1. The Outlook for Oil Markets in 2007: Head Fakes From Demand & Supply David Knapp Energy Intelligence The New York Energy Forum New York - Jan. 30, 2007

2. Key Oil Market Developments Short Term Factors  Weather, accidents, financial markets  Short-term demand responses  Inventory rebalancing  Geopolitics (demoted, but not gone)  Non-Opec’s Recovery  Opec expansion

3. Issues for Short-Term Oil Markets GeopoliticsWeather First of All, Don’t Forget Geopolitics, Weather Price Price Outlook for 2007 Balances 2007 Supply-Demand-Inventory Balances Demand Short-Term Demand Issues Supply Non-Opec Supply’s Final Last Hurrah Opec Opec’s Challenge Conclusions Some Conclusions

4. Sellers’ Markets Will Survive Sellers’ markets Sellers’ markets in 1920s, 1940s, 1970s were sudden, brief, unstable and supply-led demand-led Post-2000 market was demand-led, and emerged gradually and looks more durable not likely a reversal Late ‘06/early ‘07 not likely a reversal Supply surge not apt to come to the rescue  Post-2007 Non-Opec unable  Opec unwilling

5. Oil Market Force Diamond Geopolitics, Weather, Accidents OECD Demand Elasticity vs. Non-OECD drivers “ Peak Oil” vs. “Resource Nationalism” “China Thesis” and “Paper Oil” What’s This Diamond Worth? Q: What’s This Diamond Worth? A: Still $55-$65 per barrel

6. Geopolitics Stay in the Forefront Nigeria Nigeria  history is for sporadic not major outages  this disruption better organized, conditions ripe for generalized strife  new offshore fields help, but not safe either Iran Iran  leadership less pragmatic, threat could last  impact on oil market probably slow to come Others Others  Venezuela, Russia, West Africa, Middle East

7. Weather Past  No US Hurricanes, mild autumn, late No. Hemisphere winter, big hit on Nor. Am. gas Present  El Nino vs. North Atlantic Oscillation  Asian cyclones, North Sea storms Future  Severe 2007 Gulf of Mexico storms?  Global warming responses

8. Price Outlook $50-$60 for 2007 Range of $50-$60 for 2007 WTI  average $56-$57; high early, summer low  about $10.50 lower than 2006’s $67. 2006 WTI up 17% after 38% jump in 2005 and 34% in 2004 Fundamentals look weaker Fundamentals look weaker for 2007, with paper markets reflecting expected weakness Up-shift in long-term Up-shift in long-term oil band still being digested differentials For now, no return of late-2004 differentials explosion

9. Reasons for 2004/mid-06 Strength demand Strong and unexpected demand surge Stormsdisruptions Storms & other non-Opec disruptions Iraq Sporadic Iraqi exports Atlantic Basin sweet Tight Atlantic Basin sweet crude supplies threats Supply threats in Nigeria, Iran, Venezuela long positions Growing long positions by traders and funds

10. Reasons for Post-July ’06 Weakening weather Mild Northern Hemisphere summer/winter weather demand Weaker OECD demand supply Surging non-Opec supply Opec Credibility issues for Opec cuts rotation Market rotation out of commodities into equities geopolitical concerns Diminished geopolitical concerns

11. 2007 Outlook for Price Levels Source: Energy Intelligence Research.

12. Quarterly Oil Prices Outlook Source: Energy Intelligence Research.

13. Short-Term Demand Weather dominates current Northern Hemisphere demand Price impacts hit harder in OECD Low North American natural gas prices hitting bottom of the barrel US nuclear capacity utilization has been relatively high Anti-oil policies, peer pressure may be having an effect Economic, demographic drivers propel Non-OECD Fewer options for substitution, less discretionary use

14. OECD Flat After 2006 Decline

15. Non-OECD Not Back On Fast Track

16. Short-Term Supply 2004-2006 2004-2006 special factors inhibited supply  Hurricanes Ivan, Katrina & Rita plus several others  leaks at offshore fields in No. Sea, Canada, Mars  BP pipeline corrosion at Prudhoe Bay 2007 2007 non-Opec supply spurt, final last hurrah Opecexpansion Opec capacity adds, membership expansion  Saudi Arabia, Nigeria, Kuwait, Libya, Algeria  Angola + (who’s next?)

17. 2007 -- A Final Last Hurrah?

18. 2006 Supply-Demand Balances Source, Oil Market Intelligence, January 2007 Source, Oil Market Intelligence, January 2007.

19. 2007 Supply-Demand Balances Source, Oil Market Intelligence, February 2007, forthcoming Source, Oil Market Intelligence, February 2007, forthcoming.

20. “Observed” Stock Changes Evidence of stock draws since September, despite supply-demand surplus Oil at sea has been highly variable Non-OECD SPRs beginning to suck up oil Contango helping keep independent commercial storage high Geopolitics out of the headlines but still in tanks Opec focus still on OECD commercial stocks

21. 2005 Global Stock Changes Source, Oil Market Intelligence, January 2007 Source, Oil Market Intelligence, January 2007.

22. Opec’s Dilemma Maintaining long term markets Showing production discipline Adding sufficient capacity to handle chronic geopolitical risks Making reserve estimates credible Dealing with global quality issues

23. Conclusions transition 2007 is a transition year  non-Opec supply spurt is an illusion  demand reactions are temporary  Opec difficulties peak in 2007 bearish signalscontinue Sporadic physical market price bearish signals will continue in first half bullish second half Investors look to bullish 2008 and beyond by the second half of the year

24. SUPPLEMENT DETAILS on 2007 Non-Opec Oil Supply

25. 2007 North American Oil Supply new fields in Gulf of Mexico, PL repairs in Alaska growth from Canada synthetics, East Coast, in situ bitumen

26. 2007 North Sea Oil Supply positive impact on UK of Buzzard, Tweedsmuir Norway’s Alvheim plus Snohvit, Ormen Lange late in the year

27. 2007 FSU Oil Supply higher Russian upstream spending; nearly half of growth Sakhalin 1 better performance at Kazakh’s Karachaganak, Tengiz filling Azerbaijan’s BTC pipeline undoing Yukos damage in Russia; full-year Sakhalin 2 from 2007-08

28. 2007 Non-Opec Africa Oil Supply Changes exclude Angola, which joined Opec as of Jan. 1, 2007 Sudan’s delayed pipeline expansion, new fields Equatorial Guinea bouncing back

29. 2007 S. & C. America* Oil Supply Brazil belatedly growing Campos Basin joined by Santos Ecuador dealing with protest to new pipeline Colombia, Argentina past their peaks * Excluding Venezuela.

30. 2007 Asian* Oil Supply * Excluding Indonesia. dominated by sharp drop for China small gains for Australia, Thailand, Vietnam, Malaysia

31. 2007 Non-Opec Mideast Oil Supply Oman and Syria seeing accelerating declines some new fields in Yemen

32. 2007 Other Europe Oil Supply