Agenda                                     DOLLARS AND DISTILLATES DRIVE CRUDE                                     October...
QE and high liquidity risk inflation short term, but will add supply when rates rise                           After the L...
Base case price forecast: Potential for major disruptions from all directions                                             ...
Flexible LNG seeks to push into high value market for oil substitutes                                                     ...
Oil demand is robust, poised to move into supply deficit                           Global Demand Growth Profile and Foreca...
Rising oil demand reflects infrastructure strains, comfort with high prices                           US Port Traffic     ...
Distillate will provide the marginal demand barrel in 2010                                 Non-OECD Product Demand Year-on...
In an industry running at 93% capacity there is little margin for error                                           Peak Oil...
Meeting emerging market growth will be a challenge                         Growth in Emerging Markets                     ...
High price and better equipment availability allows production to grow                                                    ...
OPEC will let oil prices swing between $55 and $100 per barrel                          Prompt WTI Price                  ...
Refinery Crude Runs                            Post-Summer Runs and Margins                                  NYMEX product...
Global crude demand peaked in the summer: winter rebound seen in 4Q10                          Crude Market Balance       ...
World product supply potential points to distillate-led tightness                                                         ...
Reported Crude Stocks have fallen by 10% from early 2009 peak                          OECD Commercial Crude Inventories a...
Medium-term risks to near-term prices                        Spare capacity starts to fall sharply from 2011              ...
J.P. Morgan – Global Refinery Analysis Model                                         J.P. Morgan’s Global Refinery Analys...
Regional refining capacity growth: the Americas; EMEA; Asia-Pacific                                    Global refining in...
Regional upgrading capacity growth: the Americas; EMEA; Asia-Pacific                                   Global Crude Distil...
Oil market outlook : Conclusions                            Linking of Fed policy to price levels, rather than growth a k...
North American capacity expansion driven by the US                                   US refiners continue to adapt to ris...
World product supply potential points to distillate-led tightness                                                         ...
North American supply potential — gasoline imports to diminish                                                           N...
Upgrading capacity to tighten the fuel oil balance in the coming years     Global Fuel Oil Supply and Demand Balance     m...
European supply potential — gasoline exports remain a threat to region                                                    ...
Conclusions: global refining and product supply                       Refiners globally are over-investing in new capacit...
Agenda                                     J.P. MORGAN GLOBAL COMMODITIES GROUP                                     Octobe...
J.P. Morgan Global Commodities – Growth Story                                  Investing in our platform                  ...
J.P. Morgan Global Commodities Group                                    Commodity risk expertise is interlinked with firm ...
J.P. Morgan Covers Commodities Across the Supply Chain                                                  Research          ...
J.P. Morgan – Oil Trading                                             Global Oil Trading Headcount by Location – 24 hour c...
Global Footprint                                  Worldwide Locations                                    From metals and ...
J.P. Morgan’s Global Oil Physical Asset Overview                                                                          ...
Select Oil Team Members                                              Jeff Frase,          Jeff Frase joined J.P. Morgan an...
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  • A combination of surging distillate demand and xxx pushed distillate prices to record levels last summer
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    1. 1. Agenda DOLLARS AND DISTILLATES DRIVE CRUDE October 2010STRICTLY PRIVATE AND CONFIDENTIAL
    2. 2. QE and high liquidity risk inflation short term, but will add supply when rates rise After the Liquidity Cycle Gold $/troz  Gold prices are a good barometer of interest rates, liquidity and inflation risk  QE risks weakening the US dollar, adding a further stimulus to North American and Emerging Market growth  Linking of Fed policy to price levels, rather than growth a key change in policy – could spark inflationary expectations and cause money to flow into commodities  Low interest rates enable the oil market to hold high levels of inventory – currently a stabilizing feature, but could Source: JP Morgan Energy Strategy, Bloomberg become a driver of rising prices Oil Price is Cheap When Measured in Gold US Dollar and Crude Oil Correlation to Resume $/bbl $/EU Bbl / troz 0.16 160 Brent Crude USD/EUR 1.7 0.14 140 1.6 0.12 120 0.1 1.5 100 0.08 80 1.4LATEST MARKET OUTLOOK 0.06 60 1.3 0.04 40 0.02 1.2 20 0 Oil priced in Gold 0 1.1 1983 1988 1993 1998 2003 2008 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Source: JP Morgan Energy Strategy, Bloomberg Source: JP Morgan Energy Strategy, Bloomberg 2
    3. 3. Base case price forecast: Potential for major disruptions from all directions Old World: Forward price solidly anchored ■ Prior to the 2004-2008 price run-up and subsequent In US$/bbl $140 collapse, the forward curve was anchored around $120 $20/bbl $100 ■ $20/bbl was thought to be the marginal cost of $80 supply $60 ■ Short-term disruptions had minimal impact on long- $40 term price views $20 ■ OPEC sought to manage market through inventories $- 99 01 03 05 07 09 11 Source: JPMorgan Energy Strategy ■ Over 2004-2008 worries about long- New World: Disruptions will transmit across the forward price curve term supply escalated ■ In 2008-2009 there was concern Event/shock (US$ Impact) Front Back (Dec 2012) about the duration of the recession Global economic shock (+ or -) +20/-30 +10/-15 ■ In both cases, long-term concerns Iraqi collapse or shock +30/-5 +15/-5 directly impacted short-term prices Iran turmoil +40 +20 ■ The past year has seen a period of China take-off or collapse +15/-20 +15/-15 relative stability with the marketLATEST MARKET OUTLOOK Substantial interfuel substitution -5 -10 poised at $70-80/bbl ■ Is this the calm realistic? Substantial change to costs +5/-5 +10/-20 ■ Will prices ratchet up again as we saw Unknown supply disruption +5 to +50 +0 to +30 over 2004-2008? Other? ? ? Source: JPMorgan Energy Strategy 3
    4. 4. Flexible LNG seeks to push into high value market for oil substitutes ■ Asian LNG imports grew by close to 30 percent in Oil-linked Asia provides the highest value for LNG August versus the same period last year Competing Fuels US$/MMBtu (approx) ■ Korea was up over 80% yoy US Natural Gas 4 ■ Demand was weak in 2009 due to the crisis, but UK Natural Gas 7 new LNG supply is pushing into the Asian market Asia Spot LNG (Japan) 9 ■ Spot LNG is certainly competitive with oil...sellers Asia Long Term LNG (Recent) 12 seek to place flexible LNG in high value niche LSWR FOB Indonesia 12.50 markets in place of oil (e.g., India, Kuwait) Fuel Oil 180CST FOB Singapore 11.50 Naphtha CFR Japan 16 Minas Crude Oil 15 Global Gas Prices: What will Qatar do with its flexible volumes? Source: JPMorgan Energy Strategy, Bloomberg Push into Asia ■ A huge question is what Qatar will do with over 30 MTPA of “flexible” LNG initially targeted at the US and UK which is now $3-5/MMBtu $3-8/MMBtu $9-13/MMBtu ramping up ■ This has important implications for the oil How will Qatar adjust to new market market as it is 740 kbd of oil equivalentLATEST MARKET OUTLOOK realities? ■ Will it push into low value markets to compete with coal, or will it get pulled into Asia as a substitute for oil? ■ The Middle East is the latest region to emerge as a surprise LNG Source: JP Morgan importer...replacing oil 4
    5. 5. Oil demand is robust, poised to move into supply deficit Global Demand Growth Profile and Forecasts by Region, 2009-2011 ■ World oil demand growth to moderate 461 87 75 80 to 1.6 mbd in 2011 44 -99 - ■ Still seen above trend, driven by 252 Emerging Market demand - 1182 - 911 285 281 FSU ■ China imports easing 883 Europe 757 2272 ■ But signs it is drawing on OECD North America 166 521 1631 211 263 stocks 82 157 119 Middle-East ■ Structural risks: Latin America 59 Asia Pacific ■ Natural gas substitution ■ Efficiency Africa World Oil Balance -1218 2009 2010 2011 92.0 +10.0 Global +8.0 Source: JPMorgan Energy Strategy 90.0 +6.0 ■ OPEC output has stabilised at 29.1 mbd, even 88.0 +4.0 assuming rising OPEC supplies, a market deficit +2.0LATEST MARKET OUTLOOK is seen 86.0 +0.0 ■ Still see trend GDP growth -2.0 84.0 ■ Receding risks of double-dip recession -4.0 ■ But Eurozone problems show they have Stock Change To Balance Total Product Demand Supply 82.0 -6.0 not gone away Jan 08 Jan 09 Jan 10 Jan 11 Source: JPMorgan Energy Strategy 5
    6. 6. Rising oil demand reflects infrastructure strains, comfort with high prices US Port Traffic Vehicle Fuel Consumption and Oil Prices 800 MPG $ bbl 22.0 120 750 700 650 21.5 80 600 550 500 21.0 40 450 400 350 Total Loaded Inbound 20.5 Average Miles Per Gallon 0 Crude Oil Prices $/bbl 300 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: JP Morgan Energy Strategy, Port Authority Long Beach and LA Source: JP Morgan Energy Strategy, US Bureau of Transport, EIA Global Air Traffic Indicators  World oil demand is coming in stronger than economic growth indicators suggest Miles Index 40  Robust demand from Emerging Market 30 economies due to growth straining infrastructure - 20 much in the same way as 2004 and 2008LATEST MARKET OUTLOOK 10  Signs that initial conservation response to high 0 prices is waning – not surprising considering oil -10 Freight Traffic prices have averaged $75 bbl for five years now -20 Passenger Traffic -30  Subsidies being removed in emerging markets, 2003 2004 2005 2006 2007 2008 2009 2010 but likely to be re-imposed if prices rise Source: JP Morgan Energy Strategy, IATA 6
    7. 7. Distillate will provide the marginal demand barrel in 2010 Non-OECD Product Demand Year-on-Year Change Global Product Demand Year-on-Year Change mbd mbd 3 Light Ends Middle Distillate Fuel Oil 4 Light Ends Middle Distillate Fuel Oil 2 2 1 0 0 -2 -1 -2 -4 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 OECD Product Demand Year-on-Year Change  Dramatic divergence in product demand growth trends between Emerging Markets and OECD post recession mbd 2 Light Ends Middle Distillate Fuel Oil  Light ends have driven the market higher, led by the petrochemical sector  Decline in light ends reflects weaker gasoline 0 demand and end of petchem restockingLATEST MARKET OUTLOOK  Maybe too bearish -2  Middle distillate demand (gasoil, diesel, jet and kerosene) has shown signs of improvements in the past few months -4  Strong gasoil/diesel cracks and is good news for Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 complex refiners 7
    8. 8. In an industry running at 93% capacity there is little margin for error Peak Oil Projection International Energy Agency Concern  There is a need to find 3-4 mbd of new oil every year just to stand still  But we have been doing that for the past decade  When we are less successful or demand surges, prices spike  When we are marginally better, there is a downward bias to pricesLATEST MARKET OUTLOOK  Future project analysis only provides clarity for the next 3-4 years  Reality is there are plenty of hydrocarbons around  The real questions are the price to produce them and the price to curtail demand  A major concern is that even with the highest level of spare capacity for a decade, the industry is running at 96% of capacity 8  There is little margin for error
    9. 9. Meeting emerging market growth will be a challenge Growth in Emerging Markets Indexed Global Oil Demand Growth  EM economies pull more oil for every extra dollar earned OECD China/India/Brazil Other Non-OECD than mature economies. 250  EM’s have been the driver of oil demand for much of the 200 last decade, but now that they make up nearly half the 150 world oil economy 100  Forecast of Chinese demand for 2010 is up 10.4%, plus another 5.3% in 2011. It will surpass the US as the worlds 50 largest consumer by 2020 0  Demand growth for 2011 from India and Brazil with yoy increases of 4.4% and 4.8%, respectively. Chinese Oil Demand Growth Percent Share of Global Oil Demand 30 2001 Average 2013 Forecast 25 Chinese Oil Demand … 20 Other Non- OECD Other Non- 26% OECD 30%LATEST MARKET OUTLOOK 15 OECD 50% OECD 10 China/India/ 62% Brazil 12% M China/India/ D 5 B p e a n y s r l Brazil 20% 0 2000 2004 2008 2012 2016 2020 2024 2028 Source: JP Morgan Energy Strategy, JODI, IEA Source: JP Morgan Energy Strategy, JODI, IEA 9
    10. 10. High price and better equipment availability allows production to grow Per country Revisions (% and Vol) to 2010 Supply-ex  Over the past year, 2010 non-OPEC supply FSU projections by the International Energy Agency have been revised up by 770 kbd  Russia and Azerbaijan were two major FSU forecasting issues, which cancelled each other out  Russia higher to new projects  Azerbaijan to ongoing project delay  Supply revised higher in 41 countries, lower in 23  Decline (and forecasting error) has not gone away Number of countries with revisions  Russia and USA alone present upside risk to 2011 forecast non-OPEC supply growth of 0.5 mbd  Corporate guidance suggests Russian output growth of 350 kbd, JPM forecast 80 kbd  US growth could be revised up on:LATEST MARKET OUTLOOK  lower drilling impact to Gulf of Mexico  Rapid shale oil development  Strong pace of development in West Africa  Iraq, Brazil provide two-way risks 10
    11. 11. OPEC will let oil prices swing between $55 and $100 per barrel Prompt WTI Price  OPEC uncomfortable with prices below $70 bbl, but would only act if prices dipped below $65 bbl 90  The time taken to gather a response could see prices dip to $55 80  Saudi budget needs $70 to balance – with social 70 spending growing rapidly, Saudi will be comfortable if prices rise gradually 60  Outside of a significant downward price shift, OPEC is 50 WTI 10 day MAV not likely to change current quotas. Additional output 40 20d MAV from Iraq/Nigeria. Still concerned about high prices 30 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Source: JP Morgan Energy Strategy, JODI, IEA Geopolitical flashpoints High geopolitical risks over next six months  Attacks on Iraqi northern pipeline have been stepped up during political impasse  Nigerian elections risk positioning by Niger DeltaLATEST MARKET OUTLOOK rebels  Iranian sanctions seem to be having economic effect, but international patience wearing thin  Venezuelan elections already causing surge in diesel demand as president seeks to avert rolling blackouts. Source: JP Morgan Energy Strategy, JODI, IEA 11
    12. 12. Refinery Crude Runs Post-Summer Runs and Margins NYMEX product cracks Heat Crack Gas Crack Fuel Oil Crack  Refining runs are being supported by the bottom $/bbl half of the barrel 20 15  US refining runs have remained high despite 10 impending maintenance 5  Diesel and fuel oil demand for power generation 0 has been higher than years prior -5 -10  Diesel demand forecast has been adjusted up by -15 150 kbd globally. Fuel oil adjusted up by a similar Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 amount – more significant effect due to smaller pool US Refinery crude runs 2010 2009 2008 2007  Surge in demand is reflected in prompt cracks rising to above $15/bbl for ULSD in Europe, its 17.0 highest level since late June 16.0 15.0  Northern hemisphere winter heating demand 14.0 could keep inventories tight in coming monthsLATEST MARKET OUTLOOK 13.0  Market will be reluctant to draw inventory prior to 12.0 1Q11 11.0 10.0 J F M A M J J A S O N D Source: JP Morgan Energy Strategy, EIA 12
    13. 13. Global crude demand peaked in the summer: winter rebound seen in 4Q10 Crude Market Balance m b/d mb Crude Market Balance 74.0 150 100 73.0 50 - 72.0 -50 71.0 -100 -150 70.0 -200 -250 69.0 -300 Jan-08 Jan-09 Jan-10 Stock Change (rhs) Crude Demand Crude SupplyLATEST MARKET OUTLOOK  Material upward revisions to supply estimates suggest market less tight than previously thought  Crude market tightness still seen peaking in July/August  Thereafter seasonal maintenance points to renewed build., before year-end ramp-up in runs start the next draw 13
    14. 14. World product supply potential points to distillate-led tightness Tighter Fuel Oil to Pressure Upgrading Margins mbd 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 LPG Naphtha Gasoline Jet/kero Gasoil/Diesel Fuel Oil 2009 2010 2011 2012 2013 Source: JP Morgan Energy Strategy ■ Robust economic growth in Emerging Market economies, Asia in particular, underpins distillate-led demand growthLATEST MARKET OUTLOOK ■ By contrast rising supplies of ethanol and NGL volumes will pressure gasoline cracks  Continued robust naphtha demand growth provides some support to light distillate markets ■ A similar picture of rising supplies (OPEC NGL volumes) is evident in LPG markets ■ By contrast diesel/gasoil markets look set to tighten despite distillate-focused upgrading investment 14
    15. 15. Reported Crude Stocks have fallen by 10% from early 2009 peak OECD Commercial Crude Inventories and Floating Storage In mb 1.25 Floating OECD Land-based 1.20 1.15 1.10 1.05 1.00 0.95 0.90LATEST MARKET OUTLOOK Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 OECD land-based crude stocks and global floating crude storage has fallen by over 100 mb since the peak in April 2009 15
    16. 16. Medium-term risks to near-term prices Spare capacity starts to fall sharply from 2011 mbd mbd 100 7  Pace of economic growth and Iraqi oil field 6 development are the real 95 uncertainties as we move 5 forward 90 4  Financial stresses and unemployment could drive 3 85 efficiencies, but policy and 2 high prices will be more 80 effective and permanent 1  Electric vehicles are unlikely 75 0 to have a significant impact 2009 2010 2011 2012 2013 2014 2015 on demand until post 2015 at best Supply Capacity (LHS) Demand(LHS) OPEC Spare Capacity (RHS) JPMorgan Medium Term Crude Oil Price Forecast 1Q10 2Q10 3Q10 4Q10 2010 2011 2012 2013LATEST MARKET OUTLOOK Nymex WTI Crude ($/bbl) 78.88 78.05 76.00 81.00 78.50 82.50 92.50 102.50 Price forecast assumes OPEC will try to moderate increases  but will the market rise much faster, to prevent a supply crunch happening? All Forecasts are period averages. Actual to date prices for 1Q10 and 2Q10 are as of July 30, 2010 16
    17. 17. J.P. Morgan – Global Refinery Analysis Model  J.P. Morgan’s Global Refinery Analysis Model (GRAM) is a bottom-up analysis of existing refinery capacity and confirmed investment projects  The analysis covers more than one thousand individual new units adding to the existing 750 detailed refineries in the model  Regional crude slates and volumes are forecast based on typical regional consumption patterns and forecast changes to crude quality  NGL supply volumes are assumed to be a substitute for crude in the global crude market  Implications for the residue balance in particular  Supply analysis assumes OPEC will maximize production of non-quotas barrels ahead of crude  The GRAM uses 50 crude assays to analyze output from the initial distillation of the crude. The model then runs these outputs through secondary processing units and aggregates the output into seven finished product categories  Model assumes that most capital intensive units are filled first  i.e. cokers are filled before visbreakersMETHODOLOGY & REFINERY OUTLOOK  The impact of the new capacity additions are shown through a comparison of total product supply of these seven product categories against JP Morgan’s detailed product demand model  Regional and global product market balances are then calculated including other sources of supply including NGLs and biofuels 17
    18. 18. Regional refining capacity growth: the Americas; EMEA; Asia-Pacific  Global refining industry set for substantial growth in Global Refining Capacity Growth 2010-2014 (mbd) 2010-2014 period  Growth is led by regional champions  China in Asia 1.7 3.0 1.5 2.3  Saudi Arabia in the Middle East 1.6 1.9  The US and Brazil in the Americas  Ongoing investment in upgrading capacity will  Further boost the supply of light clean products  Continue to tighten fuel oil markets  Puts upgrading margins under pressure CDU Upgrading  Regional variations will become critical to refinery profitability Source: JP Morgan Energy Strategy, Wood Mackenzie  European and Japanese refineries faces the greatest pressure to close capacity  Falling regional demand keeps profit generation under intense pressureMETHODOLOGY & REFINERY OUTLOOK  Rising biofuels supplies globally will further undermine potential returns 18
    19. 19. Regional upgrading capacity growth: the Americas; EMEA; Asia-Pacific Global Crude Distillation Capacity Growth 2010-2014 Global Upgrading Capacity Growth Profile 2010-2014 1.0 1.5 1.0 1.0 1.0 1.0 0.5 1.0 0.5 0.5 0.5 0.5 - 0.5 - - 2010 2012 2014 2010 2012 2014 2010 2012 2014 - - - 2010 2012 2014 2010 2012 2014 2010 2012 2014 Source: JP Morgan Energy Strategy, Wood Mackenzie Source: JP Morgan Energy Strategy, Wood Mackenzie ■ Asia Pacific and Middle East lead CDU capacity increaseMETHODOLOGY & REFINERY OUTLOOK  Driven by supply security concerns in China, India  OPEC expansions driven by: ■ Energy security ■ Desire to maximize revenue from the barrel ■ Market control ■ Brazil, Mexico and the US bolster the Americas ■ Upgrading capacity additions concentrated in next three years 19
    20. 20. Oil market outlook : Conclusions  Linking of Fed policy to price levels, rather than growth a key change in policy – could spark inflationary expectations and cause money to flow into commodities  Low interest rates enable the oil market to hold high levels of inventory – currently a stabilizing feature, but could become a driver of rising prices  The recent decision to allow output to drift higher and lower stock levels adds weight to extreme views on higher underlying decline rates and lower spare capacity  World oil demand growth of 2.2mbd will moderate to 1.6 mbd in 2011  Still seen above trend, driven by Emerging Market demand and healthy EM GDP growth.  Light ends have driven the market higher, led by the petrochemical sector  Middle distillate demand (gasoil, diesel, jet and kerosene) has overtaken gasoline/naphtha as transportation gain become the dominant feature of world oil demand growth.  A major concern for the industry and OPEC is that even with 6mbd of spare, the industry is running at 93% of capacity; suggesting there is little margin for error  OPEC output has stabilised at 29.1 mbd, and upcoming OPEC meeting is unlikely to see any departure from current script.LATEST MARKET OUTLOOK  The market seems happy to anchor prices in the $80-100/bbl long-term, but is this rational? Supply and demand shocks could quickly force a re-appraisal of long-term equilibrium prices if circumstance change. 20
    21. 21. North American capacity expansion driven by the US  US refiners continue to adapt to rising supplies of heavy sour crude/bitumen from Canada, rising Shale Oil production and the Middle East’s increasingly sour crude slate  Nearly 75% of US capacity additions relate to projects to increase the ability to process heavy sour crude  Key projects include:  Motiva Port Arthur—325 kbd new crude US Coking Capacity Growth Projects capacity in 2012  Marathon Garyville—180 kbd new crude capacity on stream in 2010  Projects involve substantial expansion of upgrading units  However, these investment decisions, while still robust in term of potential economics ignore the changing landscape of the US crude market—notably the rise of better quality oil from the emerging shaleMETHODOLOGY & REFINERY OUTLOOK oil plays Source: JP Morgan Energy Strategy, Wood Mackenzie 21
    22. 22. World product supply potential points to distillate-led tightness Tighter Fuel Oil to Pressure Upgrading Margins mbd 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 LPG Naphtha Gasoline Jet/kero Gasoil/Diesel Fuel Oil 2009 2010 2011 2012 2013 Source: JP Morgan Energy Strategy ■ Robust economic growth in Emerging Market economies, Asia in particular, underpins distillate-led demand growth ■ By contrast rising supplies of ethanol and NGL volumes will pressure gasoline cracksPRODUCT BALANCES  Continued robust naphtha demand growth provides some support to light distillate markets ■ A similar picture of rising supplies (OPEC NGL volumes) is evident in LPG markets ■ By contrast diesel/gasoil markets look set to tighten despite distillate-focused upgrading investment 22
    23. 23. North American supply potential — gasoline imports to diminish North American Gasoline Market to Become More Balanced mbd 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 LPG Naphtha Gasoline Jet/kero Gasoil/Diesel Fuel Oil 2009 2010 2011 2012 2013 Source: JP Morgan Energy Strategy ■ Regional gasoline import requirement diminishes due to falling demand (despite Mexico) ■ Rising ethanol supplies help rebalance marketPRODUCT BALANCES ■ Current diesel exports are eroded by strong economic growth supporting diesel demand ■ However we have assumed US refiners do not radically alter their operating mode – i.e. they remain focused on max gasoline 23
    24. 24. Upgrading capacity to tighten the fuel oil balance in the coming years Global Fuel Oil Supply and Demand Balance mbd 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 2009 2010 2011 2012 2013 Source: J.P. Morgan Energy Strategy  With the move towards cleaner/lower sulfur fuels, demand for the bottom cut of the barrel has continued to trend lower over the years despite strength in other product groups  However, we expect the fuel oil balance to tighten considerably over the next several years as the current refinery buildout cycle is expected to add a considerable amount of upgrading capacity  Much of the new refining capacity (the bulk in non-OECD Asia) is expected to be rather sophisticated, with the ability to reprocess much of the fuel oil produced into more desirable (and higher priced) middle and light end products  In Europe and North America, the inability to build new greenfield refineries has led to additions of secondary units to existing infrastructure to produce a lighter product slate, reducing fuel oil yields
    25. 25. European supply potential — gasoline exports remain a threat to region Diesel-Biased Demand Leaves Region Vulnerable to Rationalization mbd 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 LPG Naphtha Gasoline Jet/kero Gasoil/Diesel Fuel Oil 2009 2010 2011 2012 2013 Source: JP Morgan Energy Strategy ■ Despite lower crude run assumptions, declining regional demand leaves European refineries exposed toPRODUCT BALANCES competition from rising Asian export volumes (particularly from India) ■ In contrast to North America, Europe’s product balance moves more out of line with demand ■ Capacity rationalization remains a real risk given low complexity many regional refineries 24
    26. 26. Conclusions: global refining and product supply  Refiners globally are over-investing in new capacity, and particularly upgrading capacity  This is the area that has provided strong returns over the past 20 years, but by virtue of overinvestment will provide less of a competitive advantage in the future  World refinery capacity and upgrading expansions to constrain refining margins for the next five years  Upgrading capacity to keep fuel oil margins tight and narrow differentials between light/sweet, and heavy/sour crude oil prices  Bulk of new capacity taking place in Asia and Middle East—the area of greatest demand growth  Low clean freight rates to open up wider scope for product trade when Asia becomes over-supplied  Refining profitability is therefore likely to be strongly influenced by location factors—particularly access to low cost crudes  Atlantic Basin crude supplies to be tightened by ongoing draw from Asia, Russian preference for supplies via ESPO pipeline, ongoing decline in North Sea  US refiners continue to adapt to rising supplies of heavy sour crude/bitumen from Canada, rising shale oil production and the Middle East’s increasingly sour crude slate  Significant investment in additional coking capacity will allow refiners to run heavier crude slates—PRODUCT BALANCES positioning themselves to capture lower cost feedstock’s on the Gulf Coast and potentially the US Midwest  But many of these investment plans were signed off before the recent surge in shale oil production 25
    27. 27. Agenda J.P. MORGAN GLOBAL COMMODITIES GROUP October 2010STRICTLY PRIVATE AND CONFIDENTIAL 26
    28. 28. J.P. Morgan Global Commodities – Growth Story Investing in our platform  J.P. Morgan has made significant investments in building out and diversifying our Global Commodities platform and capabilities - organically and through strategic acquisitions, such as RBS Sempra  J.P. Morgans Global Commodities Group offers clients a comprehensive set of market making, structuring, risk management, financing and warehousing capabilities across the full spectrum of commodity asset classes Key transactions accelerate J.P. Morgan’s growth  Completed acquisition of RBS Sempra’s metals, oil, coal,  Acquired UBS plastics, agricultural, Commodities Canada and concentrates; non- Ltd and UBS AG’s U.S. emissions,  Acquired Bear Energy global agricultural European power and as part of J.P. business gas and investor Morgan’s acquisition of products assets from  J.P. Morgan expands Bear Stearns  Acquired the Royal Bank of energy trading platform EcoSecurities Group Scotland and Sempra  Acquired ClimateCare, plc, a global leader in organically Energy in JulyGLOBAL COMMODITIES OVERVIEW  J.P. Morgan corporate a leading originator of the carbon credit  Co-founded the New carbon offsets market  Completed acquisition focus on developing York Mercantile of RBS Sempra’s market leading energy Exchange’s Green North America natural trading platform Exchange gas and power trading portfolios in October 2005-2006 2006 2008 2009 2010 27
    29. 29. J.P. Morgan Global Commodities Group Commodity risk expertise is interlinked with firm wide capabilities  Corporate Risk Management: J.P. Morgan provides risk management solutions for clients hedging commodities exposure - clients covered include consumers, producers, refiners and traders of metals, energy and agriculture/softs  Market Intelligence: J.P. Morgan affords clients a wide view of the commodity markets given J.P. Morgan’s diverse client base and distributes industry leading research in all commodities  Commodity Related Financing: J.P. Morgan provides corporate finance solutions for clients seeking to buy or sell commodity assets or to leverage assets as collateral for financing transactions  Leverage of J.P. Morgan’s internal resources (Research, Lending, Equity and Debt Underwriting):  J.P. Morgan’s clients have access to J.P. Morgan’s complete platform  Up to date on latest industry and product trends  Strong customer relationships: J.P. Morgan works closely with customers to design the most appropriate solution in the futures, cash, and over-the-counter commodities markets J.P. Morgan stands out  Commodity leader: J.P. Morgan is at the leading edge of product development and risk management in the Commodity and Currency product spaceGLOBAL COMMODITIES OVERVIEW  Risk transfer: J.P. Morgan takes significant principal risk, publishes leading research, and works on a global structure to ensure that our customers get the best service available  J.P. Morgan’s vast ability to take risk:  Long-dated risk: J.P. Morgan can take on commodity risk beyond normal market tenors  Outsized Risk : J.P. Morgan has strong market risk lines so can warehouse sizable positions  Exotic risk: J.P. Morgan has the ability to trade products that many other banks do not  Correlation risk: J.P. Morgan has a large correlation book and has the ability to trade exotic correlation 28
    30. 30. J.P. Morgan Covers Commodities Across the Supply Chain Research Global Commodities Futures & Options  Metals, Bulk Commodities  OTC Metals, Energy and Ags  Listed Futures and Options  Energy and Power  Warehousing Risk  Specialist Trading Desks  Grains and Agricultural  Structured Products  Global Clearing Solutions  Technical Analysis  Long Dated Contracts  Electronic Trading Energy and Base Metals Precious Metals Agricultural Weather Environmental Plastics Power Markets  Steel  Gold  Cattle  Temperature  Ethylene  Coal  Carbon  Dairy  Precipitation  Polyethylene  Nickel  Silver allowances and  Electricity Grains offsets (e.g.,  Zinc  Platinum  Wind  Polypropylene  Soybeans RGGI; EUAs;  Natural Gas  Tin  Palladium  Hurricanes CERs; VERs)  Gasoline  Wheat  Copper  Sunshine  Sulphur Dioxide  CornGLOBAL COMMODITIES OVERVIEW  Crude Oil  Aluminium  Crop Yields  Nitrogen Oxides Softs  NGLs  Lead  Coffee  Renewable Transportation Energy Credits  Aluminium Alloy  Sugar  Freight  NASAAC  Cotton 29
    31. 31. J.P. Morgan – Oil Trading Global Oil Trading Headcount by Location – 24 hour coverage London 18 Stamford 12 Calgary 6 New York 13 Geneva/ Zug 5 Houston 4PHYSICAL AND FINANCIAL OIL CAPABILITIES Singapore 16  In addition, there are over 20 waterborne and pipeline logistics experts spread across these locations 30
    32. 32. Global Footprint Worldwide Locations  From metals and energy to environmental and agricultural commodities, our nearly 2,000 professionals in more than 10 countries operate at the center of the commodity markets. In addition to our office locations, our Henry Bath warehousing franchise operates more than 100 individual warehouses locations in 11 countries Liverpool Oxford Oslo London* Stamford Stockholm Calgary Holland New York* Beijing Germany Washington DC Shanghai Chicago Seoul Maryland Hong Kong Tokyo Houston* Madrid Istanbul Singapore* GenevaGLOBAL COMMODITIES OVERVIEW Sao Paulo** Dubai Zug Mumbai Italy Combined Location JPM GCG Only Center Johannesburg** Sydney RBS-S Only Center * Major hub ** Expected in 2nd half of 2010 31
    33. 33. J.P. Morgan’s Global Oil Physical Asset Overview London New York Calgary Geneva/ Zug HoustonPHYSICAL AND FINANCIAL OIL CAPABILITIES Time Chartered Vessels Singapore Storage Facilities  J.P. Morgan can provide physical off take, delivery, storage, shipping and blending solutions across most petroleum products, enabled by strong trading, operational, and functional support expertise  Unique market position because much of the physical activity cannot be achieved in the financial market (e.g., float a ship without a sale, unmatched physical longs and shorts in different market areas, trade non-hub locations)  Participate in both wet and dry freight 32
    34. 34. Select Oil Team Members Jeff Frase, Jeff Frase joined J.P. Morgan and the GCG management team in October 2008 as the head of Global Oil Trading, based in New York. He joins us from Lehman Brothers, where he ran Global Oil Trading for one year. Prior to Lehman, Jeff was a part of Goldman Sachs Commodities Managing Director franchise for 17 years, where he had most recently been head of Global Crude Oil and Derivatives trading. Ken Krug, Ken Krug joined J.P. Morgan in July 2010 and will run the North American physical crude oil trading business. Prior to joining, he spent four years at Goldman Sachs running the North American physical crude oil business. Ken also started the Canadian physical crude oil trading business Executive Director during his time at Goldman. In addition, Ken has worked in the refining space doing supply and trading at Suncor Energy. Dean Bristow, Dean Bristow joined J.P. Morgan in 2010 with the acquisition of Sempra. He has spent the past year at Sempra running the Canadian Crude Oil book, trading Canadian physical grades, and managing the physical storage portfolio. Previously at Sempra, Dean managed business Executive Director development for North America physical oil and the Canadian wellhead business. Dean has over 21 years in the energy business. Kirk Kinnear joined J.P. Morgan in 2010 with the acquisition of Sempra. He has over 30 years experience in oil trading with Phibro Energy, Hess Kirk Kinnear, Energy Trading and Sempra. Kirk was responsible for supplying crude to refineries in the mid-continent with Farmland, and the US Gulf Coast Executive Director with Phibro USA. He has worked on the trans-Alaska Pipeline and has experience as a lease crude buyer in the Mid-Continent and the Rockies. Kirk currently serves as Secretary on the Board of Directors and NYMEX Foundation. Jay Miller joined J.P. Morgan in 2010 with the acquisition of Sempra. He has been in the oil industry since 1975 and began his career trading at Jay Miller, ConocoPhillips. Jay helped start the crude oil trading group at Drexel, Burnham, Lambert until the energy trading operations were sold to Sempra Executive Director Energy. Jay has spent most of his career managing domestic crude oil trading operations and has extensive experience on both the physical and financial side of the business. Jay is also a member of the Board of Directors of the New York Mercantile Exchange. David Scholten, David Scholten joined J.P. Morgan in 2010 with the acquisition of Sempra. He joined Sempra in 2005 as domestic crude oil trader. Prior to that, David was with Shell Trading US Co where he held various positions as a domestic crude oil trader. Before trading, David spent 8 years inPHYSICAL AND FINANCIAL OIL CAPABILITIES Executive Director refining as a chemical engineer with Star Enterprise. Ira Eisenstein, Ira Eisenstein joined J.P. Morgan in April 2008 as a crude oil trader. Ira started his career as a trader at Phibro Energy and also worked in the Executive Director tanker industry. Prior to joining J.P. Morgan, Ira was an Executive Director responsible for crude oil trading at Morgan Stanley for 17 years. Andy Kelleher, Andy Kelleher joined J.P.Morgan in August 2009 as the head of North American Products, bringing with him 30 years of extensive experience trading physical crude and products. His previous roles include President of ConocoPhillips Supply and Trading, Vice President of Tosco Supply Managing Director and Trading, Phillips Petroleum Company, Sunoco Supply and Trading, and The Marc Rich Trading Company. Greg Hebrank, Greg Hebrank joined J.P. Morgan in 2010 with the acquisition of Sempra. At Sempra, Greg managed North American light products trading (gasoline, ethanol, distillates, jet) for the past 6 years. Prior to Sempra, Greg worked for BP, Koch, Shell and El Paso Corporation in light Executive Director products trading. Max Strongin, Max Strongin joined J.P. Morgan in 2010 with the acquisition of Sempra. Max joined the Sempra fuel oil desk in 2002 and traded financial fuel Executive Director oil. Max is currently an Executive Director at J.P. Morgan trading financial and physical fuel oil based in Stamford. Dean Craig, Dean Craig joined J.P. Morgan in 2010 with the acquisition of Sempra. He has been with Sempra for five years, and currently runs the physical Natural Gas Liquids book. Dean has traded Natural Gas Liquids for 10 years. Prior to that, Dean traded refined products including unleaded Executive Director gasoline, jet, and distillate for 8 years. In total, Dean has been in the trading business for 20 years. 33

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