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1 Daily 3 November 2010 Walter de Wet, CFA* Walter.DeWet@standardbank.com Focus: Oil inventory takes a back seat Leon Westgate* Leon.Westgate@standardbank.com Focus: Last night, API published very bullish weekly US inventory data. Crude inventory declined by 4.1mbbl, distillates by 4.7mbbl, and gasoline by 3.2mbbl. In total, it was a sizable 12mbbl draw. The market gave a lukewarm response. We view this response as a function of an energy market in limbo ahead of the DOE numbers (which tend to carry much more weight than API s number.) The base metals are trading nervously ahead of this evening s long-awaited FOMC announcement, with the complex trading sideways to higher ahead of the afternoon. Turnover has subdued for all the base metals, but particularly for copper which has seen turnover on LME Select lag behind both aluminium and zinc during the pre-market. Trading in precious metals markets is relatively thin as investors stay on the sidelines ahead of the FOMC announcement later today. Some nervous selling in Asian trade has seen prices come down slightly, most notably that of palladium but, for the most part, prices are range-bound. We expect muted trade, with small price dips, to continue for the most of today. API weekly inventory data released yesterday pointed to a massive draw of 12mbbl or crude, gasoline and distillate combined. This is on the back of API s hefty build of 5.4mbbl the week before for the all groups of oil combined vs. a 1mbbl draw from the equivalent DOE data. The market gave a lukewarm response to the API number this morning. Commodity price data (2 November 2010) Base metals LME 3-month Open Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash 3m Aluminium 2,411 2,432 2,439 2, % 2, Copper 8,380 8,440 8,450 8, % 8, Lead 2,495 2,491 2,510 2, % 2, Nickel 23,525 23,475 23,950 23, % 23, Tin 25,900 25,850 25,950 25, % 25, Zinc 2,460 2,454 2,484 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q4' % EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFPs Gold 1, , , , , /0.1 Silver /1.0 Platinum 1, , , , , /4.0 Palladium /1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Focus: Oil inventory on back seat as market awaits Fed QE2 Last night, API published very bullish weekly US inventory data. Crude inventory declined by 4.1mbbl, distillates by 4.7mbbl, and gasoline by 3.2mbbl. In total, it was a sizable 12mbbl draw. The market gave a lukewarm response. We view this response as a function of an energy market in limbo ahead of the DOE numbers (which tend to carry much more weight than API s number.) But, more importantly, the market is waiting for the Fed s decision on further quantitative easing. US crude inventory has been at its record seasonal high since May, and the gap between this year s inventory level and its seasonal average continues to widen (see graph). However, the high inventory has hampered the recovery of the crude oil flat price. Front-month WTI has more than doubled from the low seen at end-2008, while the US crude inventory is eyeing the record high set in May Nevertheless, oil fundamentals remain important for the crude term structure, especially for commercial market participants. In this regard, for the DOE data release later today, we forecast that crude inventory will rise by 2mbbl and gasoline inventory by 3mbbl, and that distillate will decline by 1.6mbbl. US refineries are expected to continue ramping up on refinery runs following maintenance and improved margins. We forecast an increase of 0.5% refinery utilisation. The impact of the French strike should continue to affect the trans- Atlantic product arbitrage flow in the form of fewer gasoline imports to the US and more distillate exports from the US. In gasoline, the impact from the decline in demand as the driving season ends and as production increases could exceed that from the reduction of im- DOE crude oil inventory mbbl 270 Jan Feb Apr May Jun Aug Sep Oct Dec 5-yr Range yr Average Sources: DOE, Standard Bank ports from Europe. For distillate, we expect a decline in stocks as a result of an increased demand from an earlier-than-normal harvest season and higher exports. We note that these bullish factors are partly offset by higher refining production and warmer-thanaverage seasonal weather. Overall, we have a more bearish forecast than the market consensus for today s DOE data. We believe that the data will weigh on oil prices. However, DOE numbers may have a limited on the oil flat price initially as the market awaits the Fed FOMC announcement. Base metals The base metals are trading nervously ahead of this evening s long-awaited FOMC announcement, with the complex trading sideways to higher ahead of the afternoon. Turnover has subdued for all the base metals, but particularly for copper which has seen turnover on LME Select lag behind both aluminium and zinc during the pre-market. Although the Republican party made strong gains in the US mid-term elections, they failed to take the Senate. Consequently, the reaction from the dollar to the election was rather muted, with the dollar continuing to weaken during Wednesday morning ahead of the Fed announcement. Looking ahead, while the headline figure for the widely anticipated QE2 will be key, what will also be interesting is whether the Fed highlights increased inflation or a lower unemployment rate as being key to when QE measures may be pared back. With the UK summer time well and truly over, and the country reverting to GMT, the FOMC statement will be released at $18.15 UK time, 45 minutes before LME Select closes for the day. Copper has been steadily creeping higher over the past couple of days, with the metal consolidating above $8,400. Its hard to determine quite how much QE the market is already pricing in (if any), with the metal s recent price behaviour not really consistent with being ramped higher specifically ahead of the FOMC announcement. With open interest remaining very high, there is a risk of an aggressive sell-off should the Fed disappoint the market. That said however, given that any additional liquidity should be bearish for the dollar, we would view any dips as a buying opportunity. By Leon Westgate 2

3 Trading in precious metals markets is relatively thin as investors stay on the sidelines ahead of the FOMC announcement later today. Some nervous selling in Asian trade has seen prices come down slightly, most notably that of palladium but, for the most part, prices are range-bound. We expect muted trade, with small price dips, to continue for the most of today. For the Fed s additional quantitative easing, consensus remains around the $500bn mark, which we believe is consistent with the current gold price of around $1,350. We maintain that the risk lies in the Fed disappointing markets by announcing a staggered approach (i.e. smaller amounts of asset purchases on a monthly basis). If so, we could see a pull-back in prices, with our calculation placing a floor at $1,280 for gold (a price consistent with no additional quantitative easing). Nevertheless, any additional liquidity (no matter in what manner it is delivered) should be bullish for precious metals, especially for gold. Therefore, we would buy on dips. In addition, seasonal jewellery demand for gold (ahead of Diwali and the Indian wedding season) remains strong, even at current prices, adding weight to our bullish stance over the medium term. Gold support is at $1,353 and $1,347. Resistance is at $1,363 and $1,366. Silver support is at $24.70 and $24.49, resistance is at $25.03 and $ Platinum support is at $1,706 and $1,697, resistance at $1,724 and $1,732. Palladium support is at $639 and resistance at $652. Oil pushed higher yesterday as the dollar resumed its decline and passed the important support level of $1.40 against the euro. The Euro-zone October PMI Manufacturing Index was better-than-expected at 54.6 which assisted the euro. However, the yield of the Irish and Portuguese government bonds saw sharp increase yesterday which raises some concern about the performance of the euro going forward. For the time being, all eyes are on the Fed s actions and the market is ignoring the unresolved euro-zone sovereign debt problem to another day. API weekly inventory data released yesterday pointed to a massive draw of 12mbbl or crude, gasoline and distillate combined. This is on the back of API s hefty build of 5.4mbbl the week before for the all groups of oil combined vs. a 1mbbl draw from the equivalent DOE data. The market gave a lukewarm response to the API number this morning. Technically, oil settled above short-term moving averages. Front month Brent has support at $85.27 and resistance at $ Coal price continues its gradual increase, with November API2 (CIF ARA) and API4 (FOB Richards Bay) edged up 50c/mt and 60c/mt, and settled at $ and $ respectively. 3

4 Base metals Daily LME stock movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Contract turnover Aluminium 4,297,675 4,303, ,525-5, , , ,704 Copper 366, , ,375 28, ,441 Lead 202, ,725 2, ,725 55,950 9, ,470 Nickel 128, , ,208 4, ,083 Tin 12,935 13, , ,379 Zinc 632, ,000 4, , ,175 39, ,067 Shanghai 3-month forward prices COMEX active month future prices ZAR metal prices (3 November 2010) Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 16,580 58,344 17, , ,014 16, month 17,141 59,485 17, , ,191 17, futures pricing Price Change Price Change Price Change Price Change Price Change 1-month forward 2-month forward 3-month forward 6-month forward 1-year forward Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO 380 Cargo ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q4-10 Q1-11 Q2-11 Cal 11 Cal 12 API2 (CIF ARA) API4 (FOB RBCT) Forwards (%) 1-month 2-month 3-month 6-month 12-month 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 Dec'10 Dec 10 Jan'11 Jan'11 Dec'10 Aug'11 Dec'10 Settlement 1, , , , , Open Interest 608, ,866 26,190 37,867 1, ,657 2,338 Change in Open Interest -5,040-1, , Date: 2 November 2010 Sources: Standard Bank; LME; Bloomberg Cancelled warrants (mt) Cancelled warrants (%) Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,560 16, Ali Dec' Copper 63,570 63, Cu Dec' % Zinc 19,850 19,

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