Analys
US crude recovery could cover all OPEC cuts
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
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
Collapsing after Trump tariffs and large surprise production hike by OPEC+ in May. Brent crude collapsed yesterday following the shock of the Trump tariffs on April 2 and even more so due to the unexpected announcement from OPEC+ that they will lift production by 411 kb/d in May which is three times as much as expected. Brent fell 6.4% yesterday with a close of USD 70.14/b and traded to a low of USD 69.48/b within the day. This morning it is down another 2.7% to USD 68.2/b. That is below the recent low point in early March of USD 68.33/b. Thus, a new ”lowest since December 2021” today.
Kazakhstan seems to be the problem and the reason for the unexpected large hike by OPEC+ in May. Kazakhstan has consistently breached its production cap. In February it produced 1.83 mb/d crude and 2.12 mb/d including condensates. In March its production reached a new record of 2.17 mb/d. Its crude production cap however is 1.468 mb/d. In February it thus exceeded its production cap by 362 kb/d.
Those who comply are getting frustrated with those who don’t. Internal compliance is an important and difficult issue when OPEC+ is holding back production. The problem naturally grows the bigger the cuts are and the longer they last as impatience grows over time. The cuts have been large, and they have lasted for a long time. And now some cracks are appearing. But that does not mean they cannot be mended. And it does not imply either that the group is totally shifting strategy from Price to Volume. It is still a measured approach. Also, by lifting all caps across the voluntary cutters, Kazakhstan becomes less out of compliance. Thus, less cuts by Kazakhstan are needed in order to become compliant.
While not a shift from Price to Volume, the surprise hike in May is clearly a sign of weakness. The struggle over internal compliance has now led to a rupture in strategy and more production in May than what was previously planned and signaled to the market. It is thus natural to assign a higher production path from the group for 2025 than previously assumed. Do however remember how quickly the price war between Russia and Saudi Arabia ended in the spring of 2020.
Higher production by OPEC+ will be partially countered by lower production from Venezuela and Iran. The new sanctions towards Iran and Venezuela can to a large degree counter the production increase from OPEC+. But to what extent is still unclear.
Buy some oil calls. Bullish risks are never far away. Rising risks for US/Israeli attack on Iran? The US has increased its indirect attacks on Iran by fresh attacks on Syria and Yemen lately. The US has also escalated sanctions towards the country in an effort to force Iran into a new nuclear deal. The UK newspaper TheSun yesterday ran the following story: ”ON THE BRINK US & Iran war is ‘INEVITABLE’, France warns as Trump masses huge strike force with THIRD of America’s stealth bombers”. This is indeed a clear risk which would lead to significant losses of supply of oil in the Middle East and probably not just from Iran. So, buying some oil calls amid the current selloff is probably a prudent thing to do for oil consumers.
Brent crude is rejoining the US equity selloff by its recent collapse though for partially different reasons. New painful tariffs from Trump in combination with more oil from OPEC+ is not a great combination.
Brent crude prices initially maintained the gains from late March and traded sideways during the first two trading days in April. Yesterday evening, the price even reached its highest point since mid-February, touching USD 75.5 per barrel.
However, after the U.S. president addressed the public and unveiled his new package of individual tariffs, the market reacted accordingly. Overnight, Brent crude dropped by close to USD 4 per barrel, now trading at USD 71.6 per barrel.
Key takeaways from the speech include a baseline tariff rate of 10% for all countries. Additionally, individual reciprocal tariffs will be imposed on countries with which the U.S. has the largest trade deficits. Many Asian economies end up at the higher end of the scale, with China facing a significant 54% tariff. In contrast, many North and South American countries are at the lower end, with a 10% tariff rate. The EU stands at 20%, which, while not unexpected given earlier signals, is still disappointing, especially after Trump’s previous suggestion that there might be some easing.
Once again, Trump has followed through on his promise, making it clear that he is serious about rebalancing the U.S. trade position with the world. While some negotiation may still occur, the primary objective is to achieve a more balanced trade environment. A weaker U.S. dollar is likely to be an integral part of this solution.
Yet, as the flow of physical goods to the U.S. declines, the natural question arises: where will these goods go? The EU may be forced to raise tariffs on China, mirroring U.S. actions to protect its industries from an influx of discounted Chinese goods.
Initially, we will observe the effects in soft economic data, such as sentiment indices reflecting investor, industry, and consumer confidence, followed by drops in equity markets and, very likely, declining oil prices. This will eventually be followed by more tangible data showing reductions in employment, spending, investments, and overall economic activity.
Ref oil prices moving forward, we have recently adjusted our Brent crude price forecast. The widespread imposition of strict tariffs is expected to foster fears of an economic slowdown, potentially reducing oil demand. Macroeconomic uncertainty, particularly regarding tariffs, warrants caution regarding the pace of demand growth. Our updated forecast of USD 70 per barrel for 2025 and 2026, and USD 75 per barrel for 2027, reflects a more conservative outlook, influenced by stronger-than-expected U.S. supply, a more politically influenced OPEC+, and an increased focus on fragile demand.
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US DOE data:
Last week, U.S. crude oil refinery inputs averaged 15.6 million barrels per day, a decrease of 192 thousand barrels per day from the previous week. Refineries operated at 86.0% of their total operable capacity during this period. Gasoline production increased slightly, averaging 9.3 million barrels per day, while distillate (diesel) production also rose, averaging 4.7 million barrels per day.
U.S. crude oil imports averaged 6.5 million barrels per day, up by 271 thousand barrels per day from the prior week. Over the past four weeks, imports averaged 5.9 million barrels per day, reflecting a 6.3% year-on-year decline compared to the same period last year.
The focus remains on U.S. crude and product inventories, which continue to impact short-term price dynamics in both WTI and Brent crude. Total commercial petroleum inventories (excl. SPR) increased by 5.4 million barrels, a modest build, yet insufficient to trigger significant price movements.
Commercial crude oil inventories (excl. SPR) rose by 6.2 million barrels, in line with the 6-million-barrel build forecasted by the API. With this latest increase, U.S. crude oil inventories now stand at 439.8 million barrels, which is 4% below the five-year average for this time of year.
Gasoline inventories decreased by 1.6 million barrels, exactly matching the API’s reported decline of 1.6 million barrels. Diesel inventories rose by 0.3 million barrels, which is close to the API’s forecast of an 11-thousand-barrel decrease. Diesel inventories are currently 6% below the five-year average.
Over the past four weeks, total products supplied, a proxy for U.S. demand, averaged 20.1 million barrels per day, a 1.2% decrease compared to the same period last year. Gasoline supplied averaged 8.8 million barrels per day, down 1.9% year-on-year. Diesel supplied averaged 3.8 million barrels per day, marking a 3.7% increase from the same period last year. Jet fuel demand also showed strength, rising 4.2% over the same four-week period.
Analys
Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today
Brent crude rallied to a high of USD 75.29/b yesterday, but wasn’t able to hold on to it and closed the day at USD 74.49/b. Brent crude has now crossed above both the 50- and 100-day moving average with the 200dma currently at USD 76.1/b. This morning it is trading a touch lower at USD 74.3/b
Brent riding a rollercoaster between bullish sanctions and bearish tariffs. Biden sanctions drove Brent to USD 82.63/b in mid-January. Trump tariffs then pulled it down to USD 68.33/b in early March with escalating concerns for oil demand growth and a sharp selloff in equities. New sanctions from Trump on Iran, Venezuela and threats of such also towards Russia then drove Brent crude back up to its recent high of USD 75.29/b. Brent is currently driving a rollercoaster between new demand damaging tariffs from Trump and new supply tightening sanctions towards oil producers (Iran, Venezuela, Russia) from Trump as well.
’Liberation day’ is today putting demand concerns in focus. Today we have ’Liberation day’ in the US with new, fresh tariffs to be released by Trump. We know it will be negative for trade, economic growth and thus oil demand growth. But we don’t know how bad it will be as the effects comes a little bit down the road. Especially bad if it turns into a global trade war escalating circus.
Focus today will naturally be on the negative side of demand. It will be hard for Brent to rally before we have the answer to what the extent these tariffs will be. Republicans lost the Supreme Court race in Wisconsin yesterday. So maybe the new Tariffs will be to the lighter side if Trump feels that he needs to tread a little bit more carefully.
OPEC+ controlling the oil market amid noise from tariffs and sanctions. In the background though sits OPEC+ with a huge surplus production capacity which it now will slice and dice out with gradual increases going forward. That is somehow drowning in the noise from sanctions and tariffs. But all in all, it is still OPEC+ who is setting the oil price these days.
US oil inventory data likely to show normal seasonal rise. Later today we’ll have US oil inventory data for last week. US API indicated last night that US crude and product stocks rose 4.4 mb last week. Close to the normal seasonal rise in week 13.
Lowest since Dec 2021. Kazakhstan likely reason for OPEC+ surprise hike in May
Oljepriserna slaktas på samtidiga negativa faktorer
Tariffs deepen economic concerns – significantly weighing on crude oil prices
Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today
Våren präglas av svängigt elpris och ankkurva
USA är världens största importör av aluminium
Oversold. Rising 1-3mth time-spreads. Possibly rebounding to USD 73.5/b before downside ensues
Crude oil comment: Unable to rebound as the US SPX is signaling dark clouds on the horizon
Crude oil comment: Not so fragile yet. If it was it would have sold off more yesterday
Oil prices climb, but fundamentals will keep rallies in check
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Nyheter3 veckor sedanUSA är världens största importör av aluminium
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Analys4 veckor sedan
Oversold. Rising 1-3mth time-spreads. Possibly rebounding to USD 73.5/b before downside ensues
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Analys3 veckor sedan
Crude oil comment: Unable to rebound as the US SPX is signaling dark clouds on the horizon
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Analys4 veckor sedan
Crude oil comment: Not so fragile yet. If it was it would have sold off more yesterday
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Analys3 veckor sedan
Oil prices climb, but fundamentals will keep rallies in check
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Nyheter3 veckor sedanPriset på koppar skiljer sig åt efter tariffer
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Analys2 veckor sedan
Crude oil comment: Ticking higher as tariff-panic eases. Demand growth and OPEC+ will be key
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Nyheter2 veckor sedanEtt samtal om råvarorna som behövs för batterier