Analys
Trade war today and oil market balance tomorrow


Brent crude lost 7.2% and closed at $60.5/bl with also the three year contract loosing 4% with a close of $56.02/bl. Neither equities nor oil were satisfied with ”mid-cycle rate adjustment” cut by the Fed earlier in the week and were already on a weak footing. Yesterday’s announcement/tweet by Donald Trump that an additional $300 bn worth of trade with China would get a 10% import levy totally pulled the plug on oil.
The thing is that the global oil market balance is not too bad right now and so far this year. IEA announced in its July Oil Market Report that OECD oil inventories had been rising during the first part of the year. It is true that the OECD inventories are up 34 m bl in May versus December last year but normally (2010 to 2014 average) they increase 45 m bl during this period. So if inventories are the proof of the pudding then the global oil market was pretty much in balance from Jan to May this year. Since then the US crude oil inventories have fallen sharply and the Brent crude oil forward curve is still in backwardation signalling a market which is on the tight side of the scale.

The sell-off yesterday is thus about concerns for the oil market balance for tomorrow, for next year and not so much for the current balance and the balance in 2H-19.
The forward Brent crude oil curve is still in backwardation, US crude inventories have been falling sharply since early June and continue to do so, US shale oil production growth is slowing quite sharply, European overall spot refining margin is close to the highest level over the past 2-3 years, OPEC+ is cutting and supply from Iran and Venezuela is just plunging.
Thus the bearish take on oil is not so much coming from the front end (spot) of the oil market. It is all about slowing global growth, slowing oil demand growth, US-China trade war, too little proactive stimulus from the US Fed and deep concerns for the oil market balance of tomorrow.
If we remember correctly Saudi Arabia commented earlier this summer that it might be difficult to cut yet deeper in 2020 than what they are doing now. So if the oil market is running a surplus in 2020 then the oil price and not OPEC+ will have to do the job of balancing the market.
If we look at where oil prices are trading on the forward curve it is very clear that the main job of the oil prices at the moment is about holding US shale oil production growth in check. The three year WTI price yesterday closed at $50.12/bl while the three year Brent crude oil contract closed at $56/bl. Thus the oil price right now is all about controlling US shale oil production growth.
Four new pipelines channelling oil out of the Permian will come on-line in 2H-19 and early 2020 with a total capacity of 2.3 m bl/d. What this mean is that local Permian oil prices will move much closer to US Gulf seaborne oil prices and Brent crude oil prices. Oil will be drained out of the Permian and allow Permian oil producers to ramp up production without crashing the local Permian oil price. The flow of oil from Permian to Cushing Oklahoma on the Sunrise pipeline will slow to a halt. US Cushing stocks will decline much more easily and the WTI Cushing price will also move closer to Brent crude.
So, again, will WTI move up to Brent or will Brent move down to WTI when the pipelines open up? The 670 Cactus II from Permian to Corpus Christi at the US Gulf opened for service on 1 August. Since one year ago the Brent June 2020 contract has declined by $10.2/bl while the comparable WTI contract has declined by only $7.5/bl and the spread between the two has declined from $8.5 to now $5.8/bl. So over the past year at least we see that it is the Brent contract which has moved down to the WTI price and not the WTI price which has moved up to the Brent price. The interim transportation cost on the Epic II pipeline has been lowered from $5/bl to only $2.5/bl and pipelines from Cushing to US Gulf are lowering tariffs in competition. In a slowing shale oil production growth situation coupled with a large increase in pipeline capacity we should expect to see a further strong convergence between the Brent crude oil price curve and the WTI price curve. In general the Brent prices should move down to the WTI prices but the initial reaction will be declining US crude oil inventories both in general and in Cushing Oklahoma. This will drive WTI prices higher initially and drive the WTI crude curve into full backwardation.
The only reconciliation we can envisage for an oil market where the current situation is tight, refinery margins are strong and IMO 2020 is coming on top coupled with deep rooted market concerns for the oil market balance for 2020 is very weak 2020 forward prices together with spiky and backwardated front end prices. So expect WTI curve into full backwardation (strong spot prices), weak 2020 prices and tighter Brent to WTI spreads with forward Brent prices moving down towards the WTI prices.
Ch1: Rising OECD inventories by IEA. But those rises are very close to normal seasonal trends. From Jan to March inventories usually drop by 32 m bl (2010 to 2014 average seasonal trend). This year they only dropped by 16 m bl. From March to May however they normally increase by 46 m bl while this year they only increased by 39 m bl. In total from Jan to May they normally increase by 14 m bl while this year they increased by 23 m bl. So yes OECD inventories increased by 9 m bl more than the seasonal trend from Jan to May. That is pretty close to noise as it gets. So if OECD inventories are anything to go by we’d say that the OECD-inventory implied supply/demand balance was pretty much in balance from Jan to May
Ch2: US crude stocks have fallen sharply since early June. Here seen in days of consumption where it has fallen from 28.9 days to only 25.4 days in the latest data. We expect US crude inventories to fall further
Ch3: US crude oil stocks in barrels have fallen sharply since early June and now only stands some 9 m bl above the 5 year average. Also if we look at total US crude, middle distillates and gasoline we see that these US inventories in total are only 9 m bl above normal (2014 – 2018).
Ch4: What worries the market is this: Global economic growth and thus oil demand growth. Here depicted through the lense of Bloomberg’s calculated now-cast indices. What stands out here is that it is worse in the rest of the world than in the US but maybe more importantly that the US economy now is cooling faster than the rest of the world. Though this is a very qualitatively assesment from the graph. This week’s quarter percent US Fed rate cut is probably far too little to counter this cooling trend.
Ch5: Agregating Bloomberg’s individual country now-cast indices to one “global now-cast” index shows that the global economy is cooling and cooling and will soon be down to the trough in 2015/16. Graphing this global index versus the Brent crude 6m/6m change in prices we see that from a demand/macro view point Brent has moved counter to the cooling macro trend and a deteriorating global demand back-drop. It has risen on the back of OPEC+ supply cuts and Iran issues.
Ch6: Huge loss in supply from key producers since primo 2017 not enough to lift prices
Ch7: Aggressive cuts by Saudi Arabia neither enough to lift prices. It is very hard to lift prices through production cuts amid a deteriorating global growth
Ch8: European spot refining margins are very strong and close to the highest level over the last 2-3 years
Ch9: Speculators are not feeling very bullish in the face of the deteriorating global macro picture
Ch10: Forward crude oil curves. Ydy close vs end of June. Brent down more than WTI. Brent is moving lower and closer to WTI.
Ch11: Spreads between the forward crude oil curves have moved lower since late June
Ch12: US shale oil production growth has slowed to a growth rate of only 0.6 m bl/d on a marginal, annualized rate. Sharply down from around 1.5 – 2.0 m bl/d in 2017/18 period. Shale oil players are signalling further slowdown during the autumn. The shale oil well completion rate only needs to be lowered by some 100 to 200 wells per month in order to drive US shale oil production growth to close to zero
Analys
Tightening fundamentals – bullish inventories from DOE

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

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.


Analys
Bombs to ”ceasefire” in hours – Brent below $70

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.

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.
Analys
A muted price reaction. Market looks relaxed, but it is still on edge waiting for what Iran will do

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.

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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