Analys

Why Brent 1mth at $65/b is reachable before Christmas

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8 år sedan

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23 oktober, 2017

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Crude oil price action – Brent crude 1mth Inching 1% higher WoW amid dollar headwinds. Brent to WTI crude spreads continues to widen

Brent crude inched 1% higher over the past week with a close of $57.75/b while the longer dated Dec-2020 gained 0.4% to $54.75/b.
The energy complex in total gained 0.6% while the other commodity sub-indexes all experienced losses from a marginal 0.03% loss for metals to a more substantial 1.7% and 1.8% for Agri and precious respectively.
Overall commodities lost 0.4% over the week and thus slightly less than dollar headwind from a 0.7% stronger USD index.
Compared to the 0.4% gain in the Brent Dec-2020 the WTI Dec-2020 instead fell back 0.3% to $50.08/b.
The spread between longer dated Brent and WTI prices thus continued to expand last week rising to $4.67/b for the Dec-2020 horizon.
The further expansion in Brent – WTI crude spreads was even more pronounced on the Dec-2018 horizon where it expanded 0.7% to $4.35/b., the highest since November 2015.

Brent crude oil comment – Why Brent 1mth at $65/b is reachable before Christmas

Declining US shale oil rig count is likely going to allow the mid-term WTI crude curve to move from current $51/b up towards the high of the year of around $56-57/b
Increasing US crude production is placing increasing strains on US crude oil export bottlenecks leading to further widening in the Brent to WTI crude spreads.
As a result mid-term forward Brent crude prices have the potential to move to $61-62/b when mid-term WTI moves to $56-57/b.
Further global inventory draws are likely to add yet steeper backwardation to the Brent crude curve which would allow the Brent 1mth contract to rise towards $65/b ($3-4/b above the Brent mid-term crude forward prices).

However, the 2018 crude oil market balance could be challenging as US shale oil players are likely going to drill less and complete more.
At the moment there is a tug of war between short term bullish drivers, real and visible, versus bearish concerns for 2018.
Bullish short term drivers are likely to win in the short term while medium term bearish drivers are likely going to come back and bite the market in the … in 2018.

There has been lots of comments that it would be unwise for Brent crude 1mth to move above $60/b because that would stimulate US shale oil production too much.
The thing is that it is not the 1mth Brent crude contract which sends stimulating price signals to US shale oil producers all that much. Rather it is the medium term forward WTI curve contracts which do so.
Typically it is the 1-3 year forward WTI contract price level which is what US shale oil players can sell and hedge new and existing production at. These forward prices are setting the level of profitability for new shale oil wells and production.

The Brent 1mth contract reached its highest price level since March 2015 in late September ($59.49/b) and is trading just $1.6/b shy of that level today at $57.88/b.
Conversely the medium term WTI forward prices have set no such new ytd highs. If we look at the rolling WTI 18 mths contract (1.5 years forward) it reached a high of the year in early January of $57.39/b.
That was real shale oil stimulus resulting in lots of additional shale oil rigs and drilling. On Friday however it closed at no more than $51.02/b with the highest price this side of the summer being $51.7/b

In late September we commented that “Brent was set free to rally on increasing backwardation and widening spread to WTI”. The argument was that we can get a higher Brent 1mth price without stimulating US shale oil production because of an increasing Brent backwardation and an increasing Brent to WTI crude spread both in the front and on the curve.

At the moment we see that US shale oil players are kicking out shale oil drilling rigs. Just last week they kicked out 7 shale oil rigs. Since early August they have kicked out 30 oil rigs and 24 implied shale oil rigs.
Assuming a 6 week lag between price action and rig count reaction this shedding of US oil rigs is taking place at a forward WTI18 mth crude price of $50-51/b (6 weeks ago).

The US shale oil players are thus sentiment wise telling the market that WTI at a medium term forward price level of $50/b is not enough for them to keep the current rig count running.
They are kicking out rigs at $50/b. Thus while empirical market experience from May 2016 to July 2017 was that the US shale oil rig count inflection point was around $47/b (18mth forward) it has now clearly shifted higher than $50-51/b.

We believe that the market dynamic with respect to US shale oil is much about trial and error. Having figured out that it is now no longer at $47/b and that it is now also higher than $50-51/b it now remains to figure out where it has moved too. Thus the next test should now be to figure out where the US shale oil rig count change versus WTI 18mth forward price level relationship inflection point has moved to. I.e. the market should allow the forward WTI18mth contract to move upwards. Acceptable moves upwards in perspective of what we have seen earlier this year would be that the WTI 18 mth contract moves to $55-56/b.

One reason why such a move higher for the WTI 18 mth price horizon is reasonable to expect is because even though the WTI crude curve is in contango at the very front end of the curve there is still an overall backwardation in the forward WTI curve structure. The consequence of this is that shale oil producers now have to sell at a discount to front end prices if they want to sell forward hedging their future production. This typically leads to reluctance and reduced forward selling by producers. Consumers however experience the opposite. Consumers can now buy forward at a discount to front end prices which typically leads to more forward buying. Thus less forward selling and more forward buying should typically help to lift the mid-term forward crude prices higher both for Brent and WTI.

Thus if we assume that the mid-term WTI forward crude prices has potential to move $5/b higher it would allow the Brent mid-term crude price to shift $5/b higher as well which would allow the Brent 1mth contract to shift $5/b higher as well. If we in addition assume that the Brent to WTI crude price spread on the curve expands a further $1/b then the Brent crude curve can shift yet another dollar higher. Add another dollar in further steepening Brent backwardation and the front end Brent has another dollar on the upside. Thus a total $2/b extra on widening Brent – WTI spread and further Brent backwardation steepening.

Thus in total the Brent 1mth contract has an upside potential of another $7/b. The move would place the 18 mth WTI price at $56/b versus ytd high in early January of $57.39/b and current $51/b. It would place the Brent 18 mth contract at $61/b and a new ytd high and highest since April 2015 and it would place the Brent 1mth contract just shy of $65/b. And still US shale producers would not be stimulated with a higher forward price than WTI 18mth at $56/b. Maybe that is where the US shale oil rig count to WTI18mth inflection point has shifted to? At the moment it is at least higher than $51/b given data since early August.

The sentimental drivers for such a move higher is going to be further draw downs in inventories (yes, market is running a deficit due to OPEC+ production cuts), further reductions in US shale oil rig count (yes, we expect US shale players to kick out 5-10 rigs every week to Christmas to balance drilling versus completions), further accumulation of net long Brent spec into the backwardated Brent crude curve with positive roll yield, emergence of geopolitical risk premium in crude prices as stocks move lower, stronger and stronger signals from Saudi Arabia and Russia that they are willing to extend cuts to end of 2018 topped up with forecasts pointing to a cold US winter ahead (stronger La Nina event) with US Atlantic coast mid-distillate stocks now below 5yr average.

Annons

However, there is a reason for why Saudi Arabia and Russia both are signalling elevated willingness to extend current production cuts all to the end of 2018. They are concerned for the oil market balance in 2018. And with good reason. Since November 2016 when OPEC+ decided to cut production there has been a veritable shale oil drilling party with an accumulation of 1735 uncompleted wells and the accumulation continued also in September adding another 179 uncompleted wells lifting the total to 7270 uncompleted wells. In comparison the shale players completed 10161 wells over the 12mths to September and on average 847 wells per mth.

Thus if 2017 was a US shale oil drilling party then 2018 may be a shale oil completion party. US shale oil completions have been rising every month since January. In December 2016 completions stood at a low of 645 wells rising to 1029 in September and still rising. If completions average 1100 wells per month in 2018 then it would be 30% higher than the average of 847 in the 12 mths to September. In our view the US shale oil players today have too many active drilling rigs. They should spend their money on completions rather than drilling. That is what creates oil and cash flow. Thus the natural thing to expect is a further decline in the drilling rig count. Maybe another 100 to 200 rigs down and at the same time to expect a further increase in completions and eventually a draw down in the inventory of drilled but yet uncompleted wells.

At the moment the market is in a tug of war between short term bullish drivers which are very true, very visible and very strong versus real concerns for the oil market balance for 2018. We expect the short term bullish drivers will win in the short term while the medium term issues will hit back at the market in the medium term.

Ch1: US shale oil players are kicking out drilling rigs with WTI 18 mth contract at $51/b

Ch2: US shale oil rig count change to WTI mid-term forward price breaking up. Inflection point shifting higher. Rigs being kicked out at WTI $50-51/b

Ch3: Brent crude 1 to 18 mth time spread – Increasing backwardation as inventories falls
Stronger backwardation allows the 1mth contract to rise higher without stimulating US shale production on the forward WTI curve

Ch4: Rolling Brent 18mth price spread to the rolling WTI 18mth crude price
The spread is expanding as the US crude production is increasing
Higher spread will allow the Brent18 mth contract to move relatively higher versus the WTI curve without stimulating US shale oil production
More to come as US crude production continues to rise

Ch5: WTI 18mth forward crude oil price. Still lots of room on the upside before getting back to ytd high

Ch6: Crude oil forward curves. Brent in backwardation, more to come. Front end WTI in front end contango to flip into front end backwardation

Ch7: Brent 1mth to WTI 1mth contract price spread makes a jump to $6/b

Ch7: Resulting in a big jump in US crude oil exports
This will drain US crude inventories and flip front end WTI contango into backwardation

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

Market Still Betting on Timely Resolution, But Each Day Raises Shortage Risk

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1 dag sedan

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20 april, 2026

Redaktionen

Down on Friday. Up on Monday. The Brent June crude oil contract traded down 5.1% last week to a close of $90.38/b. It reached a high of $103.87/b last Monday and a low of $86.09/b on Friday as Iran announced that the Strait of Hormuz was fully open for transit. That quickly changed over the weekend as the US upheld its blockade of Iranian oil exports while Iran naturally responded by closing the SoH again. The US blew a hole in the engine room of the Iranian ship TOUSKA and took custody of the ship on Sunday. Brent crude is up 5.6% this morning to $95.4/b.

Bjarne Schieldrop, Chief analyst commodities, SEB

The cease-fire is expiring tomorrow. The US has said it will send a delegation for a second round of negotiations in Islamabad in Pakistan. But Iran has for now rejected a second round of talks as it views US demands as unrealistic and excessive while the US is also blocking the Strait of Hormuz.

While Brent is up 5% this morning, the financial market is still very optimistic that progress will be made. That talks will continue and that the SoH will fully open by the start of May which is consistent with a rest-of-year average Brent crude oil price of around $90/b with the market now trading that balance at around $88/b.

Financial optimism vs. physical deterioration. We have a divergence where the financial market is trading negotiations, improvements and resolution while at the same time the physical market is deteriorating day by day. Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.

Financial markets are betting that a US/Iranian resolution will save us in time from violent shortages down the road. But every day that the SoH remains closed is bringing us closer to a potentially very painful point of shortages and much higher prices.

The US blockade is also a weapon of leverage against its European and Asian allies. When Iran closed the SoH it held the world economy as a hostage against the US. The US blockade of the SoH is of course blocking Iranian oil exports. But it is also an action of disruption directed towards Europe and Asia. The US has called for the rest of the world to engaged in the war with Iran: ”If you want oil from the Persian Gulf, then go and get it”. A risk is that the US plays brinkmanship with the global oil market directed towards its European and Asian allies and maybe even towards China to force them to engage and take part. Maybe unthinkable. But unthinkable has become the norm with Trump in the White House.

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TACO (or Whatever It Was) Sends Oil Lower — Iran Keeps Choking Hormuz

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4 veckor sedan

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24 mars, 2026

Redaktionen

Wild moves yesterday. Brent crude traded to a high of $114.43/b and a low of $96.0/b and closed at $99.94/b yesterday.

US – Iran negotiations ongoing or not? What a day. Donald Trump announced that good talks were ongoing between Iran and the US and that the 48 hour deadline before bombing Iranian power plants and energy infrastructure was postponed by five days subject to success of ongoing meetings. Iranian media meanwhile stated that no meetings were ongoing at all.

Today we are scratching our heads trying to figure out what yesterday was all about.

Friends and family playing the market? Was it just Trump and his friends and family who were playing with oil and equity markets with $580m and $1.46bn in bets being placed by someone in oil and equity markets just 15 minutes before Trump’s announcement?

Was Trump pulling a TACO as he reached his political and economic pain point: Brent at $112/b, US Gas at $4/gal, SPX below 200dma and US 10yr above 4.4%?

Different Iranian factions with Trump talking with one of them? Are there real negotiations going on but with the US talking to one faction in Iran while another, the hardliners, are not involved and are denying any such negotiations going on?

Extending the ultimatum to attack and invade Kharg island next weekend? Or, is the five day delay of the deadline a tactical decision to allow US amphibious assault ships and marines to arrive in the Gulf in the upcoming weekend while US and Israeli continues to degrade Iranian military targets till then. And then next weekend a move by the US/Israel to attack and conquer for example the Kharg island?

We do not really know which it is or maybe a combination of these.

We did get some kind of TACO ydy. But markets have been waiting for some kind of TACO to happen and yesterday we got some kind of TACO. And Brent crude is now trading at $101.5/b as a result rather than at $112-114/b as it did no the high yesterday.

But what really matters in our view is the political situation on the ground in Iran. Will hardliners continue to hold power or will a more pragmatic faction gain power?

If the hardliners remain in power then oil pain should extend all the way to US midterm elections. The hardliners were apparently still in charge as of last week. Iran immediately retaliated and damaged LNG infrastructure in Qatar after Israel hit Iranian South Pars. The SoH was still closed and all messages coming out of Iran indicated defiance. Hardliners continues in power has a huge consequence for oil prices going forward. The regime has played its ’oil-weapon’ (closing or chocking the Strait of Hormuz). It is using it to achieve political goals. Deterrence: it needs to be so politically and economically expensive to attack Iran that it won’t happen again in the future. Or at least that the US/Israel thinks 10-times over before they attack again. The highest Brent crude oil closing price since the start of the war is $112.19/b last Friday. In comparison the 20-year inflation adjusted Brent price is $103/b. So Brent crude last Friday at $112.19/b isn’t a shockingly high price. And it is still far below the nominal high of $148/b from 2008 which is $220/b if inflation adjusted. So once in a lifetime Iran activates its most powerful weapon. The oil weapon. It needs to show the power of this weapon and it needs to reap political gains. Getting Brent to $112/b and intraday high of $119.5/b (9 March) isn’t a display of the power of that weapon. And it is not a deterrence against future attacks.

So if the hardliners remain in power in Iran, then the SoH will likely remain chocked all the way to US midterm elections and Brent crude will at a minimum go above the historical nominal high of $148/b from 2008.

Thus the outlook for the oil price for the rest of the year doesn’t depend all that much of whether Trump pulls a TACO or not. Stops bombing or not. It depends more on who is in charge in Iran. If it is the hardliners, then deterrence against future attacks via chocking of the SoH and high oil prices is the likely line of action. It is impacting the world but the Iranian ’oil-weapon’ is directed towards the US president and the the US midterm elections.

If a pragmatic faction gets to power in Iran, then a very prosperous future is possible. However, if power is shifting towards a more pragmatic faction in Iran then a completely different direction could evolve. Such a faction could possibly be open for cooperation with the US and the GCC and possibly put its issues versus Israel aside. Then the prosperity we have seen evolving in Dubai could be a possible future also for Iran.

Annons

So far it looks like the hardliners are fully in charge. As far as we can see, the hardliners are still fully in control in Iran. That points towards continued chocking of the SoH and oil prices ticking higher as global inventories (the oil market buffers) are drawn lower. And not just for a few more weeks, but possibly all the way to the US midterm elections.

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Oil stress is rising as the supply chains and buffers are drained

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1 månad sedan

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17 mars, 2026

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A brief sigh of relief yesterday as oil infra at Kharg wasn’t damaged. But higher today. Brent crude dabbled around a bit yesterday in relief that oil infrastructure at Iran’s Kharg island wasn’t damaged. It traded briefly below the 100-line and in a range of $99.54 – 106.5/b. Its close was near the low at $100.21/b.

No easy victorious way out for Trump. So no end in sight yet. Brent is up 3.2% today to $103.4/b with no signs that the war will end anytime soon. Trump has no easy way to declare victory and mission accomplished as long as Iran is in full control of the Strait of Hormuz while also holding some 440 kg of uranium enriched to 60% and not far from weapons grade at 90%. As long as these two factors are unresolved it is difficult for Trump to pull out of the Middle East. Naturally he gets increasingly frustrated over the situation as the oil price and US retail gas prices keeps ticking higher while the US is tied into the mess in the Middle East. Trying to drag NATO members into his mess but not much luck there.

When commodity prices spike they spike 2x, 3x, 4x or 5x. Supply and demand for commodities are notoriously inflexible. When either of them shifts sharply, the the price can easily go to zero (April 2022) or multiply 2x, 3x, or even 5x of normal. Examples in case cobalt in 2025 where Kongo restricted supply and the price doubled. Global LNG in 2022 where the price went 5x normal for the full year average. Demand for tungsten in ammunition is up strongly along with full war in the middle east. And its price? Up 537%.

Why hasn’t the Brent crude oil price gone 2x, 3x, 4x or 5x versus its normal of $68/b given close to full stop in the flow of oil of the Strait of Hormuz? We are after all talking about close to 20% of global supply being disrupted. The reason is the buffers. It is fairly easy to store oil. Commercial operators only hold stocks for logistical variations. It is a lot of oil in commercial stocks, but that is predominantly because the whole oil system is so huge. In addition we have Strategic Petroleum Reserves (SPRs) of close to 2500 mb of crude and 1000 mb of oil products. The IEA last week decided to release 400 mb from global SPR. Equal to 20 days of full closure of the Strait of Hormuz. Thus oil in commercial stocks on land, commercial oil in transit at sea and release of oil from SPRs is currently buffering the situation.

But we are running the buffers down day by day. As a result we see gradually increasing stress here and there in the global oil market. Asia is feeling the pinch the most. It has very low self sufficiency of oil and most of the exports from the Gulf normally head to Asia. Availability of propane and butane many places in India (LPG) has dried up very quickly. Local prices have tripled as a result. Local availability of crude, bunker oil, fuel oil, jet fuel, naphtha and other oil products is quickly running down to critical levels many places in Asia with prices shooting up. Oman crude oil is marked at $153/b. Jet fuel in Singapore is marked at $191/b.

Oil at sea originating from Strait of Hormuz from before 28 Feb is rapidly emptied. Oil at sea is a large pool of commercial oil. An inventory of oil in constant move. If we assume that the average journey from the Persian Gulf to its destinations has a volume weighted average of 13.5 days then the amount of oil at sea originating from the Persian Gulf when the the US/Israel attacked on 28 Feb was 13.5 days * 20 mb/d = 269 mb. Since the strait closed, this oil has increasingly been delivered at its destinations. Those closest to the Strait, like Pakistan, felt the emptying of this supply chain the fastest. Propane prices shooting to 3x normal there already last week and restaurants serving cold food this week is a result of that. Some 50-60% of Asia’s imports of Naphtha normally originates from the Persian Gulf. So naphtha is a natural pain point for Asia. The Gulf also a large and important exporter of Jet fuel. That shut in has lifted jet prices above $200/b.

To simplify our calculations we assume that no oil has left the Strait since that date and that there is no increase in Saudi exports from Yanbu. Then the draining of this inventory at sea originated from the Persian Gulf will essentially look like this:

The supply chain of oil at sea originating from the Strait of Hormuz is soon empty. Except for oil allowed through the Strait of Hormuz by Iran and increased exports from Yanbu in the Red Sea. Not included here.

Oil at sea is falling fast as oil is delivered without any new refill in the Persian Gulf. Waivers for Russian crude is also shifting Russian crude to consumers. Brent crude will likely start to feel the pinch much more forcefully when oil at sea is drawn down another 200 mb to around 1000 mb. That is not much more than 10 days from here.