August 22, 2011 Energy Weekly Commodities Research Control over Libyan oil shifting, but full ramp-up may take time We had initially assumed that Libyan production would average 250 thousand b/d next year, with a potential increase to 585 thousand b/d by the end of 2012 should the opposition gain control of the western production and export facilities. While we do not change our production forecast until we have more clarity on the situation, the recent events have increased the likelihood that Libyan production could end up closer to 585 thousand b/d, which would push back the timing on the drawdown of OPEC spare capacity by about 3 months. Practically all crude production and export facilities are now reported in the hands of the opposition forces… David Greely Libyan opposition forces advanced into Tripoli over the weekend, raising (212) 902-2850 [email protected] Goldman Sachs & Co. the possibility that crude oil production normalizes in coming months. News reports suggest that the opposition forces now control the vast Stefan Wieler, CFA majority of all oil Libyan production, refining and export facilities. (212) 357-7486 [email protected] Goldman Sachs & Co. … increasing the likelihood that Libyan production might exceed our forecast on a 12-18 month horizon… Damien Courvalin (212) 902-3307 [email protected] We had initially assumed that Libyan production would average Goldman Sachs & Co. 250 thousand b/d next year, with a potential increase to 585 thousand b/d by the end of 2012 should the opposition gain control of the western Johan Spetz production and export facilities. We continue to believe that any increase in +44(20)7552-5946 [email protected] Goldman Sachs International supply over the coming weeks is limited to our production forecast and bound to the eastern production that has been long under opposition control. However, the sudden takeover of the largely intact western fields increases the likelihood that production on a 12-18 month horizon might be closer to 585 thousand b/d. This might be partly offset by disappointments in the ramp up of current production which continues to languish around 60 thousand b/d, well below expectations and consistent with our view that it will be challenging to bring the shut-in production back online. ..which could push back the timing on the drawdown of OPEC spare capacity by about 3 months On net, while we do not change our production forecast until we have more clarity on the situation, the recent developments have increased the risk that Libyan production would turn out to be 250-350 thousand b/d above our current forecast by the end of 2012, which would in turn push back the timing on the drawdown of OPEC spare capacity by about 3 months. Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research August 22, 2011 Hedging and trading recommendations Petroleum Hedging recommendations Consumers: With world economic growth continuing to drive oil demand growth well in excess of non-OPEC production growth, the oil market continues to draw on inventories and OPEC spare capacity in order to balance. In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply. Consequently, we believe the recent market correction provides a good opportunity for consumers to begin to hedge their forward oil exposure. Refiners: Refining margins have recently shown counter-seasonal strength. However, this strength largely owes to the local weakness in WTI. As we expect the spread between WTI and Brent to narrow from current levels, we also expect product cracks to weaken. Further, we maintain that refining margins will remain under pressure owing to the large increase in refining capacity in Asia. As a result, we view any renewed rise in long-dated refinery margins in 2011 as a selling opportunity for refinery hedgers. For 2012 and beyond, we believe that crude will be the bottleneck in the system, rather than refining; this would squeeze margins from the crude side through backwardation, suggesting that refiners should also look for potential time-spread hedges. Producers: While the risk-reward trade-offs for producer risk management programs have diminished with the recent market correction, additional economic disappointments could generate more downside in the near term. We recommend that producers look at option strategies to hedge against this risk. However, we expect supply-demand balances to continue to move to critically tight levels in 2012, with prices above recent levels by next year. Consequently, we think opportunities for producer hedging longer term are less attractive. Goldman Sachs Global Economics, Commodities and Strategy Research 2 August 22, 2011 Current trading recommendations Current Current trades First recommended Initial value Current Value profit/(loss)1 Long Brent Crude Oil Buy December 2012 ICE Brent Crude Oil May 23, 2011 - Energy Watch $105.16/bbl $105.68/bbl $0.52/bbl Long Copper Buy June 2012 LME Copper May 23, 2011 - Commodity Watch $8,804/mt $8,850/mt $46/mt Long Zinc Buy December 2012 LME Zinc May 23, 2011 - Commodity Watch $2,189/mt $2,279/mt $90/mt Long UK Natural Gas Buy Q4 2012 ICE UK NBP Natural Gas April 26, 2011 - Natural Gas Weekly 70.8 p/th 70.5 p/th (0.2 p/th) Long Soybeans Buy November 2011 CBOT Soybean November 18, 2010 - Agriculture Update $11.60/bu $13.64/bu $2.04/bu Rolled into a long Nov-11 CBOT soybean $14.0/bu call on 3-Aug-11 with a realized gain of $1.68/bu Long Gold Buy December 2011 COMEX Gold October 11, 2010 - Precious Metals $1,364.2/toz $1,852.2/toz $488.0/toz ¹As of close on August 19, 2011. Inclusive of all previous rolling profits/losses. Source: Goldman Sachs Global ECS Research. Goldman Sachs Global Economics, Commodities and Strategy Research 3 August 22, 2011 Price actions, volatilities and forecasts Prices and monthly changes1 Volatilities (%) and monthly changes2 Historical Prices Price Forecasts3 units 19 Aug Change Implied2 Change Realized2 Change 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3m 6m 12m Energy WTI Crude Oil $/bbl 87.58 35.4 4.83 42.3 7.9 78.88 78.05 76.21 85.24 94.60 102.34 111.00 115.00 126.50 -9.66 Brent Crude Oil $/bbl 110.60 35.9 4.22 34.3 -1.9 77.37 79.41 76.96 87.45 105.52 116.99 117.00 120.00 130.00 -6.66 RBOB Gasoline $/gal 2.87 34.5 4.09 37.9 -0.1 2.11 2.17 2.002.22 2.68 3.10 2.89 2.95 3.35 -0.26 NYMEX Heating Oil $/gal 2.96 32.43.43 30.0 -6.9 2.05 2.11 2.06 2.36 2.82 3.05 3.12 3.26 3.48 -0.16 NYMEX Nat. Gas $/mmBtu 3.93 33.7 -1.52 23.8 -8.7 4.99 4.35 4.23 3.98 4.20 4.38 4.25 4.50 4.00 -0.61 UK NBP Nat. Gas p/th 52.65 20.6 -2.77 17.1 -0.8 33.35 37.48 42.68 51.74 56.77 58.04 76.00 75.00 78.00 -1.96 Industrial Metals4 LME Aluminum $/mt 2395 23.8 0.82 20.9 2.7 2199 2122 2110 2365 2531 2618 2700 2850 2900 -99 LME Copper $/mt 8965 28.0 1.53 25.1 8.4 7274 7042 7278 8614 9629 9163 9450 9800 11000 -707 LME Nickel $/mt 21950 33.3 -1.46 35.5 14.4 20163 22431 21271 23619 26926 24191 24000 24000 23000 -2205 LME Zinc $/mt 2215 31.4 -0.66 36.3 14.8 2307 2052 2043 2333 2414 2271 2400 2500 2700 -163 Precious Metals London Gold $/troy oz 1791 20.1 4.34 19.4 4.5 1110 1197 1228 1370 1388 1508 1645 1730 1860 201 London Silver $/troy oz 40.0 41.3 3.48 39.8 -3.1 16.9 18.3 19.0 26.4 31.9 38.0 27.5 28.9 31.1 1.9 Agriculture CBOT Wheat cent/bu 728 33.1 -1.29 37.4 -21.7 496 467 653 707 786 745 750 790 750 33 CBOT Soybean cent/bu 1357 21.4 -1.37 16.3 0.9 955 957 1035 1245 1379 1361 1375 1400 1400 -29 CBOT Corn cent/bu 712 34.1 -0.05 29.1 -29.7 370 355 422 562 670 731 735 735 700 10 NYBOT Cotton cent/lb 108 n/a n/a 40.5 2.8 76 81 87 128 179 156 100 100 100 7 NYBOT Coffee cent/lb 263 n/a n/a 26.4 -2.6 134 140 174 205 257 271 235 200 175 11 NYBOT Cocoa $/mt 3017 n/a n/a 21.8 -6.5 3070 2987 2863 2856 3307 3043 2700 2700 2700 -151 NYBOT Sugar cent/lb 29.5 38.0 3.15 38.2 -7.7 24.4 15.5 20.2 29.0 30.5 24.5 25.0 20.0 20.0 0.5 CME Live Cattle cent/lb 115.9 n/a n/a 13.1 -8.9 90.5 93.7 95.0 100.5 111.2 110.7 120.0 130.0 120.0 5.3 CME Lean Hog cent/lb 87.4 n/a n/a 64.4 38.7 69.7 81.9 79.7 71.2 86.2 93.6 95.0 95.0 95.0 -11.6 1 Monthly change is difference of close on last business day and close a month ago.