Exceptionally cheap forward crude oil

SEB - Prognoser på råvaror - CommodityBrent crude oil is ticking higher by the day as OPEC+ cuts are intact, global oil demand growth is firm (though global economic growth rates seems to have peaked), Venezuela oil production is in a death spiral, renewed Iran sanctions are imminent (May 12) and sanctions towards Russia on oil and not just Aluminium is possible. Yesterday Brent crude oil hit $74.75/bl and highest since mid-2015. Barring a global recession we think there is more room on the upside and as we stated in early march: If OPEC+ sticks to its cuts we are likely to see $85/bl later in the year as inventories draw lower. While we are bearish long term oil prices due to technology and increasing competitive pressure beyond 2025, we are cyclically bullish for the time horizon up to that point. In this view it is staggering how cheaply you can purchase crude oil on the forward curve. Not just in relative terms to where the front month Brent crude oil price is trading but also in a more absolute perspective versus historical prices. The most accentuated gains in the oil price have taken place at the front end of the forward curve. Yesterday the Brent crude front month contract closed at $73.78/bl (+0.4%) which was 25% above the Brent Dec-2021 contract. But if you inflation adjust the Dec-2021 contract then the front month contract yesterday closed 36% above the real Dec-2021 price of $54.4/bl. If we also adjust for the fact that the market is pricing in an 11% forward weakening of the USD vs the euro to Dec-2021 we get that the front month Brent contract yesterday closed 51% above the real, inflation adjusted and fx adjusted forward Brent Dec-2021 crude oil price. It is staggering cheap. Run and buy it before it ticks higher along with higher front end prices. Because that is what always happens.

Ch1: Brent 1mth ydy closed at $73.78/bl which was 25% above the Brent Dec-2021 contract at $58.88/bl

Adjust the Dec-2021 price for 8.3% cumulative inflation and get a real price of $54.4/bl. Then adjust for market pricing in an 11% weakening in the USD vs the euro to Dec-2021 and we get a real, inflation adjusted and fx adjusted forward Dec-2021 Brent price of only $48.6/bl

Brent 1mth ydy closed at $73.78/bl which was 25% above the Brent Dec-2021 contract at $58.88/bl

Ch2: Brent crude priced in euro. To visualize inflation and fx more easily. Brent Dec-2021 is dead cheap in real euro

Brent front month crude in euro is trading 40% above the Dec-2021 price of €42.6/bl and 47% above the real, inflation adjusted price of €40.5/bl

Brent crude priced in euro. To visualize inflation and fx more easily. Brent Dec-2021 is dead cheap in real euro

Ch3: Front end Brent charging ahead, leaving the three year contract far behind still trading at no more than $60/bl nominally.

But as front end prices linger at elevated levels it will over time drag the longer dated prices higher as well. Higher inflation and interest rates will typically lift the forward nominal prices as well.

Front end Brent charging ahead, leaving the three year contract far behind still trading at no more than $60/bl nominally.

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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