Analys
Crude oil comment – Hard to be bullish for the coming 6 months

Crude oil price action – Down and then back towards the $48/b converging point – for now
- Crude oil comment – Hard to be bullish for the coming 6 months
- Graph: US commercial crude and product stocks – on par with two years production from US frack log
- Graph: Less Brent crude 12mth contango lately, but mostly since longer dated contracts are falling
- Graph: The relentless decline of the Brent crude oil December 2019 contract
- Graph: China Leading Index inched yet lower to 98.23 and the lowest since 2009
Crude oil price action – Down and then back towards the $48/b converging point – for now
Brent crude oil traded down 2.6% yesterday to $47.34/b amid a broad based sell-off in European and US equities (-2.6%). Growth concerns for China (industrial profits down 8.8% y/y in August) and the close to 30% drop in Glencore shares helped to drive the bearish sentiment. Do note that Industrial metals only lost 1% so there was not really much of a shake-out in metals on the back of rising China concerns yesterday. Note that while Brent crude saw a percentage wise large drop yesterday, it did not stray too far from the $48/b line which has been a converging price point lately. Today Asia is in the red following the US from last night, but US equities are rebounding. Also Brent crude is rebounding today to $47.7/b and is closing in on the $48/b level again.
Crude oil comment – Hard to be bullish for the coming 6 months
It is difficult to be bullish for the coming 6 months. First out in October and November is the refining turnaround season where refineries now increasingly are taken off-line for maintenance and adjustments ahead of the Northern hemisphere winter season. As this happens more crude oil is left in the market as refineries are not consuming it. Chinese refineries are also projected to process some 250 kb/d to 400 kb/d less in Q4-15 than in Q3-15. At the same time crude oil production in the North Sea is increasing into October and may rise further in November and December, potentially to multi year high. While Q4 is normally a strong demand period of the year it also marks the entrance into demand weakness in Q1 and Q2. We are quite confident that OPEC will not trim its production at its December 4 meeting in Vienna. We are also quite confident that Iran will increase exports of crude oil in Q1 and Q2 as sanctions are lifted and that we overall will get yet another strong rise in global oil stocks in 1H-16. Global oil inventories are already very high with commercial OECD stocks up 272 mb y/y in July to 2972 mb. Of this the US account for 825 mb of crude, gasoline and distillates with a y/y rise of 124 mb (September). On top of this we have the so called US fracklog of drilled wells that have not yet been fracked and put into production. It is difficult to know the size of the fracklog exactly but one estimate places it at around 4500 wells. If we view the fracklog as a kind of oil storage, then 4500 wells amounts to around 800 mb of crude oil that can be put into the market over two years. In other words if all these 4500 wells were producing for two years they would yield some 800 mb of crude oil. After those two years comes the tail-production which will yield even more oil, but over quite a few years.
Counter to this however is the intensifying credit and liquidity situation for the many smaller US shale oil players which will lead to continued declining US crude oil production. Overall however there is limited risk to the upside with so much oil at hand in stocks around the world as well as the US fracklog. In a slightly longer perspective towards the end of 2016 deciding whether the market will be in surplus or deficit in Q4-16 is highly uncertain and will amongst other things depend highly on OPEC production. OPEC has increased production by between 1-2 mb/d this year with main contributors being Iraq and Saudi Arabia. While we expect increasing exports from Iran, it is highly uncertain whether we will see the same increase from Iraq and Saudi Arabia in 2016 as in 2015.
US commercial crude and product stocks – on par with two years production from US frack log
Two years of production from the US fracklog of yet unfracked, but drilled wells will yield crude oil in a magnitude of the current US commercial oil inventories.
Less Brent crude 12mth contango lately, but mostly since longer dated contracts are falling
A key factor here is however that this is not so much to do with strengthening in the front end of the curve, but more to do with a relentless decline in longer dated contracts.
The relentless decline of the Brent crude oil December 2019 contract
The front end of the Brent crude oil curve seems to be very well supported at the $48/b level for the time being. However as the longer dated contracts like the Dec-19 contract ticks lower and lower it forces the curve to be flatter with less contango. If stocks are to increase yet further, which is our base case into 1H-16, an increase in the contango will however be needed. If the longer dated contracts continue to push lower or just stay steady at current level, then the front end contract will need to move lower in order to create the necessary contango to hold increasing storage. At the moment we expect the longer dated contracts to continue lower as producers need to hedge out on the curve while consumer will preferred to purchase oil more towards the front end of the curve in order to utilize contango and low spot crude oil prices.
And then one last graph for the China bears. The China Leading Index inched yet lower to 98.23 and the lowest level since 2009.
Watch out for China PMI manufacturing and services index on Thursday this week.
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
OPEC+ will likely unwind 500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d in one go could be in the cards

Down to mid-60ies as Iraq lifts production while Saudi may be tired of voluntary cut frugality. The Brent December contract dropped 1.6% yesterday to USD 66.03/b. This morning it is down another 0.3% to USD 65.8/b. The drop in the price came on the back of the combined news that Iraq has resumed 190 kb/d of production in Kurdistan with exports through Turkey while OPEC+ delegates send signals that the group will unwind the remaining 1.65 mb/d (less the 137 kb/d in October) of voluntary cuts at a pace of 500 kb/d per month pace.

Signals of accelerated unwind and Iraqi increase may be connected. Russia, Kazakhstan and Iraq were main offenders versus the voluntary quotas they had agreed to follow. Russia had a production ’debt’ (cumulative overproduction versus quota) of close to 90 mb in March this year while Kazakhstan had a ’debt’ of about 60 mb and the same for Iraq. This apparently made Saudi Arabia angry this spring. Why should Saudi Arabia hold back if the other voluntary cutters were just freeriding? Thus the sudden rapid unwinding of voluntary cuts. That is at least one angle of explanations for the accelerated unwinding.
If the offenders with production debts then refrained from lifting production as the voluntary cuts were rapidly unwinded, then they could ’pay back’ their ’debts’ as they would under-produce versus the new and steadily higher quotas.
Forget about Kazakhstan. Its production was just too far above the quotas with no hope that the country would hold back production due to cross-ownership of oil assets by international oil companies. But Russia and Iraq should be able to do it.
Iraqi cumulative overproduction versus quotas could reach 85-90 mb in October. Iraq has however steadily continued to overproduce by 3-5 mb per month. In July its new and gradually higher quota came close to equal with a cumulative overproduction of only 0.6 mb that month. In August again however its production had an overshoot of 100 kb/d or 3.1 mb for the month. Its cumulative production debt had then risen to close to 80 mb. We don’t know for September yet. But looking at October we now know that its production will likely average close to 4.5 mb/d due to the revival of 190 kb/d of production in Kurdistan. Its quota however will only be 4.24 mb/d. Its overproduction in October will thus likely be around 250 kb/d above its quota with its production debt rising another 7-8 mb to a total of close to 90 mb.
Again, why should Saudi Arabia be frugal while Iraq is freeriding. Better to get rid of the voluntary quotas as quickly as possible and then start all over with clean sheets.
Unwinding the remaining 1.513 mb/d in one go in October? If OPEC+ unwinds the remaining 1.513 mb/d of voluntary cuts in one big go in October, then Iraq’s quota will be around 4.4 mb/d for October versus its likely production of close to 4.5 mb/d for the coming month..
OPEC+ should thus unwind the remaining 1.513 mb/d (1.65 – 0.137 mb/d) in one go for October in order for the quota of Iraq to be able to keep track with Iraq’s actual production increase.
October 5 will show how it plays out. But a quota unwind of at least 500 kb/d for Oct seems likely. An overall increase of at least 500 kb/d in the voluntary quota for October looks likely. But it could be the whole 1.513 mb/d in one go. If the increase in the quota is ’only’ 500 kb/d then Iraqi cumulative production will still rise by 5.7 mb to a total of 85 mb in October.
Iraqi production debt versus quotas will likely rise by 5.7 mb in October if OPEC+ only lifts the overall quota by 500 kb/d in October. Here assuming historical production debt did not rise in September. That Iraq lifts its production by 190 kb/d in October to 4.47 mb/d (August level + 190 kb/d) and that OPEC+ unwinds 500 kb/d of the remining quotas in October when they decide on this on 5 October.

Analys
Modest draws, flat demand, and diesel back in focus

U.S. commercial crude inventories posted a marginal draw last week, falling by 0.6 million barrels to 414.8 million barrels. Inventories remain 4% below the five-year seasonal average, but the draw is far smaller than last week’s massive 9.3-million-barrel decline. Higher crude imports (+803,000 bl d WoW) and steady refinery runs (93% utilization) helped keep the crude balance relatively neutral.

Yet another drawdown indicates commercial crude inventories continue to trend below the 2015–2022 seasonal norm (~440 million barrels), though at 414.8 million barrels, levels are now almost exactly in line with both the 2023 and 2024 trajectory, suggesting stable YoY conditions (see page 3 attached).
Gasoline inventories dropped by 1.1 million barrels and are now 2% below the five-year average. The decline was broad-based, with both finished gasoline and blending components falling, indicating lower output and resilient end-user demand as we enter the shoulder season post-summer (see page 6 attached).
On the diesel side, distillate inventories declined by 1.7 million barrels, snapping a two-week streak of strong builds. At 125 million barrels, diesel inventories are once again 8% below the five-year average and trending near the low end of the historical range.
In total, commercial petroleum inventories (excl. SPR) slipped by 0.5 million barrels on the week to ish 1,281.5 million barrels. While essentially flat, this ends a two-week streak of meaningful builds, reflecting a return to a slightly tighter situation.
On the demand side, the DOE’s ‘products supplied’ metric (see page 6 attached), a proxy for implied consumption, softened slightly. Total demand for crude oil over the past four weeks averaged 20.5 million barrels per day, up just 0.9% YoY.
Summing up: This week’s report shows a re-tightening in diesel supply and modest draws across the board, while demand growth is beginning to flatten. Inventories remain structurally low, but the tone is less bullish than in recent weeks.


Analys
Are Ukraine’s attacks on Russian energy infrastructure working?

Brent crude rose 1.6% yesterday. After trading in a range of USD 66.1 – 68.09/b it settled at USD 67.63/b. A level which we are well accustomed to see Brent crude flipping around since late August. This morning it is trading 0.5% higher at USD 68/b. The market was expecting an increase of 230 kb/d in Iraqi crude exports from Kurdistan through Turkey to the Cheyhan port but that has so far failed to materialize. This probably helped to drive Brent crude higher yesterday. Indications last evening that US crude oil inventories likely fell 3.8 mb last week (indicative numbers by API) probably also added some strength to Brent crude late in the session. The market continues to await the much heralded global surplus materializing as rising crude and product inventories in OECD countries in general and the US specifically.

The oil market is starting to focus increasingly on the successful Ukrainian attacks on Russian oil infrastructure. Especially the attacks on Russian refineries. Refineries are highly complex and much harder to repair than simple crude oil facilities like export pipelines, ports and hubs. It can take months and months to repair complex refineries. It is thus mainly Russian oil products which will be hurt by this. First oil product exports will go down, thereafter Russia will have to ration oil product consumption domestically. Russian crude exports may not be hurt as much. Its crude exports could actually go up as its capacity to process crude goes down. SEB’s Emerging Market strategist Erik Meyersson wrote about the Ukrainian campaign this morning: ”Are Ukraine’s attacks on Russian energy infrastructure working?”. Phillips P O’Brian published an interesting not on this as well yesterday: ”An Update On The Ukrainian Campaign Against Russian Refineries”. It is a pay-for article, but it is well worth reading. Amongst other things it highlights the strategic focus of Ukraine towards Russia’s energy infrastructure. A Ukrainian on the matter also put out a visual representation of the attacks on twitter. We have not verified the data representation. It needs to be interpreted with caution in terms of magnitude of impact and current outage.
Complex Russian oil refineries are sitting ducks in the new, modern long-range drone war. Ukraine is building a range of new weapons as well according to O’Brian. The problem with attacks on Russian refineries is thus on the rise. This will likely be an escalating problem for Russia. And oil products around the world may rise versus the crude oil price while the crude oil price itself may not rise all that much due to this.
Russian clean oil product exports as presented by SEB’s Erik Meyersson in his note this morning.

The ICE Gasoil crack and the 3.5% fuel oil crack has been strengthening. The 3.5% crack should have weakened along with rising exports of sour crude from OPEC+, but it hasn’t. Rather it has moved higher instead. The higher cracks could in part be due to the Ukrainian attacks on Russian oil refineries.

Ukrainian inhabitants graphical representation of Ukrainian attacks on Russian oil refineries on Twitter. Highlighting date of attacks, size of refineries and distance from Ukraine. We have not verified the detailed information. And you cannot derive the amount of outage as a consequence of this.

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