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From: US GIO [us.gio@jpmorgan.com] Sent: 2/27/2012 5:50:08 PM To: Undisclosed recipients:; Subject: J.P. Morgan Eye on the Market 2/27/2012: Dire Straits Attachments: image007.png; image008.png; image009.png; image013.png; image019.png; image020.png; image021.png; 02-27- 2012 - EOTM - Dire Straits.pdf Eye on the Market, February 27, 2012 {the attached PDF is much easier to read this week, particularly if you are interested in the energy science implications of last week’s press release from the House Minority Leader] Topics: oil markets and Iran Most of this week’s note deals with oil prices and Iran, but I did want to point out a trend that is illustrative of how things are going globally. One of the strongest aspects of the US recovery has been the rebound in business spending on equipment and software. As highlighted by our friends at Hamiltonian Associates, sales by Caterpillar’s dealer network are a proxy for global trends. Caterpillar’s US sales are leading the pack for the first time in a while, Asia is moderating, and Europe trails with a distinctly negative trend. We expect a recovery in US payrolls this year, and eventually, in labor incomes. The US recovery may be weak by historical standards, but expectations are pretty low (2.2% growth in 2012). We expect the US to exceed expectations, and for Europe ex-Germany to disappoint them. Absent a blow-up in “Tranium enrichment”: another hurdle for global markets to surmount The near-term fundamentals don’t point to higher oil prices. Oil demand has been revised down a bit, particularly in the OECD, and non-OPEC supply growth is a little higher in 2012 than in recent years. After netting all the supply and demand factors, it looks like there will be a global oil inventory build in 2012 (see chart below), not something we would normally associate with rising oil prices. However, even before we get to Iran, there are other factors contributing to higher prices: a pick-up in global growth expectations for 2013 and beyond; the explosion of Central Bank balance sheets and associated reflation goals (see last week’s EoTM); and the possibility that China’s will build strategic crude oil reserves to the IEA standard of 90 days from their current level of 14. Note as well that the inventory build is a small one, nowhere near 2002-2007 levels. HOUSE_OVERSIGHT_031146