Analys

US crude oil production, only a lower price can slow it down

Publicerat

9 år sedan

den

9 mars, 2017

Redaktionen

Price action – Long positions taking a hit – Pain trade to the down side

The front month Brent crude contract sold off 5% yesterday with a clos at $53.11/b. This was the lowest close for front month Brent since early December 2016 and clearly a break out of the close, sideways trend around $55/b which has been in place since OPEC decided to cut production in late November. Technically the Brent crude May 17 contract broke the important support level of $54.64/b. The next support level for the contract is $52.86/b and that has already been broken in today’s trading with Brent crude now trading at $52.3/b. Net long speculative positions are close to record high so if the bearish sentiment continues then oil prices are naturally and clearly vulnerable to the downside. That is where the pain-trade is.

It is worth mentioning that in a week on week perspective there has been a broad based sell-off in commodities in general with all sub-indices selling off between 2.6% and 4.4% and the total commodity index down 3.5%. In a week on week perspective Brent sold off 5.8% so a little more than the total energy index which sold off 3.9%. Still, oil was not alone in the sell-off. I.e. It was not just oil specific reasons for why oil sold off over the last week even though the sell-off came yesterday. In the background for all assets is the market concern for higher US interest rates which is hurting bonds, equities as well as commodities. Gold which is definitely sensitive to higher interest rates sold off 3.3% over the past week. The bullish US employment statistics yesterday probably helped to underpin the expectation for higher US rates.

Longer dated crude oil contracts also sold off yesterday with the Brent crude December 2020 contract closing yesterday at $53.74/b which is a new fresh low since April 2016. As stated earlier we expect this contract to trade yet lower down towards the $50/b mark in a pure neccessity to lower the implied shale oil profitability offered US shale oil players on a forward crude oil price curve. More than anything it is the one to three year forward contracts which needs to move lower in order to stemm the current strong rise in shale oil rigs and shale oil investments. Since OPEC decided to cut production in late November 2017 US shale oil players have been offered a nice profitable lunch on in the forward market basis.

Crude oil comment – US crude oil production, only a lower price can slow it down

The consequence of the increase in US oil rigs since the mid-May last year has now become alarmingly visible in US crude oil production. US crude oil production is growing. And it is growing strongly. That was one of the key bearish statistics in the US EIA’s data release yesterday. US crude oil production rose by 56 kb/d w/w to 9.088 mb/d. Sounds like little in the big picture but multiply by 52 weeks (if it is a steady trend rather than weekly noise) and you get a marginal, annualized US crude oil production growth rate of 2.9 mb/d. Since the start of 2017 the average US crude oil production growth has been +35 kb/d w/w. That equates to a marginal, annualized growth rate of 1.8 mb/d. We are in general very bullish US shale oil production growth. However, we had not expecte to see this level of growth rate before in September 2017.

There is only one way to slow down the US crude oil production growth and that is a lower oil price. Thus beside an overall bearish sell-off in commodities in general, the oil price is pushing lower. A marginal, annualized US crude oil production growth rate of 1.8 mb/d which we now have seen since the start of the year is too much, too early. The shale oil veteran Harrold Hamm this week said at the Cera Week in Houston that the current investment binge in US shale oil production will kill the oil market unless it is tempered. Pioneer’s Scott Sheffield was out earlier in the week stating that US Permian crude oil production could rise to 8-10 mb/d in 10 years time and thus surpas Saudi Arabia’s Ghawar field (biggest in the world today). He also said that the WTI crude oil price would fall to $40/b if OPEC doesn’t carry over its production cuts into H2-17. On top of this the US EIA revised its US crude oil production projections significantly higher yet again. We still think they are way behind the curve when they predict US crude oil production at 9.73 mb/d on average in 2018 versus our projection of 10.76 mb/d for that year. We thus think that the US EIA will revise higher its projections for US crude oil 2018 production projection again and again in 2017.

If US crude oil production continues to grow at the pace we have seen since the start of the year, then it will pass its past peak of 9.61 mb/d (which was reached in June 2015) by mid-June 2017. That is not our projection, just a pure mathematical extrapolation.

Shale oil service costs, labour costs and material costs are tellingly definitely on the rise. This could definitely slow down weekly rig count additions if the cost side starts to bit significantly. In that case the oil price would not need to move all that much lower in order to slow down rig count additions. However, we have not seen that effect yet. Normally there is a time lag of 6-8 weeks from the oil price moves to when we see a reduction or increase in the weekly US shale oil rig count numbers. As such even if the oil price now continues yet lower we are likely to see that the US shale oil rig count increases by 9-10 rigs every week the next 6-8 weeks.

We still think that oil inventories will fall in Q2-17 and as such give support to prices. Our expectations is to see the highest Brent crude oil price to be printed in Q2-17. However, US crude oil prodution is now growing so strongly that market focus is shifting away from OPEC cuts and over to US production growth. We had not expected this to happen before in late Q2-17.

Then we are left with the question – What will OPEC do in the face of strongly rising US crude oil production? The can decide to cut also in H2-17, but does it make sense? We think not. US shale oil production response is too fast and too flexible.

Ch1: Brent crude front month contract – Breaking the sideways trend. Back to pre-OPEC-cut-decission?

Ch2: US crude oil production rising strongly – too strongly. Now just 0.5 mb/d below prior peak
If it continues at this pace then US crude production will pass the 9.6 mb/d mark in June 2017

Ch3: Brent crude oil 1mth contract adjusted for US dollar strength since July 2013.
For all those longing for a Brent crude oil price of $60/b it is worth remembering that
if we adjust for the 23% stronger USD since July 2013 a Brent price today of only $51/b actually equals $63.6/b in 2013 USD terms.
In that perspective we are already “back above $60/b”. Acutally we were close to $70/b in 2013 dollar terms when Brent averaged $55/b so far this year.

Annons

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Relaterade ämnen:seb analys

Nästa

SHB Råvarukommentar 9 mars 2017

Missa inte

SEB Råvarubrev 7 mars 2017

Fortsätt läsa

Analys

Sell the rally. Trump has become predictable in his unpredictability

Publicerat

3 timmar sedan

den

24 oktober, 2025

Redaktionen

Hesitant today. Brent jumped to an intraday high of $66.36/b yesterday after having touched an intraday low of $60.07/b on Monday as Indian and Chinese buyers cancelled some Russian oil purchases and instead redirected their purchases towards the Middle East due to the news US sanctions. Brent is falling back 0.4% this morning to $65.8/b.

Bjarne Schieldrop, Chief analyst commodities, SEB

It’s our strong view that the only sensible thing is to sell this rally. In all Trump’s unpredictability he has become increasingly predictable. Again and again he has rumbled about how he is going to be tough on Putin. Punish Putin if he won’t agree to peace in Ukraine. Recent rumbling was about the Tomahawk rockets which Trump threatened on 10 October and 12 October to sell/send to Ukraine. Then on 17 October he said that ”the U.S. didn’t want to give away weapons (Tomahawks) it needs”.

All of Trump’s threats towards Putin have been hot air. So far Trump’s threats have been all hot air and threats which later have evaporated after ”great talks with Putin”. After all these repetitions it is very hard to believe that this time will be any different. The new sanctions won’t take effect before 21. November. Trump has already said that: ”he was hoping that these new sanctions would be very short-lived in any case”. Come 21. November these new sanctions will either evaporate like all the other threats Trump has thrown at Putin before fading them. Or the sanctions will be postponed by another 4 weeks or 8 weeks with the appearance that Trump is even more angry with Putin. But so far Trump has done nothing that hurt Putin/Russia. We can’t imagine that this will be different. The only way forward in our view for a propre lasting peace in Ukraine is to turn Ukraine into defensive porcupine equipped with a stinging tail if need be.

China will likely stand up to Trump if new sanctions really materialize on 21 Nov. Just one country has really stood up to Trump in his tariff trade war this year: China. China has come of age and strength. I will no longer be bullied. Trump upped tariffs. China responded in kind. Trump cut China off from high-end computer chips. China put on the breaks on rare earth metals. China won’t be bullied any more and it has the power to stand up. Some Chinese state-owned companies like Sinopec have cancelled some of their Russian purchases. But China’s Foreign Ministry spokesperson Guo Jiakun has stated that China “oppose unilateral sanctions which lack a basis in international law and authorization of the UN Security Council”. Thus no one, not even the US shall unilaterally dictate China from whom they can buy oil or not. This is yet another opportunity for China to show its new strength and stand up to Trump in a show of force. Exactly how China choses to play this remains to be seen. But China won’t be bullied by over something as important as its oil purchases. So best guess here is that China will defy Trump on this. But probably China won’t need to make a bid deal over this. Firstly because these new sanctions will either evaporate as all the other threats or be postponed once we get to 21 November. Secondly because the sanctions are explicit towards US persons and companies but only ”may” be enforced versus non-US entities.

Sanctions is not a reduction in global supply of oil. Just some added layer of friction. Anyhow, the new sanctions won’t reduce the supply of Russian crude oil to the market. It will only increase the friction in the market with yet more need for the shadow fleet and ship to ship transfer of Russian oil to dodge the sanctions. If they materialize at all.

The jump in crude oil prices is probably due to redirections of crude purchases to the Mid-East and not because all speculators are now turned bullish. Has oil rallied because all speculators now suddenly have turned bullish? We don’t think so. Brent crude has probably jumped because some Indian and Chinese oil purchasers of have redirected their purchases from Russia towards the Mid-East just in case the sanctions really materializes on 21 November.

Fortsätt läsa

Analys

Brent crude set to dip its feet into the high $50ies/b this week

Publicerat

4 dagar sedan

den

20 oktober, 2025

Redaktionen

Parts of the Brent crude curve dipping into the high $50ies/b. Brent crude fell 2.3% over the week to Friday. It closed the week at $61.29/b, a slight gain on the day, but also traded to a low of $60.14/b that same day and just barely avoided trading into the $50ies/b. This morning it is risk-on in equities which seems to help industrial metals a little higher. But no such luck for oil. It is down 0.8% at $60.8/b. This week looks set for Brent crude to dip its feet in the $50ies/b. The Brent 3mth contract actually traded into the high $50ies/b on Friday.

The front-end backwardation has been on a weakening foot and is now about to fully disappear. The lowest point of the crude oil curve has also moved steadily lower and lower and its discount to the 5yr contract is now $6.8/b. A solid contango. The Brent 3mth contract did actually dip into the $50ies/b intraday on Friday when it traded to a low point of $59.93/b.

More weakness to come as lots of oil at sea comes to ports. Mid-East OPEC countries have boosted exports along with lower post summer consumption and higher production. The result is highly visibly in oil at sea which increased by 17 mb to 1,311 mb over the week to Sunday. Up 185 mb since mid-August. On its way to discharge at a port somewhere over the coming month or two.

Don’t forget that the oil market path ahead is all down to OPEC+. Remember that what is playing out in the oil market now is all by design by OPEC+. The group has decided that the unwind of the voluntary cuts is what it wants to do. In a combination of meeting demand from consumers as well as taking back market share. But we need to remember that how this plays out going forward is all at the mercy of what OPEC+ decides to do. It will halt the unwinding at some point. It will revert to cuts instead of unwind at some point.

A few months with Brent at $55/b and 40-50 US shale oil rigs kicked out may be what is needed. We think OPEC+ needs to see the exit of another 40-50 drilling rigs in the US shale oil patches to set US shale oil production on a path to of a 1 mb/d year on year decline Dec-25 to Dec-26. We are not there yet. But a 2-3 months period with Brent crude averaging $55/b would probably do it.

Oil on water increased 17 mb over the week to Sunday while oil in transit increased by 23 mb. So less oil was standing still. More was moving.

Crude oil floating storage (stationary more than 7 days). Down 11 mb over week to Sunday

The lowest point of the Brent crude oil curve versus the 5yr contract. Weakest so far this year.

Crude oil 1mth to 3mth time-spreads. Dubai held out strongly through summer, but then that center of strength fell apart in late September and has been leading weakness in crude curves lower since then.

Fortsätt läsa

Analys

Crude oil soon coming to a port near you

Publicerat

1 vecka sedan

den

16 oktober, 2025

Redaktionen

Rebounding along with most markets. But concerns over solidity of Gaza peace may also contribute. Brent crude fell 0.8% yesterday to $61.91/b and its lowest close since May this year. This morning it is bouncing up 0.9% to $62.5/b along with a softer USD amid positive sentiment with both equities and industrial metals moving higher. Concerns that the peace in Gaza may be less solid than what one might hope for also yields some support to Brent. Bets on tech stocks are rebounding, defying fears of trade war. Money moving back into markets. Gold continues upwards its strong trend and a softer dollar helps it higher today as well.

US crude & products probably rose 5.6 mb last week (API) versus a normal seasonal decline of 2.4 mb. The US API last night partial and thus indicative data for US oil inventories. Their data indicates that US crude stocks rose 7.4 mb last week, gasoline stocks rose 3.0 mb while Distillate stocks fell 4.8 mb. Altogether an increase in commercial crude and product stocks of 5.6 mb. Commercial US crude and product stocks normally decline by 2.4 mb this time of year. So seasonally adjusted the US inventories rose 8 mb last week according to the indicative numbers by the API. That is a lot. Also, the counter seasonal trend of rising stocks versus normally declining stocks this time of year looks on a solid pace of continuation. If the API is correct then total US crude and product stocks would stand 41 mb higher than one year ago and 6 mb higher than the 2015-19 average. And if we combine this with our knowledge of a sharp increase in production and exports by OPEC(+) and a large increase in oil at sea, then the current trend in US oil inventories looks set to continue. So higher stocks and lower crude oil prices until OPEC(+) switch to cuts. Actual US oil inventory data today at 18:00 CET.

US commercial crude and product stocks rising to 1293 mb in week 41 if last nights indicative numbers from API are correct.

Crude oil soon coming to a port near you. OPEC has lifted production sharply higher this autumn. At the same time demand for oil in the Middle-East has fallen as we have moved out of summer heat and crude oil burn for power for air-conditioning. The Middle-East oil producers have thus been able to lift exports higher on both accounts. Crude oil and condensates on water has shot up by 177 mb since mid-August. This oil is now on its way to ports around the world. And when they arrive, it will likely help to lift stocks onshore higher. That is probably when we will lose the last bit of front-end backwardation the the crude oil curves. That will help to drive the front-month Brent crude oil price down to the $60/b line and revisit the high $50ies/b. Then the eyes will be all back on OPEC+ when they meet in early November and then again in early December.

Crude oil and condensates at sea have moved straight up by 177 mb since mid-August as OPEC(+) has produced more, consumed less and exported more.