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OPEC meeting: Holding back is easy as Iran and Venezuela takes all the pain

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

Brent crude jumps 2.8% this morning to $66.6/bl following news that Saudi Arabia and Russia are in agreement of an extension of current cuts for another 6 to 9 months and that this plan is also endorsed by Iran’s oil minister Zanganeh. A trade truce between US and China also adds strength to the oil price this morning.

OPEC being “between a rock and a hard place” has been the description of OPEC’s situation in the run-up to this OPEC meeting. Losing market share to booming US shale oil production on the one hand while facing weakening oil demand growth along with slowing global growth on the other hand. It is true that OPEC as a whole is losing market share. But this burden is not evenly distributed as it is Venezuela and Iran who are taking almost all the pain. The other OPEC members (and OPEC+ members) are basically not taking any heat at all.

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

From Jan to May Saudi Arabia produced only 173 k bl/d below its 2014-2018 average while Russia produced 371 k bl/d above that average.

It is thus easy for the main producers to decide to roll cuts forward as they do not really cost them anything, or very little to do so. The only price they have to pay is to hold back supply slightly and refrain from growing their production along with global oil demand growth while harvesting an oil price of $60-70/bl.

It will of course be problematic when Iran and Venezuela eventually returns to the market. And that could indeed be a very bearish moment in the oil market. Given the large range of uncertainties in the oil market OPEC has learned to act reactively rather than trying to act pre-emptively. Thus OPEC will have to deal with the return of Venezuela and Iran at some point in the future but then it will deal with that rainy day when it comes. Right now things are as they are and it is easy for OPEC’s key members and Russia to roll the cuts forward into H2-19 and also likely into Q1-20.

It is clear that the global economy is still in a slow-down mode and so is global oil demand growth. Global oil demand growth is however rarely below +1% y/y unless the global economy is in a recession and as far as we can see we are not there yet at all.

Global oil demand seasonally jumps roughly 1 m bl/d from Q2 to H2. US shale oil production is currently growing at a marginal annualized rate of about 0.8 m bl/d YoY and in addition comes US NGL growth. US crude production will thus probably be 0.4 m bl/d higher at year end but on average just 0.2 m bl/d higher in H2 than in June. So OPEC+ will probably have to produce more in H2 than they did in H1 in order to satisfy seasonally higher demand unless the global economy tanks completely. Thus if Russia, Saudi Arabia and the other key OPEC members keeps production at the levels they produced in H1-19 they will ensure that the global oil market is not flowing over. They will only have to pay a small restraint while reaping a nice oil price of $60-70/bl

Two factors are coming into play in H2-19 in addition to global oil demand growth. The first is a large ramp-up of oil pipelines coming online from the Permian basin and out to the US Gulf. Cactus, EPIC and Grey Oak will add a total capacity of between 2.2 and 2.5 m bl/d from Permian to the USGC which effectively (80%) will amount to 1.7 to 2.0 m bl/d. This will help to release surplus oil inventories in the US into the global market place, tighten up the US market while easing the global situation. It will help to tighten up the WTI crude price curve while helping to ease the Brent crude price curve in relative terms. The oil market has a tendency to trade the global oil price on the back of US oil data due to lacking availability of high quality global data. Thus a draining of US oil inventories could be interpreted bullishly even though it is only shifting inventories from the US to non-US.

The other factor is the IMO – 2020 shift of fuel quality in global shipping from maximum 3.5% sulphur to only 0.5% sulphur in January 2020. In general this will add a lot of Marine Gasoil (MGO) demand from global shipping and especially so in Q4-19 and H1-2020. Global refineries will need to run hard to satisfy elevated stock building and demand already in Q4-19. This will be bullish for global crude oil demand already in H2-19. Ballpark figures are that shipping will need an additional 2 m bl/d of MGO in this period. Global refineries will probably have to process another 4-5 m bl/d of crude in order to satisfy this added MGO demand.

Ch1: Supply from OPEC+ declined 3.0 m bl/d from a peak in November last year. It looks like a decisive cut. To a large degree it is the misfortune of Iran and Venezuela. OPEC+ also boosted production from May to Nov last year and then cut from a peak.

Supply from OPEC+ declined

Ch2: Production in OPEC+ during Jan to May this year versus average levels from 2014 to 2018 in %. Russia, Iraq and UAE are well above while Saudi Arabia and Kuwait are just marginally below. Not a high price for these countries to hold production unchanged through H2-19 and Q1-20. Venezuela and Iran are taking the pain

Production in OPEC+ during Jan to May this year versus average levels from 2014 to 2018 in %

Ch3: Production in OPEC+ during Jan to May this year versus average levels from 2014 to 2018 in k bl/d. Saudi Arabia produced only 173 k bl/d below the 5 year average while Russia produced 371 k bl/d above that level. They are producing at very good volumes and not really paying a high price.

Production in OPEC+ during Jan to May

Analys

Tightening fundamentals – bullish inventories from DOE

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SEB - analysbrev på råvaror

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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