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Trends

Rotterdam (ARA) fuel oil - Trading USD 1 higher

Singapore fuel oil - Trading USD 1 higher

US Gulf fuel oil - Expected to open USD 5 higher

Not only Iran's crude is missing (Brent: $120.5)

The current upwards move in prices is driven by the fundamental fact that a lot of crude supply is actually missing. Currently Iran is having trouble selling up to 500,000 bpd, as they refuse to sell it at a discount. In addition to that: Sudan’s production is out (-0.4 mbpd), Libya is still not up and running (-0.5 mbpd) and issues in Syria+Yemen+Nigeria (0.2 mbpd) is not exactly improving the supply situation. In total there is missing 1.0-1.6 mbpd (depending on which numbers from Libya one chooses to believe). Saudi Arabia has been trying to calm the market by stating they will meet any oil demand. The only problem is that the oil that is currently "missing" is of a very high quality (Sudan oil has a suplhur content close to 0%, Libya: 0.5%), and Saudi oil does not even come close 1.2-2.8%. As such refineries set up from sweet crude (low suplhur) cannot suddenly adjust the production to run on sour/heavy crude input. Furthermore the refinery situation is not having the best outlook with the shutdown of Petroplus’ refineries. With the shutdown of Hovensa in the Caribbean, current global oversupply is just above 2%, which historically has marked a "Golden Age" for refineries and their margins.

To sum up: Crude input for the refineries has increased a lot. The input is/will be of lower quality. Which means more input than usual will be required. Refinery capacity is approaching low levels. Thus the outlook for lower product price does not seem just around the corner.

Technical update

Brent prices today are near our expected resistance level of USD 120.5. Should the week close with prices at current levels, we see an increased possibility of an upward trend with new resistance level at around USD 127.

Recommendation

We recommend client to prepare for higher prices ahead. Despite the whole debt debacle in western countries, global oil demand is already higher than in 2011 (and 2010, 2009, 2008). In combination with missing production any drop in prices might be rather short-lived.