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Brent crude tipping over the technical abyss

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SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

Brent crude ydy closed down 1.5% at $58.94/bl. That was the lowest level since early January, below the lows from June and below the technically important Fibonacci price level of $59.74/bl below which there is no real support before the $50/bl line. This abyss or lack of technical support below $59.74/bl has been high on the radar of many of our customers for a long time and now we have broken down below that level with an open abyss down to the $50/bl line.

Oil producers may pray that tight front end fundamentals and continued declining US crude oil stocks may save them but as of now the bearish and deteriorating global macro situation seems to have the upper hand, pushing lower and lower.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

US crude oil stocks have now fallen 7 weeks in a row since early June with a total decline of 49 million barrels. API ydy released partial, indicative numbers pointing to yet another weekly draw in US crude stocks of 3.4 m bl, with Cushing crude stocks down 1.6 m bl, Gasoline stocks down 1.1 m bl and distillates stocks up 1.2 m bl.

So US crude oil stocks are likely to continue lower together with a range of other bullish elements: Mid-East geopolitical risk is likely to continue at an elevated level, OPEC+ will likely continue to hold back, US production growth will continue to slow further and refinery margins are likely to stay strong due to the IMO 2020 event. But the bearish macro sentiment still has the upper hand for now pushing lower.

Last time we were at the current price level in early January the spot market was plentiful but the market was optimistic of the future. Now the spot market is tight with both the Brent and WTI crude curves in front-end backwardation. But since the market is very pessimistic of the future macro situation and future oil demand it has pushed the whole front end of the crude oil curve lower so that backwardated part of the curve now is below the longer dated contracts.

This is unlikely to change before we either get a major outage of supply giving an even stronger bullish force to the front end of the market or the macro sentiment turns from a bearish trend to a bullish trend. A partial or full stop in the flow of oil out of the Strait of Hurmuz would be bullish supply event which undoubtedly would drive the front end to the sky. A full or partial resolution to the ongoing US – China trade war would definitely be a turn to the positive from the macro side.

For now the bearish macro sentiment continues to push down the whole forward curve for both Brent and WTI paying little attention of the tight front end of the market. The US Fed did not rescue the macro situation. It was not enough to change the direction of the cooling global growth trend. Instead Donald Trump has upped the US – China trade war making it all worse.

While slowing US crude oil production growth is good for the global oil market balance it is not entirely positive for Brent crude in the first round of events.

Much more US pipeline capacity from the Permian basin to the US Gulf in combination with slowing US crude oil production growth implies that Brent crude oil prices will move much closer to the WTI crude curve. I.e. global oil producers will lose the Brent crude oil premium over WTI which averaged $8.3/bl on average so far in 2019 and averaged $6.8/bl in 2018.

Lately we have seen marginal cost for transporting oil from the Permian to the US Gulf of $2.5/bl. So that is probably the Brent to WTI price spread we are heading towards.

The ongoing price dynamics shows how difficult it is for OPEC+ to prop up prices through production cuts in the face of cooling global growth. It was much easier when they initiated cuts in late 2016 with strong tailwind from accelerating global growth.

Ch1: The Brent crude oil forward curves in early January (green) versus now (yellow). Plentiful spot supply in January but coupled with a fairly positive view of the future. Today the spot market is tight in the front but the bearish macro sentiment is very bad. I.e. deep concerns for future demand is pushing down the whole forward crude curve

The Brent crude oil forward curves

Ch2: Brent crude losing more and more of its premium over WTI. Here the spread between the two forward curves at the end of June versus the close yesterday. Brent had a premium of $6.8/bl in 2018 and $8.3/bl ytd average in 2019.

Brent crude losing more and more of its premium over WTI

Ch3: Brent front month breaking down below the 38.2% Fibo level with basically open space down to the $50/bl line. I.e. Brent crude oil price is extremely vulnerable to the downside and to further deterioration in the global macro sentiment.

Brent front month breaking down

Analys

Tightening fundamentals – bullish inventories from DOE

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The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.

US DOE, inventories, change in million barrels per week
US crude inventories excl. SPR in million barrels
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Analys

Bombs to ”ceasefire” in hours – Brent below $70

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A classic case of “buy the rumor, sell the news” played out in oil markets, as Brent crude has dropped sharply – down nearly USD 10 per barrel since yesterday evening – following Iran’s retaliatory strike on a U.S. air base in Qatar. The immediate reaction was: “That was it?” The strike followed a carefully calibrated, non-escalatory playbook, avoiding direct threats to energy infrastructure or disruption of shipping through the Strait of Hormuz – thus calming worst-case fears.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

After Monday morning’s sharp spike to USD 81.4 per barrel, triggered by the U.S. bombing of Iranian nuclear facilities, oil prices drifted sideways in anticipation of a potential Iranian response. That response came with advance warning and caused limited physical damage. Early this morning, both the U.S. President and Iranian state media announced a ceasefire, effectively placing a lid on the immediate conflict risk – at least for now.

As a result, Brent crude has now fallen by a total of USD 12 from Monday’s peak, currently trading around USD 69 per barrel.

Looking beyond geopolitics, the market will now shift its focus to the upcoming OPEC+ meeting in early July. Saudi Arabia’s decision to increase output earlier this year – despite falling prices – has drawn renewed attention considering recent developments. Some suggest this was a response to U.S. pressure to offset potential Iranian supply losses.

However, consensus is that the move was driven more by internal OPEC+ dynamics. After years of curbing production to support prices, Riyadh had grown frustrated with quota-busting by several members (notably Kazakhstan). With Saudi Arabia cutting up to 2 million barrels per day – roughly 2% of global supply – returns were diminishing, and the risk of losing market share was rising. The production increase is widely seen as an effort to reassert leadership and restore discipline within the group.

That said, the FT recently stated that, the Saudis remain wary of past missteps. In 2018, Riyadh ramped up output at Trump’s request ahead of Iran sanctions, only to see prices collapse when the U.S. granted broad waivers – triggering oversupply. Officials have reportedly made it clear they don’t intend to repeat that mistake.

The recent visit by President Trump to Saudi Arabia, which included agreements on AI, defense, and nuclear cooperation, suggests a broader strategic alignment. This has fueled speculation about a quiet “pump-for-politics” deal behind recent production moves.

Looking ahead, oil prices have now retraced the entire rally sparked by the June 13 Israel–Iran escalation. This retreat provides more political and policy space for both the U.S. and Saudi Arabia. Specifically, it makes it easier for Riyadh to scale back its three recent production hikes of 411,000 barrels each, potentially returning to more moderate increases of 137,000 barrels for August and September.

In short: with no major loss of Iranian supply to the market, OPEC+ – led by Saudi Arabia – no longer needs to compensate for a disruption that hasn’t materialized, especially not to please the U.S. at the cost of its own market strategy. As the Saudis themselves have signaled, they are unlikely to repeat previous mistakes.

Conclusion: With Brent now in the high USD 60s, buying oil looks fundamentally justified. The geopolitical premium has deflated, but tensions between Israel and Iran remain unresolved – and the risk of missteps and renewed escalation still lingers. In fact, even this morning, reports have emerged of renewed missile fire despite the declared “truce.” The path forward may be calmer – but it is far from stable.

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Analys

A muted price reaction. Market looks relaxed, but it is still on edge waiting for what Iran will do

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Brent crossed the 80-line this morning but quickly fell back assigning limited probability for Iran choosing to close the Strait of Hormuz. Brent traded in a range of USD 70.56 – 79.04/b last week as the market fluctuated between ”Iran wants a deal” and ”US is about to attack Iran”. At the end of the week though, Donald Trump managed to convince markets (and probably also Iran) that he would make a decision within two weeks. I.e. no imminent attack. Previously when when he has talked about ”making a decision within two weeks” he has often ended up doing nothing in the end. The oil market relaxed as a result and the week ended at USD 77.01/b which is just USD 6/b above the year to date average of USD 71/b.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Brent jumped to USD 81.4/b this morning, the highest since mid-January, but then quickly fell back to a current price of USD 78.2/b which is only up 1.5% versus the close on Friday. As such the market is pricing a fairly low probability that Iran will actually close the Strait of Hormuz. Probably because it will hurt Iranian oil exports as well as the global oil market.

It was however all smoke and mirrors. Deception. The US attacked Iran on Saturday. The attack involved 125 warplanes, submarines and surface warships and 14 bunker buster bombs were dropped on Iranian nuclear sites including Fordow, Natanz and Isfahan. In response the Iranian Parliament voted in support of closing the Strait of Hormuz where some 17 mb of crude and products is transported to the global market every day plus significant volumes of LNG. This is however merely an advise to the Supreme leader Ayatollah Ali Khamenei and the Supreme National Security Council which sits with the final and actual decision.

No supply of oil is lost yet. It is about the risk of Iran closing the Strait of Hormuz or not. So far not a single drop of oil supply has been lost to the global market. The price at the moment is all about the assessed risk of loss of supply. Will Iran choose to choke of the Strait of Hormuz or not? That is the big question. It would be painful for US consumers, for Donald Trump’s voter base, for the global economy but also for Iran and its population which relies on oil exports and income from selling oil out of that Strait as well. As such it is not a no-brainer choice for Iran to close the Strait for oil exports. And looking at the il price this morning it is clear that the oil market doesn’t assign a very high probability of it happening. It is however probably well within the capability of Iran to close the Strait off with rockets, mines, air-drones and possibly sea-drones. Just look at how Ukraine has been able to control and damage the Russian Black Sea fleet.

What to do about the highly enriched uranium which has gone missing? While the US and Israel can celebrate their destruction of Iranian nuclear facilities they are also scratching their heads over what to do with the lost Iranian nuclear material. Iran had 408 kg of highly enriched uranium (IAEA). Almost weapons grade. Enough for some 10 nuclear warheads. It seems to have been transported out of Fordow before the attack this weekend. 

The market is still on edge. USD 80-something/b seems sensible while we wait. The oil market reaction to this weekend’s events is very muted so far. The market is still on edge awaiting what Iran will do. Because Iran will do something. But what and when? An oil price of 80-something seems like a sensible level until something do happen.

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