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SIP Nordic – Nytt år, nya möjligheter

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SIP Nordic - Analyser av råvarorSamtidigt som det är dags att summera ett ganska ljummet råvaruår är det hög tid att rikta blickarna mot 2012 års spåkula. Kommer industrimetallpriserna hålla emot, fortsätter guldet sin lyckliga resa under 2012 och hur heta är egentligen jordbruksråvarorna? Oavsett vad har vi ett spännande år framför oss där mycket kommer att styras av oron för en Eurokris. Råvaror har mer och mer blivit en självklar del av portföljen och samtidigt som de finansiella marknaderna kämpar mot extrem turbulens har råvaror klivit fram som räddare i nöden. Aktiemarknaden kommer troligtvis att fortsätta att famla i mörkret, ständigt hemsökta av oron om en europeisk statsskuldskris såväl som rädsla av en återkommande global recession. Det som talar för att råvaror, generellt, kommer att gå motsatt håll är bland annat tillväxtmarknadernas fortsatta tillväxt, försvagning av dollarn samt en fortsatt obalans i tillgång och efterfrågan.

Råvaror i det långa loppet

Råvaror har haft en otrolig utveckling sedan starten av detta millennium och om historien upprepar sig har råvaror, trots det oroliga börsläget, många goda år framför sig. Råvaror och aktiemarknaden har sedan 1870 alternerat om vilken marknad som presterat bäst. Under 1980 och 90 talet florerade aktiemarknaden samtidigt som råvarupriserna låg på bottennivåer. Detta gjorde att investeringar i gruvor, oljereservoarer och jordbruk inte ansågs sexiga nog att investera i. Och det är just detta som gett upphov till den positiva trend råvaror är i nu. Pga. Av bristande investeringar har vi i nuläget en obalans i tillgång och efterfrågan vilket driver upp priserna i de flesta råvarorna.

Rädsla trycker ned basmetallerna

Nu ska man ju inte titta sig blind på historisk data men det finns en del intressanta iakttagelser att beakta. En intressant iakttagelse är den negativa korrelationen mellan VIX index, ofta kallad fear index, och basmetallernas prisutveckling. En hög volatilitet betyder allt som oftast en nedåtgående aktietrend vilket ger avtryck i basmetallernas utveckling då marknaden tror på en avsvalnande tillväxt. Nu har VIX Index börjat stabiliseras och är på väg ned till mer normala nivåer. Kommer detta att resultera i att basmetallerna återigen klättrar norrut? Ja, för vissa metaller så finns det ett flertalet punkter som talar för det.

Diagram över basmetaller och VIX under år 2011

Vad gäller då för 2012?

Det mest troliga är att råvaror kommer att använda 2012 för att hämta andan för att sedan spänna bågen ordentligt inför 2013 hjälpta av en mer stabil ekonomisk utsikt samt ett åter ökande tillgångsunderskott. Trots detta finns det många guldkorn under 2012 och kom ihåg, man behöver inte alltid tro på uppgång.

Råvaruåret 2012 ser ut att bli mycket svårtippat då en ökad korrelation med aktiemarknaden talar för stagnerade prisutvecklingar. Jag sticker dock ut hakan och tror på uppgång i guld och platina. En sista kommentar: Ur kaos kommer alltid möjligheter.

Alexander Frick

 

Råvaror – Update

Guld – Trygg hamn eller inte

  • Guldets nedgång de senaste veckorna kan härledas till den generella panik som råder bland investerare. Investerare säljer av för att istället placera i likvida medel.
  • Den stigande dollartrenden har också påverkat guldpriset negativt. Under 2012 kommer dollarkursen studeras noga för att se var guldet bär av.
  • Guld har haft smått otroliga 11 plusår i rad. Nu när priset korrigerats nedåt talar mycket för att 2012 också blir ett bra år.

Analytikerkonsensus för guld år 2012

Silver

  • Silver är en mer använd industrimetall än guld. Ändå har silver seglat upp som god tvåa i racet om den trygga hamnen.
  • Överskottet av silver uppgår idag till 14%. Inför 2012 spås överskottet minska en aning till 9,8%.
  • Trots ett högt pris på silver är det långt kvar till ATH på 100 dollar (1978)
  • En fortsatt förstärkning av dollarn mot euron kommer troligtvis påverka negativt på silverpriset.

Analytikerkonsensus för silver år 2012

Platina

  • Sydafrikanska producenter, som står för den största delen av platinaproduktion, kämpar med fackliga problem och elavbrott. Något som kommer inverka positivt på platinakursen.
  • Fortsatt obalans i tillgång och efterfrågan talar för ett fortsatt högt pris.
  • Nuvarande tillgängligt platina räcker endast till 16 månaders konsumtion. Tillgängligt platina har minskat med 30% sedan 2001.

Analytikerkonsensus för platina år 2012

Brent olja

  • Oljelagerstatistiken pekar på mycket låga nivåer i USA. Någon som håller uppe oljepriset trots den globala oron.
  • Oron i Iran och de andra OPEC länderna kompenserar det oroliga börsläget. Ett oljepris som konsoliderar under början av 2012 är inte osannolikt.
  • Kan olja fortsätta hålla emot bra är det en av den mest intressanta placeringarna på marknaden. Om eller när den europeiska krisen får en lösning kommer oljepriset att påverkas positivt.

Analytikerkonsensus för olja (brent) år 2012

Koppar

  • Strejker i stora gruvor i Peru och Indonesien fortsätter att begränsa utbudssidan. Det ska dock vara nära en lösning men produktion lär halta en aning.
  • Koppar är mycket konjunkturskänsligt och följer ofta negativa aktietrender. Sedan början av året är koppar ned ca. 23%. Världens största kopparkonsument, Kina spås inte ha en lika hög tillväxt vilket kan påverka kopparpriset negativt.
  • Trenden i kopparpriset är dock avtagande men analytikerkåren ser positivt på kopparn inför 2012.

Koppar - Analytikerkonsensus för år 2012

Naturgas

  • Naturgaspriserna fortsätter sin resa söderut, delvis pga. en högre medeltemperatur i USA. 51% av USAs hushåll använder naturgas för uppvärmning.
  • Naturgas är en av de svåraste råvarorna att lagra. I priset på framtida leveranser ingår lagerkostnader, ränta och försäkring så trots att terminsmarknaden för naturgas ser ut att stå stilla, faller den fritt.
  • Naturgas har tappat nästan 70% sedan finanskrisen men kan tappa ytterligare 50% för att matcha de låga nivåerna som rådde under 90-talet.
  • Tekniskt handlas Naturgas i en negativ trend.

Naturgas - Analytikerkonsensus för år 2012

Majs

  • Den globala majsproduktionen spås nå rekordnivåer under början av 2012 trots minskad produktion i USA.
  • Det genomsnittliga priset spås vara 30 cents lägre än föregående räkenskapsår, enligt USDA.
  • USDA spår en nedgång i majspriset, uppbackat av ökad produktion i såväl Kina som Europa och Kanada samt gynnsamma globala väderförhållande.
  • Den tekniska trenden för majs är nedåtgående med en viktig stödnivå på 572 cents per bushel.

Majs år 2012 - Analytikerkonsensus

Vete

  • Den globala produktionen av vete spås stiga med 5.3% under första halvåret 2012, samtidigt som efterfrågan endast kommer att öka 3.3%, med ett totalt överskott om 10 miljoner ton.
  • Vete har tappat närmre 25% under de senaste året men fortfarande är priset på ca. 6 dollar tillräckligt attraktivt för att bönder ska fortsätta plantera. Ett ökande överskott är således att vänta.
  • Ytterligare faktorer som talar för en fortsatt nedåtgående trend är rädslan för en global recession där oron för att världens största veteimportör, Kina, ska dra i handbromsen.

Analytikerkonsensus för vete år 2012

Socker

  • Överskottet av socker har mer än halverats sedan maj.
  • Dåliga väderförhållanden i Brasilien har fått analytiker att revidera sockerskörden med nästan 20%.
  • Sockerproduktionen i Indien väntas fortfarande växa. Dock med blygsamma 8%, att jämföra med förra årets tillväxt på 25%.

Socker - Analytikerkonsensus år 2012

Bomull

  • Förra året rusade bomull med en nästan fördubblad kursuppgång. I år har läget varit annorlunda. Rekordskördar och svagare efterfrågan har tryckt ned bomullspriset rejält.
  • Trots en kraftig nedgång ligger bomullspriset på historiskt höga nivåer och en halvering av bomullspriset är inte otänkbart.
  • Det höga priset har återställt balansen i tillgång och efterfråga.
  • Trots extrem torka i USA har goda skördar i Kina och Indien täckt upp detta bortfall.
  • I dagsläget ligger genomsnittsinvesteraren i långa positioner men säljarna blir fler och fler.

Bomull - Analytikerkonsensus år 2012

 

[box]Denna uppdatering är producerat av SIP Nordic och publiceras i samarbete och med tillstånd på Råvarumarknaden.se[/box]

Ansvarsbegränsning

Detta produktblad utgör endast marknadsföring och har sammanställts av SIP Nordic Fondkommission AB.

Innehållet ger inte fullständig information avseende det finansiella instrumentet. Investerare uppmanas att del av prospekt och slutliga villkor, vilka finns tillgängliga på: www.rbsbank.se/markets, innan ett investeringsbeslut tas.

Förekommande exempel är simulerade och baseras på SIP Nordics egna beräkningar och antaganden, en person som använder andra data eller antaganden kan nå andra resultat. Administrativa avgifter och transaktionsavgifter påverkar den faktiska avkastningen.

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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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