March, 2011

COMMODITY OUTLOOK: GEOPOLITICS, GROWTH AND VOLATILITY

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Copyright © 2009 JPMorgan Chase & Co. (“JPMorgan Chase”) All rights reserved worldwide. MORCOM® and MORganCOMmunicationsTM are registered trademarks of JPMorgan Chase.

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F&O Disclaimer

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Macroeconomic Outlook for 2011

The world economy appears to be on track to return to synchronous above-trend growth in 2011. The foundation for a strong synchronized global upturn lasting 4-8 quarters is in place

High oil prices, inflation and possible sovereign debt are the key forecast risk factors –Volatility will be the norm High oil prices driven by a supply shock are likely to be more damaging than those driven by strong

economic growth The IEA and OPEC can offset supply disruptions

– Delayed or partial response could trigger hoarding activities

Major economies in the emerging world, including China, India, and Brazil are in a much better place than the G3, but need to find a balance between growth and inflation

High oil prices have a greatest influence on importing countries with low energy taxes In the 2007/8 oil rally, high oil prices contributed to a weaker dollar While the Fed may be forced to raise interest rates quicker than expected, high unemployment may

lead to it remaining ‘behind the curve’ in 2011 Both factors could weaken the US dollar, which would be supportive for commodity prices

A shift from a zero interest rate policy will be extremely significant for the commodity markets Impact strongest for those with high inventories

A weaker dollar encourages inventory accumulation as a store of value

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PRECIOUS METALS TOTAL RETURN

Commodity markets have moved higher as emerging market growth surges

Broad rally in commodities as the world economy has recovered from the global recession

Sustainable recovery in commodities, despite anemic growth in OECD shows consumption driver from emerging market economies

Agricultural markets have seen some of the strongest recoveries

Supply disruptions have played their role, but low ending stocks have been a significant driver

Source: J.P. Morgan Energy Strategy, Bloomberg

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INDUSTRIAL METALS TOTAL RETURN

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AGRICULTURE TOTAL RETURN

Source: J.P. Morgan Energy Strategy, Bloomberg Source: J.P. Morgan Energy Strategy, Bloomberg

Source: JPMorgan Commodity Research. “Total” equals world-value-weighted average using 2010 YTD prices and production

Demand-supply situation for 2011

Demand growth required by commodity is relative to JPM projections for global production

1.1%

3.4%

2.1% 2.3%

7.1%

11.7%

3.9%

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Hurdle rates required for global demand to catch up with global production in 2011Hurdle rates required for global demand to catch up with global production in 2011

A 1.5% to 2.0% global real GDP growth rate is all that is required to send most commodity markets, including oil, into deficit in 2011. Our economists expect global real GDP growth of 3.5% in 2011, suggesting ample room for any would-be downshift in growth expectations to arrive at the same conclusion.

Inventories are already low in softs and grains, higher in metals and energy; but across sectors, the fact that US real interest rates are negative means global carrying costs are abnormally low and there are strong incentives to accumulate stocks for anticipated demand well into the future, especially in non-USD-based jurisdictions.

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Brent and WTI Historical PriceBrent and WTI Historical Price

All forecasts are period averages. Actual to date prices are as of February 21, 2011. Source: JPMorgan Energy Strategy

Global Supply & Demand and ForecastGlobal Supply & Demand and Forecast

J.P. Morgan Crude Oil Price ForecastJ.P. Morgan Crude Oil Price Forecast

Geopolitical risk takes over from demand as oil price driver

Volatility to remain heightened

Civil unrest is rapidly redrawing the political map in North Africa, market concern tensions will spread to major oil producing and transporting regions

Price spike risks have materially increased

World oil demand growth of 2.7 mbd in 2010 will moderate to 1.7 mbd in 2011 Demand seen above trend, driven by EM demand and healthy GDP growth Risks include an overly aggressive rise in price hurting global economic recovery and

Eurozone financial market volatility

OPEC output restraint by key members has kept a cap on supply, but there are signs they are upping output in the face of outages and +$100/bbl prices

Robust diesel demand is once again driving crude prices as refiners run more crude

High product inventories and seasonal refinery maintenance will lead to reduced crude demand in the coming months

Although we do not envisage a significant retracement in prices having hit our price target for 1Q2011, a dramatic increase in OPEC output provides downside risk

US Total Product InventoriesUS Total Product Inventories

82

84

86

88

90

92

Q1'10 Q3'10 Q1'11 Q3'11 Q1'12 Q3'12

In mbdDemand Supply

Source: JPMorgan Energy Strategy, IEA, government and industry sources

In $/bbl 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12 2012

Brent Forecast* … … … … … 108.00 105.00 102.00 102.00 104.00 110.00 105.00 110.00 115.00 110.00

Prev ious Brent Forecast** … … … … … 95.00 95.00 90.00 100.00 95.00 105.00 100.00 105.00 110.00 105.00

Brent Actual To Date 77.37 79.41 76.96 87.45 80.34 100.08 … … … … ... … … … …

WTI Forecast* … … … … … 96.00 103.00 95.00 92.00 97.00 100.00 98.00 103.00 110.00 103.00

Prev ious WTI Forecast** … … … … … 93.00 93.00 88.00 98.00 93.00 104.00 99.00 104.00 109.00 104.00

Actual To Date 78.88 78.05 76.21 85.24 79.61 89.43 … … … … ... … … … …

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20406080

100120140160

4-Jan-08 9-Jan-09 15-Jan-10 21-Jan-11

In $/bblWTI Brent

600

650

700

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800

850

J F M A M J J A S O N D

Mb Five-Year RangeFive-Year Average20102011

Probability assessment: a useful guide

Different Price ScenariosDifferent Price Scenarios

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Unrest in Middle East/North Africa

Contagion 5%

Geopolitical concerns increase

Further supply shocks emerge

Continuation 35%

Supply outages remain

OPEC only partially offsets loss

IEA does not release

Resolution 60%

Political unrest moderates

Additional supplies balance the market

Price $180

Av Weighted Price $9

Price $120

Av Weighted Price $42

Price $95

Av Weighted Price $57

Average Weighted Price $108

But low-high variance $85

Three reasons why OPEC needs a higher oil price

Source: J.P. Morgan Energy Strategy, IEA, Government Statistics

Social spending rising by 7% per year

Government spending on wages and capital projects has risen in tandem with higher oil prices: Abu Dhabi : $20/bbl in 2004; Bahrain $30/bbl in 2003 – now 2-3 times that level

Energy demand rising rapidly, production is stagnating

Energy export revenues fall unless prices rise

Stemming taxation in consumer countries

If prices fall, consuming countries are likely to use the opportunity to raise taxes—the end user price remains high regardless

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2007 2009 2011 2013 2015 2017 2019

$ bblBBE Price - +7% spend, flat production, flat demand

BBE Price - +7% spend, flat production, 4.5% demand

Budget Breakeven (BBE) Oil Price $/bblBudget Breakeven (BBE) Oil Price $/bblMiddle East Oil Demand Surges as % of ProductionMiddle East Oil Demand Surges as % of Production

Source: J.P. Morgan Energy Strategy, Various National Sources

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1978 1982 1986 1990 1994 1998 2002 2006 2010 (Dec)

UK Gasoline Retail Price Ex Tax $/BBLUK Gasoline Retail Price $/BBL

UK Gasoline Prices—With and Without Tax $/bblUK Gasoline Prices—With and Without Tax $/bbl

20%

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1Q2000 3Q2002 1Q2005 3Q2007 1Q2010

Note: Does not include Israel, Jordan and Lebanon

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Commodities Outlook for 2011

Outlook: The outlook for commodities in 2011 is positive, spurred by global cyclical recovery and easy hurdles for global consumption to surpass constrained global production. For long exposures heading into 2011, we prefer Brent crude oil, Wheat, Corn and Copper.

Demand growth:. In 2011, the cyclical re-ignition of demand growth expectations will likely become a more dominant factor in guiding the performance of physical commodities and their associated futures markets.

Macroeconomic Policy: The low interest rate regime in place around the world will push money into commodities and other hard assets as a hedge against the value of paper money.

Inflationary risks: Rising inflation expectations and actual rate hikes in 2011 will tend to steepen upward-sloping commodity forward curves, as rising forward valuations and higher carrying costs are embedded in term structures.

Supply Side Risks: A number of commodity forward curves are already exhibiting backwardation, providing concrete evidence of the very low level of inventories that prevail in a number of agricultural markets. Low stock levels will continue to be an important factor in 2011. Apart from this, a number of markets face individual supply risks arising from weather related phenomena which can spike prices.

Policy Risks (Part 2): The risks to our central view are skewed toward higher price volatility and higher returns, especially should governments implement price controls and other trade barriers that increase friction in the movement of scarce inventories to jurisdictions where they are needed most.

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