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Energy Brent (25 Jun): USD 91/bbl (last month: USD 109/bbl) UBS View (crude oil) Brent 6-month target: USD 100/bbI ¢ A combination of renewed economic concerns about the Eurozone, easing geopolitical tensions between Iran and the West, and further inventory builds in crude oil triggered a sharp decline in the Brent crude oil price to USD 92/obl and USD80/bbI for WTI. ¢ We think the crude oil market is oversupplied, which is likely to push up OECD crude oil inventories to 62 days of consumption in the coming months. While it seems that Saudi Arabia has slightly reduced its production in May from 10.1 mbpd in April, the country could be in a wait-and-see position for longer. First, the EU/US sanctions on Iran take effect at the end of June/early July, and bring some additional supply uncertainty. Second, Saudi Arabia also sees the need for lower prices in the short run to support economic activity in the developed world. But to prevent inventories from swelling too strongly, additional production cuts of up to 0.5 mbpd (0.55% of global demand) are needed in the coming months. ¢ So what should investors do at current levels? Although downward momentum in crude oil prices is likely to fade, a sideways move should still lead to negative investment returns in the short run. The Brent forward curve flipped into contango from backwardation, which is deteriorating the risk reward payoff of the energy sector. Hence, we currently maintain our underweight position. @ Positive scenario Brent 6-month target: USD 140-180/bbl e Iranian oil exports gets subject to a complete embargo, or military interventions affect crude oil supply via the Strait of Hormuz. Alternative OPEC supply routs would not be in a position to compensate for such a supply shortfall. In order to curb demand, prices would need to spike towards USD 180/bbl. & Negative scenario Brent 6-month target: USD 75-80/bbl ¢ Economic growth in the developed world contracts, thereby triggering a 0.5% to 1% decline in world crude oil consumption. Although to a lesser degree, fading Iranian tensions and no supply cuts by OPEC would allow crude oil inventories to build firmly and push Brent prices down towards USD 80/bbl. What we're watching Why it matters lran tensions Resurfacing Iranian tensions could cause prices to spike higher, but an escalation is less likely, in our view. The focus is on remaining Iranian exports (currently around 1.6mbpd versus 2.4 mbpd in 2011). US crude oil supply has come in strongly — reaching 6.4 mbpd. Further supply growth would not bode well for WTI crude ail. We also look at oil supply related to Sudan, Syria and Yemen, which caused a 0.5 mbpd decline in global crude oil production capacity. It seems that these production capabilities will remain offline for a longer period — potentially until 2014. Key dates: 12 July, IEA Medium Term Oil market report. Another round of downward revisions to demand, like in June, is not expected. The latest forecast changes to demand have been meaningful. Supply Oil market reports (EIA/IEA/OPEC) 3 UBS For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com Preference: underweight Recommendations Tactical (6 months) ¢ We foresee further short-term weakness although less pronounced than the past month — we expect Brent to stabilize in the range of USD 80.5 - 90/bbl in the next 3 months. Production cuts and a pick up in emerging market demand should push Brent crude oil above current levels. Strategic (1 to 2 years) e After the demand slump in 1H 2012, we expect Brent crude oil to trade at USD 110/bbl in 12 months. This higher price level for 2013 reflects our expectation that economic activity should provide price support in 2013. Thus, three-year crude oil futures contracts at USD 90/bbl remain for us mispriced and an attractive investment solution for strategy-oriented crude oil investors. OECD crude oil industry inventories on the rise 65 ) Days of consumption 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Noy Dec range 2007-2011 —=2012 average 2007-2011 Source: EIA, UBS CIO as of 19 June 2012 Note: Past performance is not an indication of future returns. 36 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_024171