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Trends

Rotterdam: $5 lower
Singapore: $26 lower
US Gulf: $3 lower

Oil market flash crash (Brent: $107.8)

John M. Keynes once said: “when the facts change, I change my mind. What do you do, Sir?” While the fundamentals of the oil market have not changed over the past three days, the perception in the financial market certainly has. We cannot argue with price action, but merely continue the search for facts in order to best estimate prices. The fact that Saudi Arabia supplies an extra 100,000 bpd for the rest of 2012 should not really cause a stir in the markets as (i) it only means 100/250,000 = 0.04% of the daily turnover in the financial oil markets(ii) Saudi Arabia burned an extra 82,000 bpd compared to 2011 for power plants to keep the A/C’s running. Furthermore sanctions on Iran look to be tighter in the months ahead, as the nuclear enrichment plan has not been halted. Muscle flexing in the Persian Gulf (Naval minesweeping exercises) by several western nations. Iran responds by exercises in closing the all important Strait of Hormuz.

Reports are out that big financial institutions are betting the gap between Bret and WTI will narrow in December 2013. The reversal of the Seaway pipeline out of Cushing, Oklahoma (400,000 bpd capacity), and an additional 500,000 bpd pipeline operated by Magellan will surely have an effect in the markets. Quotes straight from the horse’s mouth (the physical pipeline operator) that they do not expect it to have any major effect before another 4-5 years, have us doubting that the effect will be as big next years as financial institutions are currently betting.

Recommendation

We estimate prices to trade somewhat sideways around the 107/108 level for a couple of days. The unrest in the Middle East should support prices, as should the QE3 from the FED. Risk to the downside could emerge from the US fiscal cliff, but as they have agreed on a "last minute deal" during the last couple of decades it seems reasonable to assume the same will happen.