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SHB Råvarubrevet 22 november 2013

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Handelsbanken - Råvarubrevet - Nyhetsbrev om råvaror

Kvartalsrapport för råvaror från HandelsbankenRåvaror allmänt

Kina ger kött på benen

Till slut kom så beslutsdokumentet från Kinas högsta ledare efter landets strategiska högmöte som hålls vart tionde år och banar vägen för det centralstyrda jättelandets utveckling. Tyngdpunkten ligger på reformer och dessa är massiva. Effekterna beror slutligen på hur väl dessa lyckas implementeras men det kommer sannolikt att kosta tillväxt att genomföra. Det blir alltså fortsatt en balansakt för landets ledare att genomföra reformer i en takt som ekonomins utveckling tål. De stora förändringarna har adresserats kända krishärdar som statligt ägda bolags oförmåga att tjäna pengar och reformer av finansmarknaden.

I stora drag hittar vi inte mycket som har direkt påverkan på råvarumarknaden. Det är tydligt att fokus nu ligger på ”mjuka” variabler och tiden med högsta prioritet för antal km byggda järnvägar och motorvägar ligger bakom oss. Mycket infrastruktur kommer dock fortfarande krävas för att öka inkomstnivåerna utanför kustprovinserna men det är en långsam process. För råvarumarknaden blir därför slutsatsen att i närtid kommer balansakten på kniveggen då ledarna ska implementera reformer utan att stjäla tillväxt vara det viktigaste för prisbidraget från Kina.

Sammanfattar vi andra makrohändelser i veckan så har vi både bättre än väntat jobless claims från USA och amerikanskt markit PMI. Från Fed sa Bernanke i tal att nollräntan kan bestå en avsevärd tid efter att QE har avslutats och kanske även långt efter att arbetslöshetströskeln (6,5%) passerats. Tapering är åter på tapeten efter fedprotokollet publicerats där tapering kan väntas de kommande månaderna. HSBC´s preliminära PMI för Kina i november kom in sämre än väntat (50,4 mot väntat 50,8).

Handelsbanken om råvaror

Basmetaller

Lugn vecka för metallerna

Metallerna har handlats ganska oförändrat under veckan och vårt basmetallindex likaså. Koppar och nickel sticker dock ut där koppar stiger under veckan dels på grund av ökad import av koppar i Kina, världens största konsument av metallen, men även på fortsatt fallande lager. Nickel däremot slutar veckan på minus och tyngs till motsats till koppar på stigande lager. Nickel fortsätter att handlas långt under produktionskostnad vilket har fått några nickelproducenter att dra ner på kapacitet. Vi väntar att fler följer i samma spår. Nickel handlas nu på 13 560 USD/ton och med en marginalkostnad för produktion på 18 900 USD/ton blir bilden väldigt tydlig.

Det återstår att se vad Kina inköpschefsindex (PMI) kommer in på för november. Det publiceras inte förrän 1 december men under veckan har HSBC´s preliminära PMI visat för en siffra något är lägre än vad marknaden väntat sig. Oktobers PMI var 51,4 och förväntningar för november är något lägre på 51,0.

Kopparpris och kopparlager

Vi tror att Kinas tillväxt kommer överraska positivt under Q4 och Q1, vilket kommer stärka metallerna. Vi tror på: LONG BASMETALLER

Ädelmetaller

Guldet fortsätter sin kräftgång

Vi är som bekant negativa till guldet sedan ganska lång tid, och dess kräftgång fortsätter. En analys från Bloomberg från igår hänger upp guldets snara återhämtning på att dollarn ska fortsätta falla, vilket i sig kan ifrågasättas givet Feds förestående nedtrappning kombinerat med ECB:s troligt låga räntor under lång tid framöver. Vår syn på guldets svaghet är upphängd primärt runt att det köps och säljs i syfte att tjäna pengar, alltmedan övriga råvaror köps för att förbrukas, i en förenklad förklaring. Detta gör att när guldköparna inte längre kan sälja till andra guldköpare till högre pris, ja då slutar man köpa. När priset börjar falla så blir det en form av ”chicken race” där man testas i sin uthållighet.

Under 2013 har guldet fallit mot alla valutor, inklusive årets största valutaförlorare, den Sydafrikanska randen. Detta får oss att misstänka att om 2014 blir ett år då dollarn kommer tillbaks, då är det inte omöjligt att det får stor negativ påverkan på guldet.

Veckan som gått har sett guldet falla ytterligare drygt 3.5 procent, och pengarna fortsätter att flöda ur guld-ETF:er (chicken-racet börjar bli smärtsamt). Nuvarande nivå, 1250 dollar per uns, var en motståndsnivå på uppsidan när det bröt igenom år 2010, vilket gör att det kan vara en känslig nivå om vi skulle falla under nu. I den närmast panikartade stämning som rådde i somras föll det så lågt som 1200, varför området mel-lan 1200 och 1250 borde ses som kritiskt. Ett brott här öppnar upp för en rörelse ner mot 1000 dollar per uns, en psykologiskt viktig nivå som ansträngda guldinnehavare inte önskar se.

Guldpriset på Comex enl februari-termin

Efter en uppgång under sommaren tror vi åter att guldets väg lutar utför. Vi tror på: SHRT GULD H

Energi

Fortsatt utbudsproblem för oljan

Oljemarknaden stärks ytterligare 1.5 procent under veckan och handlas nu på 110 USD/fat. De två främst drivande faktorerna utöver veckans positiva sysselsättningssiffror och optimism kring USA (USA konsumerar 21 procent av världens olja så minsta förändring i den förväntade efterfrågan brukar slå på en marknad med låg reservkapacitet) är fortsatt Libyen´s utbudsproblem samt Iran där tidigare optimism kring den nukleära tvisten nu slagit om till skepticism och utdragna sanktioner vilket hindrar landets oljeexport. Iran´s produktion var i september endast 2.63 miljoner fat per dag och de lägsta på 23 år (Iran producerade som mest 6.6 mfpd under 1976) och är ned 1 mfpd sedan sanktionerna infördes. Den minskade exporten som fallit från 2.2 mfpd till 700,000 fpd innebär med andra ord att det kostat landet hela 4.2 miljarder USD. Så vad är då risken för att marknaden faller tillbaka vid en eventuell tillfällig lösning? Visst kan marknaden falla tillbaka några dollar direkt på en sådan nyhet men bör ganska snabbt återhämta rörelsen eftersom inget förändrats fundamentalt i marknaden och det lär dröja lång tid innan vi ser denna volym på exportmarknaden då något mer konkret och det kommer ta lång tid. Oljan har nu nått en mer balanserad nivå, dvs ca 5 dollars riskpremie över fundamental nivå om 105 dollar där varje produktionsbortfall och/eller politiskt upptrappning kring MENA´s produktionsländer bör skapa ytterligare möjlighet på uppsidan.

Förra veckans uppgång på elmarknaden raderades ut av kraftiga nederbördsfronter där en ny rekordhög energivolym noterades för Sverige och Norge på 4.1 TWh under ett dygn! Totalt fick vi närmare 3 TWh mer regn än normalt vilket innebär att energibalansen förbättrats till -9.16 TWh. Den långa kurvan (10 år) tappar 2.5 öre till lite drygt 34.5 öre /kWh (36.57 EUR/MWh). Samtidigt som utsläppsrätterna handlas oförändrat fortsätter den positiva trenden på kol, bilden nedan visar utvecklingen på Api2 som nu handlas på 82.20 USD/ ton för närmsta kvartalet och vi räknar med att den trenden håller i sig. Väderprognoserna pekar på ett mer normalbetonat väder de kommande 10-dagarna där vi förväntar oss en neutral till stark utveckling på marknaden nu när all nederbörd diskonterats för.

Kolpris första kvartalet 2014

Energiunderskott tillsammans med osäkerhet kring kärnkraftsverken inför vintern talar för högre elpris. Vi tror på: LONG EL

Livsmedel

Bra utsikter för sydamerikansk soja

Priserna på majs i Chicago är i stort sett oförändrade jämfört med förra veckan. Skörden i USA är nästan helt klar och inte mycket kan överraska där nu. Argentina har länge varit väl torrt men har fått en del regn nu vilket ses som klart gynnsamt för pågående sådd även om mer önskas – omkring 55 procent av sådden uppges nu vara klar. Utan väderproblem i Sydamerika är det för tillfället svårt att se varför majspriserna skulle börja stiga då tillgången på majs globalt är väldigt god.

Priserna på sojabönor i Chicago noteras upp sedan förra veckan. Skörden i USA är i stort sett helt klar och lär inte bjuda på så mycket överraskningar. Mer intressant att följa nu är väderutvecklingen i Sydamerika, vilken hittills varit tillfredställande. I Argentina uppges sådden vara avklarad till 32 procent. Fortsätter vädret att utvecklas väl och nuvarande produktionsestimat håller kommer globala lager av sojabönor nå nära rekordnivå.

Sojabönor

Efter flera år av rekordskördar handlas kaffe idag på femårslägsta. Vi finner kaffe köpvärd och ser risken på nedsidan begränsad. Vi tror på: BULL KAFFE

Handelsbankens Råvaruindex

Handelsbankens råvaruindex 22 november 2013

Handelsbankens råvaruindex består av de underliggande indexen för respektive råvara. Vikterna är bestämda till hälften från värdet av nordisk produktion (globala produktionen för sektorindex) och till hälften från likviditeten i terminskontrakten.

[box]SHB Råvarubrevet är producerat av Handelsbanken och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Ansvarsbegränsning

Detta material är producerat av Svenska Handelsbanken AB (publ) i fortsättningen kallad Handelsbanken. De som arbetar med innehållet är inte analytiker och materialet är inte oberoende investeringsanalys. Innehållet är uteslutande avsett för kunder i Sverige. Syftet är att ge en allmän information till Handelsbankens kunder och utgör inte ett personligt investeringsråd eller en personlig rekommendation. Informationen ska inte ensamt utgöra underlag för investeringsbeslut. Kunder bör inhämta råd från sina rådgivare och basera sina investeringsbeslut utifrån egen erfarenhet.

Informationen i materialet kan ändras och också avvika från de åsikter som uttrycks i oberoende investeringsanalyser från Handelsbanken. Informationen grundar sig på allmänt tillgänglig information och är hämtad från källor som bedöms som tillförlitliga, men riktigheten kan inte garanteras och informationen kan vara ofullständig eller nedkortad. Ingen del av förslaget får reproduceras eller distribueras till någon annan person utan att Handelsbanken dessförinnan lämnat sitt skriftliga medgivande. Handelsbanken ansvarar inte för att materialet används på ett sätt som strider mot förbudet mot vidarebefordran eller offentliggörs i strid med bankens regler.

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Analys

Not below USD 70/b and aiming for USD 80/b

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SEB - analysbrev på råvaror

Saudi Arabia again reminded the global oil market who is king. Oil price is ticking carefully upwards today as investors are cautious after having burned their fingers in the production cut induced rally to (almost) USD 90/b which later faltered. We expect more upside price action later today in the US session. The 1 m b/d Saudi cut in July is a good tactic for the OPEC+ meeting on 4-6 July. Unwind if not needed or force all of OPEC+ to formal cut or else….Saudi could unwind in August. The cut will unite Saudi/Russia and open for joint cuts if needed. I.e. it could move Russia from involuntary reductions to deliberate reductions

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

Adjusting base-lines and formalizing and extending May cuts to end of 2024. OPEC+ this weekend decided to extend and formalize the voluntary agreement of cuts in May. These cuts will now be and overall obligation for the group to produce 40.5 m b/d  on average in 2024 (not including natural gas liquids). There were some adjustments to reference production levels where African members got lower references as they have been unable to fill their quotas. UAE on the other hand got a 200 k b/d increase in its reference production level to match actual capacity increases. It was also a discussion of whether to change the baseline for Russia’s production. But these changes in baselines won’t make any immediate changes to production.

Unilateral cut of 1 m b/d by Saudi in July. The big surprise to the market was the unilateral 1 m b/d cut of Saudi Arabia for July. To start with it is for July only though it could be extended. The additional cut will 

1) Make sure the oil price won’t fall below 70
2) Prevent inventories from rising
3) Help prevent capex spending in upstream oil and gas globally is not getting yet another trough
4) Make for a great tactical negotiation setup for next OPEC+ meeting on 4-6 July
       a) If the 1 m b/d July cut is unnecessary, then it will be un-winded for August
       b) If it indeed was needed then Saudi can strong-arm rest of OPEC+ to make a combined cut from August. Else Saudi could revive production by 1 m b/d from August and price will fall.
5) It is roughly aligning actual production by Russia and Saudi Arabia. Actually it is placing Saudi production below Russian production. But basically it is again placing the two core OPEC+ members on equal footing. Thus opening the door for combined Saudi/Russia cuts going forward if needed.

Saudi produced / will produce /Normal production:
April: 10.5
May: 10.0
June: 10.0
July: 9.0
Normal prod: 10.1

Oil price to strengthen further. Especially into the US session today. We expect crude oil prices to strengthen further and especially into the US session today. Price action has been quite careful in response to the surprise 1 m b/d cut by Saudi Arabia so far today. Maybe it is because it is only for one month. But mostly it is probably because the market in recent memory experienced that the surprise cut for May sent the Dated Brent oil price to USD 88.6/b in mid-April before it again trailed down to almost USD 70/b. So those who joined the rally last time got burned. They are much more careful this time around.

USD 80/b is the new USD 60/b and that is probably what Saudi Arabia is aiming for. Not just because that is what Saudi Arabia needs but also because that is what the market needs. We have seen a sharp decline in US oil rig count since early December last year and that has taken place at an average WTI price of USD 76/b and Brent average of USD 81/b. Previously the US oil rig count used to expand strongly with oil prices north of USD 45/b. Now instead it is declining at prices of USD 75-80/b. Big difference. Another aspect is of course inflation. US M2 has expanded by 35% since Dec 2019 and so far US CPI has increased by 17% since Dec 2019. Assume that it will rise altogether by 30% before all the stimulus money has been digested. If the old oil price normal was USD 60/b then the new should be closer to USD 80/b if adjusting for a cumulative inflation increase of 30%. But even if we just look at nominal average prices we still have USD 80/b as a nominal average from 2007-2019. But that is of course partially playing with numbers.

Still lots of concerns for a global recession, weakening oil demand and lower oil prices due to the extremely large and sharp rate hikes over the past year. That is the reason for bearish speculators. But OPEC+ has the upper hand. This is what we wrote recently on that note: ”A recession is no match for OPEC+”

Aligning Saudi production with Russia. Russian production has suffered due to sanctions. With a 1 m b/d cut in July Saudi will be below Russia for the first time since late 2021. Russia and Saudi will again be equal partners. This opens up for common agreements of cuts. Reduced production by Russia since the invasion has been involuntary. Going forward Russia could make deliberate cuts together with Saudi.

Graph over Russia and Saudi oil production
Source: Rystad data

Short specs in Brent and WTI at 205 m barrels as of Tuesday last week. They will likely exit shorts and force the oil price higher.

Short specs in Brent and WTI
Source: Blberg data

Long vs. Short specs in Brent and WTI at very low level as of Tuesday last week. Will probably bounce back up.

Long vs. Short specs in Brent and WTI
Source: Blbrg data

US oil rig count has declined significantly since early Dec-2022 at WTI prices of USD 76/b and Brent of USD 81/b (average since Dec-2022).

US oil rig count
Source: Blbrg data

Historical oil prices in nominal and CPI adjusted terms. Recent market memory is USD 57.5/b average from 2015-2019. But that was an extremely bearish period with booming US shale oil production.

Historical oil prices in nominal and CPI adjusted terms.
Source: Blberg data. SEB graph and calculations
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Analys

A recession is no match for OPEC+

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SEB - analysbrev på råvaror

History shows that OPEC cuts work wonderfully. When OPEC acts it changes the market no matter how deep the crisis. Massive 9.7 m b/d in May 2020. Large cuts in Dec 2008. And opposite: No-cuts in 2014 crashed the price. OPEC used to be slow and re-active. Now they are fast and re-active. Latest cut indicates a ”reaction-function” with a floor price of USD 70/b. Price could move lower than that in May, but JMMC meeting on 4 June and full OPEC+ meeting on 5-6 July would then change the course. Fresh cuts now in May will likely drive market into deficit, inventory draws, stronger prices. Sell-offs in May should be a good buying opportunities

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

Production cuts by OPEC+ do work. They work wonderfully. Deep cuts announced by OPEC in December 2008 made the oil price bottom at USD 33.8/b on Christmas Eve. That is USD 48.3/b adj. for CPI. The oil price then collapsed in 2014 when it became increasingly clear during the autumn that OPEC would NOT defend the oil price with confirmation of no-cuts in December that year.  The creation of OPEC+ in the autumn of 2016 then managed to drive the oil price higher despite booming US shale oil production. A massive 9.7 m b/d cut in production in May 2020 onward made the oil price shoot higher after the trough in April 2020. 

Historical sequence pattern is first a price-trough, then cuts, then rebound. This history however points to a typical sequence of events. First we have a trough in prices. Then we get cuts by OPEC(+) and then the oil price shoots back up. This probably creates an anticipation by the market of a likewise sequence this time. I.e. that the oil price first is going to head to USD 40/b, then deep cuts by OPEC+ and then the rebound. If we get an ugly recession.

But OPEC+ is faster and much more vigilant today. Historically OPEC met every half year. Assessed the situation and made cuts or no cuts in a very reactive fashion. That always gave the market a long lead-time both in terms of a financial sell-off and a potential physical deterioration before OPEC would react.

But markets are faster today as well with new information spreading to the world almost immediately. Impact of that is both financial and physical. The financial sell-off part is easy to understand. The physical part can be a bit more intricate. Fear itself of a recession can lead to a de-stocking of the oil supply chain where everyone suddenly starts to draw down their local inventories of crude and products with no wish to buy new supplies as demand and prices may be lower down the road. This can then lead to a rapid build-up of crude stocks in the hubs and create a sense of very weak physical demand for oil even if it is still steady.

Deep trough in prices is possible but would not last long. Faster markets and faster OPEC+ action means we could still have a deep trough in prices but they would not last very long. Oil inventories previously had time to build up significantly when OPEC acted slowly. When OPEC then finally made the cuts it would take some time to reverse the inventory build-up. So prices would stay lower for longer. Rapid action by OPEC+ today means that inventories won’t have time to build up to the same degree if everything goes wrong with the economy. Thus leading to much briefer sell-offs and sharper and faster re-bounds.

OPEC+ hasn’t really even started cutting yet. Yes, we have had some cuts announced with 1.5 m b/d reduction starting now in May. But this is only bringing Saudi Arabia’s oil production back to roughly its normal level around 10 m b/d following unusually high production of 11 m b/d in Sep 2022. So OPEC+ has lots of ”dry powder” for further cuts if needed.

OPEC reaction function: ”USD 70/b is the floor”. The most recent announced production cut gave a lot of information. It was announced on 2nd of April and super-fast following the 20th of March when Dated Brent traded to an intraday low of USD 69.27/b.

JMMC on 4 June and OPEC+ meeting on 5-6 July. Will cut if needed. OPEC+ will now spend the month of May to assess the effects of the newest cuts. The Joint Ministerial Monitoring Committee (JMMC) will then meet on 4 June and make a recommendation to the group. If it becomes clear at that time that further cuts are needed then we’ll likely get verbal intervention during June in the run-up to 5-6 July and then fresh cuts if needed.

Oil man Biden wants a price floor of USD 70/b as well. The US wants to rebuild its Strategic Petroleum Reserves (SPR) which now has been drawn down to about 50%. It stated in late 2022 that it wanted to buy if the oil price fell down to USD 67 – 72/b. Reason for this price level is of course that if it falls below that then US shale oil production would/could start to decline with deteriorating energy security for the US. Latest signals from the US administration is that the rebuilding of the SPR could start in Q3-23.

A note on shale oil activity vs. oil price. The US oil rig count has been falling since early December 2022 and has been doing so during a period when the Dated Brent price has been trading around USD 80/b.

IMF estimated social cost-break-even oil price for the different Middle East countries. As long as US shale oil production is not booming there should be lots of support within OPEC+ to cut production in order to maintain the oil price above USD 70/b. Thus the ”OPEC+ reaction-function” of a USD 70/b floor price. But USD 80/b would even satisfy Saudi Arabia.

IMF estimated social cost-break-even oil price for the different Middle East countries
Source: SEB graph, Bloomberg, IMF

US implied demand and products delivered is holding up nicely YoY and on par with 2019. So far at least. Seen from an aggregated level.

US implied demand and products delivered
Source: SEB graph and calculations, Blberg, US DOE

Total US crude and product stocks including SPR. Ticking lower. Could fall faster from May onward due to fresh cuts by OPEC+ of 1.5 m b/d

Total US crude and product stocks including SPR.
Source: SEB graph and calculations, Bloomberg, DOE

An oil price of USD 95/b in 2023 would place cost of oil to the global economy at 3.3% of Global GDP which is equal to the 2000 – 2019 average.

Oil cost as share of global economy
Source: SEB calculations and graph, Statista, BP
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Analys

Mixed signals on demand but world will need more oil from OPEC but the group is cutting

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SEB - analysbrev på råvaror

A world where OPEC(+) is in charge is a very different world than we are used to during the ultra-bearish 2015-19 period where US shale AND offshore non-OPEC production both were booming. Brent averaged USD 58/b nominal and USD 70/b in real terms that period. The Brent 5yr contract is trading at USD 66/b nominal or USD 58.6/b in real-terms assuming no market power to OPEC+ in 2028. Could be, but we don’t think so as US Permian shale is projected by major players to peak next 5yrs. When OPEC(+) is in charge the group will cut according to needs. For Saudi that is around USD 85/b but maybe as high as USD 97/b if budget costs rise with inflation

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

No major revisions to outlook by the IEA last week in its monthly Oil Market Report.

Total demand to rise 2 m b/d, 90% of demand growth from non-OECD and 57% from Jet fuel. Total demand to rise by 2 m b/d YoY to 101.9 m b/d where 90% of the gain is non-OECD. Jet fuel demand to account for 57% of demand growth as global aviation continues to normalize post Covid-19. Demand for 2022 revised down by 0.1 m b/d and as a result so was the 2023 outlook (to 101.9 m b/d). Non-OPEC supply for 2023 was revised up by 0.1 m b/d. Call-on-OPEC 2023 was reduced by 0.2 m b/d as a result to 29.5 m b/d. Call-on-OPEC was 28.8 m b/d in Q4-22. The group produced 28.94 m b/d in Mar (Argus).

World will need more oil from OPEC. Call-on-OPEC to rise 1.6 m b/d from Q4-22 to Q4-23. IEA is forecasting a call-on-OPEC in Q4-23 of 30.4 m b/d. The world will thus need 1.6 m b/d more oil from OPEC YoY in Q4-23 and 0.46 m b/d more than it produced in March. Counter to this though the OPEC group decided to cut production by 1 m b/d from May to the end of the year. So from May onward the group will produce around 28 m b/d while call-on-OPEC will be 29.1 m b/d, 30.3 m b/d and 30.4 m b/d in Q2,3,4-23.

If the IEA is right about demand then the coming OPEC cuts  should drive inventories significantly lower and oil prices higher.

But the market doesn’t quite seem to buy into this outlook. If it had then prices would have moved higher. Prices bumped up to USD 87.49/b intraday on 12 April but have since fallen back and Brent is falling back half a percent today to USD 85.9/b.

Market is concerned for declining OECD manufacturing PMI’s. It is of course the darkening clouds on the macro-sky which is making investors concerned about the outlook for oil products demand and thus crude oil demand. Cross-currents in global oil product demand is making the situation difficult to assess. On the one hand there are significant weakening signals in global diesel demand along with falling manufacturing PMIs. The stuff which makes the industrial world go round. Manufacturing, trucking, mining and heavy duty vehicles all need diesel. (Great Blbrg story on diesel here.) Historically recessions implies a cyclical trough in manufacturing activity, softer diesel demand and falling oil prices. So oil investors are naturally cautious about buying into the bull-story based on OPEC cuts alone.

Cross-currents is making demand growth hard to assess. But the circumstances are much more confusing this time around than in normal recession cycles because: 1) Global Jet fuel demand is reviving/recovering post Covid-19 and along with China’s recent reopening. IEA’s assessment is that 57% of global demand growth this year will be from Jet fuel. And 2) Manufacturing PMIs in China and India are rising while OECD PMIs are falling.

These cross-currents in the demand picture is what makes the current oil market so difficult to assess for everyone and why oil prices are not rallying directly to + USD 100/b. Investors are cautious. Though net-long specs have rallied 137 m b to 509 m b since the recent OPEC cuts were announced.

The world will need more oil from OPEC in 2023 but OPEC is cutting. The IEA is projecting that non-OPEC+ supply will grow by 1.9 m b/d YoY and OPEC+ will decline by 0.8 m b/d and in total that global supply will rise 1.2 m b/d in 2023. In comparison  global demand will rise by 2.0 m b/d. At the outset this is a very bullish outlook but the global macro-backdrop could of course deteriorate further thus eroding the current projected demand growth of 2 m b/d. But OPEC can cut more if needed since latest cuts have only brought Saudi Arabia’s production down to its normal level.

OPEC has good reasons to cut production if it can. IEA expects global oil demand to rise 2 m b/d YoY in 2023 and that call-on-OPEC will lift 1.6 m b/d from Q4-22 to Q4-23. I.e. the world needs more oil from OPEC in 2023. But OPEC will likely produce closer to 28 m b/d from May to Dec following latest announced production cuts

Source: SEB graph, IEA, Argus

Market has tightened with stronger backwardation and investors have increased their long positions

Source: SEB calculations and graphs. Blbrg data

Net long specs in Brent + WTI has bounced since OPEC announcement on coming cuts.

Source: SEB calculations and graph, Blbrg data

Saudi Arabia’s fiscal cost-break-even was USD 85/b in 2021 projected the IMF earlier. Don’t know when it was projected, but looks like it was before 2020 and thus before the strong rise in inflation. If we add 15% US inflation to the 2021 number we get USD 97/b. Inflation should lift budget costs in Saudi Arabia as it is largely a USD based economy. Though Saudi Arabia’s inflation since Q4-19 is reported as 8% to data while Saudi cost-of-living-index is up by 11%. Good reason for Saudi Arabia to cut if it can cut without loosing market share to US shale.

Source: SEB graph, IMF data

Adjusting for inflation both on a backward and forward basis. The 5yr Brent price is today at USD 66.3/b but if we adjust for US 5yr inflation it is USD 58.6/b in real terms. That is basically equal to the average Brent spot price from 2015-2019 which was very bearish with booming shale and booming offshore non-OPEC. Market is basically currently pricing that Brent oil market in 5yrs time will be just as bearish as the ultra-bearish period from 2015-2019. It won’t take a lot to beat that when it comes to actual delivery in 2028.

Source: SEB calculations and graph, Blbrg data

Nominal Brent oil prices and 5yr Brent adj. for 5yr forward inflation expectations only

Source: SEB claculations and graph, Blbrg data

ARA Diesel cracks to Brent were exceptionally low in 2020/21 and exceptionally high in 2022. Now they are normalizing. Large additions to refining capacity through 2023 will increase competition in refining and reduce margins. Cuts by OPEC+ will at the same time make crude oil expensive. But diesel cracks are still significantly higher than normal. So more downside before back to normal is achieved.

Source: SEB graph and calculations. Blbrg data
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