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Fuel oil trend

Rotterdam: $ 3 higher. Singapore: $ 1 higher. US Gulf: $ 3 lower.

Iran and Russia: oil deal in the making? (Brent: $107.1)

Oil price action for the beginning of 2014 has so far been muted. Brent prices have mostly been range trading between 106 and108. Not much news has hit the headlins to move prices decisively outside the range. The implementation of the interim deal between Iran and the group of P5+1 on the former's nuclear program is set to begin next Monday (20 Jan). As mentioned in our annual outlook, and previous market briefings this does little to change the global oil supply situation, as most Iranian oil is still subject to sanctions.

Meanwhile Iran seems to play more than one horse in the race to get back on the global oil market. Reuters reports that the country is in negotiations with Russia in a massive oil deal, where Iran could potentially export 0.5mbpd and receive Russian equipment and goods (not defined) as payment. Which seems rather odd since Russia, an oil net exporter, is part of the P5+1, who tried to strike a deal with Iran in Nov13 to curb the country’s nuclear program. Russia has however not implemented any sanctions on Iran. Needless to say the American response was not exactly cheerful to the learning of these negotiations. If the Russian-Iranian deal goes through, oil is likely to be shipped directly from Iran to its former buyers (mostly Asia), and the sanction strategy performed by western countries would have to be reinvented in order not to be circumvented.

In the North Sea, one of the oil fields used to price Brent, Buzzard, experienced production issues. Hiccups in the output from the North Sea has become more the rule than the exception (approximately 200,000bpd below “budgeted output” as an average the past decade). Buzzard is however expected to be fully up and running again in a few days.

In South Sudan, the government states that it has retaken control of oilfields previously controlled by rebels. Whether production can be started shortly is still not confirmed by the big African producer.

Recommendation

We expect the present dip in oil prices to be short term and the level could be a buying opportunity for oil consumers if it fits your hedging strategy. We expect major support around $104-104.5, but currently the upside looks to have more potential than the downside, especially for lighter products.