The document provides an overview of the crude oil market in summer 2012. It discusses several factors impacting crude oil prices at the time, including: 1. A projected 17% drop in North Sea crude oil production in September due to maintenance at the Buzzard oil field. 2. Ongoing tensions between Iran and Western countries over Iran's nuclear program, as well as fears of supply disruptions through the Strait of Hormuz. 3. Uncertainty in the Middle East from Syria's civil war and the potential for supply shocks from political instability in other oil producing countries. The document analyzes supply and demand trends and geopolitical risks that were supporting elevated crude oil prices at

1. Crude Oil Overview Report - summer 2012
Economic over view: News that affects crude oil prices in recent times:
NORTH SEA OUTPUT DROP> North Sea crude oil production will fall about 17 percent in
September from August, mainly due to a drop in Forties crude output with the Buzzard field
offline for maintenance.
IRAN AND MIDDLE EAST>The North Sea output drop comes with the European Union's embargo
on Iranian oil in its second month as the West's dispute with Iran over Tehran's nuclear
activities drags on.
Remarks by Prime Minister Benjamin Netanyahu on Sunday, stating that most threats to Israel's
security were "dwarfed" by the prospect that Iran could develop nuclear weapons, kept fears
about potential supply disruptions in focus. Beside that the oil market is concerned once again
that Iran will try to block oil shipments through the Strait of Hormuz, a narrow waterway in the
Persian Gulf through, through which one-fifth of the world’s oil travels every day. Syria> Syria's
ongoing civil war kept intact another element of uncertainty in the region and support oil
price.
Russia and US> Russia sharply criticized new U.S. sanctions against Iran on Monday, saying the
measures to punish banks, insurance companies and shippers that help Iran sell its oil would
harm Moscow's ties with Washington if Russian companies were affected.
A post from Rachel Ziemba of RGE excerpted below highlights the potential premium the
oil markets are attaching to the growing Iran V Israel rhetoric and.............
RGE Forum Post on Israeli strike worries reach fever pitch
.........Israel, where war preparations have picked up sharply, according to the local press.
Worries over a unilateral Israeli strike on Iran's nuclear facilities have reached a new level of
late, with some Israeli officials even suggesting a strike could come as soon as August 20, the
next full moon. A combination of warning statements from former defense officials,
contingency economic planning, security dry-runs and new administrative measures that would
help PM Netanyahu push through a strike, suggest that once again the risk of a strike has
increased.
While it is impossible to speculate on the timing of such an attack, a low-to-moderate

2. probability of a high risk event in the near term, the chances are rising, meaning it is worth
revisiting what an attack could imply for oil prices and the global economy (a likely spike and
risks of another recession respectively). The initial impact would likely be an overshooting of
the oil price, even if supply chains remain open. In case of retaliation, Israeli assets would
likely suffer, while the straits of Hormuz could face temporary closure. We expect this would
quickly become a regional conflict, with the U.S. drawn in. Even if supply lanes remain open,
we could expect oil prices remaining elevated after any conflict as the risk of future conflict
remains high.
Intrade contracts (below) suggest that collective wisdom thinks the probability of an attack has
risen, but remains well below 50%. Not only has the chance of a U.S./Israeli strike risen but the
volume of bets on the two most liquid contracts increased sharply.

3. ……….the technical difficulties of Israel going it alone, the optics of doing so during the Eid, it
seems most likely that the Israelis aim to make sure that the Americans do not allow Iranians to
just play for time. We expect not only more sanctions, but also more covert activities to
challenge the nuclear program. And with Iranian oil output continuing to drop, and adding
some pressure to the oil markets.......... the moderate supply shock from Iran, the
unexpected supply shock from the North Sea and worries of future supply shocks have sent
oil prices up strongly, helping stabilize the macro outcomes in the GCC and other oil
exporters. The return of the Iran-related fear premium means oil prices are climbing back
toward levels that could pose demand destruction. Another round from the FED ; Qe3, which
we still see as a greater than 50% probability, in such an eventuality oil prices should stay
elevated through most of the remainder of the year and much higher than warranted by
underlying global growth.
Our Technical Overview:
Crude oil had an interesting week ,last week and this , as in five sessions it attempted to rally,
but was turned away at the $95 level. We find the fact that last week it formed a shooting
star, just after forming two hammers in a row. This suggests to us that there is a consolidation
coming, and unless the market can close above a 94-95 dollar area the WTI crude oil markets
will be stalled between a $84 - $87 and $92 levels. However; on the weekend the markets
closed above 95 and thus signaled a strength that can take this to a 97$ to a 100$ range

4. Therefore the trade set up for a longer-term trader will be as follows. If crude breaks above
the shooting star ($95), we go higher and longer-term traders will be long. If we break below
the two hammers ($87), this would suggest weakness coming back into the market and support
giving way which of course means that longer-term traders will be short of this market. In the
meantime, range trading....with one eye on Israel Iran situation emerging.........
Crude oil prices continued it’s upward trend during last week; the gap between Brent and WTI
also expanded during most of the week. The concerns over the rising tensions between Iran and
Israel might be contributing to the rally of oil rates.
Key Technical Area: The light sweet crude markets had a positive week over the last five
sessions, and more impressive is the fact that for last 5 days of trading, we saw higher highs in
crude, so it certainly looks like that the upside pressure is building.
Looking at the charts,Currently we are in the middle of this consolidation zone, so choppiness
could be the norm. There are a lot of potentially bad headlines to come out of Iran over the
next couple of weeks, so a spike in prices is certainly possible.
To put things in perspective, there are reports that the Obama administration is currently
looking to release some of the strategic petroleum reserves, or SPR, in order to help combat
rising gasoline prices in the United States. Upon this report, oil prices actually rose. The last
time they attempted to release the SPR, it actually brought prices down but only for about a
week. It seems that the markets are more in tune with what difference the Obama
administration can actually make and for how long that can really hold.....It also shows exactly
how bullish the underlying are; as if there were any weakness we would have seen some type
of pullback from this story breaking but traders are just buying dips at this point in time and
understand that $100 will be a hurdle but a confrontation at the Straits of Hormuz shall prompt
a spike well above that !!

5. Long term weekly and monthly , daily Charts of Brent Crude …….from livecharts.com
Brent Weekly Continuous
Brent Monthly Continuous
Brent Daily Continuous

6. Brent Daily Continuous
RSI is in a neutral zone and there is a upside candlestick hammer in the daily brent chart,
technically market is in a indecisive mood on the very short term but up-trending due to geo-
political concerns. Shrugging off the demand destruction and growth concerns this is a smart
bounce up during summer months, ignoring stocks and deflationary trends in the EU...
We feel that $116 will be a key resistance for Brent. Currently trading within a tight range
over the past few days between $111 to $114. a break above $116 will be decisive....
Oil Price movement
Oil prices hit an all-time high of $145 a barrel in July 2008. Most news sources blamed this on
surging demand from China and India, combined with decreasing supply from Nigeria and Iraq
oil fields. After that Crude oil prices reached a recent high of $113.93 on April 29, 2011. Prices
had been increasing steadily since February 2009, when prices dropped to $39 a barrel. Since
then Prices is hovering at a comfortable range between $80-$100 a barrel.
Oil Prices: Bleak Macro Outlook; Fundamentals and Stimulus to Provide Strength ?
Upside Risks ImmediacyyImpact Downside Risks ImmediacyImpact
European sovereign
Central bank and debt crisis political and
government policy policy uncertainty
Low/ High /
stimulus—QE3— NT-MT weighing on market NT-MT
Medium Medium
providing short-term sentiment. Possible
limited boost Greek exit from the
eurozone
Slowing global growth
hits demand and
sentiment: Anemic
Increased summer demand growth in the U.S.; High/
NT-MT Low/Medium NT-MT
/ tightening fundamentals recession in the Medium
eurozone and slowing
Chinese growth (soft or
hard landing)
Strait of Hormuz supply
disruption/EU-Iran oil
Flight to safety
embargo NT-MT Medium NT-MT Low
stregthening USD
distortions/Increased Iran
rhetoric
Instability in MENA
countries (Iraq , Syria, QE in other DMs limit
NT-MT Medium/High NT-MT Low
Yemen, Libya, Algeria, dollar weakening
Egypt and Bahrain) adding

7. to oil risk premium
U.S. / China Iran, Israel cooling of
macroeconomic data rhetoric/sanctions Low/
NT-MT Medium NT
surprising on the upside, working, reducing oil Medium
improving sentiment risk premium
Chinese strategic reserve Risks of further
stockpile building / Low/ tightening of DM credit Medium/
NT-LT NT-LT
refineries coming back Medium markets; EU banking Low
online crisis
Greater supply
including : Modest
Libya supply increases;
Supply outages in South
NT-MT Medium renewed drilling in the NT-MT Medium
Sudan, Yemen and Syria
Gulf of Mexico; and
greater Canadian and
North Dakota output
OPEC GCC countries
curbing production in the
face of falling demand and NT-MT Medium Increased OPEC output NT-MT Medium
rising Libyan, Angolan
and Iraqi output
Nigeria strikes/political
Strategic petroleum
unrest disrupting NT-MT Medium NT-MT Medium
reserve release
production
Cushing pipeline
capacity additions
ECB’s 3y LTROs alleviate
(exerting downward
credit strain on NT-MT Medium/Low NT-MT Medium
pressure on Brent prices
refiners/support growth
and upward pressure on
WTI prices)
EU bank credit
Weak USD, sustained low tightening as capital
NT-MT Low NT-MT Low
DM interest rates reserve requirements
rise
Chinese strategic reserve
stockpile High oil prices lead to
NT-LT Low NT-MT Medium
building/refineries coming demand destruction
back online
U.S. political gridlock
threatens credit outlook
Oil exporter budget
and recession, weighing
balancing = US-85/barrel NT-MT Low NT-MT Low
on consumer oil
support (WTI)
demand and market
sentiment

8. Asia, the Middle East and
LatAm are constructing
refineries that may
NT-MT Low
decrease excess crude
supply in developed
markets/blend distortions
Environmental concerns
MT-LT Low
increase production costs
Slowing OPEC net export
LT Medium/Low
growth
Table from RGE NT=Near Term, MT=Medium Term, LT=Long Term Risk
Demand (Global Economic Activity)........ Weak Demand, but Optimism Grows
One of the key drivers of oil is the global economic growth, particularly in emerging market
economies. As shown in Figure 1, world gross domestic product (GDP) growth (with countries
weighted by oil consumption shares) has averaged close to 5 percent per year since 2004,
marking the strongest performance in two decades.

9. Supply (Stagnant Production)
While global demand has remained strong, overall non-OPEC production growth has slowed. In
the past three years, non-OPEC production growth has been well below rates seen earlier this
decade. World oil consumption growth has simply outpaced non-OPEC production growth every
year since 2003. This imbalance increases reliance upon OPEC production and/or inventories
to fill the gap. However, since 2003, OPEC oil production has grown by only 2.4 million barrels
per day while the “call on OPEC” (defined as the difference between world consumption and
non-OPEC production) increased by 4.4 million barrels per day. As a result, the world oil
market balance has tightened significantly.
Figure RGE : OPEC Output (1000 bpd)

10. Increasing Consumption
The rise in global economic activity has been accompanied by corresponding growth in world oil
consumption. Since 2003, world oil consumption growth has averaged 1.8 percent per year.
Non-member countries of the OECD, especially China, India, and the Middle East, represent the
largest part of this growth. Despite higher prices, growth in world oil consumption remains
strong.
Data from EIA
High correlation between S&P 500 and WTI crude oil price:
Recently oil prices reached above $107 and $90 for Brent and WTI references, respectively, due
to increasing tensions in the Middle East. According to Department of Energy’s Energy
Information Administration, it is interesting to note that since 2009, up ticks in the U.S.
economy have usually coincided with rises in oil prices but from Jan 2009 onward, the two
measures have followed each other in near lockstep, breaking only in the months surrounding
the Arab Spring uprisings after another price spike.
The two explanations have been linked to the recently strengthened positive relationship
between the price of oil and the S&P 500. First, expectations of economic growth have an
impact on oil prices as increased economic activity generates increased demand for
commodities. Second, the development and expansion of commodities indices has allowed oil
and other commodities to become a new investment asset whose level of risk/return is similar
to that of stocks. This causes investors to trade oil in a fashion more similar to that of stocks,
increasing the likelihood that the prices of both would move in tandem.

11. Data Source RGE + Thomson Reuters

12. U.S. Oil Inventories at 22-Year Highs; Gasoline Inventories Draw
Source: EIA via RGE

13. sbhose@microsec.in asingha@microsec.in
Shamik Bhose Archan Singha
Commodity & Currency & Interest rate futures Markets ; Microsec Commerze Limited
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