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SEB – Råvarukommentarer, 14 september 2012

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SEB Banken - Veckans råvarukommentarer - Prognoser

Sammanfattning av rekommendationer

Sammanfattning av vilka råvaror SEB rekommenderar

Förra veckans summerade vinst på 28% vändes den här veckan såsom mätt per stängning igår torsdag, till en förlust. Dock skulle det ha sett annorlunda ut om man beräknade vinsten idag, eftersom FED:s besked igår kväll ledde till kursrusning i ädelmetallerna. FED annonserade en öppen Quantitative Easing (QE3), där man ska köpa amerikanska bostadsobligationer för 40 miljarder dollar varje månad till dess sysselsättningen förbättras. FED fortsätter också ”Operation Twist” och behåller räntorna mellan noll och 0.25%. Man lovade att hålla räntorna i botten fram till slutet av 2014. En journalist för the New York Times beskrev den här oväntade aggressiviteten så här: ”We will provide the punch for the party. Heavy pours. And we’re not going to be too careful about closing time.”

Naturligtvis är detta mycket positivt för ädelmetaller. Men fundamentalt är efterfrågan på råvaror alltjämt svag. Det betyder att koppar, olja, elektricitet och annat som efterfrågas när industrin går på högvarv kanske omotiverat har stigit i pris. Sedelpressen skapar inte tillväxt och välstånd.

Råolja – Brent

Trots QE3 har råoljepriset svårt att gå över 117 dollar, där det finns ett tekniskt motstånd. Vi förväntar oss ett svagare oljepris in i det fjärde kvartalet, men Iran-problematiken hänger i bakgrunden som ett olöst problem. Orkansäsongen i Mexikanska golfen och underhållsarbeten på Nordsjön, tillsammans med säsongsmässigt hög konsumtion har gett stöd till oljemarknaden. QE3 och det tyska godkännande av ESM ger också stöd. Men underliggande svag makroekonomisk statistik visar att efterfrågan är svag framöver i USA, Europa och Kina. Således tror vi att oljepriset kommer att falla tillbaka något från nuvarande nivå när vi ger oss in i det fjärde kvartalet.

Oljemarknaden är emellertid i en svår situation. Balansen mellan utbud och efterfrågan är svag. Reservkapaciteten är liten, pga sanktionerna mot Iran och det finns inga tecken på ett det ”phony war” är på väg att lösas. Snarare tvärt om. Iran fortsätter arbeta på sitt kärnenergiprogram. Man kan därför lätt tänka sig en ytterligare åtstramning av sanktionerna från EU och USAs sida. Israel har än så länge låtit Kfirerna stå på marken. Strategiska lager finns att lätta på om det skulle bli ännu hårdare restriktioner. Detta skulle kunna gjuta olja på varje prisuppgång.

Diagram över pris på olja (brent) - 13 september 2012

Vi rekommenderar en kort position i oljemarknaden, om man inte föredrar att förhålla sig neutral. Alltså t ex BEAR OLJA X2 S.

Elektricitet

Vi har noterat att de flesta varit intresserade av att köpa BULL EL X4 S, medan vi här vidhållit att det är lite för tidigt att göra det. Vi tror att priset kommer att utveckla sig svagt under september och oktober, att marknaden söker en botten under den här perioden. Ett pris under 40 euro per MWh är köpvärt. Nu är 40 euro ett tekniskt stöd, så det är möjligt att 40 euro är botten. Mellan 40 och 41 euro kan det vara köptillfälle, men annars bör man vara försiktig med BULL.

Prisutveckling på elektricitet - 13 september 2012

Guld, Silver och Platina

Allt har talat för ädelmetallerna den här veckan: Löften om monetära stimulanser på båda sidor om Atlanten. Tekniskt sett ser det mycket starkt ut. Guld är upp 4 %, silver och platina ca 6 % sedan förra fredagen. Vi deklarerade förra veckan att ädelmetallerna hade mer att ge. Målkurserna som vi angav börjar närma sig och det kan vara idé att börja ta hem vinster. $1800 för guld och $35 för silver utgör motståndsnivåer. Platina kan vara undantaget där potentialen kan vara större med tanke på oroligheterna i Sydafrika som har eskalerat i veckan. Uppror och strejker har spridits till fler gruvor, och flera bedömare varnar för kaos i hela landet. Det är i och för sig inte bra för utbudet på guld heller, även om Sydafrika för längesedan lämnade förstaplatsen som producentland.

Prisdiagram på guld spot - 13 september 2012

Vår favorit är Platina (t ex genom certifikatet PLATINA S, eller för den som vill ha lite mer hävstång, BULL PLATIN X4 S). Nedan ser vi platinaprisets utveckling, där brottet av den långsiktiga motståndslinjen, signalerade att den långa konsolideringsperioden är bruten, på uppsidan. Det ser ut som om 1700, toppen från februiari/mars, kan bli ett motstånd. Det är sent i den raska uppgångsfasen och det är väl inte otroligt att det kommer lite eftertankens kranka blekhet här. Med vägen stadigt inslagen på helikopterpengar i världe borde dock priset på ädelmetaller som t ex platina kunna inflateras mer.

Diagram över pris på platina - 13 september 2012

Nedan ser vi priset på guld dividerat med priset på platina. Vi ser att guld har utvecklats sämre än platina sedan mitten av augusti. Tekniskt ser den här trenden stark ut och har potential att gå från 1.05 till 1, dvs en outperformance på ytterligare 5% till platinas fördel. Det mesta av rörelsen från 1.15 är dock avklarad och platina har inte lång tid kvar att vara vår favorit bland ädelmetallerna.

Priset på guld dividerat med priset på platina

Nedan ser vi silverprisets kursutveckling. Det är samma starka tekniska köpsignal i den här metallen.

Diagram över pris på silver spot - 13 september 2012

Även i den här jämförelsen med silver, ser vi att guld har utvecklats sämre än silver sedan månadsskiftet juli/augusti. Vi ser att det finns en stödnivå kring 50 i kvot mellan guld och silverpris. Silverprisets uppgång i förhållande till guld är nära den nivå och vi rör oss alltså in i stödområdet. Det mesta av silvrets outperformance i förhållande till guld är avklarat.

Relation mellan pris på silver och guld

Koppar

Förra veckans svaga arbetsmarknadsstatistik blev (paradoxalt nog) startskottet för ett nytt rally för både bas- och ädelmetaller. Det var en ”tillräckligt” svag siffra som skulle behövas för att få FED att agera. Helgens nyhet att Kina beslutat om ett infrastrukturpaket inkluderande järnvägs- och tunnelbanebyggen motsvarande 157 Mdr USD, blev nästa impuls. Förväntningarna var således högt ställda, och FED:s besked nu ikväll (torsdag) om ett nytt penningpolitiskt stimulanspaket, har därför ännu inte gett någon större effekt. Prisuppgångarna sedan förra fredagen ligger mellan 5 och 10 % för de stora basmetallerna. Aluminium sticker ut med en uppgång på hela 10 %.

I skrivandes stund ligger kopparpriset på LME kring $8180 ($3,72/Lbs) vilket är upp ca 5 % från förra fredagen. Marknaden har nu (med besked) brutit igenom motståndet. Stimulanspaketen från Kina, Europa och USA har naturligtvis gjort sitt för att stärka stämningsläget. Frågan är hur det ser ut fundamentalt. Det bör påpekas att Kina som förbrukar ca 40 % av all koppar befinner sig i en avmattning. Det gäller att stimulanserna får effekt för att prisnivåerna ska hålla. Det är svårbedömt. Aktörerna räknar med fler åtgärder från den kinesiska ledningen. Frågan är till vilka sektorer stimulanserna riktas. Utbyggnaden av elnätet betyder mest (för koppar). Lagernivåerna är höga, vissa marknadsbedömare uppskattar den totala nivån till hela 1,8 milj. ton (det produceras ca 18-19 milj. ton globalt). Statistiken i Kina är osäker. Om det stämmer är det väldigt stora lager, men kom ihåg att Kina kommer att behöva metallen förr eller senare. Just nu är mycket av ett positivt scenario inprisat. Risken har ökat för en rekyl.

Prisutveckling på koppar - 13 september 2012

Vi väljer att vara neutrala till koppar till nästa veckobrev.

Kaffe

Priset på Arabica, som handlas i New York, som steg pga regnen i viktiga kaffeodlingsormråden i Brasilien i juni och juli, föll sedan tillbaka i augusti.

Colombia, som är världens näst största producent av arabica, tycks vara på väg mot en mindre skörd än väntat. Colombia behöver skörda 3.6 miljoner säckar (à 60 kg) från och med nu till årsskiftet, eller 34% mer än samma period förra året, för att nå upp till 8.5 miljoner säckar. Det är vad Colombias ”National Federation of Coffee Growers” förutspådde den 10 september.

Tekniskt verkar priset röra sig ”sidledes” och vi avvaktar ett eventuellt köp lite längre fram.

Tekniskt verkar kaffepriset röra sig ”sidledes”

Socker

Priset på socker, tycks ha funnit ett stöd. Priset vände upp på samma nivå som i juni. Det skulle inte förvåna om priset nu steg upp mot motståndslinjen, dvs till 21 – 22 cent per pund, ur teknisk synvinkel.

Regnväder har återvänt till Brasiliens sockerrörsproducerande områden. Somar Meteorologia i Sao Paulo kommenterar att fälten kan vara för blöta för att skörda mot slutet av oktober. Branschföreningen Unica rapporterar produktionsdata varannan vecka. I Sud-Oeste (Center South i engelsk betydelse), där delstaten Sao Paulo ligger, hade branschen processat 9.4% mindre sockerrör än förra året fram till slutet av augusti. Augusti låg dock högre än förra året, då man tog igen vad man missat tidigare. Augusti låg 14.2% över förra årets augusti. Risken är nu alltså att regnen åter gör det svårt att skörda, vilket bör ge stöd för priset på socker.

Prisutveckling och teknisk prognos på sockerpriset - 13 september 2012

I Indien, världens näst största producent av socker, har monsunen, som står för 70% av nederbörden i landet, fortsatt att förbättras. Från att under sommaren ha legat ca 30% sämre, ligger nederbörden sedan den 1 juni nu bara 9% under genomsnittet för de senaste 50 åren.

Vi stänger positionen i SHORT SOCKE A S. Och så ser vi vad som händer, om det kan utveckla sig ett köptillfälle istället.

Kakao

Förra veckan rekommenderade vi köp av KAKAO S. Det har varit torrt i Elfenbenskusten i juni och juli och det har påverkat utvecklingen av kakaoskörden negativt. De senaste dagarna har nederbörden återvänt och det har ökat förhoppningarna om skörden. Följaktligen har priset backat de senaste dagarna. Det rapporteras att chokladfabrikanterna avvaktade med köp när priset låg över 2700 dollar och väntade på en rekyl. Vi har nu den rekylen och det kan vara ett köptillfälle just nu.

Kakaopris - Utveckling och prognos - 13 september 2012

För spannmål och övriga jordbruksprodukter hänvisas till gårdagens nyhetsbrev.

[box]SEB Veckobrev Veckans råvarukommentar är producerat av SEB Merchant Banking och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Disclaimer

The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska Enskilda Banken AB (publ) (“SEB”).

Opinions contained in this report represent the bank’s present opinion only and are subject to change without notice. All information contained in this report has been compiled in good faith from sources believed to be reliable. However, no representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents and the information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of this document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent permitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document or its contents.

About SEB

SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a participant at major Nordic and other European Regulated Markets and Multilateral Trading Facilities (as well as some non-European equivalent markets) for trading in financial instruments, such as markets operated by NASDAQ OMX, NYSE Euronext, London Stock Exchange, Deutsche Börse, Swiss Exchanges, Turquoise and Chi-X. SEB is authorized and regulated by Finansinspektionen in Sweden; it is authorized and subject to limited regulation by the Financial Services Authority for the conduct of designated investment business in the UK, and is subject to the provisions of relevant regulators in all other jurisdictions where SEB conducts operations. SEB Merchant Banking. All rights reserved.

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Analys

The ”normal” oil price is USD 97/b

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SEB - analysbrev på råvaror

The Dated Brent crude oil price ydy closed at USD 96/b. Wow, that’s a high price! This sensation however depends on what you think is ”normal”. And normal in the eyes of most market participants today is USD 60/b. But this perception is probably largely based on the recent experience of the market. The average Brent crude oil price from 2015-2019 was USD 58.5/b. But that was a period of booming non-OPEC supply, mostly shale oil. But booming shale oil supply is now increasingly coming towards an end. Looking more broadly at the last 20 years the nominal average price was USD 75/b. But in inflation adjusted terms it was actually USD 97/b.

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

Saudi Arabia’s oil minister, Abdulaziz bin Salman, yesterday stated that its production cuts was not about driving the price up but instead it was preemptive versus the highly uncertain global economic development. In that respect it has a very good point. The US 2yr government bond rate has rallied to 5.06% which is the highest since 2006 and just a fraction away of being the highest since December 2000. The Chinese property market is struggling and global PMIs have been downhill since mid-2021 with many countries now at contractive, sub-50 level. Thus a deep concern for the health of the global economy and thus oil demand going forward is absolutely warranted. And thus the preemptive production cuts by Saudi Arabia. But killing the global economy off while it is wobbling with an oil price of USD 110-120/b or higher is of course not a smart thing to do either.

At the same conference in Canada yesterday the CEO of Aramco, Amin H. Nasser, said that he expected global oil demand to reach 110 m b/d in 2030 and that talk about a near term peak in global oil demand was ”driven by policies, rather than the proven combination of markets, competitive economics and technology” (Reuters).

With a demand outlook of 110 m b/d in 2030 the responsible thing to do is of course to make sure that the oil price stays at a level where investments are sufficient to cover both decline in existing production as well as future demand growth.

In terms of oil prices we tend to think about recent history and also in nominal terms. Most market participants are still mentally thinking of the oil prices we have experienced during the shale oil boom years from 2015-2019. The average nominal Brent crude price during that period was USD 58.5/b. This is today often perceived as ”the normal price”. But it was a very special period with booming non-OPEC supply whenever the WTI price moved above USD 45/b. But that period is increasingly behind us. While we could enjoy fairly low oil prices during this period it also left the world with a legacy: Subdued capex spending in upstream oil and gas all through these years. Then came the Covid-years which led to yet another trough in capex spending. We are soon talking close to 9 years of subdued capex spending.

If Amin H. Nasser is ballpark correct in his prediction that global oil demand will reach 110 m b/d in 2030 then the world should better get capex spending rolling. There is only one way to make that happen: a higher oil price. If the global economy now runs into an economic setback or recession and OPEC allows the oil price to drop to say USD 50/b, then we’d get yet another couple of years with subdued capex spending on top of the close to 9 years with subdued spending we already have behind us. So in the eyes of Saudi Arabia, Amin H. Nasser and Abdulaziz bin Salman, the responsible thing to do is to make sure that the oil price stays up at a sufficient level to ensure that capex spending stays up even during an economic downturn.

This brings us back to the question of what is a high oil price. We remember the shale oil boom years with an average nominal price of USD 58.5/b. We tend to think of it as the per definition ”normal” price. But we should instead think of it as the price depression period. A low-price period during which non-OPEC production boomed. Also, adjusting it for inflation, the real average price during this period was actually USD 72.2/b and not USD 58.5/b. If we however zoom out a little and look at the last 20 years then we get a nominal average of USD 75/b. The real, average inflation adjusted price over the past 20 years is however USD 97/b. The Dated Brent crude oil price yesterday closed at USD 96/b.

Worth noting however is that for such inflation adjustment to make sense then the assumed cost of production should actually rise along with inflation and as such create a ”rising floor price” to oil based on rising real costs. If costs in real terms instead are falling due to productivity improvements, then such inflation adjusted prices will have limited bearing for future prices. What matters more specifically is the development of real production costs for non-OPEC producers and the possibility to ramp up such production. Environmental politics in OECD countries is of course a clear limiting factor for non-OPEC oil production growth and possibly a much more important factor than the production cost it self.  

But one last note on the fact that Saudi Arabia’s energy minister, Abdulaziz bin Salman, is emphasizing that the cuts are preemptive rather then an effort to drive the oil price to the sky while Amin H. Nasser is emphasizing that we need to be responsible. It means that if it turns out that the current cuts have indeed made the global oil market too tight with an oil price spiraling towards USD 110-120/b then we’ll highly likely see added supply from Saudi Arabia in November and December rather than Saudi sticking to 9.0 m b/d. This limits the risk for a continued unchecked price rally to such levels.

Oil price perspectives. We tend to think that the nominal average Brent crude oil price of USD 58.5/b during the shale oil boom years from 2015-19 is per definition the ”normal” price. But that period is now increasingly behind us. Zoom out a little to the real, average, inflation adjusted price of the past 20 years and we get USD 97/b. In mathematical terms it is much more ”normal” than the nominal price during the shale oil boom years 

The new normal oil price
Source: SEB graph and calculations, Bloomberg data feed.

Is global oil demand about to peak 1: OECD and non-OECD share of global population

OECD and non-OECD share of global population
Source: SEB graph and calculations, UN population data

Is global oil demand about to peak 2: Oil demand per capita per year

Oil demand per capita per year
Source: SEB graph and calculations, BP oil data
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Analys

USD 100/b in sight but oil product demand may start to hurt

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SEB - analysbrev på råvaror

Some crude oil grades have already traded above USD 100/b. Tapis last week at USD 101.3/b. Dated Brent is trading at USD 95.1/b. No more than some market noise is needed to drive it above USD 100/b. But a perceived and implied oil market deficit of 1.5 to 2.5 m b/d may be closer to balance than a deficit. And if so the reason is probably that oil product demand is hurting. Refineries are running hard. They are craving for crude and converting it to oil products. Crude stocks in US, EU16 and Japan fell 23 m b in August as a result of this and amid continued restraint production by Saudi/Russia. But oil product stocks rose 20.3 m b with net draws in crude and products of only 2.7 m b for these regions. Thus indicating more of a balanced market than a deficit. Naturally there has been strong support for crude prices while oil product refinery margins have started to come off. Saudi/Russia is in solid control of the market. Both crude and product stocks are low while the market is either in deficit or at best in balance. So there should be limited down side price risk. But oil product demand is likely to hurt more if Brent crude rises to USD 110-120/b and such a price level looks excessive.

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

Crude oil prices have been on a relentless rise since late June when it became clear that Saudi Arabia would keep its production at 9 m b/d not just in July but also in August. Then later extended to September and then lately to the end of the year. On paper this has placed the market into a solid deficit. Total OPEC production was 27.8 m b/d in August and likely more or less the same in September. OPEC estimates that the need for oil from OPEC in Q3-23 is 29.2 m b/d which places the global market in a 1.4 m b/d deficit when OPEC produces 27.8 m b/d.

The proof of the pudding is of course that inventories actually draws down when there is a deficit. A 1.4 m b/d of deficit for 31 days in August implies a global inventory draw of 43.4 m b/d. If we assume that OECD countries accounts for 46% of global oil demand then OECD could/should have had a fair share of inventory rise of say 20 m b in August. Actual inventory data are however usually a lagging set of data so we have to work with sub sets of data being released on a higher frequency. And non-OECD demand and inventory data are hard to come by.

If we look at oil inventory data for US, EU16 and Japan we see that crude stocks fell 23 m b in August while product stocks rose 20.3 m b with a total crude and product draw of only 2.7 m b. I.e. indicating close to a balanced market in August rather than a big deficit. But it matters that crude stocks fell 23 m b. That is a tight crude market where refineries are craving and bidding for crude oil together with speculators who are buying paper-oil. So refineries worked hard to buy crude oil and converting it to oil products in August. But these additional oil products weren’t gobbled up by consumers but instead went into inventories.

Rising oil product inventories is of course  a good thing since these inventories in general are low. And also oil product stocks are low. The point is more that the world did maybe not run a large supply/demand deficit of 1.5 to 2.5 m b/d in August but rather had a more balanced market. A weaker oil product demand than anticipated would then likely be the natural explanation for this. Strong refinery demand for crude oil, crude oil inventory draws amid a situation where crude inventories already are low is of course creating an added sense of bullishness for crude oil.

On the one hand strong refinery demand for crude oil has helped to drive crude oil prices higher amid continued production cuts by Saudi Arabia. Rising oil product stocks have on the other hand eased the pressure on oil products and thus softened the oil product refinery margins.

The overall situation is that Saudi Arabia together with Russia are in solid control of the oil market. Further that the global market is either balanced or in deficit and that both crude and product stocks are still low. Thus we have a tight market both in terms of supplies and inventories. So there should be limited downside in oil prices. We are highly likely to see Dated Brent moving above USD 100/b. It is now less than USD 5/b away from that level and only noise is needed to bring it above. Tupis crude oil in Asia traded at USD 101.3/b last week. So some crude benchmarks are already above the USD 100/b mark.

While Dated Brent looks set to hit USD 100/b in not too long we are skeptical with respect to further price rises to USD 110-120/b as oil product demand likely increasingly would start to hurt. Unless of course if we get some serious supply disruptions. But Saudi Arabia now has several million barrels per day of reserve capacity as it today only produces 9.0 m b/d. Thus disruptions can be countered. Oil product demand, oil product cracks and oil product inventories is a good thing to watch going forward. An oil price of USD 85-95/b is probably much better than USD 110-120/b for a world where economic activity is likely set to slow rather than accelerate following large interest rate hikes over the past 12-18 months.

OPEC’s implied call-on-OPEC crude oil. If OPEC’s production stays at 27.8 m b/d throughout Q3-23 and Q4-23 then OPECs numbers further strong inventory draws to the end of the year.

OPEC's implied call-on-OPEC crude oil.
Source: SEB graph and calculations. Call-on-OPEC as calculated by OPEC in its Sep report.

Net long speculative positions in Brent crude and WTI. Speculators have joined the price rally since end of June.

Graph of net long speculative positions in Brent crude and WTI.
Source: SEB calculations and graph, Blbrg data

End of month crude and product stocks in m b in EU16, US and Japan. Solid draw in crude stocks but also solid rise in product stocks. In total very limited inventory draw. Refineries ran hard to convert crude to oil products but these then went straight into inventories alleviating low oil product inventories there.

End of month crude and product stocks
Source: SEB table, Argus data

ARA oil product refinery margins have come off their highs for all products as the oil product situation has eased a bit. Especially so for gasoline with now fading summer driving. But also HFO 3.5% cracks have eased back a little bit. But to be clear, diesel cracks and mid-dist cracks are still exceptionally high. And even gasoline crack down to USD 17.6/b is still very high this time of year.

ARA oil product refinery margins
Source: SEB graph and calculations

ARA diesel cracks in USD/b. Very, very high in 2022. Almost normal in Apr and May. Now very high vs. normal though a little softer than last year.

ARA diesel cracks in USD/b.
Source: SEB graph and calculations, Blbrg data

US crude and product stocks vs. 2015-2019 average. Still very low mid-dist inventories (diesel) and also low crude stocks but not all that low gasoline inventories.

US crude and product stocks vs. 2015-2019 average.
Source: SEB graph and calculations, Blbrg data feed

US crude and product stocks vs. 2015-2019 averages. Mid-dist stocks have stayed persistently low while gasoline stocks suddenly have jumped as gasoline demand seems to have started to hurt due to higher prices.

US crude and product stocks vs. 2015-2019 averages.
Source: SEB calculations and graph, Blbrg data feed.

Total commercial US crude and product stocks in million barrels. Rising lately. If large, global deficit they should have been falling sharply. Might be a blip?

Total commercial US crude and product stocks in million barrels.
Source: SEB graph and calculations, Blbrg data feed, EIA data
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Analys

USD 85/b or USD 110/b is up to Saudi/Russia to decide

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SEB - analysbrev på råvaror

The market is bewildered and cannot quite figure out whether the latest extension of Saudi Arabia’s unilateral cut to the end of the year is 1) A reflection of weakness to come and an effort to preemptively trying to avoid the oil price from falling below USD 85/b amid coming weakness, or 2) An effort do drive the oil price to USD 100-110/b by the end of the year. If the IEA’s latest calculations for global demand in Q3 and Q4 are correct and Saudi sticks to its cuts then global inventories will indeed decline by 250 million barrels by year end and Brent crude will rally to USD 100-110/b. And Saudi Arabia will get a lot of blame. One thing which is very clear though is that Saudi Arabia together with Russia is in comfortable control of the oil market and we’ll just have to accept the oil price they are aiming for.

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

OPEC produced 27.8 m b/d in August. The IEA in its latest OMR has calculated call-on-OPEC to be 30 m b/d in Q3-23 and 29.8 m b/d in Q4-23. So on paper the global market is running a deficit of 2.2 m b/d or 15.4 m b per week. If so we should see a decline in US oil inventories as they are impacted by the global balance. Maybe on par with US oil demand share of the world being close to 20%. I.e. we should expect to see an inventory decline in the US of at least 3 m b per week. Maybe more. And indeed that is also what we have seen. Ydy the US API released partial US inventory data indicating that US crude inventories declined 5.5 m b last week while gasoline inventories declined 5.1 m b. That is big and a clear signal that the market today is running at a significant deficit. Other signs of a tight market is the elevated level of backwardation in crude and oil product forward curves, rising official selling prices by Saudi and also the fact that Dubai crude is trading at a premium of close to USD 1/b versus Brent crude rather than the usual discount of USD 1-2-3/b.

In this perspective the extension of Saudi Arabia’s unilateral production cut to the end of the year is shocking. If the IEA is correct in its assessments then we would get a global inventory draw of about 250 million barrels from now to the end of the year. And if so the Brent crude oil price would indeed move to USD 100 – 110/b by the end of the year. Speculators can then doubt the market as much as they want. But such a physical deficit would most definitely drive the price up, up, up.

This deliberate action of driving the oil price to USD 100 – 110/b can then squarely be blamed on Saudi Arabia’s unilateral production cuts. Together with Russian export curbs of 0.3 m b/d of course. Everyone can accept that the oil price rallies to USD 100/b and higher due to unforeseen events. But here we are talking about deliberate action of driving the oil price higher in the face of a western world fighting hard to curb inflation while the Biden administration is also preparing for a re-election in 2024. Gasoline prices higher and higher. Hm, that is not at all what the US consumers wants, what Biden wants or what the Fed wants. So the latest action from Saudi Arabia, if it drives the oil price to USD 100/b or higher must indeed lead to political heat from the US.

But there is a possible excuse. We know that interest rates have been lifted rapidly over the past 12-18 months and that this is leading to global economic cooling for the year to come. Add China’s struggling housing market to this. Western consumers are buying less stuff from China. Chinese consumers are buying less stuff because they fear the economic situation. Chinese exports are down 8.8% YoY and imports are down 7.3% YoY.

Saudi Arabia has one of the biggest physical oil books in the world. As such it can see the cards of its oil purchasing clients on a 1-2-3 months forward basis. It can see what they are booking and ordering for the coming 1-2-3 months. IEA’s calculations is the global balance on paper. It is a static snapshot. But the world is dynamic and changing all the time. So it is possible that the extension of Saudi Arabia’s unilateral cut is a counter to weakness to come and an effort to avoid the oil price from falling below USD 85/b rather than an effort to drive the oil price to USD 100/b or higher. It is impossible to know for sure. What we can be pretty confident about however is that Saudi Arabia together with Russia are comfortably running the show.

Another twist here is also that even if Saudi Arabia now has pledged to keep its production at 9 m b/d (vs. normal 10 m b/d) to end of December, it always has the option to change the course in October and November. I.e. if it turns out that the cuts are too deep and the market is overly short oil, then it can lift production November and December if need be.

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