesday, though quite how the market will react to a deviation from the billion consensus remains uncertain. The euro has nevertheless rallied against the dollar this morning while European equity markets have also strengthened, giving the base metals complex a boost heading into the afternoon. Turnover remains rather lacklustre, with the metals going with the flow for the time being. Aside from the LTRO tomorrow, this afternoon sees the release of the latest US Durable goods numbers for January, expected at 1.0%, or unchanged ex-transportation. US consumer confidence numbers for February are also due out later this afternoon and are expected to come in at 63.0 from 61.1 in January. A dichotomy is emerging in copper, with strong futures prices clearly disconnected from weak and weakening signs of Chinese demand. Shanghai bonded premiums have continued to deteriorate over the past week and have been heard below $50. While a reflection of weak demand and the negative SHFE-LME arbitrage, the weakness in premium has, in part, also been due to the nearby backwardation on the LME forward curve and the urge by some participants to offload excess inventory. The nearby backwardation is however another factor helping give outright copper prices a lift, in so much as amid expectations of potential further short covering still to come, participants are being deterred from aggressively shorting the metal. 2 Nickel has broadly tracked the likes of copper, and aluminium higher this morning, though the metal has struggled to move much above $20,300. Fresh inflows of metal into Rotterdam and Singapore have helped dampen sentiment, with on-warrant stocks climbing a net 1,230 mt this morning to 94,152 mt, the highest level since September By Leon Westgate

3 Daily 28 February 2012 Precious metals After a good start to New York trading hours yesterday, off the back of a weakening dollar and expectations of growing liquidity (ECB s LTRO this Wednesday), we saw markets lose their resolve. Profit-taking was evident on TOCOM gold as the yen price took a dip. However, precious metals soon rebounded on risk-on trading, as a parliamentary vote on the Greek bailout was passed in Germany. We except such volatility in precious metals to continue as we move closer to tomorrow morning s ECB announcement and markets begin to speculate more on the magnitude of the ECB s allocation (currently market expectations appear to be around 500bn, similar to the amount allocated the first time). So after this morning rally, we wouldn't be surprised to see some weakness creep in again. However, the general bias is towards more upside today, as the dollar shows signs of weakness and sentiment appears buoyant (European equities are currently up, and US equity futures point to gains later today). On the PGM front, we have South African production concerns continuing to grab headlines. One of the country s newspapers has reported that Implats has had to apply to the Department of Mineral Resources for a licence to restart operations at its beleaguered Rustenburg mine, owing to the fact that the mine has been shut down for more than 21 days. While the report remains unconfirmed, it has fuelled further concerns over global platinum supply. Gold support is at $1,766 and $1,755. Resistance is $1,784 and $1,791. Silver support is at $35.22 and $34.87, resistance is at $35.78 and $ Platinum support is at $1,695 and $1,680, resistance is at $1,722 and $1,733. Palladium support is at $702 and resistance at $716. Energy By Marc Ground Oil gave back some of the gains yesterday amid signs of cracks appearing in many previously supportive. WTI and Brent lost $1.21/bbl and $1.30/bbl respectively. Oil products were also under pressure as demand is being crippled by high oil prices. The time spread in both Brent and ICE Gasoil continues to weaken, with the backwardation in the front-end of ICE gasoil curves flattening substantially. A similar move is developing in the structure of Nymex RBOB gasoline and Heating oil, which reinforces a bearish physical demand picture. Current levels of oil prices have attracted plenty of political attention, with some groups calling for OCED countries to release their strategic reserves. While this is unlikely to take place immediately, we do see a decent probability of a release taking place if prices stay at the current level or even climb further over the coming weeks. Meanwhile, Saudi is likely to push more oil to the market in an attempt to prevent a stock release by the OECD countries. As it was reported on Friday, Saudi exported $9mbbl/d crude last week, which could be a sign of a production boost from the kingdom. In the event of a reserve release and/or a substantial increase of supply from Saudi, we should expect both flat prices and time spreads to weaken significantly. While both scenarios remain rather uncertain, we still foresee weakness in the oil market induced by a soft physical market. As we noted in the Focus section today, there are various signs that the physical market has been squeezed by heated oil prices. As we approach month-end, there a good chance that net long position holders are tempted to lock in their gains, as on aggregate the net speculative length has been at very high level. Looking ahead, the market be buoyed by the next tranche of the ECB s liquidity programme, the last one of which has been widely credited for the market rally in many risky assets which started at the end of last year. Meanwhile, some observers would argue that the elevated oil prices have overtaken the Eurozone debt crisis as a the biggest threat to global economy. Technically, price actions in Brent during the last two session make it look increasingly bad. The balance of sentiment in the oil market is reaching a tipping point, in our view. What appeared to be a golden opportunity for producer hedging during the last couple of weeks could disappear quickly. By James Zhang 3

4 Daily 28 February 2012 Base metals Daily LME Stock Movement (mt) Metal Today Yesterday In Out Energy One day change YTD change (mt) Cancelled warrants (mt) Cancelled warrants (%) Contract turnover Aluminium 5,115,775 5,115,475 5,000 4, ,375 1,620, ,738 Copper 300, , ,025-3,025-70,425 87, ,238 Lead 368, , ,325-2,325 15,100 35, ,157 Nickel 97,398 97, ,350 4, ,101 Tin 10,250 10, ,940 1, ,609 Zinc 867, , ,025 4, ,066 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,255 16,245-5 Ali May' Copper 60,420 60, Cu May' % Zinc 15,980 16, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,280 64,303 16, , ,938 15, month 18,012 65,958 17, , ,169 16, Energy 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) 1, , , , , NWE CIF jet ($/mt) 1, , , , , Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q2-12 Q3-12 Q4-12 Cal 13 Cal 14 API2 (CIF ARA) API4 (FOB RBCT) Precious metals 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 Apr'12 May'12 Apr'12 Apr'12 Apr 12 Feb'13 Apr'12 Settlement 1, , , , , Open Interest 470, ,874 21,525 44,622 2, ,963 1,585 Change in Open Interest Sources: Standard Bank; LME; Bloomberg 4

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