Analys

US crude recovery could cover all OPEC cuts

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9 år sedan

den

21 mars, 2017

Over the last two weeks Brent crude has fallen close to $4/b. Market perception has shifted from “OPEC will do the job and US crude production will recover gradually” to instead “Can OPEC do the job? and US production is rebounding strongly”. The hypothesis that US crude oil production will only recover gradually and slowly as long as the oil price stays below $60/b has clearly fallen. The US EIA projects that US crude production will move above its April 2015 peak of 9.6 mb/d in February 2018. We think that this will happen already in October 2017. However, if we extrapolate the average weekly increase since the start of 2017 (+33.9 kb/d/week) we get that with a starting point of 9.1 mb/d on the 10th of March then US crude production will pass the 9.6 mb/d already in June 2017. Thus full attention to the US EIA’s weekly publishing of US crude production is clearly warranted.

If US production had only recovered slowly as long as the oil price stayed below $60/b, then it would easily have been in OPEC’s power to drive the oil price rather quickly back to $60/b. However, US shale oil rig count rose by 7 rigs per week in H2-17 when the WTI 15mth forward price averaged around $52/b in H2-16. When that part of the forward curve was pushed up to $55-56/b following OPEC’s decision to cut it lifted the weekly rig count additions to 9.2 rigs/week on average so far in 2017. Along with the latest sell-off the WTI 15mths price has now fallen back to $50.5/b. This can be interpreted as an effort by the market to push back the current acceleration in shale oil investments. If this price stays at this level of about $50/b then we won’t know the effect of this before some 6-8 weeks down the road which is the typical lag between price action to rig count reaction. Thus the growth in US shale oil rig count is likely to continue unabated all through April.

OPEC will meet on the 25th of May this year to discuss whether to continue its cuts or not. US crude oil production stood at 8.7 mb/d when OPEC decided to cut at its 30th November meeting in 2016. That was only 0.25 mb/b above the US crude production trough of 8.45 mb/d in July/August 2016. The general view then was clearly that US crude production would recover gradually. There would not be much acceleration unless the oil price moved up to $60/b. OPEC decided to cut 1.16 mb/d from its October production level which lead to a production target of 31.8 mb/d for H1-17. So far OPEC has cut 0.4 mb/d less than planned with an averaged Jan/Feb production of 32.2 mb/d. I.e. the organisation has cut some 0.8 mb/d versus its October 2016 level. Back in November a US crude production rebound was not even on the horizon and not much discussed. The US EIA’s monthly report only stretched out to the end of 2017 with a prediction that US crude production would hit 8.94 mb/d in Dec 2017 which was just 250 kb/d above the US crude production in November 2016.

Now it all looks different. If we look away from EIA’s projection of US hitting 9.6 mb/d in Feb 2018 and instead focus on the latest weekly production data of 9.1 mb/d and extend it with the growth trend so far this year then US production would hit close to 9.5 mb/d just when OPEC’s members meet on the 25th of May. US production would then have increased by close to 0.8 mb/d since OPEC decided to cut in November 2016. That is close to exactly what OPEC has cut in Jan and Feb. Thus if OPEC’s compliance to the decided cuts don’t rise from here then US crude oil production recovery could end up rising equaly much as OPEC ended up cutting. The previous oil minister in Saudi Arabia, Ali al-Naimi’s words that an OPEC cut would only yield a lower market share while not necessarily lift the oil price may start to ring in the back of the head of OPEC’s members. We don’t expect OPEC to extend its cuts into H2-17. We have this itching feeling that OPEC compliance to cuts may start to erode towards the end of H1-17. Especially if the expectation is that there will be no further cuts.

Speculative market repositioning helped to shift oil prices lower
The pullback in the oil price last two weeks was clearly a repositioning in speculative positions as holders of long positions started to be concerned about the increasingly visible strong US production recovery. Net long speculative positions in WTI reached close to 600 mb some 4 weeks ago but have now sold off back down to 500 mb. A more neutral level is however around 350 mb. Thus there is still risk for further bearish repositioning.

We still expect Brent crude at $57.5/b in Q2-17 before falling back to $52.5/b in Q4-17
We are still positive for crude oil prices into Q2-17 where we expect front month Brent to average $57.5/b. We expect to see inventories to start to draw any moment as OPEC’s elevated production in Nov and Dec now increasingly is assimilated. Global refineries are also now increasingly coming back on line thus starting to process crude oil again. As oil inventories continues to draw as it did all through H2-16 we expect the forward crude oil curves to flip fully into backwardation. This will then enable the Brent crude oil front month contract to move up to $57.5/b while still leaving the WTI 15mth contract at around $51-52/b. Our outlook for Q2-17 is however at risk if US crude oil production continues to grow at its current trend rate. We still expect Brent crude to head down to average $52.5/b in Q4-17 in order to cool US shale oil production growth.

We expect OECD inventories to draw down 160 million barrels in 2017
The market was disappointed when it heard from IEA that OECD inventories rose by 48 mb in January. In perspective however, OECD inventories normally increase by some 30 mb from Dec to Jan. Thus the increase in inventories was only 18 mb more than normal. What is striking is that OECD’s inventories trended downwards all through H2-16 and ended down y/y for the first time in a long, long time in both December and January. And this was even without the help of OPEC cuts. We still expect the oil market to run a deficit of some 0.4 mb/d in 2017 thus resulting in a steady draw in inventories. Thus we have passed the OECD peak inventories and we are now heading downwards. The higher activation of US shale oil rigs than expected over the last two to three months has however impacted our projected supply/demand balance for 2018 leading to virtually no deficit in 2018 and thus very limited draws. Thus 2018 look likely to be a waiting year for the oil market with still plenty of oil in OECD inventories and with few pressure points.

Ch1: OECD down y/y for the first time in a long time in Dec and Jan
We are past the peak OECD inventories. To draw down from here

Ch2: Strong US production growth recovery is posing a problem for OPEC
OPEC cuts unlikely to continue in H2-17 as US production may reach 9.5 mb/d already in late May (trend extrapolation)

Ch3: Latest sell-off has increased the depth of front end crude curve contango
This contango and discount for spot crude prices versus longer dated contracts is just what OPEC wants to get away from
The 1-2 year forward WTI curve has shifted down to $50/b which would reduce the profitability for new shale oil investments

Ch4: Net long speculative WTI positions has pulled back but are still high
Now standing at 500,000 contracts or 500 million barrels.
Neutral level would be around 350 million barrels

Ch5: OPEC production at 32.16 mb/d in Feb and thus some 350 kb/d above its target.
Will OPEC compliance fall apart if it becomes increasingly clear that there will be no cuts in H2-17?

Ch6: We still expect a deficit the next three years despite strong US production growth
The balance assumes no OPEC cuts after H1-17

Ch7: Due to current high OECD inventories the global oil market is fine all through 2017 and 2018.
Not a lot of pressure points to be seen before 2019

Annons

Ch8: And yes, we are bullish US crude oil production but even more than that is needed in 2019
Then it all boils down to “too little too late” or “too much too soon”.
The US EIA is lifting its prognosis every month all since last July.
We expect them to continue to do that going forward as well as the EIA prognosis is still way behind the curve in our view.

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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SEB Råvarubrev 21 mars 2017

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Analys

Sell the rally. Trump has become predictable in his unpredictability

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4 dagar 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.

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Analys

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

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1 vecka 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.

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Analys

Crude oil soon coming to a port near you

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2 veckor 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.