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Spare capacity (ex-Libya) higher than CY08 levels We expect OPEC spare capacity, ex Libya, to average 3.4 mb/d in CY11 and 2.5 mb/d in CY12, higher than levels seen during CY08. In addition, we expect non- OPEC production and NGLs (natural gas liquids) to increase by 0.8 mb/d and 0.6 mb/d, respectively, Y-o-Y, thereby effectively limiting the call on OPEC in CY11. At USD 115/bbl Brent, our view is that, the market is discounting the possibility of the Middle East crisis spreading to other countries like Saudi Arabia (accounts for ~80% of OPEC spare capacity) and Iran. In CY11, we expect OPEC spare capacity to remain adequate due to increase in Brazilian bio-fuels supply and start of deepwater projects in Brazil in Q4CY11.

Oil demand to remain robust from China and India We believe that global oil demand will remain robust and average 89.4 mb/d in CY11 (+1.4 mb/d Y-o-Y), driven by demand growth from China (+6.5% Y-o-Y) and India (+3.3% Y-o-Y), while demand from OECD economies (-0.2% Y-o-Y) remains relatively muted.

Outlook: Brent to remain range-bound at USD 110-115/bbl in Q1FY12E We are now moving to using Brent as a benchmark for our forecasts. On a quarterly basis, we expect crude prices to remain at USD 110-115/bbl in Q1FY12 as the impact of Libyan crisis may remain and market focuses on demand-supply mismatch in Q2FY12/Q3FY12 as refineries come out from their maintenance season (Q1FY12). Q2FY12 onwards, we expect prices to moderate as fear of geopolitical issues subside and market focuses on the impact of prices on global crude demand.

Bio-fuel supplies from Brazil in Q3FY12 and higher production from deepwater projects in Q3/Q4FY12 will also alleviate the fear of lower crude supplies. Our new FY12 and FY13 Brent crude price estimates are USD 100/bbl (USD 89/bbl earlier) and USD 95/bbl (USD 94/bbl earlier), respectively.

Crude – Focus Back On Supply Side The recent unrest in MENA (Middle East and North Africa) and tragic events in Japan have firmly turned markets’ attention on the supply side—a key inflection point for sentiment, in our view. We are moving to a Brent crude price benchmark and, going forward, we will reassess our crude price call on a quarterly basis.

We expect Q1FY12 to remain range-bound between USD 110 and USD 115/bbl; our FY12 forecast increases to USD 100/bbl (versus our prior estimate of USD 89/bbl). The key risks to our estimates come from demand destruction due to higher crude prices (typically oil burden greater than 4% poses a risk) and instability in other significant countries like Nigeria, Iran and Saudi Arabia.

Demand: Remains All About China And India We believe that CY11 global crude demand estimates pose less risk, as we are in midst of an upward revision to global crude demand estimates, and US has been recently showing signs of improvement in the broader economy (recent Fedex guidance).

While we do not rule out a delayed impact of global crude demand due to high crude prices, we believe the same will be less pronounced as seen in the last correction, as: (1) we are in a upward economic cycle in a high liquidity regime; and (2) earlier demand correction was exacerbated by the financial/mortgage crisis, which is absent currently.

In CY12, however, the risk is that a higher oil price environment may lead to some demand

destruction; historically, this has been the case when oil’s wallet share increases beyond 4- 5% (Chart 2).

Global oil demand estimates revised upwards Global resurgence of economic growth has led the International Energy Agency (IEA) to increase its global oil demand estimates, backed by rise in both base demand in CY10 and incremental demand in CY11 over CY10. In CY11, IEA forecasts global oil demand to remain robust and average 89.4 mb/d (+1.4 mb/d Y-o-Y), driven by demand growth from China (+6.5% Y-o-Y) and India (+3.3% Y-o-Y), while demand from OECD economies (-0.2% Y-o-Y) remains relatively muted.

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