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Energy Preference: neutral Brent (24 Oct): USD 109/bbI (last month: USD 111/bbl) Recommendations UBS View (crude oil) Brent 6-month target: USD 105-110/bbI Tactical (6 months) ¢ Growing fear over an escalation of the Syrian civil war, involving Turkey, allowed crude oil prices to move ¢ OPEC is in a good position to balance the higher again. While Syria's crude oil exports already dropped to near zero due to international sanctions, oil market, which should limit the price the oil market's concerns relate to the Kirkuk—Ceyhan oil pipeline (Iraq-Turkey — capacity of 0.4mbpd) and weakness. Along with central banks’ the crude exports from the Turkish port of Ceyhan, around 70km from the Syrian border. support and with the geopolitical risks e Though we believe that Syria and Turkey are not interested in a military confrontation, a stop of crude oil remaining, we believe that the potential flows from Iraq via Turkey would curb global incremental crude oil supply in 4Q12 by more than 50%. It would also tighten up the market balance in early 2013 and put additional pressure on the structurally low spare capacity in the crude oil market. e In the absence of a further escalation, which remains our base case, ebbing news related to Syria-Turkey is likely to ease supply concerns. This should keep the market focus on weak demand growth and strong crude oil output from North America, allowing the Brent price to temporarily reach USD 95/bbl. downside for the oil price has declined, thereby warranting allocation. Strategic (3-5 years) e We regard the long end of the forward curve in crude oil as mispriced. To satisfy e A weaker USD, reduced economic tail risk for Europe, ongoing social turmoil in the Middle East and emerging market demand in the long run, North Africa and the risk that the Iranian topic heats up again after the US presidential elections are likely prices around USD 90-95/bbl are unlikely to keep the Brent price around USD 105-110/oz in 6 months. to secure the needed investments to keep . . supply growing adequately. This gives 4 Positive scenario Brent 6-month target: USD 140-180/bbl strategically oriented crude oil investors ¢ Iranian oil exports are subject to a complete embargo, which would drain another 0.5-0.75 mbpd of the opportunity to build up some long- global crude oil supply. Alternatively, a military confrontation that affects crude oil supply via the Strait of term crude oil exposure over the next Hormuz would be the ultimate supply shock, requiring crude oil to be rationed on a large scale. three to five years & Negative scenario Brent 6-month target: USD 75-80/bbl , ¢ Political tensions lead to a breakup of the Eurozone or intensify the economic contraction. At the same time, the Fed is not successful in promoting growth. Supply-wise, a restoration of Iranian exports and no supply cuts by OPEC would push oil inventories firmly up and weaken Brent prices towards USD 80/bbl. Petroleum demand in selected markets Year-on-year change - in mbpd oO 1.2 KS What we're watching Why it matters O08 mt oy A on i) The biggest risk related to a potential military confrontation is an Israeli air strike 04 2256 a OO OS [/ lran tensions on nuclear facilities in Iran. A preemptive strike could easily destabilize the region oo = a a os aa even further and threaten global crude oil supply. 04 Lx MO OS Supply Changes in the US gasoline blending mandate with ethanol (made from corn) -0.8 oF GS might fuel higher crude oil prices as spare capacity increases slides further. © .8§ 8 3 § S480 ; . & cz ACH 5 US crude oil supply progress (room to grow by 1.3 mbpd from 2011 to 2013) isa G 33 g y 28S = = vital offsetting factor to supply outages seen in the MENA region. 18 a = Brepasndl Most of China's demand growth seems to be related to stock building (strategic m2012E 12013E and by refineries). If this is true, the import should stay on the weak side y/y. Oil market reports Key date: 13 Nov, IEA Oil market report Source: UBS, as of Oct. 2012 Note: Past performance is not an indication of future returns. bs UBS For further information please contact ClO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com 36 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025283