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Trends

Rotterdam (ARA) fuel oil - Trading USD 3 lower

Singapore fuel oil - Trading USD 9 lower

US Gulf fuel oil - Expected to open USD 1 lower

Budget cuts automatic or not? – Oil down on rating worries

As the US debt ceiling was raised earlier this year, a super-committee was put together to find additional money in the public budget. The goal was $1.5 trillion. The deadline for the committee is due on 23 November. However, committee members are still debating if taxes should be raised for the rich, or government spending has to be cut. Whether they will find a solution before Wednesday or not does not matter in an economic perspective, as automatic budget cuts to the military and State department will kick in. But what does matter is whether the unresolved political outlook will result in yet another cut in the rating of the United States. When the rating was cut in August, from AAA to AA+, it sent equities and oil prices tumbling 5-10% downwards. With the current market focus, it matters little that oil supplies are actually very tight.

Iranian wildcard

Iran’s nuclear program continues to cause a stir. To make sure Iran is not attacked; their minister of energy has warned that they might consider halting some of their 4 mbpd export. In our view one should pay attention to Iran’s "real nuclear option" as it is much simpler. Roughly 40% of the world’s oil exports pass through the 50km wide Strait of Hormuz near Iran, it unfortunately does not take much imagination to figure out what would happen if that passage is blocked.

Recommendation

We recommend consumers who have not hedged yet, to use market dips to establish hedges. As OPEC will likely support prices around and above 100, we see consumer hedges at that level as attractive going into 2012. Saudi Arabia considers the world well supplied with oil, and Iran wants to cut back on production, despite the lowest inventories in several years. Meanwhile the world, lead by China, continues to consume oil in very large amounts. This will become a bottleneck down the road, although prices might take a dip lower.