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1 : Daily Focus: WTI/Brent spread might narrow 3 March 2011 Focus: WTI/Brent spread might narrow While WTI continues to trade at a significant discount to Brent, the term structure of WTI has shifted significantly during the past two weeks. With the shift in the term structure, the incentives to accumulate WTI inventories at Cushing for a contango play has disappeared. Consequently, we expect the pressure on Cushing storage to ease, which in turn is likely to lead to narrowing of the WTI/Brent spread. Copper spent much of Wednesday treading water, with that behavior continuing into Thursday morning. Tin has also struggled to push higher, however, the rest of the base metals complex has played catch up with relative underperformers like aluminum and zinc leading the charge. Turnover is rather subdued however, ahead of this afternoon's ECB rate decision and the build up to tomorrow s US Non-farm payroll figures. 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 The DOE reported changes in US oil inventories for crude/gasoline/distillate of +0.4/-3.6/-0.8 MB respectively for week ending 28 January. Cushing crude inventory rose by 1.1MB. The refinery utilization rate increased by 1.5%. Earlier this morning, however, news of a possible end to the crisis in Libya has quelled investor demand for precious metals prompting a sharp fall in prices. Commodity price data (2 March 2011) Base metals LME 3-month Open Close High Low Daily change Change (%) Change in cash Cash Settle settle Cash - 3m Aluminium 2,591 2,603 2,604 2, % 2, Copper 9,828 9,890 9,913 9, % 9, Lead 2,525 2,564 2,579 2, % 2, Nickel 28,500 28,605 28,830 28, % 28, Tin 31,600 31,600 31,750 31, % 31, Zinc 2,473 2,481 2,505 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q2' % ICE EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /0.5 Silver /-1.0 Platinum 1, , , , , /2.0 Palladium /1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of the document.

2 Daily 3 March 2011 Focus: WTI/Brent spread might narrow Since December 2010, the front-month WTI/Brent spread has widened significantly. The spread hit a record of -$19.54/ bbl on 21 February 2011 when TransCanada announced that the second phase of the Keystone project had started to operate. The term structure for WTI has also weakened dramatically. The M1/M6 time spread also reached a recent record, of -$10.48/bbl, on 10 February 2011 (Figure 1). The widening of both spreads have been driven by concerns over the containment risks at Cushing, the Nymex WTI futures contract delivery point. Since April 2010, the crude inventories at Cushing have been hitting seasonal highs. The latest DOE reports put the Cushing inventories at an all-time high of 38.6MB by 25 February. This is in contrast to the 46MB of storage capacity at Cushing as of September 2010, according to the DOE. While WTI continues to trade at a significant discount to Brent, the term structure of WTI has shifted significantly during the past two weeks. What is more important is that, given the current term structure, it no longs pays to store oil at Cushing. The structure has flattened to a level that is below the breakeven level of our storage model (Figure 2). With the shift in the term structure, the incentives to accumulate WTI inventories at Cushing for a contango play has disappeared. Consequently, we expect the pressure on Cushing storage to ease, which in turn is likely to lead to narrowing of the WTI/Brent spread. The main risk remains whether the strengthening of the WTI term structure was a temporary move driven by MENA turmoil or a structural shift driven by underlying changes in physical oil flows around Cushing. Figure 1: WTI/Brent spread vs. WTI time spread Dec/10 Jan/11 Feb/11 Mar/11 Source: NYMEX; Standard Bank Figure 2: WTI return on storage 16.0% 12.0% 8.0% 4.0% Breakeven level 0.0% Dec/10 Jan/11 Feb/11 Mar/11 Source: NYMEX; Standard Bank WTI/Brent spread M1 WTI time spread M1/M6 WTI return on storage By James Zhang Base metals Copper spent much of Wednesday treading water, with that behavior continuing into Thursday morning. Tin has also struggled to push higher, however, the rest of the base metals complex has played catch up with relative underperformers like aluminum and zinc leading the charge. Turnover is rather subdued however, ahead of this afternoon's ECB rate decision and the build up to tomorrow s US Non-farm payroll figures. A report regarding a proposed Libyan peace deal caused an initial knee-jerk reaction this morning across the broader commodities complex, however, with the deal being spearheaded by Venezuela s President Hugo Chavez and Libyan leader Muammar Gaddafi, the initial impact from the headline was relatively short-lived. It will be interesting to see how much attention ECB President Trichet pays to oil prices and inflationary risks in this afternoon s statement accompanying the ECB rate announcement. Copper has been incredibly resilient over recent days, with the metal continuing to shrug off negative signs from the physical market. Copper has nevertheless reached a bit of a crossroads, though whether the current stalemate ends by shorts getting exasperated and looking to cover back positions - likely resulting in another period of lethargic sideways trading once the activity subsides, or by the longs getting nervous and looking to acquire some downside protection rather than to add to their position, remains to be seen. With no physical buying to act as a safety net, any sell-off will be into a vacuum. Aluminium has emerged as the new flavour of the month, with the metal establishing itself above $2,600. Solid auto sales, higher energy prices and geopolitical concerns in the Middle East have all helped boost sentiment and take the focus away from the chronic overcapacity and high levels of inventory that have weighed on prices in the past. We struggle to get too bullish towards aluminium ourselves, though given the headwinds currently slowing copper s ascent, the likes of aluminium, nickel and lead certainly appear to offer a much better risk/reward profile. By Leon Westgate 2

3 Daily 3 March 2011 Oil strengthened further yesterday on the turmoil in the Middle East and North Africa region (MENA). Front-month WTI gained $2.60/bbl, to settle at $102.23/bbl, while front-month Brent moved 93c/bbl higher, to close at $116.35/bbl. The term structures for WTI and Brent also continued to strengthen. As we pointed out in the Focus section today, the shift in WTI term structure no longer pays to store WTI at Cushing, according to our storage model. The unrest in Libya seems interminable as rebels and Gaddafi supporters continue to clash. However, reports of further unrest spreading to other countries seem to have tailed off, which could bring some calm to the market, even if only temporarily. Indeed, prices weakened this morning on the back of possible peace deals for Libya. The DOE reported changes in US oil inventories for crude/gasoline/distillate of +0.4/-3.6/-0.8 MB respectively for week ending 28 January. Cushing crude inventory rose by 1.1MB. The refinery utilization rate increased by 1.5%. Overall, the inventory change poses a more bullish picture than its normal seasonal pattern, which gave some boost to the oil price. US crude oil imports remained at a low level, just above 8mbd, on the back of seasonal low refinery run rates. The total US crude inventories have fallen below the seasonal level seen last year, but still 14.6MB above 5-year average level. The latest inventory draw across the barrel also put the total US liquid oil inventories to the level just above the seasonal level in The implied demand for gasoline bounced back up very strongly, while distillate demand remained around the seasonal lows. In the financial market, it is clear that the major equity markets are deeply concerned over the high oil prices. There have been strong patterns of inverse relationship between the oil price and equity prices recently. For now, the underline picture for the economy remains positive. The Fed noted the US employment picture is improving in its latest Beige Book. It echoes the above-expectation ADP employment survey released yesterday. The ECB is having its rate-setting meeting today. The market will watch closely for the ECB s view on the recent pick-up in inflation, partly driven by high commodity prices. Looking ahead, the market will continue to follow developments in the MENA region. Even with the latest proposal of a peace deal in Libya, the situation is unlikely settle down soon, which is likely to keep the price at a heated level. By James Zhang For the most part New York and Asian trade was not particularly interesting. Gold did manage to post a record high of $1,440 as oil prices moved higher, but was unable to hold onto these gains. For silver, the $35.00 mark remained an impenetrable resistance level. Some profit taking and position squaring saw some dips, but otherwise trade was mostly sideways. Earlier this morning, however, news of a possible end to the crisis in Libya has quelled investor demand for precious metals prompting a sharp fall in prices. With no firm statements or commitment from the conflicting parties in Libya, gold and silver have since rebounded but remain on the back foot. Developments on this front should be closely watched as any announcements could spark another sell-off. Gold support is at $1,425 and $1,420. Resistance is at $1,439 and $1,446. Silver support is at $34.26 and $33.87, resistance is at $35.03 and $ Bernanke s testimony yesterday was largely unchanged from the day before, adding no further support to precious metals. The Fed s Beige Book remained supportive of precious metals, highlighting an improving economic outlook but still disappointing growth in jobs. ADP employment numbers showed a promising 217k increase in job during February, although we would not read too much into these numbers, given the recent poor correlation with nonfarm payrolls data. Platinum support is at $1,826 and $1,808, resistance is at $1,864 and $1,883. Palladium support is at $813 and resistance at $829. By Marc Ground 3

4 Daily 3 March 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 4,604,425 4,606,625 2,100 4,300-2, , , ,124 Copper 423, ,275 4, ,275 46,000 17, ,469 Lead 293, , ,150 24, ,290 Nickel 130, , ,256 9, ,283 Tin 17,745 17, , ,406 Zinc 708, , ,775 3, ,561 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,980 16, Ali May' Copper 74,550 74, Cu May' % Zinc 19,185 19, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,710 68,071 17, , ,288 16, month 18,283 69,467 18, , ,958 17, 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 Q2-11 Q3-11 Q4-11 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 Apr'11 May'11 Apr'11 Apr'11 Apr'11 Feb'12 Apr'11 Settlement 1, , , , , Open Interest 515, ,802 22,457 41,621 1, ,732 2,376 Change in Open Interest -6, , , Sources: Standard Bank; LME; Bloomberg 4

5 Daily 3 March 2011 Forecasts Base metals Base metals LME cash prices (US$/mt) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Aluminium 2,460 2,470 2,350 2,440 2,430 2,510 Copper 9,150 8,900 9,300 9,450 9,200 10,000 Lead 2,450 2,390 2,520 2,560 2,480 2,600 Nickel 24,500 23,800 22,000 22,500 23,200 22,000 Tin 26,200 27,000 29,000 29,800 28,000 29,500 Zinc 2,350 2,300 2,250 2,380 2,320 2,500 front-month prices Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg WTI ($/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 1,370 1,440 1,500 1,435 1,430 1,450 Silver Platinum 1,850 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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