Analys

Oil and Dollar – A self-reinforcing feedback loop

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8 år sedan

den

25 januari, 2018

There is an intimate relationship between the oil price and the USD. Looking back at the crude oil price and the USD Index since 2013 they are mirror images of each other. We argue that it is not only a one way street from a weaker USD to a nominally higher crude oil price. There is also likely a link from a stronger crude oil price to a weaker USD as well. In addition we also have that OPEC & Co is forcing the oil price higher through their cuts while Donald Trump is promoting a softer USD amid a global economy which is reviving. We are currently in a Merry-go-round circle which is feeding on itself pushing crude prices higher, the USD lower which again is bullish for Emerging Markets which is bullish again for commodity demand,… If the circle is not stopped by verbal intervention from either OPEC & Co on the oil price or ECB on the Eurodollar side then this circle could spiral higher with Brent crude rising another 10% to $77/bl while the USD Index moves back to its 2014 level of 80 points. But both the dollar and crude prices are technically very stretch at the moment and ripe for corrections.

Price action – Higher on a softer USD and bullish WTI on Cushing draw

Yesterday the USD Index fell 1% while the Brent 1mth contract gained 0.8% to $70.53/bl. Brent crude thus actually fell 0.2% in real terms. The dollar was trading lower and lower all through the day. Brent crude also traded in bearish territory most of the day while it normally should have taken a bullish queue from the softer USD. The view that Brent has gone too far already probably weighted on the crude oil price. Brent was trying to move lower while the softening USD Index pulled stronger and stronger in the bullish direction.

Brent crude caved in to bullish push from the weaker dollar when the US inventory data came in at 16:30 CET. It showed that US crude stocks declined 1.1 m bl last week while the market had feared a gain of 4.8 m bl following the indicative numbers from API on Tuesday evening. Great relief. No decline. In addition the crude stocks in Cushing declined a full 3.2 m bl which gave a real boost to WTI crude prices relative to Brent crude. All in all for crude, gasoline and middle distillates there was a rise of 3.6 m bl which is not really all bullish. However, it was clearly bullish for WTI crude prices versus Brent and the whole mood just turned bullish. The Brent bears caved in to the bullish push from WTI and the strong bullish push from the weaker USD and up it went. This morning we have some follow-through as the USD Index declines another 0.2% while Brent trades 0.5% higher at $70.9/bl.

A higher crude oil price is dollar bearish – The feedback loop

A pure 50% devaluation of the USD would obviously lead to a doubling of the nominal crude oil price. The dollar is just a unit of measure. If the yardstick shrinks by 50% then the amount measured will have to double.

There is also another effect in reverse. If the crude oil price increases strongly then it is also dollar bearish and if it falls strongly it is dollar bullish. This is probably why we have such an incredible mirror image of the USD Index and the Brent crude oil price since 2013. The huge drop in the Brent crude oil price from mid-2014 was not driven by a weaker USD but by surplus crude and OPEC moving from a price game to a market share game.

In 2014 the US had a net petroleum import of 5 m bl/d and China imported of 6 m bl/d. Every dollar increase in the crude oil price results in a $4bn increase in the yearly expenditure of USD for China and US crude imports.

From mid-2014 the crude oil price moved from $110/bl to a low of $27/bl in early 2016. That is a decline of 83 dollar per barrel. If this difference sustained for a full year it would have and impact of $333bn. In comparison the US trade deficit is roughly $500bn per year. So the oil price drop equaled a 70% drop in the US trade deficit in terms of magnitude.

When the US spends USD on oil imports it receives crude oil and sends USD into the global market place. First into the pockets of global oil producers like Russia and OPEC. Then these dollars are spent in the global market place by them. A high crude oil price results in a larger flow of dollar from the US into the global market place and is thus dollar bearish. Russia for example will have a good dollar situation when the oil price is high as it receives a lot of USDs. A sharp decline in the oil price leads to less dollar being sent out of the US to global oil producers and into the global market place and is thus dollar bullish.

Most other countries than the US do not have this impact on the dollar cycle because they do not have dollar as their currency. When Europe for example purchases and imports crude oil it has to first buy the dollars in the global market place in exchange for euros. Then it spends the dollar for oil sending them to Russia and OPEC which then sends them back into the global market place when they spend it. Thus Europe’s oil imports are dollar neutral in terms of varying crude oil prices.

China is however a different case than most other countries. It has a dollar surplus to start with due to its trade surplus with the US. Normally this surplus of dollars are recirculated back into the US as China buys US treasuries, different bonds, equities or other US assets. A part of China’s dollar surplus is however spent on its crude oil imports and is thus fed to Russia or OPEC and then into the global market. China does not need to go into the market in the first place to purchase the dollar which it spends on crude oil imports. When the price of crude oil falls sharply then China will spend less of its surplus of dollar on crude oil and instead recirculate it back into the US by purchasing US assets. So a sharply lower oil price means China will feed a significantly lower amount of dollar into the global market place. Due to its dollar surplus and dollar recycling China is not dollar neutral in its crude oil import as Europe is.

The crude oil price has moved higher since early 2016 and sharply higher since June 2017. It has probably had an impact on the USD as it means a larger flow of dollar from the US and from China being fed into the global offshore dollar market via global oil producers like OPEC and Russia. It has relieved a dollar shortage among the world’s oil producers

At the moment there is thus likely a self-reinforcing cycle feeding a higher crude oil price and a softer USD. The USD is of course primed for weakness due to other reasons as well. That is also the case for Brent crude for which OPEC & Co has set the market up for tightness. So crude oil moves higher, the dollar moves lower which again implies a higher nominal crude price. The softer dollar is also EM bullish as it reduces their dollar payment burden of debt. So softer dollar leads to more bullish EM which again means stronger commodity demand and again a higher oil price. That’s a great Merry go round circle!

Annons

In the shorter term we are likely set for a correction in the dollar weakening. Verbal intervention from the ECB is probable. That would also likely be a trigger for a correction in Brent crude as it now has the most technically stretched level since 2011.

However, if there really is significant relationship going from the crude oil price to to dollar it means that the current crude oil price revival is now pointing us in the direction of a dollar Index level which we last saw back in 2014 which is another 10% lower at an index level of 80. A 10% softer USD also means a 10% nominally higher crude oil price. The current [oil to dollar] feeding cycle can thus go upwards/downwards to $77/bl for Brent crude oil and to 80 for the dollar index unless OPEC & Co stops the oil rally or the ECB stops the euro appreciation and the dollar weakening.

Chart 1: US dollar and oil – The mirror image

Chart 2: The market is tight as in 2013/14 shown by Brent spot versus Brent 1mth contract

Chart 3: Deliberate OPEC & Co production cuts of 2.1 m bl/d
Sum of cuts not including gains by Libya, Nigeria etc

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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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

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2 dagar sedan

den

1 oktober, 2025

Redaktionen

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.

Bjarne Schieldrop, Chief analyst commodities, SEB

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.

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Analys

Modest draws, flat demand, and diesel back in focus

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7 dagar sedan

den

26 september, 2025

Redaktionen

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.

Ole R. Hvalbye, Analyst Commodities, SEB

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.

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Analys

Are Ukraine’s attacks on Russian energy infrastructure working?

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1 vecka sedan

den

24 september, 2025

Redaktionen

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.