Analys

Down to $61.1/b with EM and metals. Time to buy

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7 år sedan

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7 december, 2017

Over the past week Brent crude has sold down 3% along with EM equities (-3.5%), Industrial metals (-2.8%) plus some headwind from a 0.5% stronger USD. While not bullish to the $80/b in terms of the 2018 horizon, the OPEC+ decision last week is still supportive. Further inventory draw down will lead to a steeper Brent backwardation spot price premium to forward contracts while further US crude oil production growth is likely to lead to a yet wider Brent to WTI crude price spread. As such a Brent crude spot price delivery in the range of $60-65/b seems reasonable for 2018. Brent crude year 2018 is currently trading at $60.6/b and 2019 at $58.5/b. We expect the Brent crude front month to head towards $65-67/b in not too long.

There never was much of a bull rally following OPEC+’ firm and credible announcement last Thursday for maintaining production cuts to the end of 2018. Brent crude has instead sold off 3% w/w since last Wednesday, the day before the OPEC meeting. The sell-off has in our view little to do with oil specifics and much more to do with broad based drivers. In perspective EM equities have sold off 3.5% while the USD index has increased 0.5% with all commodity sub-indices down between 1.3% and 2.8%. All the major industrial metals were down with copper loosing 3.1% and nickel loosing 6.2%. So Brent crude loosing 3% with this kind of backdrop has little to do with oil specifics.

We still perceive OPEC+’ announcement last Thursday as an overall very strong and credible message of lasting market management. “We will not allow the inventories to rise back up”; “Production cuts will be reversed gradually” and “We’ll drive inventories down another 150 mb (vs Sep OECD level)”.

The message was however not a message of “We’ll cut so much that we’ll drive the market back to $80/b”. The market may very well drive back up to $80/b eventually, but not because OPEC+ places it there deliberately. The lack of this kind of message was maybe why the Brent crude oil price did not roll on higher after OPEC+ message but rather followed general market trends (EM and metals) lower.

In terms of hopes for a further strong bullish drive from OPEC+ the only weakness in the announcement last week was the goal of another 150 mb lower. The reason for this is that the reference point is OECD inventories from September 2017. Since then we have seen weekly data decline by close to 70 mb with probably another 20 mb lower before the end of year. In addition it will only drive OECD inventories down to the ‘2013-2017 five year average’ rather than the normal conditions of ‘2010-2014’ from before inventories started to rise.

We’ll thus be pretty close to the inventory goal already at the end of 2017 and for sure by mid-2018. And 1Q18 will not be like 1Q17 when OECD inventories jumped 82 mb from Dec-16 to Jan-17 due to elevated OPEC production in 4Q16. This time we have disciplined production by OPEC+ in 4Q17 with little reason to expect an unusual large jump in OECD inventories into January.

OPEC+’ message last week was measured and not a message of aiming for the sky in terms of prices. As inventory targets are reached they will gradually wind down cuts. Thus even if they promised to keep cuts to end of 2018 they are unlikely to over-deliver in terms of inventory target. As this target is likely to be firmly in their hands by mid-2018 we expect OPEC+ wind down production cuts in 2H18.

2018 is not going to be a year where Libya and Nigeria are going to increase production and thus counter production cuts from the rest of the OPEC+ group as was the case in 2017. Not because they have accepted a cap under the new agreement, but because they have taken out the upside production capacity in the short term. Venezuela on the other hand is likely to decline further with an extension of its current 3m y/y decline rate of -257 kb/d. Iran is likely to move sideways.

The main downside price concern for the oil market in 2018 is primarily connected to the coming tapering in bond purchases by Central Banks as well as the unavoidable debt-deleveraging in China.

Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Stronger inventory build than consensus, diesel demand notable

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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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7 dagar sedan

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17 februari, 2025

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.