February OPEC Report high lights

Persistent inventory overhang challenges market
Looking at inventory developments in recent years highlights a few important changes that should be taken into account. These include an increase in days of forward cover, a reduction in inventory requirements in absolute terms and a shift in the longstanding relationship between crude oil inventories and prices.

Graph 1 shows a steady decline in OECD days of forward cover to 51 days while absolute stock levels have continued to fluctuate around the same level. This was largely due to the widespread adoption of “just-in-time” inventory management which sought efficiencies by reducing stocks and hence the costs of holding inventories. However, since 2005, forward demand cover has begun to increase, to now approach 57 days, despite just-in-time management. In addition, inventory requirements have declined due to the reduced impact of seasonality. This can be seen in seasonal changes in demand which has fallen from an average of 3.9 mb/d over the period 1995-2005 to just 2.5 mb/d in the last three years. As a result, the
seasonal impact on stocks has also declined from around 180 mb to 110 mb. This implies lower inventory requirements during periods of peak consumption.

Another change that has taken place over this period is the break in the long-standing inverse relationship between prices and inventory levels. As Graph 2 shows, the relation between the WTI price and inventories showed a strong correlation between 1995 and 2004 — higher inventories corresponded with lower prices and falling inventories with rising prices. This
relation was broken starting in 2004 when the tight product market balance along with non-fundamental factors began to have a greater influence on prices. During this period, inventory changes did not appear to have a consistent impact on crude oil prices. However, more recent data indicates that this inventory/price relationship might be returning, although it is still too
early to judge.
􀂃 These changes are reflected in the current overhang in inventories, which has been further accelerated by the deep contango structure in the market. The market’s switch to contango has encouraged traders and others to store excess crude in floating storage to profit from higher forward prices. By the end of January, an estimated 70 to 80 mb oil was being stored offshore in 35 to 40 VLCCs vessels, representing roughly 7 to 8% of the world VLCC fleet. This created an unexpected spike in VLCC freight rates at a time when the market was expecting tanker demand to be lower due to much lower requirements for OPEC oil.
􀂃 The deep contango and the slowdown in demand in the US have encouraged the accumulation of oil inventories at the key WTI delivery point of Cushing, Oklahoma. As a result, storage has risen sharply and now stands at 34.9 mb, approaching maximum operational capacity. This has led to a distortion in the price of benchmark WTI, which has diverted from broader market fundamentals.
􀂃 Moreover, governments in the US and China are taking advantage of low prices to fill additional strategic reserves. The US Department of Energy has resumed the filling of SPR with the goal of reaching full capacity of 727 mb. Meanwhile in China, officials have acknowledged that they have been taking advantage of lower crude prices to fill its petroleum reserves.
􀂃 The high and growing stock levels — particularly for crude oil — are likely to continue to disrupt the overall stability of the market. Their impact will become even more pronounced with the onset of low seasonal demand as well as the upcoming refinery maintenance period. The current state of the market under prevailing supply and demand uncertainties, combined
with the deepening economic crisis worldwide, highlights the necessity and importance of OPEC’s actions to stabilize the market, including most recently the decision taken at Oran. It also demonstrates the need for broad cooperation across the oil industry to meet these challenges.

Crude Oil Price Movements

The crude oil market began the year ona bullish note amid a conflict in theMiddle East and a mounting disputeregarding Russian natural gas supplies.With the new calculation excluding Indonesia’s Minas, the OPECReference Basket rose as high as$46.26/b in daily terms. However,bleak economic data continued to pointto weaker demand growth, pushingprices to below $42/b later in the week.The Basket averaged $43.98/b in thefirst week, representing a jump of21%. In the second week, marketsentiment softened amid an announcedresolution to the Russian natural gas dispute. US dollar volatility added to market bearishmomentum, although OPEC supply adjustments and improved refining margins capped thedownward trend. The ORB averaged $3.07 or 7% lower in the second week to settle at $40.91/b.The market continued the downward move in the third week amid a UK bank posting thenation’s largest loss reviving fears of an economic downturn. However, a cold snap and ongoinghealthy refining margins prevented further losses. The strengthening of the US dollar and thegloomy economic outlook capped the upward trend later in the week. The Basket averaged thethird week down 2% or 83¢ to settle at $40.08/b.The upward volatility sustained into thefourth week amid tighter OPEC supply,cold weather in North America and aslip in the US dollar against majorcurrencies. In contrast, the weak economic outlook weighed on marketsentiment. Heightened demand forwinter fuels improved refining marginsin the final week of the month. Effortsto craft a US stimulus plan provided some support. The Basket rose 3.4% or$1.35 in the fourth week to settle at$41.43/b. US dollar fluctuations andfears of an economic downturnoutweighed data showing lower supply.On a monthly basis, the crude oil market emerged in the New Year on a bullish note amid tighter OPEC output, Middle East geopolitical tensions and the disruption in Russian natural gas supplies. As the latter abated, market strength eased. A cold winter in the US and Europe along with the resulting improvement in refining margins kept some market bullishness intact.Nonetheless, the dismal economic outlook was seen to continue denting crude oil demand. US dollar fluctuations and the efforts to put together a US stimulus plan revived market volatility.With the new calculation excluding Indonesia’s Minas, the OPEC Reference Basket rose $2.92or 7.6% to stand at $41.52/b in January. In February, the Basket remained in the lower $40/brange. The stimulus plan along with refinery work in the US and the UK maintained some bullishness which offset poor economic data and declining demand. The Basket stood at$41.79/b on 12 February.

Highlights of the World Economy
The latest data on the US economy is still painting a relative bleak picture and as in the other
regions the GDP forecast for 2009 has been revised down from -1.5% to -1.7%. As most
indicators are still on the negative side, some of the business sentiment indicators are improving,
although from very low levels. The ISM-manufacturing index improved from 32.9 to 35.6 and its
counterpart, the ISM-service index, moved up from 40.1 to 42.9. Despite these positive
developments, both indicators are still below 50, which means the economy is still expected to
contract. This improvement in sentiment might come partly from confidence being placed in the
new administration and its plan to recover the economy, as well as from the already relatively low expectations for the economy.
Unemployment is still rising and has now touched 7.6%, which is even higher than the previous
peak level in 1992 when unemployment reached 7.5%. Expectations on unemployment now go as high as 8% and more. In the last 12 months, 3.5m jobs have been lost in the US. The last time a figure was this high was in September 1945, briefly after the end of WWII, when a loss of 3.1m
jobs was recorded. This sharp increase in unemployment certainly does not bode well for an
economy in which nearly 70% of GDP is being generated through consumer spending, much of
which is refinanced through consumer loans. Consequently, consumer credit fell 3.1% m-o-m in
December, after already having touched a 65-year low in November of -5.1% m-o-m, the biggest drop since records began in 1943. These figures were again much higher than the market and what most economists anticipated. Not only did the amount of consumer credit decline, but credit defaults also increased. Charge-offs, which occur when credit card issuers give up trying to collect payments on delinquent accounts, climbed to 7.5% last month, 40% higher than a year earlier. Fitch Ratings estimates that this rate may reach 9% in the second half of this year. To put that into perspective, the total credit card debt in the US at the end of 2008 stood at around $950bn. If this trend holds, that means that over the course of 2009 an estimated $80bn in credit card debt might have to be written off.

Consumer spending, the driving force behind the US economy, continued to suffer in December
and is likely to fall even more in the months ahead. Consumer spending fell by 1% from
November to December, larger than the forecast drop of 0.9%, making 2008 the lowest year since1961. Personal income fell by 0.2% for December, down for the third month in a row, and only increased 1.4% for the entire year, accounting for the smallest yearly gain since 2002. Wages, which represent 55% of personal income, fell 0.1%. This sharp decline in the consumption and the still relatively modest fall in incomes can partly be explained by the lower number of employees as well as by the increase in the US savings rate. Personal savings, which rose in November, saw further gains in December to reach 3.6% of disposable personal income. Savings are now at the highest level since May when they were supported by tax rebates. Theimprovement in the personal savings rate is positive in the long term, but obviously negative forspending in the near term.The modest increase in wages of only 1.4% for 2008 in nominal terms looks better in real terms,which still represents a modest income increase as CPI for 2008 was only 0.1% compared to adecrease of 0.7% in December. This was the smallest calendar year increase since the 0.7%decline in 1954 and compares with a 4.1% increase for the 12 months ended December 2007. Theenergy index declined 8.3% in December. The index for all items excluding food and energy wasvirtually unchanged in December. While inflation is not a threat, there might even be some morepressure on the deflationary side, i.e. declining prices, which is preventing consumers fromspending.Considering the muted data, particularly on the consumer-front, the efforts of the newadministration are even more important. The probability that the US consumer will support GDPgrowth over the short term is relatively unlikely, the planned economic stimulus package is noweven more important to not only support US consumption, but also to enforce governmentspending to achieve a quick recovery in GDP growth. Assuming a successful and swift executionof the plan, a turnaround of the economy might be possible in the second half of 2009, but beforethat more negative developments in the US economy could occur.The $789bn stimulus package agreed on in Congress includes $282bn in tax cuts and taxincentives. There is some question as to how much these tax benefits will support consumptionand therefore the real economy. There is also the possibility that these extra funds might be usedto pay back debt or to increase savings instead of using it for consumption and therefore do littleto increase US GDP. In addition to the stimulus package, the Treasury Secretary unveiled abanking rescue plan to clean up the situation in the banking sector. On the same day this plan wasannounced equity markets fell nearly 5%, one of the biggest declines the stock market has everseen. The plan will use the $350bn still available through the TARP fund for further capitalinjections into the banking system. An additional $250 bn — mainly financed by the Fed — willbe used to buy up toxic assets, support consumer loans and avoid foreclosures in the housingsector.In addition to putting a lot of efforts into tax cuts and government spending, the stimulus packageand the banking rescue plan also focus on supporting the US housing market which continues todeteriorate. For 2008, purchases of new houses fell a record 38% to 482,000, to the lowest levelsince 1982, according to the US Commerce Department. The median price for 2008 fell 7%, themost since 1970, to $230,600. The number of vacant homes reached a record of around 19m atthe end of 2008, according to the US Census Bureau. The supply of new homes at the currentsales rate jumped to a record 12.9 months in December, while sales of previously-owned homesrose 6.3% in December, but from very low levels and prices are still falling.The stabilization of the US housing market remains a key challenge as it was the root cause forthe financial crisis and financial institutions are still burdened by mortgage assets and theirderivatives. A stabilization of US house prices could therefore provide important support to easethe current situation.Certainly, the issues in the financial sector have to be solved before the US economy is able torecover. There is still a great deal of uncertainty in the sector and financials are still avoidinglending to one another, so low interest rates and other measures are not meeting the potentialdemand for cash as supply is not making its way into the economy. The OIS-Libor spread –which can be used as a measure of confidence among banks – that had an historic average ofaround 0.15% to 0.25% before the financial crisis evolved in mid-September and peaked inOctober 2008 after the collapse of Lehman at 3.32%, is still currently trading at a level of 0.97%.That means that to refinance itself in the inter-banking market – once the most important marketfor banks to get liquidity– a bank today has to pay nearly one per cent more than in the past torefinance its operations.

Oil prices, the US dollar and inflation
In January, the dollar appreciated against the euro and pound sterling but fell against the yen and
Swiss franc. The dollar rose 1.4% versus the euro and 3.2% vis-à-vis the pound sterling, while
depreciating by 1% versus the yen and 1.5% against the Swiss franc. Against the modified
Geneva I + US dollar basket, the dollar rose more than 0.8% last month compared to a rise of
2.9% in December. Against the euro, the dollar averaged $1.3232/€ in January compared to
$1.3419/€ in December.
The strength of the dollar versus the euro can be attributed to four factors. Firstly, the S&P has
downgraded three Euro-zone countries – Spain, Portugal and Greece – while putting Ireland on
the watch-list. Secondly, the problems in Eastern Europe have put pressure on the euro as the
Euro-zone countries are the main lenders and trading partners to the Eastern European countries.
Thirdly, the sharp fall in Euro-zone exports has led to a decline in demand for euros relative to
other currencies. Fourthly, there are expectations that the European Central Bank will lower
interest rates at its next Governing Council meeting on 5 March, from 2% currently. Regarding
the yen and the Swiss-franc, those currencies have benefited from the status of safe-haven
currencies in uncertain times.
In January, the OPEC Reference Basket rose $2.92/b or 7.6% to $41.52/b from $38.60/b in
December. In real terms (base June 2001=100), after accounting for inflation and currency
fluctuations, the Basket price increased by more than $2.2/b or 8.8% to $27.71/b from $25.46/b.
The dollar appreciated by 0.84%, as measured against the import-weighted modified
Geneva I+US dollar basket, while inflation turned negative to the tune of 0.3%.*

World Oil Demand
US oil demand is considered the major factor behind the vanishing growth in oil demand in
2008. North America alone shaved 1.2 mb/d from world oil demand last year. For the whole
OECD region, the decline reached 1.6 mb/d. This was more than enough to offset all the oil
demand growth from other regions in the world. Although oil prices eased, world economic
turbulence managed to reduce oil demand growth in the non-OECD by one third or 0.2 mb/d in
the second half of 2008. Despite the cold weather in the OECD last December, declining
industrial production pushed oil demand down a further 0.6 mb/d y-o-y world-wide in the
fourth quarter. OECD accounted for 80% or 0.5 mb/d of the downward revision in the fourth
quarter. Other Asia was hammered badly by decreasing exports. As a result, oil demand in
Taiwan and Singapore showed a massive decline pushing regional oil demand into the red for
the first time since 1998.
Thus, world oil demand was revised down by 0.1 mb/d to show a decline of 0.2 mb/d y-o-y in
2008 to average 85.7 mb/d.

World Oil Demand in 2009
World oil demand continues its steep decline from last year and is expected to follow this strong
negative pattern at least for the first three quarters of the year. Oil demand in OECD is
experiencing a steep decline resulting from the region’s economic depression. Demand in
OECD North America, Europe, and the Pacific declined by 1.2 mb/d y-o-y in January.
However, the positive growth in non-OECD demand reduced the world decline to only
0.7 mb/d. Although the OECD regions in general are colder than average by 10% which led to
more demand in heating oil and kerosene, slowing industrial production has suppressed
consumption of industrial fuel

As a result of the continuing deterioration in the global economic outlook, world oil demand has
been revised down a further 0.4 mb/d to show a total decline of 0.6 mb/d in 2009 to average
85.1 mb/d.

Slowing economic activities in the US have suppressed oil demand more than the extra demand
for winter products due to colder weather. Although the decline in oil demand has shrunk in
comparison to last quarter, US consumption is still experiencing a major decline which started
early last year. Gasoline is a key product in total US oil demand. Given the low oil prices,
gasoline retail prices are at the lowest level since 2004 and the decline in demand has leveled
out from the previous steep fall. January gasoline demand is estimated to have declined 1.5%
versus 2.4% last December. The recent rebound in transport fuel is not anticipated to overcome
the huge decline in industrial fuel. As the prospects for the US economy have been
deteriorating, further downward revisions to North America have been implemented.

The weather in North America in January is colder than normal by almost 10% leading toincreased consumption of winter products, which has to some degree reduced the decline indemand. Although US oil demand is forecast to decline this year, the amount of decline will bedependent upon economic behavior and the reaction to government stimulus efforts. Thepetrochemical industry is showing reduced activities as a result of low industrial productionleading to a huge decline in certain fuels and feed stocks. Distillate demand dipped 5% y-o-y inJanuary leading to a total decline of 0.86 mb/d. Although the decline in US oil demand is large,it has rebounded 0.23 mb/d since December. Given the 1.2 mb/d decline in US oil demand lastyear and expected economic improvements in the second half of the year, the decline in oildemand this year is expected to be somewhat less than last year.Furthermore, the new US administration is pushing fuel economy standards extensively withthe aim of raising them from 25 mpg to 35 mpg. This of course would have an impact on futuregasoline demand in the mid-term which poses a big question on whether this will lead to a peakin gasoline demand in North America.US ethanol production has been affected negatively by both economic turbulence and low oilprices. Reduction in production capacity is estimated at 20% so far. The future of this industrywill depend on how much the government is willing to subsidize it and with the bad economicsituation, how long the government can afford to continue to bail it out.Contrary to US oil demand behavior, Mexican oil demand showed a plus last year with the helpof transport fuel, mainly gasoline. Gasoline and diesel demand grew sharply last year by 4.2%and 6.8% y-o-y despite high oil prices in early 2008. Industrial fuel declined sharply as a resultof low exports; however, the growth in transport fuel was more than enough to offset thisdecline leading to total growth of 0.7% in 2008.The decline in North America oil demand is expected to bottom out at around 0.7 mb/d in thesecond quarter of 2009 and then bounce back to a minus 0.4 mb/d in the last quarter. NorthAmerican oil demand is forecast to decline by 0.6 mb/d in 2009 to average 23.8 mb/d.

World Oil Supply

Non-OPEC
Estimate for 2008

Non-OPEC supply is estimated to have averaged 50.34 mb/d in 2008, a decline of 0.15 mb/d
from the previous year and a downward revision of 230 tb/d from last month’s assessment. The decline in non-OPEC production marks the first since 1999. Downward revisions were carried out for supply from the USA, Canada, Sudan and China. There were minor upward revisions to supply in various countries, but these were not sufficient to offset lower growth expectations elsewhere. The downward revisions affected all quarters in 2008 with the second and fourth quarters experiencing the largest drops. On a quarterly basis, non-OPEC supply now stands at 50.71 mb/d, 50.54 mb/d, 49.70 mb/d and 50.41 mb/d respectively.

Developing Countries continue to display the highest supply growth as a group in 2008 with
current estimates indicating an increase of 240 tb/d over the previous year. China and the FSU
showed supply growth in 2008, while the OECD maintained a declining trend. On a regional
basis, Latin America indicated the highest growth in 2008 of 210 tb/d, supported by increases of
130 tb/d in Brazil and 60 tb/d in Colombia. In 2008, Brazil showed the biggest supply growth
among all non-OPEC countries. China came next with an oil production increase of around
80 tb/d, followed by the FSU region where production is anticipated to have risen by 40 tb/d,
supported by supply increases from Kazakhstan and Azerbaijan which have more than offset the
decline in Russia estimated at 80 tb/d. The Africa region also displayed growth of around
40 tb/d supported by a supply increase from the Congo and Egypt. The Other Asia Group
showed a minor increase of 10 tb/d mainly from Indonesia, while Vietnam was estimated to
have declined. OECD countries supply is now estimated to have declined by 530 tb/d in 2008.
OECD North America displayed a drop of 370 tb/d while Mexico and Canada displayed a
decline of 310 tb/d and 70 tb/d respectively. US oil supply indicated minor growth of 20 tb/d in
2008. OECD Western Europe showed a decline of 190 tb/d due to lower supply from Norway,
UK and Denmark. OECD Pacific indicated the only supply growth among OECD regions
which is anticipated to be 30 tb/d, mainly from Australia. The Middle East region displayed a
decrease of around 20 tb/d with the decline from Syria and Yemen offsetting the gains
experienced in Oman.
Revisions to the 2008 estimate
Non-OPEC supply in 2008 experienced a significant downward revision of 230 tb/d to reflect
the most recent data. The downward revisions were spread across all quarters with the second
quarter displaying the largest revision. On quarterly basis, non-OPEC supply experienced
downward revisions of 68 tb/d, 374 tb/d, 176 tb/d, and 290 tb/d respectively. Recently received data for Canadian production was the main factor behind this month’s downward revisions. On an annual basis, Canadian oil supply is now estimated to have dropped by 70 tb/d in 2008. On a quarterly basis, Canadian production now stands at 3.28 mb/d, 3.11 mb/d, 3.30 mb/d, and 3.30 mb/d respectively, indicating quarterly downward revisions of 53 tb/d, 338 tb/d, 125 tb/d and 150 tb/d. Additionally, Sudan oil supply experienced a smaller revision of 40 tb/d on the back of adjustments to recently updated production data. Supply from the US and China also underwent minor downward revisions to adjust for actual figures. In contrast, supply estimates for Denmark and Other Latin America experienced minor upward revisions. In the fourth quarter, Australia experienced minor downward revisions due to cyclone disruptions.

Forecast for 2009

Non-OPEC supply is projected to average 50.89 mb/d in 2009, an increase of 0.55 mb/d over
the estimate for last year and a downward revision of 30 tb/d from the previous assessment. The revisions were mostly due to adjustments carried over from the 2008 figure. On a quarterly
basis, non-OPEC supply is expected to average 51.06 mb/d, 50.72 mb/d, 50.64 mb/d, and
51.15 mb/d respectively.

OECD

Total OECD countries’ oil supply is anticipated to average 19.50 mb/d in 2009. This represents a drop of 110 tb/d from the previous year and a downward revision of 182 tb/d from last month. This significant downward revision took place due to adjustments to the 2008 level, while the annual decline estimate remains relatively unchanged. North America and Pacific OECD regions are expected to display supply growth in 2009, supported by increases in the US, Canada,
and Australia. The OECD Western Europe region is expected to continue to decline in
2009. The current forecast will be impacted by major uncertainties, mainly due to oil price
developments and the financial situation; hence, careful monitoring is necessary to better
predict the development of OECD supply. On a quarterly basis, OECD oil supply is
estimated to average 19.77 mb/d, 19.45 mb/d, 19.26 mb/d and 19.53 mb/d respectively.
Preliminary data for January put total OECD output at around 19.89 mb/d.

USA

Oil supply from the US is forecast to reach 7.69 mb/d in 2009, an increase of around 170 tb/d over the current 2008 assessment and a downward revision of 33 tb/d from last month. The revisions were introduced mainly in the third and fourth quarters to reflect changes in project startup and ramp-ups. Among the main developments in 2009, the Thunder Horse project is expected to ramp up to peak production of 250 tb/d during the first half of the year. The project was reported to have reached 200 tb/d by the end of 2008. The Blind Faith project, started up in the fourth quarter of 2008 is also expected to reach a plateau of 65 tb/d in the first half of this year. The Tahiti project is expected to start up production in the fourth quarter. Moreover, the remaining shut-in production in the US Gulf of Mexico due to hurricanes Gustav and Ike — estimated by the US MMS at 11% in mid January — is expected to return to normal operations and add further volume. However, a considerable portion of ethanol production capacity was reported to be idle due to unfavourable economic conditions. Such issues spell significant risk to the forecast and will require close monitoring. On a quarterly basis, US oil supply is estimated at 7.63 mb/d, 7.67 mb/d, 7.66 mb/d and 7.79 mb/d respectively. According to preliminary data, US oil supply in January stood at 7.72 mb/d.

Canada and Mexico
Canadian oil supply is expected to increase 90 tb/d in 2009 to average 3.34 mb/d, following a
downward revision of 130 tb/d from previous forecast, mainly due to changes in the 2008 base
volume. Supply growth is supported by different oil sand projects such as the Long Lake
development. However, Canadian supply in 2009 faces major uncertainties as price developments have forced producers to cut output and slash spending. Additionally, maintenance in the offshore East Coast is expected to have an effect on supply, yet the risk of prolonged maintenance may further shave expected growth. On a quarterly basis, Canada production stands at 3.32 mb/d, 3.28 mb/d, 3.34 mb/d and 3.41 mb/d respectively. According to preliminary data, Canadian oil supply stood at 3.29 mb/d in January.

Oil supply from Mexico is projected to decline in 2009 by 180 tb/d to average 2.99 mb/d, broadly unchanged from the previous assessment. The declining trend is expected to continue with Mexico’s main producing field, Canterell, facing an accelerated decline which new volume from other developments are unable to offset. The Ku-Maloob-Zapp (KMZ) project is anticipated to continue ramping up in 2009. On a quarterly basis, Mexico oil supply is expected to stand at 3.10 mb/d, 2.97 mb/d, 2.98mb/d and 2.91 mb/d respectively.

OECD Western Europe oil supply is projected to drop by around 260 tb/d in 2009 to average
4.78 mb/d, indicating a minor downward revision of 10 tb/d from the previous month. Norway,
UK and Denmark are expected to decrease in 2009 causing the region to have the largest decline among all non-OPEC regions. On a quarterly basis, OECD Western Europe production stands at 5.02 mb/d, 4.83 mb/d, 4.56 mb/d and 4.73 mb/d respectively. Preliminary January data suggest a production level of 5.06 mb/d.

Oil supply from Norway is expected to decline by around 120 tb/d in 2009 to average 2.34 mb/d, relatively unchanged from previous month. A handful of new startups are expected in 2009 such as the Rev and Yttergryta condensate fields that have already added small volumes along with developments such as Tyrihans, Oseberg and YME. However, the new barrels are not expected to be sufficient to stem declines in mature fields. On a quarterly basis, Norway supply stands at 2.47 mb/d, 2.34 mb/d, 2.19 mb/d and 2.35 mb/d respectively. January preliminary data indicate Norway’s supply at 2.45 mb/d, down 110 tb/d from the previous month.
UK oil supply is projected to average 1.43 mb/d in 2009, displaying a fall of around 140 tb/d from the previous year, unchanged from last month’s assessment. The natural decline is anticipated to trim UK supply as the minor supply addition is not expected to offset the majority of the decline. On a quarterly basis, UK oil supply stands at 1.51 mb/d, 1.46 mb/d, 1.38 mb/d and 1.37 mb/d respectively.

Similarly, natural decline is foreseen to affect Denmark oil supply which will slightly in 2009 from the previous year to average 0.27 mb/d, unchanged from last month’s level.

Asia Pacific
Oil supply in this group is expected to grow by around 70 tb/d in 2009 from the previous year to reach 0.70 mb/d, indicating a minor downward revision of around 20 tb/d from previous month’s estimate. On a quarterly basis, supply is expected to average 0.69 mb/d, 0.71 mb/d, 0.72 mb/d and 0.68 mb/d respectively.
Oil supply from Australia is expected to average 0.58 mb/d in 2009, representing an increase of
around 50 tb/d and a minor downward revision of 17 tb/d from previous month. The impact of the cyclone season on Australian production, with the majority of the Western Australia output shut down for a number of days as a precaution measure, resulted in a downward revision which was carried mainly on the first quarter. On a quarterly basis, production stands at 0.58 mb/d,
0.59 mb/d, 0.60 mb/d and 0.56 mb/d respectively.
New Zealand’s oil supply forecast remained unchanged while the startup of the Maari project is
expected in the first quarter of 2009.

Brazil to add 180 tb/d in 2009
Latin America is expected to grow by 0.20 mb/d to average 4.29 mb/d in 2009, representing a
downward revision of 23 tb/d. Part of the downward revision comes from changes to Argentina’s
base, as well as minor downward revisions to Brazil. Brazil remains on the top of the list of
countries expected to add volumes to 2009 with supply growth of around 180 tb/d supported by startup and ramp-up of projects like the Roncador, Frade, and Marlim Leste. Additionally,
Colombia is also expected to add 50 tb/d in 2009, while Argentina is estimated to drop around
40 tb/d. On a quarterly basis, Latin America supply stands at 4.18 mb/d, 4.24 mb/d, 4.36 mb/d and4.37 mb/d respectively.

Russia
Oil supply from Russia is forecast to average 9.67 mb/d in 2009, a drop of around 110 tb/d from the 2008 level and relatively unchanged from last month’s assessment. While new volumes in 2009 are seen coming from projects such as Vankor, Uvat, Yuzhno-Khlyuchu, the expected reduction in spending as well as natural declines are expected to offset new barrels. Most major Russian operators announced spending cuts in response to lower oil prices, which will affect short-term as well as nearterm production. However, as the year unfolds, oil price direction will impact the production level. These uncertainties create difficulties in predicting the behavior of Russia supply and require careful monitoring. On a quarterly basis, Russian oil supply is estimated to average 9.74 mb/d, 9.67 mb/d, 9.66 mb/d and 9.63 mb/d respectively. Preliminary data indicate that January production reached 9.80 mb/d.

OPEC crude oil production
Total OPEC crude oil production averaged 28.71 mb/d in January, according to secondary
sources, down 959 tb/d from the previous month. All Member Countries saw a decline in crude
oil production, except Iraq, with Saudi Arabia indicating the largest drop followed by Angola
and Iran. OPEC, not including Iraq production, stood at 26.33 mb/d, down 965 tb/d from
December.

World Oil Supply
Preliminary figures indicate that global oil supply fell 0.39 mb/d in January to average
84.55 mb/d. Non-OPEC supply experienced an increase of around 0.57 mb/d while OPEC crude
declined. The share of OPEC crude oil in global production declined slightly to 33.9% in
January. The estimate is based on preliminary data for non-OPEC supply, estimates for OPEC
NGLs and OPEC crude production from secondary sources.

Balance of Supply and Demand

Demand for OPEC crude is estimated to average 30.9 mb/d, indicating a decline of 440 tb/d. This represents a slight revision from last month due to a downward revision in non-OPEC supply. On a quarterly basis, demand for OPEC crude is estimated at 31.7 mb/d 30.4 mb/d 30.8 mb/d and 30.8 mb/d respectively.

Demand for OPEC crude has been revised down by 0.2 mb/d to reflect lower than expected growth in world oil demand. Required OPEC crude in now forecast at 29.2 mb/d, a decline of 1.7 mb/d from the estimated 2008 figure. In quarterly terms, demand for OPEC crude is now expected at 29.7 mb/d, 28.7mb/d, 28.8 mb/d and 29.6 mb/d respectively. Demand for OPEC crude in the first three quarters is estimated to show a strong decline of around 2.0 mb/d compared to the same period last year while the fourth quarter is expected to decline by around 1.2 mb/d.

The Tanker Market

OPEC spot fixtures increased 20% in January over the previous month to reach 13.02 mb/d, according to preliminary data. The increase is mainly due to a very low spot fixtures level in the base month. OPEC fixtures from the Middle East increased by 35% in January, while those from outside the Middle East increased by 6%. Within the Middle East, spot fixtures towards the East displayed the highest monthly increase, while those towards the West were almost
steady. The Middle East/East spot fixtures ended the month at 5.87 mb/d, up from 4.05 mb/d in December, while the Middle East/West route ended the month at 1.12 mb/d, slightly up from 1.1 mb/d. Despite the increase over the previous month, OPEC spot fixtures in January indicated a decline of 9% over the same month last year. Similarly, global spot fixtures increased in January by 23% compared to the previous month to stand at 19.46 mb/d, but were
about 11% lower compared to the same month last year.
Sailings from OPEC were 5% lower in January, at 19.9 mb/d, down from 20.9 mb/d in the previous month, and were also 18% lower than a year ago. Middle East sailings in January were at 14.3 mb/d, about 5% lower than in the previous month and 19% lower than at a year earlier.
Crude oil arrivals in the USA increased by 3% in December over the previous month. Crude oil trade figures indicate that US crude oil imports were higher in January compared to the previous month, supporting the increase in crude arrivals to this country. Crude oil arrivals to North-West Europe, the Mediterranean and Japan were all lower in January compared to the month before.
The crude oil tanker market was under increasing pressure from boosted tonnage availability on many key routes in January as a result of OPEC production cuts and the ongoing global economic crisis. However, the continued contango structure in crude markets in January played a major role in preventing dirty freight rates from incurring deeper declines, especially because
of the impact on the VLCC vessel sector which enjoyed unexpected higher demand due to the increased interest of some market participants to store crude at sea. In January, VLCCs were still being used as storage in the Middle East, the US Gulf Coast, Asia and the North Sea, a process that actually started earlier during 4Q08, but gained more momentum throughout most of the month. Although there were signs towards the end of the month that the contango is easing slightly which might strongly influence spot freight rates during the coming months,
estimates still put the number of VLCCs being tied up in storage in January at about 40 vessels which makes about 8% of the VLCC global fleet. Bad weather and port closures to the west of Suez influenced spot freight rates in January, especially for both Suezmax and Aframax vessels, but the overall effect was relatively less than in the previous month.
Taking the top three vessel categories into consideration and their nine main reported routes, spot freight rates for crude oil tankers were generally lower in January compared to both the previous month and the same month last year. In January, month-to-month freight rate comparisons based on nominal world scale figures do not represent the actual fluctuations in the market, as rates for this month are based on the new flat rates for 2009 which are considerably higher than those for 2008. Comparisons only give valid interpretations when
referring to the same flat rate figures. In general, VLCC new flat rates are about 38% higher in 2009 compared to 2008. Suezmax and Aframax rates are 36% and 34% higher respectively, while flat rates for the three dirty tanker categories are 36% higher on average. A better representative for the fluctuations in freight rates in January 2009 compared to the month before would be to compare the dollar cost per barrel reflected by the two Worldscale figures, each related to its flat-rate base. According to this, the Aframax sector to the west of Suez witnessed the sharpest drop in freight rates in January from the month before. This comes as no
surprise as it was this sector of the market that witnessed the sharpest increase in the previous month, taking advantage of weather-related conditions and many port closures in the region.
Freight rates for the Suezmax sector also dropped in January, while the VLCC sector ended the month with a minor gain. To complete the picture, average dirty freight rates declined by about 21% in January from the previous month.
On average, the VLCC spot freight rates were slightly more than 1% higher in January over the previous month. Extra demand for VLCCs for storage purposes in January and higher crude oil lifting by China to accelerate the process of filling up its Strategic Petroleum Reserves were the factors behind the relative firmness of this sector of vessels compared to other sectors. Spot
freight rates for VLCCs trading on the long haul route from the Middle East to the East, which had already increased by 10% the month before, gained a further 3% in January on a dollarper- barrel basis. Most of the increases in freight rates on this route took place during the second and third weeks of the month, and eased towards the end of the month due to thin activity and tonnage build-up as most of the Eastern charterers left the market for the Lunar New Year. Spot freight rates on this route started the month at around WS48, climbing to WS71 by the end of the third week and then ended the month at WS52. Middle East to West spot freight rates closed the month with a gain of 7% in January over the previous month. It was the highest increase compared to other VLCC routes. Throughout the month, freight rates on this route peaked at the end of the third week at WS49 before ending at WS35 with a monthly average of WS42. On the other hand, VLCC spot freight rates for voyages from West Africa to East were within a range of between WS50 to WS60 throughout the month, ending with an average of WS57 for a decline of roughly 5% from the previous month. Lower West African exports to Asia in January, in addition to weaker Suezmax spot freight rates in this region, were behind the relative weakness of this market.