Analys
The 2017 crude oil market is starting bullishly but is likely to end modestly as US shale production revives

The year 2016 started on a very bearish note but ended very bullishly. It was a dramatic oil year with desperation and pain for oil producers as Brent bottomed out at $27.1/b in January before trading to a high of $57.89/b in December. The mood was on the positive side in H2-16 as Brent crude averaged $49/b which helped to lift the US oil rig count by 209 rigs to 525. OPEC then ignited further bullishness by deciding to cut production which helped to propel speculative WTI positions to a new record high of 502646 contracts net long (502 million barrels) at the end of 2016. The year 2016 was definitely the year when the global oil market moved from a large, running surplus to close to balance as the strong growth in oil inventories seen all through 2014 and 2015 came to a halt.
We expect 2017 to be much less dramatic than 2016 unless the supply side is hit by major unforeseen outages. The variations between despair and euphoria should be much less extreme and thus so should the variations in oil prices. While 2016 started bearishly and ended bullishly we expect 2017 to be the opposite but not as extreme. Oil inventories are likely to draw down in H1-17 as OPEC cuts production and crude oil curves are likely to move from deep contango in 2016 to instead backwardation in 2017. While falling in 2016 US shale oil production is going to rise in 2017.
We expect a Brent crude oil price of $55/b in Q1-17, $57.5/b in Q2-17, Q3-17: $55/b, Q4-17: $52.5/b. As a consequence we expect US shale oil rigs to rise by 30 rigs per month in H1-17 (versus 27/mth in H2-16 when Brent crude averaged $49/b) leading total US shale oil rig count to stand at 624 rigs at the start of July 2017. Thereafter there will be no need for additional oil rigs into the US shale oil space before we get to the second half of 2018. Thus by mid-2017 the oil price needs to move to a level which halts further inflow and activation of oil rigs in the US. As such the 12 to 24 month Brent crude oil price probably needs to move down to somewhere between $45-50/b. With crude oil curves having shifted into backwardation with a $5/b spot premium to longer dated contracts it implies a 1 mth Brent crude price of $50-55/b in H2-17.
OPEC has now started to reduce output according to its decision on November 30th to curb output from 34.2 mb/d in November to a planned production of 32.5 mb/d in H2-17. Libya’s crude oil production is however increasing and stood at 685 kb/d this weekend versus an average production of 360 kb/d in 2016. Thus cutting overall OPEC production according to plan is not all without problems. However, Saudi Arabia’s determination as well as its willingness to cut even more than its pledge lends confidence that cuts to overall production will be successful nonetheless. In the face of a further strong rise in US oil rigs during H1-17 we think it will be difficult for OPEC to agree to role forward their production cuts into H2-17. In our view OPEC’s main objective for cutting production in H1-17 is to draw down current elevated global oil inventories thus shifting crude oil prices from a spot discount of $12/b in 2016 to instead a crude oil spot premium of $5/b versus longer dated contracts. We think they will be successful in achieving this with no need to role cuts into H2-17.
The crude oil market is heading into 2017 on a very bullish note with net long non-commercial WTI positions (i.e. speculative positions) at a record high. The 1mth Brent crude oil price closed the year at $56.82/b which was the highest close since July 2015. US oil producers activated 51 oil rigs in December which was the highest monthly addition since March 2014. With record net long speculative WTI positions and US shale oil rigs on a strongly rising path there is clearly a risk for price set backs ahead even though we have an overall positive view for oil prices in H1-17.
Selected graphs
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
All eyes on OPEC V8 and their July quota decision on Saturday

Tariffs or no tariffs played ping pong with Brent crude yesterday. Brent crude traded to a joyous high of USD 66.13/b yesterday as a US court rejected Trump’s tariffs. Though that ruling was later overturned again with Brent closing down 1.2% on the day to USD 64.15/b.

US commercial oil inventories fell 0.7 mb last week versus a seasonal normal rise of 3-6 mb. US commercial crude and product stocks fell 0.7 mb last week which is fairly bullish since the seasonal normal is for a rise of 4.3 mb. US crude stocks fell 2.8 mb, Distillates fell 0.7 mb and Gasoline stocks fell 2.4 mb.
All eyes are now on OPEC V8 (Saudi Arabia, Iraq, Kuwait, UAE, Algeria, Russia, Oman, Kazakhstan) which will make a decision tomorrow on what to do with production for July. Overall they are in a process of placing 2.2 mb/d of cuts back into the market over a period stretching out to December 2026. Following an expected hike of 137 kb/d in April they surprised the market by lifting production targets by 411 kb/d for May and then an additional 411 kb/d again for June. It is widely expected that the group will decide to lift production targets by another 411 kb/d also for July. That is probably mostly priced in the market. As such it will probably not have all that much of a bearish bearish price impact on Monday if they do.
It is still a bit unclear what is going on and why they are lifting production so rapidly rather than at a very gradual pace towards the end of 2026. One argument is that the oil is needed in the market as Middle East demand rises sharply in summertime. Another is that the group is partially listening to Donald Trump which has called for more oil and a lower price. The last is that Saudi Arabia is angry with Kazakhstan which has produced 300 kb/d more than its quota with no indications that they will adhere to their quota.
So far we have heard no explicit signal from the group that they have abandoned the plan of measured increases with monthly assessments so that the 2.2 mb/d is fully back in the market by the end of 2026. If the V8 group continues to lift quotas by 411 kb/d every month they will have revived the production by the full 2.2 mb/d already in September this year. There are clearly some expectations in the market that this is indeed what they actually will do. But this is far from given. Thus any verbal wrapping around the decision for July quotas on Saturday will be very important and can have a significant impact on the oil price. So far they have been tightlipped beyond what they will do beyond the month in question and have said nothing about abandoning the ”gradually towards the end of 2026” plan. It is thus a good chance that they will ease back on the hikes come August, maybe do no changes for a couple of months or even cut the quotas back a little if needed.
Significant OPEC+ spare capacity will be placed back into the market over the coming 1-2 years. What we do know though is that OPEC+ as a whole as well as the V8 subgroup specifically have significant spare capacity at hand which will be placed back into the market over the coming year or two or three. Probably an increase of around 3.0 – 3.5 mb/d. There is only two ways to get it back into the market. The oil price must be sufficiently low so that 1) Demand growth is stronger and 2) US shale oil backs off. In combo allowing the spare capacity back into the market.
Low global inventories stands ready to soak up 200-300 mb of oil. What will cushion the downside for the oil price for a while over the coming year is that current, global oil inventories are low and stand ready to soak up surplus production to the tune of 200-300 mb.
Analys
Brent steady at $65 ahead of OPEC+ and Iran outcomes

Following the rebound on Wednesday last week – when Brent reached an intra-week high of USD 66.6 per barrel – crude oil prices have since trended lower. Since opening at USD 65.4 per barrel on Monday this week, prices have softened slightly and are currently trading around USD 64.7 per barrel.

This morning, oil prices are trading sideways to slightly positive, supported by signs of easing trade tensions between the U.S. and the EU. European equities climbed while long-term government bond yields declined after President Trump announced a pause in new tariffs yesterday, encouraging hopes of a transatlantic trade agreement.
The optimisms were further supported by reports indicating that the EU has agreed to fast-track trade negotiations with the U.S.
More significantly, crude prices appear to be consolidating around the USD 65 level as markets await the upcoming OPEC+ meeting. We expect the group to finalize its July output plans – driven by the eight key producers known as the “Voluntary Eight” – on May 31st, one day ahead of the original schedule.
We assign a high probability to another sizeable output increase of 411,000 barrels per day. However, this potential hike seems largely priced in already. While a minor price dip may occur on opening next week (Monday morning), we expect market reactions to remain relatively muted.
Meanwhile, the U.S. president expressed optimism following the latest round of nuclear talks with Iran in Rome, describing them as “very good.” Although such statements should be taken with caution, a positive outcome now appears more plausible. A successful agreement could eventually lead to the return of more Iranian barrels to the global market.
Analys
A shift to surplus will likely drive Brent towards the 60-line and the high 50ies

Brent sinks lower as OPEC+ looks likely to lift production in July by another 400 kb/d. Brent crude declined 0.7% yesterday to USD 64.44/b and traded in a range of USD 63.54 – 65.03/b. This morning Brent is down another 0.7% to USD 64/b along with expectations that OPEC+ will lift its production quota by another 411 kb/d in July.

Kazakhstan would be in breach even if the whole 2.2 mb/d of voluntary cuts are unwounded. The eight countries behind the 2.2 mb/d of voluntary cuts, the V8, have lifted their production quotas by close to 950 kb/d from April to June with unwinding starting in April. Over the coming week towards the end of May, the group will discuss what to do with quotas in July. Market expectations as well as indications from within the group is for another 411 kb/d hike also in July. Higher oil demand during summer both in the Middle East and globally is one reason for the hikes. Most of the additional production will not leave the Middle East but be consumed locally this summer. But Kazakhstan is also a major problem. The country produced 1.77 mb/d in April and 300 kb/d above its quota level. To maintain cohesion and credibility the group needs internal cooperation and harmony. Kazakhstan seems to have no plans to reduce production down to its quota. The alternative solution to reestablish internal harmony is to lift quotas up to where production is. The problem is that Kazakhstan only accounts for less than 5% of the overall production of V8. Thus even after unwinding all of the 2.2 mb/d, the quota of Kazakhstan would not rise much more than 100 kb/d. Far from the country’s overproduction of 300 kb/d in April.
A shift to surplus will likely drive Brent towards the 60-line and high 50ies. Losing front-end backwardation implies Brent crude down to the 60-line and high 50ies. Currently the Brent crude curve holds a front-end backwardation premium of USD 1.5/b versus the November price currently at USD 62.6/b. A result of an oil market which is still tight here and now. But if OPEC+ lifts production to a level where the market starts to run a surplus, then the front-end contract will flip from a USD 1.5/b premium vs. 4 months out to instead a comparable USD 1.5/b discount to 4 months out. That would bring the front-end contract down towards the 60-line and the high 50ies. This because a full out contango market usually also will drive the deferred contracts a bit lower as well. But this may not be all doom and gloom. A softer USD and a lower oil price is a powerful combo for global consumption. Global oil stocks are also low. This will help to cushion the downside.
Brent crude forward curve. Surplus and full contango would eradicate the front-end backwardation and drive Brent crude down towards the 60-line and high 50ies.

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