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Eye on the Market | July 11, 2011 J.P Morgan Topics: Portfolios, US corporate profits and the Twilight of the Gods (in the US, Europe, China and the IEA) The existing Federal debt is the lesser of 2 problems Items on the table in discussions to reduce the deficit Trillions, USD Revenue raises Spending cuts 100 Carried interest taxed at Discretionary spending cuts 90 ordinary income rates 80 Increased taxes on ordinary |Changing formulas affecting 70 income, capital gains and inflation indexation for 60 qualified dividends entitlements Present value of "Bracket creep": higher tax Defense spending cuts 50 unfunded : é brackets applying to lower AQ entitlement . , obligations incomes more quickly 30 Phase-out of personal Expenditure caps 20 exemptions or caps on 10 Existing debt itemized deductions 0 Changes to grantor retained |Change in entitlement Source: US Department of the Treasury, J.P. Morgan Private Bank. annuity trust required terms eligibility requirements Twilight of the Gods, part 2: Can releases of strategic oil reserves keep oil prices down for more than a few weeks? International Energy Agency member countries agreed to release strategic petroleum reserves to bring oil prices down. They have a lot of ammunition to do so; government-controlled oil inventories are at least 1.5 billion barrels, and so far, all they have done is authorize the release of 60 million barrels. The timeline suggests that oil markets began focusing on the release of the SPR after the Libyan shutdown, the lack of a sufficient OPEC supply response, and weak economic data in the US. As shown below, oil prices have been rising since the announcement of the supply increase. Are IEA members committed to doing it again if oil prices reach their May levels? Brent oil price and timeline of SPR release : USD/bbl [A] May 2: Advisors lay out SPR release plan to Obama 130 [B] May 6: Obama calls Abdullah (S.A.) and Sabah al-Ahmad (Kuw) 125 to discuss SPR release 120 115 110 105 100 95 90 Jan-11 Feb-11 = Mar-11 Apr-11 May-11 Jun-11 Jul-11 Source: Bloomberg. [C] May 19: IEA urges OPEC to increase production or else member nations are prepared to use “all tools” to protect global economy [D] May 27: Former White House energy advisor predicts IEA SPR release [E] June 8: OPEC does not agree on production increase [F] June 17: Obama authorizes IEA-SPR release feasibility study [G] June 23: SPR release announced The problem for the IEA is that the tightness in oil markets Fost Libya OF EC spare capacity running out is not just a sudden supply shock. As shown in the bottom P y 6.0 chart we first published in March, there was not much slack even before the Libyan shutdown, and oil demand is expected 5.0 to rise 1-2 mm bpd as the developed and emerging world 40 continue to grow. One of our colleagues used to work at the IEA, and in a recent piece’, argued that the impact of the SPR 3.0 release will be limited to Q3 2011, and that upside oil price 20 risks to 2012 have increased. Why? The SPR release came at a time when OPEC tanker traffic made it clear that producing Ls countries were having problems meeting prior pledges: “As 0.0 such, if is difficult to conclude anything except that there is Pre-crisis OPEC Pre-crisis "real" Post-crisis"real" 2011 additional little or no spare capacity in the oil market’. If that’s the case sparecapacity OPEC spare OPEC spare —_globaldemand : ee : pacity : ; ; 2 capacity capacity (estimated) future interventions may not have a lasting impact either. Source: J.P. Morgan SecuritiesLLC. * “Oil Market Monthly: Living with No Spare Capacity”, Lawrence Eagles, Commodities Research, JP Morgan Chase Bank NA, 7/7/2011 3 HOUSE_OVERSIGHT_030810