Analys
US crude oil 2018 production forecast by EIA still too low

Price action – Higher on Nigeria strike, Fortis pipeline outage, lower oil rig count, softer USD and positive equities
Brent crude is gaining 0.9% this morning as it climbs to $63.8/b along with a 0.2% softer USD index and positive equity gains. A part of the positive oil price drive today is the Nigerian oil union declaring a strike as they protest against unfair labour practices thus posing a risk to Nigeria’s production of 1.7 mb/d. The Fortis pipeline carrying xxx kb/d is still off-line with the operator declares force majeure as it expects repairs of the hairline will take some 2-4 weeks. The key concern is that there might be a wider problem stretching along the whole pipeline. If the reason for the current crack is the higher sulphur content in the Buzzard crude flowing in the Fortis crude stream and sulphide corrosion as a consequence of this then the outage of the pipe could be much, much longer. The pipe carries some 450 kb/d and thus a major share of the physical supply into the Brent spot market. A decline of 2 US oil rigs last week adds some support on the margin.
Crude oil comment – US crude oil 2018 production forecast by EIA still too low
Later today we’ll have the monthly update from the US EIA on shale oil drilling productivity in the US. We expect the EIA to revise its productivity as well as its production higher. Their last productivity report had data points to Dec 2017. We expect the EIA to show that the strong production growth of on average 91 kb/d/mth from July to December this year stays intact at around 90 kb/d/mth also in January and also that well completions continued to rise also in November as they have done every month since January this year.
We do not think that the EIA update later today will necessarily hit the Brent crude oil price bearishly. More likely we expect the Brent to WTI price spread to widen further on the back of such news.
The US EIA last Tuesday adjusted its 2018 forecast for US crude oil production upwards from 9.95 mb/d to an average of 10.02 mb/d thus growing 0.78 mb/d y/y to 2018. The increase in forecast of 70 kb/d was the third upwards revision in three months. We still think that the US EIA is significantly behind the curve in terms of its projections for US crude oil production for 2018. As such we expect the US EIA to continue to revise its projection for 2018 higher in the months to come until it reaches at least an average crude oil production of around 10.4 mb/d for 2018.
US shale oil production growth is currently running at some 90 kb/d/mth. That is the exit shale oil growth rate for 2017 while the average growth rate from July to December has been 91 kb/d/mth. The implied marginal, annualized production growth rate is thus currently running at 1.1 mb/d/yr. The US EIA is however assuming that US shale oil production will only grow by some 37 kb/d/mth in 2018. That is 40% lower than the current growth rate in shale oil production. From Dec-17 to Dec-18 the EIA projects that US lower 48 (ex GoM) will grow by only 440 kb/d. If we instead apply the current 90 kb/d/mth growth rate through 2018 then L48 ex GoM would grow by 1.1 mb/d from Dec-17 to Dec-18.
If we extrapolate the current shale oil production growth rate through 2018 it would lead US crude oil production to exit 2018 at 11 mb/d versus EIA’s forecast of 10.34 mb/d. If we include NGLs, Bio-fuels and refinery gains it would lift total US liquids production to close to 18 mb/d in December 2018 and drive total US liquids production growth to 1.7 mb/d y/y Dec-17 to Dec-18.
US shale oil well completions is still rising (+35 wells m/m in October), the drilled but uncompleted numbers of wells is still rising and oil prices have been on a constant trend upwards since mid-June . So if anything the current trend is for stronger US shale oil production growth month/month in the months ahead and not at all the sudden drop-off in shale oil production growth which the EIA predicts for 1Q18 where they expect a monthly average growth rate of only 23 kb/d/mth.
We think that one of the key reasons for why the US EIA has a too low production growth target for 2018 is due to the build-up in the DUC (Drilled but uncompleted wells) inventory which gives an impression of declining shale oil volume productivity. This decline in volume productivity is in our view not real. In our calculations we see US shale oil volume drilling productivity has continued to tick higher even though now mostly sideways. But at least we do not see productivity in decline as the official headline numbers indicate.
There is a lot of focus on a shift in investor focus from rewarding production growth and now instead demanding profits. This could possibly change shale oil producer behaviour and as such lead to softer US shale oil production growth than indicated above.
In our view such a shift should primarily hit drilling rather than completions as the shale oil companies have a huge stack of uncompleted wells which they can convert to oil and money in 2018. They can ease back on the drilling and continue to ramp up completions. Completions have been trailing drilling for a full year now. If shale oil companies pull back on investments then this should switch around in 2018 to a situation where drilling is lower than completions while spending on completions continues at a high level and drilling at a lower. Completions in 2018 could run some 20% above the Jan to Oct average completion level of 2017.
In terms of capex spending we had news last week that Keane Group, one of the largest pure-play providers of US shale completion services yesterday announced that they will order three new frac fleets on top of their existing 26. The order is a response to robust 2018 US shale oil investments announced latest weeks. Completions are the thing for 2018 which means more shale oil production.
Ch1: US shale oil production growth is exiting 2017 at a rate of about 90 kb/d/mth (1.1 mb/d on a marginal annualized rate)
It is now growing as strongly as it did through 2012 and 2013
Ch2: If US shale oil production grows in 2018 as it exits 2017 (~90 kb/d/mth) then total US crude production will grow by 1.1 mb/d y/y to 10.4 mb/d y/y
Ch3: The Production Weighting Price (PWP) of a new shale oil well with a 6 week lead has moved higher since Sep
If history is anything to go by then US shale oil action will increase in response. Drilling and or completions
Ch4: US oil rig count moved down 4 last week but implied shale oil rigs increased by 2
US oil rig count is up by 22 over the last 5 weeks which is 17 rigs shy of the level in August
Ch5: The mirage of declining shale oil productivity created from the large build-up in DUCs (uncompleted wells)
The official US shale oil productivity was running higher than our estimate during the DUC draw down in 2016.
It is running way below our productivity estimate in 2017 during a huge build up in the DUC inventory during 2017.
As the DUC inventory eventually draws down the official productivity will again be running above our estimate
Ch6: A lot of uncompleted wells to complete in 2018!!
The DUC inventory was still BUILDING in October (the last data point)
So drilling new wells can decline a lot in 2018 while completions can increase some 20% y/y
Ch7: No top-down sign that US shale oil resources are deteriorating as losses in existing production stays on scale to production level
No top-down sign as of yet of run-away losses in existing production versus production level
Ch8: US EIA crude oil production forecast likely to be lifted further up towards 10.4 mb/d
EIA lifting it forecast 3 mths in a row
Ch9: Volume wise there are good shale oil days in both Colorado and Bakken North Dakota these days
Ch10: Annualized 1-3 mth Brent backwardation fully funded roll-yield of 10% pa
Ch11: The positive roll-yield in Brent continues to suck in more long spec into both Brent and WTI front end crude’
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
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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