COMMODITIES RESEARCH

North American Natural Gas and Power | 15 May 2012

GAS AND POWER WEEKLY KALEIDOSCOPE That nagging $1bn/day arbitrage

Shiyang Wang +1 212 526 7464 shiyang.wang@barcap.com Michael Zenker +1 212 526 2081 michael.zenker@barcap.com www.barcap.com

The spread between North American natural gas prices and Asian LNG prices has been propelled to record levels, owing to new lows for North American gas prices and strong global oil prices, to which LNG is often linked. This spread, running at more than $13/MMBtu to Japan, has heightened the interest in LNG exports from North America. There may be no better signpost for the complete turnaround in the fortunes of gas supply than the growing number of LNG proposals. We believe that both the US and Canada will proceed with export projects. Geological potential is not the boundary; rather we expect only a few projects to get full DOE and FERC approval this decade. Canada will add its own. This we believe will constrain permitted capacity in the US to perhaps 4 Bcf/d, with another 1 Bcf/d or so in Canada. This level of exports should not have a huge effect on US gas prices. Last year alone, US supply grew by 4 Bcf/d. In addition, we would expect any rally of the gas price curve above $4/MMBtu to prompt a rebound in gas drilling, effectively capping long-term prices. Chart of the week: Landed LNG prices, $/MMBtu
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 US Lake Charles Spain UK India Japan

Source: Waterbourne, Barclays Research

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 16

Barclays | Gas and Power Weekly Kaleidoscope

US liquefaction projects are advancing

Significant progress has been made by US- and Canadian-based LNG export terminals this year, with new proposals, projects progressing through the permitting process, and some terminals obtaining contracts. While it is arbitrary when a proposed project is on any official list, we count 11 LNG terminals in advanced planning for the US, and four for western Canada (Figure 1). There are certainly many more announcements, including terminals in California, Mexico, and elsewhere, but these are early in the process. Not all of these will proceed, of course, and LNG exports are not a foregone conclusion. Just as with LNG import terminals, a project without long-term, credit worthy off-taker commitments to underpin financing is likely not viable, given the highly capital-intensive nature of liquefaction trains. How these projects fit within the haphazard US energy policy remains to be seen.

Figure 1: North American LNG export projects

Project State/Province Lead sponsor(s) Capacity Bcf/d Status FTA* and non-FTA exports approved. FERC approval for construction and operation. SPA agreements announced. Final investment decision expected this year. The most advanced project. FTA exports approved, applied for non-FTA permit. FEED contract signed. FERC pre-filing FTA exports approved, applied for non-FTA permit. FTA exports approved FTA exports approved. Agreement with Sumitomo FTA exports approved. Long term agreements with GDF Suez, Mitsubishi and Mitsui. FTA exports approved Applied to DOE Announced (floating terminal) Pre-filing 2017 2018 2017 2016 Proposed start of first train

Sabine Pass

LA

Cheniere

2.2

2015

Freeport LNG Corpus Christi Jordan Cove Lake Charles Cove Point Cameron LNG Carib LNG Gulf Coast LNG Lavaca Bay LNG Oregon LNG Total US Kitimat BC LNG Kitimat LNG Prince Rupert Total Canada Total

TX TX OR LA MD LA USA TX TX OR

Conoco Philips Cheniere Veresen Energy Transfer Dominion Sempra Carib energy Gulf Coast LNG Export Excelerate LNG Development Company

1.9 1.8 0.9 2.4 1.0 1.7 0.3 2.8 0.4 1.25 16.7

2017 2017

BC BC BC BC

Apache, Encana, EOG BC LNG Export Cooperative Shell Canada Prince Rupert Port Authority/BG

0.7 0.25 1.0 1.0 2.95 19.6

20-year export licence granted from NEB 20-year export licence granted from NEB Pre-filing (possibly a floating terminal) Project in early stages

2015 2015

*Note: FTA=Free Trade Agreement countries: Include: North America: Canada, Mexico; Latin America: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Chile, Peru; Middle East / North Africa: Israel, Jordan, Bahrain, Morocco, Oman; Austral-Asia: Australia, Singapore, South Korea. Source: ICIS Heren, Company websites and announcements, Platts, Barclays Research

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Barclays | Gas and Power Weekly Kaleidoscope

The debate over the effect of exported LNG on US prices, and whether the US should export natural gas at all, will likely determine the scope of this first wave of export projects. To be clear, we believe exports will move forward, but the US Department of Energy (DOE) is in the unenviable position of balancing the desire of the oil and gas industry to export spare gas, which would help the US balance of payments and result in additional jobs, with the demands of consumers (particularly large, gas-intensive consumers) to limit the effect on US gas prices. The Sierra Club is among those opposing projects, and the debate over fracking rears its head when considering the additional drilling that would be required to serve exports. It is difficult to judge how the DOE (and FERC) will weigh these arguments, but we expect a reasonable middle ground would be the permitting of a nominal 4 Bcf/d of US lower-48 export capacity.
while Canadian projects will add to the list

Canada, long a net exporter of natural gas, has seen its market share in the US decline as US gas production has surged. Some traditional export points for gas flowing from Canada into the US are nearly empty, such as at the Niagara crossing point. The commissioning of the Ruby pipeline has satisfied new gas needs in the western US with Rockies gas, further isolating Canadian supply. Canadian gas can discount to flow, but finding another outlet for the nations gas is important. There are four proposed LNG terminals in British Columbia (with companies eyeing even more). While currently flowing market gas would likely serve some of the BC export projects, the shale gas fields of the province are underdeveloped, and a more intensive drilling program awaits an outlet that could be provided by one or more of the proposed BC-based LNG terminals. Note that the proposed Oregon export terminals would likely be fed by Canadian gas. We view the British Columbian terminals as the most suited for the market: they have a significant transportation cost advantage to Asia compared with US Gulf-based or eastern US proposals, and the underexploited shale resources provide a tangible, low cost gas resource to back the facilities. While demand for LNG is growing in many corners of the world (eg, South America), demand growth is centered in Asia. We are counting two Canadian export terminals in our long-term outlook, taking total North American export capacity to a nominal 5 Bcf/d by the end of the decade.

North American supply can fill LNG export facilities

The US alone grew wellhead production in 2011 by the equivalent of four medium-sized export terminals, without offsetting domestic demand growth. Except for any future additional restrictions on hydraulic fracturing, there is ample evidence that North America has the geological potential to grow wellhead capacity by at least the equivalent of several terminals, while still adequately serving the domestic market. We note that there are additional sources of new demand planned to arrive coincidentally with the first North American LNG export terminals (2016-2017): petrochemical plants, GTL plants, fertilizer facilities, natural gas for transportation, new primary metals plants, and the replacement of retired coal plants. Sites have been selected for new plants in a few cases. We do not discount the potential for the sequential commissioning of a number of these plants to temporarily tighten the natural gas market. Yet, there is a large amount of untapped gas production potential in North America at $4.50/MMBtu. We believe that producers would drill at adequate levels to meet demand with gas prices at $4/MMBtu. For these reasons, we do not believe that even these combined sources of demand, plus LNG exports, would push prices meaningfully above $4 for any extended period of time. Furthermore, this level of exports is not enough to create US price linkage with destination markets.

It is a good time to be marketing LNG

The push for North American exports comes at a fortuitous time. The global market for LNG is tightening, as we expected in our previous review of global LNG (Gas and Power Weekly Kaleidoscope: Cold Shoulder, January 24, 2012). The signs were easy to see: Asian LNG
3

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consumption growth averaged 2.4 Bcf/d in the past two years, compared with expected supply growth of 1.6 Bcf/d in 2012 and 1.2 Bcf/d in 2013 (Figure 2). This simply reflects a market where demand remains strong, aided by new consuming countries, and the effects of the Japanese earthquake and the resultant idling of most of the Japanese nuclear fleet. Most of the large wave of LNG liquefaction projects is already commissioned, resulting in a low number of supply additions for the next few years. Recent LNG supply matches this trend. Supply growth in Q1 2012 came from Qatar (up 0.9 Bcf/d y/y), and the West African exporters of Nigeria (up 0.5 Bcf/d) and Equatorial Guinea (up 0.3 Bcf/d). While a number of countries experienced minor reductions in LNG output from Q1 11 levels, as shown in Figure 3, the bulk of the volume lost was registered in Brunei (-1.0 Bcf/d) and Australia (- 0.5 Bcf/d). The Australian pullback was in part driven by losses at the North West Shelf project, which saw production halted owing to a number of tropical cyclones (eg, Iggy and Lua). LNG supply growth is expected to accelerate somewhat into H2 2012 as two of the main liquefaction plants have moved into commissioning; Chevrons Angola project (0.67 Bcf/d) and Woodside Petroleums Pluto project (0.57 Bcf/d) both announced that commercial operations were anticipated by the end of Q2 (Figure 4). Adding to the Australian supply growth, output from the Middle East, even after accounting for maintenance programs, will be up y/y. Figure 2: Global LNG supply and demand, Bcf/d
Annual average 2010 Supply Atlantic Basin Pacific Basin Middle East Demand Asia Europe Lat Am & Middle East N. America 29.2 8.0 11.2 10.1 29.2 17.7 8.5 1.7 1.4 2011E 31.5 7.5 11.4 12.6 31.6 20.1 8.4 1.9 1.2 2012E 33.1 8.5 11.7 12.8 33.1 23.1 6.8 2.3 0.9 2013E 34.2 9.4 12.0 12.8 34.2 24.4 6.1 3.0 0.8 2010 5.2 0.2 1.6 3.3 5.2 2.6 1.7 0.9 0.0 y/y change 2011E 2.5 -0.5 0.4 2.7 2.5 2.3 0.1 0.2 -0.2 2012E 1.6 1.0 0.3 0.3 1.5 3.0 -1.6 0.4 -0.3 2013E 1.2 0.9 0.3 0.0 1.2 1.3 -0.8 0.8 -0.1

Source: Waterbourne, Barclays Research

Figure 3: Changes in LNG output, Q1 2012 vs. Q1 2011, Bcf/d

1.00 0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 Norway Spain Trinidad Yemen Oman Peru Australia Malaysia Algeria Russia Abu Dhabi E. Guinea Indonesia Nigeria Brunei Qatar
4

Egypt

Source: Waterbourne, Barclays Research

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Libya

Barclays | Gas and Power Weekly Kaleidoscope

Asian-only demand is growing faster than supply

As expected, demand growth was centered in Asia, with Q1 2012 imports up 3.2 Bcf/d compared to year ago levels. The growth in Asian takes continues to be driven by postearthquake Japan, which registered the largest y/y growth among all LNG consumers (2.1 Bcf/d, or 21%). The other Asian consuming countries posted import gains in the quarter as well, with India up 0.4 Bcf/d, China up 0.3 Bcf/d, and South Korea up 0.2 Bcf/d. India, China, and possibly Japan are expected to add regasification capacity this year. We expect the overall increase in Asian demand over 2012 to reach 3 Bcf/d. With Asian demand exceeding supply growth so far this year, European LNG consumption shifted downward by 2.1 Bcf/d in the first quarter, continuing a trend that started last summer (Figure 5). While the 2010 reductions were largest in Southern Europe, Q1 2012 weakness was concentrated in Northern Europe with UK takes falling by 1.3 Bcf/d. The weakness in demand is rooted in the economic slowdown seen in the past three quarters, the reduction in carbon prices that has reduced the competitiveness of gas as a fuel into Europe, and the increasing competition from pipes into Europe with both Medgas and Nordstream helping to provide incremental supply into the market. With the economic outlook tepid, it is hard to see where additional demand might come from. Furthermore, Asia is out-bidding other markets for cargoes. Figure 4: 2012 LNG capacity additions
Country Australia Angola Algeria Project Pluto Angola LNG Skikda Size (Bcf/d) 0.57 0.67 0.53 Notes Commissioning by mid-April Commercial operations expected Q2 2012. Exports expected in June. No update on status

pulling cargoes from Europe

Source: ICIS Heren, Argus, Platts, Barclays Research.

North American gas, at Japanese LNG prices, would be worth $1bn more per day

Latin American and Middle Eastern consumption were up by about 0.1 Bcf/d, with growth coming from Mexico, Argentina, and Chile. Mexico commissioned its new regasification terminal at Manzanillo last month. The gains in these countries were offset by lower consumption in Brazil, Kuwait, and Dubai. We forecast that 2012 will see Latin America and the Middle East increase LNG takes by 0.4 Bcf/d. Figure 5: Y/y change in monthly LNG consumption by region, Bcf/d
10 8 6 4 2 0 -2 -4 -6 Feb-09 North America Latin America / ME Europe Asia

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Source: Waterbourne, Barclays Research

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The combination of still-strong demand, and weaker y/y supply growth has meant that Asia is drawing cargoes out of Europe, while North American imports remain near minimum levels. Asian prices remain at a premium to those in Europe, where sufficient pipeline gas and tepid demand mean that Europe can afford to lose cargoes. If North American natural gas prices matched those in Japan, it would equate to an uplift of $1bn/day. Given our expectation that global oil prices remain supported in the years ahead, the gap between North American gas prices and oil-linked LNG prices overseas will entice LNG project developers. The progress made in advancing the slate of North American LNG export projects suggests that buyers are ready to support these facilities, offering a new, substantial outlet for North American supply by the end of this decade.

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COMMENTARY ON WEEKLY DATA

Prices
Prices continued to recover

A continuation of the recent price rally pushed the prompt contract above $2.50/MMBtu at the end of last week; however, the momentum started to lose some steam at the start of this week. We believe that the market needs gas to reside in the $2.00-2.50/MMBtu range to displace enough coal to avoid an early fill of storage and work off about 450 Bcf of the surplus in inventories. In this regard, the market does not need gas prices below $2 (note that cash prices are more important for coal displacement). Likewise, prices above $2.50 risk a pullback in coal displacement of sufficient size. The market is now juggling clashing data on implied coal displacement, which has grown even in the past few weeks, projections for summer weather (mild), and mixed news on gas supply. Contemporary data suggest that supply has declined somewhat since the start of the year. We believe declines will be more noticeable by Q3 2012, the very time when fears over an early fill of storage may be the most acute. Thus, the market is stuck between fears of an early fill of storage, which can only be cured by the blunt instrument of coal displacement, and constructive news on supply. This should keep the front of the curve under pressure, but should be supportive for the back of the curve.

Storage levels
Storage revisions continued to show growth

This week's storage injection was decidedly bullish. Not only was it lower than consensus, but also it has reduced the storage overhang for the second week in a row. For the week ending on May 4, storage added 30 Bcf overall, about 4 Bcf lower than the consensus and 41 Bcf lower than the injection for the same week last year. As a result, the storage overhang to last year's level has been reduced to 799 Bcf from 840 Bcf last week. The East added 24 Bcf, while the West injected 8 Bcf. The Producing region withdrew 2 Bcf. For storage to end October within capacity, we calculate that the market needs to get rid of 450 Bcf of the current 799 of surplus storage (storage can accommodate about 350 Bcf more than last years peak storage level, we estimate). With 180 days between the storage reference week and the end of the injection season, this means that storage injections need to average about 2.5 Bcf/d below the injection pace of last year. In aggregate, this means we would need to see each weekly storage injection come in 17.5 Bcf lower than the same week last year. We expect y/y coal displacement will lead to this difference, but is dependent on cash gas prices remaining below $2.50/MMBtu. Unexpected supply growth or cooler-than-normal summer weather would threaten the ability of coal displacement to solve this years inventory problem.

Supply and demand

The gas rig count continues to drop

The gas-directed rig count has finally moved below 600, now at 598 rigs. We believe the rig count will move below 550 by mid-year, at which point the downward momentum is likely to slow. More rigs are certainly moving to liquids-rich plays. We are already seeing the Marcellus, the last stronghold of gas drilling, losing gas rigs to the nearby new hot play, the Utica basin. The move will most likely accelerate as the year goes on; however, we do not believe associated gas production, which will certainly grow, will completely offset production declines from existing wells.

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NATURAL GAS MARKET REFLECTIONS: PRICES

Figure 6: Henry Hub NYMEX prompt and cash prices
$/MMBtu 3.3

Figure 7: NYMEX natural gas forward price curve

$/MMBtu 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 Jun-12

2.8

2.3

1.8 10-Feb 24-Feb 9-Mar 23-Mar 6-Apr 20-Apr 4-May Prompt Cash

Oct-12 Feb-13 5/7/2012

Jun-13 Oct-13 5/1/2012

Figure 8: Henry Hub UK NBP prompt differential

$/MMBtu 12 10 8 6 4 2 0 Oct-11 Dec-11 NBP-HH difference Feb-12 HH (US) Apr-12 NBP (UK)

Figure 9: Transco Zone-6 New York basis, $/MMBtu

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 May-11 Sep-11 Jan-12 May-12

Figure 10: CIG Rocky Mountains basis, $/MMBtu

0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 May-11

Figure 11: AECO basis, $/MMBtu

2.0

1.0

0.0 -1.0

-2.0

Aug-11

Nov-11

Feb-12

May-12

-3.0 May-11

Aug-11

Nov-11

Feb-12

May-12

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NATURAL GAS MARKET REFLECTIONS: STORAGE

Figure 12: Working gas in storage, total US, Bcf
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1 5 9 13 17 21 25 29 33 37 41 45 49 5yr range 2011 2012

Figure 13: Working gas in storage, east region, Bcf

2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 1 5 9 13 17 21 25 29 33 37 41 45 49 5yr range 2010 2012

Figure 14: Working gas in storage, producing region, Bcf

1,400 1,200 1,000 800 600 400 200 1 5 9 13 17 21 25 29 33 37 41 45 49 5yr range 2011 2012

Figure 15: Working gas in storage, west region, Bcf

600 550 500 450 400 350 300 250 200 150 100 1 5 9 13 17 21 25 29 33 37 41 45 49 5yr range 2010 2012

Figure 16: Working gas in storage, Canada, Bcf

800 700 600 500 400 300 200 100 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 2009 2010 2011 2012

Figure 17: US end of injection season storage levels, Bcf

4,150

4,250 4,000 3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 3,840 3840 3,399

3,800

2003 2004 2005 2006 2007 20082009 2010 20112012E

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NATURAL GAS MARKET REFLECTIONS: SUPPLY

Figure 18: Average monthly LNG receipts by terminal, net of re-exports, MMcf/d
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 -200 Mar-11 May-11 Jul-11 Cameron Everett Lake Charles Canaport Freeport Neptune

Figure 19: Monthly US LNG imports, MMcf/d

2,000

2008 2011

2009 2012

2010

1,500

1,000

500 Sep-11 Nov-11 Jan-12 Mar-12 Cove Point Golden Pass Northeast Elba Island Gulf LNG Sabine Pass 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Figure 20: Net daily Canadian imports to the US, MMcf/d

8,000

Figure 21: Net monthly Canadian imports to the US, MMcf/d

2,000 2008 2011 2009 2012 2010

6,000

1,500

4,000

1,000

2,000

500

0 16-Feb 5-Mar Midwest

0
23-Mar 10-Apr Northeast 28-Apr West

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Figure 22: US natural gas rig count

1,600 1,400 1,200 1,000 800 600 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 2008 2009 2010 2011 2012

Figure 23: Canadian rig count

400

300

200

100

0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 2008 2009 2010 2011 2012

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NATURAL GAS MARKET REFLECTIONS: DEMAND

Figure 24: Weekly US electric output, GWh
100,000 95,000 90,000 85,000 80,000 75,000 70,000 65,000 60,000 Jan Mar May 2010 Jul 2011 Sep 2012 Nov 80,000 75,000 70,000 65,000 Jan Mar May 2010 Jul 2011 Sep Nov 2011

Figure 25: US nuclear power output, weekly Avg GW

100,000 95,000 90,000 85,000

Figure 26: Fuel switching economics, New York City

$/MMBtu $35 $30 $25 $20 $15 $10 $5 $0 May-08 May-09 NG No. 6 May-10 No. 2 May-11 May-12

Figure 27: Fuel switching economics, Gulf Coast

$/MMBtu $35 $30 $25 $20 $15 $10 $5 $0 May-08 May-09 NG May-10 No. 6 May-11 No. 2 May-12

Figure 28: US gas-weighted heating degree days

110 90 70 50 30 10 -10 5-May 2010

Figure 29: Monthly US industrial demand, MMcf/d

22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

5-Jun

5-Jul

5-Aug 10-year

5-Sep 2011 2012

30-year

2008

2009

2010

2011

2012

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NATURAL GAS MARKET REFLECTIONS: BALANCES

Figure 30: US lower-48 natural gas supply/demand balances and price
Annual average 2009 Supply total (Bcf/d) US L-48 Production Canadian Exports to US, net US Imports of LNG Exports to Mexico Demand total (Bcf/d) Residential & Commercial Industrial Power Other Storage Inventories (Tcf) End of March End of October Economic Indicators GDP growth Industrial production growth Natural gas price ($/MMBtu) $4.16 $4.38 $4.03 $2.43 $3.25 3.0 5.3 1.7 4.0 2.5 4.3 2.5 4.5 1.7 3.8 1.7 3.8 1.6 3.8 2.5 4.1 1.9 3.9 0.0 0.0 -0.1 0.0 0.9 0.3 -0.6 -0.3 62.74 55.30 7.05 1.24 0.85 62.85 21.73 16.91 18.81 5.41 2010 65.42 58.08 6.96 1.18 0.80 65.23 21.72 17.87 20.21 5.43 2011 67.54 62.00 5.95 0.96 1.36 66.85 21.74 18.56 20.79 5.76 2012E 68.59 64.03 5.52 0.61 1.56 68.27 20.37 19.08 22.89 5.93 2013E 66.79 62.93 5.06 0.60 1.79 67.01 21.47 19.38 20.31 5.85 2010 2.68 2.77 -0.09 -0.05 -0.05 2.38 -0.01 0.96 1.40 0.02 y/y change 2011E 2.12 3.92 -1.01 -0.23 0.56 1.62 0.02 0.69 0.59 0.33 2012E 1.05 2.03 -0.43 -0.35 0.20 1.42 -1.36 0.52 2.09 0.17 2013E -1.80 -1.10 -0.46 -0.01 0.23 -1.26 1.10 0.30 -2.58 -0.08

Data for Figures 2-26 come from the following sources and from Barclays Research calculations: Reuters, Bloomberg, Intercontinental Exchange, Baker Hughes, US Minerals Management Service, Canadian Association of Oilwell Drilling Contractors, US Energy Information Administration, Waterborne Energy, company websites, quarterly presentations and reports.

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TRADE RECOMMENDATIONS
Figure 31: Key recommendations
% Open trades Rationale: We see the medium-term crude oil price risks, as being to the upside mainly due to strong EM demand growth, lack of spare capacity and constraints on non-OPEC supply. We expect far-forward prices to benefit, with our long-term price forecast for Brent pegged at $135/bbl. -0.9% Long Brent crude oil Dec-15 27/01/2011 98.2 97.3 $/bbl -0.9 Rationale: China's rising costs for aluminium suggest a production slowdown ahead. Meanwhile, demand continues to grow very strongly and incentive prices for producers are rising. This should support steady appreciation in prices over the medium-term with the back end of the curve expected to outperform. -15.0% Long LME aluminium Dec-15 29/03/2011 2884 2452 $/t -432.0 Rationale: LME copper stocks are declining and Chinese imports have remained firm. The picture for raw materials is tight, with a narrowing in scrap discounts and recent supply problems at Grasberg, plus some other mines. -3.9% Long LME copper Jun-12 21/11/2011 7328 8453 $/t -613 Rationale: Our expectation of stable crude oil prices should support US gasoline demand at reasonable levels in 2012, but a substantial loss in refining capacity is set to squeeze supplies. As a result, summer gasoline prices should increase. US gasoline (RBOB) spread tightening 20/12/2011 2.95 3.22 0.27 Long position 37.71 Aug-12 265 303 cents/g Short position -37.44 Sep-12 263 300 cents/g Rationale: Palladium has potentially the weakest supply outlook in 2012 of any commodity we forecast. We expect the market to swing from surplus in 2011 to a small deficit in 2012, helped by a strong growth in autocatalyst demand. We also expect a rebound in net investment buying of palladium in 2012. -3.6% Long NYMEX palladium Dec-12 29/02/2012 710 684 $/oz -25.6 Rationale: The long-running push to reconfigure refineries globally to maximise the production of light products is coming at the expense of fuel oil output. Meanwhile expansion in bulk carrier and tanker fleets, plus strong demand from Japanese electricity generators is underpinning demand. Fuel oil versus gasoil differentials 29/02/2012 -30.54 -30.53 0.02 Long Rotterdam fuel oil 0.61 Q4 2013 97.74 98.35 $/bbl Short ICE gasoil Q4 2013 128 128.88 $/bbl -0.6 Note: The open long position on LME copper was originally opened on May 26, 2011 and includes losses from the previous trade (December 2011). The open long position on CBOT corn was originally opened on April 20, 2011 and includes losses from the previous trade (December 2011). The long position in LME copper spreads was opened on August, 24, 2011 and includes losses on the December 2011/June 2012 trade. Source: Reuters, Barclays Research

Contract

Entry Date

Entry price

Current price (May-01-2012)

Gain/Loss Unit $

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Barclays | Gas and Power Weekly Kaleidoscope

Figure 32: Closed trades

Closed Trades Directional trades Short ICE coffee Long CBOT soybeans Long CBOT corn Short US nat gas Henry Hub Long COMEX gold** Long Carbon EUA Long KBOT wheat ** Long UK natural gas Long LME nickel Long European delivered coal (API2) ** Short Comex silver Long LME copper Long CBOT corn ** Short UK natural gas Long NYMEX crude oil ** Short US natural gas Long ICE cotton Long LME lead Long LME copper ** Long NYMEX palladium Long ICE sugar Long LME nickel Long NYMEX crude oil Long ICE sugar Spread trades Copper spreads tightening Long position Short position WTI contango widening Short position Long position Natural gas spread widening Short forward Henry Hub Long forward Henry Hub Crude oil spread tightening ** Long forward Brent crude Short forward Brent crude Gasoil spread tightening Long nearby ICE gasoil Short further forward ICE gasoil US Henry Hub nat gas Short position Long position Contract Dec-12 Mar-12 Mar-12 Oct-13 Dec-12 Dec-11 Dec-11 Q3-11 Jun-11 Apr-11 Dec-11 Jun-11 Mar-11 Summer 2011 Dec-11 Dec-11 Dec-10 Dec-10 Sep-10 Jun-10 Jul-10 Jun-10 May-10 Mar-10 Entry Date 29/02/2012 20/12/2011 21/11/2011 21/11/2011 21/11/2011 24/02/2011 20/04/2011 29/03/2011 24/02/2011 27/01/2011 27/01/2011 22/09/2010 26/11/2010 19/10/2010 19/10/2010 13/08/2010 14/04/2010 21/06/2010 10/12/2009 22/02/2010 18/03/2010 10/12/2009 10/12/2009 10/12/2009 21/11/2011 Mar-12 Sep-12 19/07/2011 Mar-12 Apr-12 15/12/2010 Oct-11 Jan-12 20/04/2011 Jul-11 Aug-11 22/09/2010 Dec-10 Jun-11 21/06/2010 Oct-10 Jan-11 13/08/2010 19/10/2010 26/05/2011 30/06/2011 29/02/2012 Exit Date 16/04/2012 14/03/2012 14/03/2012 20/12/2011 20/12/2011 30/06/2011 30/06/2011 26/05/2011 26/05/2011 29/03/2011 24/02/2011 24/02/2011 24/02/2011 27/01/2011 27/01/2011 26/11/2010 19/10/2010 13/08/2010 13/08/2010 11/05/2010 14/04/2010 18/03/2010 18/02/2010 18/02/2010 21/03/2012 Entry price 212 1155 605 4.4 1694 15.4 964 63.9 27501 114.5 27.1 7833.0 553.0 47.2 84.8 5.54 75.7 1851 7062 444 22.6 16331 75.4 23.3 -17.3 7317 7334 0.38 100.40 100.78 0.63 4.49 5.12 -0.36 123.5 123.1 -16.8 669.75 686.50 0.66 5.01 5.67 Exit price 181 1356 670 4.1 1628 13.5 733 58.5 22821 125.7 33.1 9505 685.8 52.5 99.3 5.12 110.3 2065 7143 532 17.7 22760 79.1 26.5 14.5 8471 8456 0.41 105.84 106.25 0.41 4.43 4.84 -0.37 115.1 114.7 -15.3 705.50 720.75 0.65 4.35 5.00 Unit c/lb c/Bsh c/Bsh $/mmbtu $/oz /t c/Bsh p/therm $/t $/t $/oz $/t c/Bsh p/therm c/bbl $/mmbtu c/lb $/t $/t $/oz c/lb $/t $/b c/lb $ Gain/Loss % 14.5% -1.0% 1.9% 6.6% 29.3% -12.1% -26.4% -8.5% -17.0% 14.4% -22.4% 21.3% 55.1% -11.3% 14.2% 7.7% 45.7% 11.6% 5.0% 19.8% -21.6% 39.4% 4.9% 13.8% -

30.7 -57.8 6.8 0.3 -66 -1.9 -231 -5.4 -4680 16 -6 1672 245 -5 12.1 0.43 35 214 345 88 -5 6429 3.7 0.03 14.0 1154 -1122 0.03 -5.44 5.47 -0.22 0.05 -0.27 0.34 -8.45 8.46 1.50 35.75 -34.25 0.01 -0.66 0.67

$/t $/t $/b $/b $/mmbtu $/mmbtu $/mmbtu $/b $/b $/b $/t $/t $/t $/mmbtu $/mmbtu $/mmbtu

Note: Entry and exit prices reference closing prices on the day of publication. ** These trades include gains/losses from previous trades. Source: Reuters, Barclays Research

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Barclays | Gas and Power Weekly Kaleidoscope

PRICE FORECAST
Figure 33: Quarterly price forecast
Q1 11 Base Metals (LME cash) Aluminium US$/t Copper US$/t Lead US$/t Nickel US$/t Tin US$/t Zinc US$/t Base Metal Index^ Precious metals Gold US$/oz Silver US$/oz Platinum US$/oz Palladium US$/oz Energy WTI US$/bbl Brent US$/bbl US Natural Gas US$/mmbtu UK Natural Gas p/therm Agriculture Cocoa US$/t Coffee Usc/lb Sugar Usc/lb Cotton Usc/lb Wheat Usc/bushel Corn Usc/bushel Soybeans Usc/bushel 2,503 9,646 2,605 26,899 29,950 2,393 266 1387 31.9 1789 788 95 106 4.2 57 3303 256 30.5 180 786 670 1379 Q2 11 2,600 9,137 2,550 24,165 28,694 2,250 254 1508 38.4 1781 756 102 117 4.4 58 3043 271 24.5 168 745 731 1361 Q3 11 2,399 8,982 2,459 22,043 24,757 2,224 239 1705 38.8 1766 747 90 112 4.1 54 2962 256 28.7 107 690 696 1356 Q4 11 2,090 7,489 1,983 18,303 20,853 1,897 201 1682 31.8 1527 626 94 109 3.5 57 2383 229 24.7 95 615 620 1175 Q1 12 2,177 8,310 2,093 19,651 22,941 2,025 219 1690 32.6 1604 680 103 118 2.5 59 2308 205 24.6 93 643 641 1272 Q2 12F 2,250 8,600 2,200 20,500 23,000 2,100 225 1850 34.5 1640 745 104 118 2.2 55 2325 210 23.8 89 650 660 1345 Q3 12F 2,350 9,000 2,350 20,000 25,000 2,200 235 2030 38.0 1755 860 107 121 2.1 57 2400 180 23.5 85 628 640 1355 Q4 12F 2,500 9,300 2,500 19,750 28,000 2,300 245 1920 27.5 1815 895 107 121 3.0 70 2500 170 23.7 80 595 580 1325

Note: ^Economist Intelligence Unit weight. Base metals prices are LME cash. Precious metals spot prices. WTI: front-month NYMEX close. Brent: Front-month IPE close. US natural gas: NYMEX front-month close. Cocoa, coffee, sugar, cotton: Front-month ICE close. Wheat, corn, soybeans: Front-month CBOT close. Source: Barclays Research

Figure 34: Annual price forecast

2007 Base Metals Aluminium US$/t Copper US$/t Lead US$/t Nickel US$/t Tin US$/t Zinc US$/t Base Metal Index^ Precious Metals Gold US$/oz Silver US$/oz Platinum US$/oz Palladium US$/oz Energy WTI US$/bbl Brent US$/bbl US Natural Gas US$/mmbtu UK Natural Gas p/therm Coal API2 US$/t Coal API4 US$/t Coal Newcastle US$/t Carbon (EUA) /t Carbon (CER) /t Agriculture Cocoa US$/t Coffee Usc/lb Sugar Usc/lb Cotton Usc/lb Wheat Usc/bushel Corn Usc/bushel Soybeans Usc/bushel Note: ^Economist Intelligence Unit weight. Source: Thomson Datastream, Barclays Research 2,640 7,129 2,592 37,276 14,542 3,251 237.2 697 13.4 1,304 354 72.3 72.7 7.12 30.0 87 62 66 20 16 1882 117 9.9 57 636 373 861 2008 2,573 6,961 2,093 21,115 18,500 1,876 204.3 872 15.0 1,569 348 99.7 98.4 8.90 58.2 144 120 128 23 17 2555 132 12.1 64 798 527 1234 2009 1,664 5,148 1,721 14,604 13,579 1,654 146.2 972 14.6 1,205 262 62 63 4.16 31.1 71 66 72 13 12 2794 125 17.7 57 530 374 1031 2010 2,172 7,533 2,146 21,809 20,407 2,158 210 1,226 20.2 1,610 526 80 80 4.39 42.2 93 92 99 15 12 2944 163 22.3 94 581 427 1048 2011 2,398 8,813 2,399 22,853 26,063 2,191 240 1,571 35.2 1,716 729 95 111 4.03 56.4 123 119 120 13 10 2923 253 27.1 138 709 680 1318 2012F 2,319 8,803 2,286 19,975 24,735 2,156 231 1,873 33.2 1,704 795 105 120 2.43 60.3 102 102 112 9 4 2383 191 23.9 87 629 630 1324 2015F 3,000 9,500 3,650 25,000 30,000 3,500 274 1,400 21 2,200 1,200 125 135 4.00 85.0 114 115 120 15 7 3200 180 26 88 650 620 1350

Cycle average
2,750 6,200 2,700 19,000 18,000 2,600 N/A 1,125 16 1,850 650 95 95 4.0 N/A 92 95 97 16 7 N/A N/A N/A N/A N/A N/A N/A

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Barclays | Gas and Power Weekly Kaleidoscope

COMMODITIES RESEARCH ANALYSTS

Barclays 5 The North Colonnade London E14 4BB Gayle Berry Commodities Research +44 (0)20 3134 1596 gayle.berry@barclays.com Miswin Mahesh Commodities Research +44 (0)20 77734291 miswin.mahesh@barclays.com Trevor Sikorski Commodities Research +44 (0)20 3134 0160 trevor.sikorski@barclays.com Shiyang Wang Commodities Research +1 212 526 7464 shiyang.wang@barclays.com Commodities Sales Craig Shapiro Head of Commodities Sales +1 212 412 3845 craig.shapiro@barclays.com Martin Woodhams Commodity Structuring +44 (0)20 7773 8638 martin.woodhams@barclays.com Suki Cooper Commodities Research +1 212 526 7896 suki.cooper@barclays.com Roxana Mohammadian-Molina Commodities Research +44 (0)20 7773 2117 roxana.mohammadian-molina@barclays.com Nicholas Snowdon Commodities Research +1 212 526 7279 nicholas.snowdon@barclays.com Michael Zenker Commodities Research +1 212 526 2081 michael.zenker@barclays.com Helima Croft Commodities Research +1 212 526 0764 helima.croft@barclays.com Kevin Norrish Commodities Research +44 (0)20 7773 0369 kevin.norrish@barclays.com Kate Tang Commodities Research +44 (0)20 7773 0930 kate.tang@barclays.com Paul Horsnell Commodities Research +44 (0)20 7773 1145 paul.horsnell@barclays.com Amrita Sen Commodities Research +44 (0)20 3134 2266 amrita.sen@barclays.com Sudakshina Unnikrishnan Commodities Research +44 (0)20 7773 3797 sudakshina.unnikrishnan@barclays.com

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