March, 2011 COMMODITY OUTLOOK: GEOPOLITICS, GROWTH AND VOLATILITY S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

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Macroeconomic Outlook for 2011 The world economy appears to be on track to return to synchronous above-trend growth in The foundation for a strong synchronized global upturn lasting 4-8 quarters is in place High oil prices, inflation and possible sovereign debt are the key forecast risk factors –Volatility will be the norm High oil prices driven by a supply shock are likely to be more damaging than those driven by strong economic growth The IEA and OPEC can offset supply disruptions –Delayed or partial response could trigger hoarding activities Major economies in the emerging world, including China, India, and Brazil are in a much better place than the G3, but need to find a balance between growth and inflation High oil prices have a greatest influence on importing countries with low energy taxes In the 2007/8 oil rally, high oil prices contributed to a weaker dollar While the Fed may be forced to raise interest rates quicker than expected, high unemployment may lead to it remaining ‘behind the curve’ in 2011 Both factors could weaken the US dollar, which would be supportive for commodity prices A shift from a zero interest rate policy will be extremely significant for the commodity markets Impact strongest for those with high inventories A weaker dollar encourages inventory accumulation as a store of value 1 O I L M A R K E T O V E R V I E W

Commodity markets have moved higher as emerging market growth surges Broad rally in commodities as the world economy has recovered from the global recession Sustainable recovery in commodities, despite anemic growth in OECD shows consumption driver from emerging market economies Agricultural markets have seen some of the strongest recoveries Supply disruptions have played their role, but low ending stocks have been a significant driver Source: J.P. Morgan Energy Strategy, Bloomberg 13 O I L M A R K E T O V E R V I E W Source: J.P. Morgan Energy Strategy, Bloomberg

Source: JPMorgan Commodity Research. “ Total ” equals world-value-weighted average using 2010 YTD prices and production Demand-supply situation for 2011 Hurdle rates required for global demand to catch up with global production in 2011 A 1.5% to 2.0% global real GDP growth rate is all that is required to send most commodity markets, including oil, into deficit in Our economists expect global real GDP growth of 3.5% in 2011, suggesting ample room for any would-be downshift in growth expectations to arrive at the same conclusion. Inventories are already low in softs and grains, higher in metals and energy; but across sectors, the fact that US real interest rates are negative means global carrying costs are abnormally low and there are strong incentives to accumulate stocks for anticipated demand well into the future, especially in non-USD-based jurisdictions. 4 O I L M A R K E T O V E R V I E W

Brent and WTI Historical Price All forecasts are period averages. Actual to date prices are as of February 21, Source: JPMorgan Energy Strategy Global Supply & Demand and Forecast J.P. Morgan Crude Oil Price Forecast Geopolitical risk takes over from demand as oil price driver Volatility to remain heightened Civil unrest is rapidly redrawing the political map in North Africa, market concern tensions will spread to major oil producing and transporting regions Price spike risks have materially increased World oil demand growth of 2.7 mbd in 2010 will moderate to 1.7 mbd in 2011 Demand seen above trend, driven by EM demand and healthy GDP growth Risks include an overly aggressive rise in price hurting global economic recovery and Eurozone financial market volatility OPEC output restraint by key members has kept a cap on supply, but there are signs they are upping output in the face of outages and +$100/bbl prices Robust diesel demand is once again driving crude prices as refiners run more crude High product inventories and seasonal refinery maintenance will lead to reduced crude demand in the coming months Although we do not envisage a significant retracement in prices having hit our price target for 1Q2011, a dramatic increase in OPEC output provides downside risk US Total Product Inventories Source: JPMorgan Energy Strategy, IEA, government and industry sources 8 O I L M A R K E T O V E R V I E W

Probability assessment: a useful guide Different Price Scenarios 9 O I L M A R K E T O V E R V I E W

Three reasons why OPEC needs a higher oil price Source: J.P. Morgan Energy Strategy, IEA, Government Statistics Social spending rising by 7% per year Government spending on wages and capital projects has risen in tandem with higher oil prices: Abu Dhabi : $20/bbl in 2004; Bahrain $30/bbl in 2003 – now 2-3 times that level Energy demand rising rapidly, production is stagnating Energy export revenues fall unless prices rise Stemming taxation in consumer countries If prices fall, consuming countries are likely to use the opportunity to raise taxes—the end user price remains high regardless Budget Breakeven (BBE) Oil Price $/bbl Middle East Oil Demand Surges as % of Production Source: J.P. Morgan Energy Strategy, Various National Sources UK Gasoline Prices—With and Without Tax $/bbl 11 O I L M A R K E T O V E R V I E W

Commodities Outlook for 2011 Outlook: The outlook for commodities in 2011 is positive, spurred by global cyclical recovery and easy hurdles for global consumption to surpass constrained global production. For long exposures heading into 2011, we prefer Brent crude oil, Wheat, Corn and Copper. Demand growth:. In 2011, the cyclical re-ignition of demand growth expectations will likely become a more dominant factor in guiding the performance of physical commodities and their associated futures markets. Macroeconomic Policy: The low interest rate regime in place around the world will push money into commodities and other hard assets as a hedge against the value of paper money. Inflationary risks: Rising inflation expectations and actual rate hikes in 2011 will tend to steepen upward-sloping commodity forward curves, as rising forward valuations and higher carrying costs are embedded in term structures. Supply Side Risks: A number of commodity forward curves are already exhibiting backwardation, providing concrete evidence of the very low level of inventories that prevail in a number of agricultural markets. Low stock levels will continue to be an important factor in Apart from this, a number of markets face individual supply risks arising from weather related phenomena which can spike prices. Policy Risks (Part 2): The risks to our central view are skewed toward higher price volatility and higher returns, especially should governments implement price controls and other trade barriers that increase friction in the movement of scarce inventories to jurisdictions where they are needed most. 3 O I L M A R K E T O V E R V I E W