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Trends

Rotterdam: $ 1 lower
Singapore: $ 4 lower
US Gulf: $ 1 lower

Saudia Arabia cut production by 5% in Dec12 (Brent: $111.6)

The world’s second biggest oil producer - Saudi Arabia - cut production by nearly 500,000 bpd in December. The Middle Eastern Kingdom now produces approximately 9 mbpd, down a whopping million barrels per day from the multi-decade production from early 2012. In order to make up for lower volume, the Kingdom has increased the premium for oil shipments (+5% for light, and 21% for heavy crude), thereby sending a clear signal to oil consumers: “We have a lot of spare production capacity, but we’d rather that you find the product elsewhere.”

If the U.S. shale oil boom continues and demand does not pick up dramatically in 2013 we would expect Saudi Arabia to continue the production cuts. However, should Iranian sanctions be lifted and their oil return to the market (1-1.5 mbpd) it would put significant pressure on Saudi Arabia to make a significant production cut, something that may hurt the bottom line enough to keep the big cut from happening. As a result, there would be more supply than demand, thereby sending prices lower. Currently, there are absolutely no signs of Iranian sanctions being lifted, quite the contrary. We therefore do not see full Iranian production returning to the market within the medium term (even if sanctions are lifted instantly, it is not easy to regain full capacity in old oil fields).

In other news:
China showed some serious positive export numbers for December. Up 14% year-on-year. President Obama named Jack Lew to replace Timothy Geithner as Secretary of Treasury. The ECB ruled out further cut in interest rates in yesterdays press conference, thereby strenghtning the EUR versus the USD (correlation: EURUSD up = oil up, still holds true).

Recommendation

Clients are advised to enter hedges during market outliers. For the past decade prices have only increased after the month of January. Currently option prices with short duration are – relatively – cheap compared to the past two years. Please contact your dedicated Oil Risk Manager for an in-depth discussion of your most advantegous opportunities in the oil market.