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Trends

Rotterdam (ARA) fuel oil - Trading USD 7 higher

Singapore fuel oil - Trading USD 10 higher

US Gulf fuel oil - Expected to open USD 3 higher

Saudi output reaches 31-year high (Brent: $111.25)

In November the biggest OPEC producer and exporter, Saudi Arabia, pumped 10 million barrels per day (mbpd) compared to the 9.45 mbpd in October. This is the highest output since 1980! All the extra produced oil is either consumed in the Middle East or on eastbound ships to feed the roaring Asian dragons. The limit of Saudi Arabian production capacity is an allegedly 12.5 mbpd, but as this has never actually been tried, we remain skeptical to the 2.5 mbpd spare capacity. In comparing this with the hard fact that crude inventories continue to decline and western oil inventories are at their lowest level in several years, we see a real risk of rising oil prices. Technically a close above 112.5 would highly increase the chance of an upward move.

Release: API oil data (Consensus)

Crude: -5,000,000 barrels (-600,000)
Distillates: 6,000,000 barrels (700,000)
Gasoline: 1,700,000 barrels (1,200,000)

On the political stage, the end-week EU summit still takes the main headlines. The news slipping out from Merkel and Sarkozy indicates potential for a rather large reform of the European Union. EU responded to the negative watch from rating agencies with an investigation on the rating process. Any irregularities could result in anything from a fine, suspension of the rating to an outright withdrawal of the rating license. Until the outcome of the summit is known it should have a limited effect on oil prices.

Recommendation

We recommend consumers who have not hedged yet, to use market dips to establish hedges. Levels around 108 have proven to be favorable levels in the medium term. Should this week close above the 110-level we see a real risk of a test above the 112.50 resistance area. As OPEC will likely support prices around and above 100, we advise consumers to adjust for three digit oil prices in 2012.