Analys

The last hurrah from Vienna

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7 år sedan

den

22 maj, 2017

Handelsbanken - Råvarubrevet - Nyhetsbrev om råvaror

We see a close to 100% probability of an extension of oil production cuts from OPEC at the upcoming OPEC meeting in Vienna on May 25. For H2 2017, we see compliance with proposed cuts as a much more difficult issue than the deal itself. We think there is a 95% probability that Russia will sign on for a new six-month production cut period, but we see only a 30% probability that Russia will keep compliance for that period. Oil cuts during H2 2017 will come at a high cost due to seasonally higher production. We believe the next big price turn will come from non-compliance from Russia in particular but also other OPEC countries, as growing US production shows evidence of the futility of subsidising growth there by keeping production off stream. Saudi Arabia seems assured that production cuts at any price are the right way to go; it seems to us that the longer OPEC tries to keep production down, the more such measures backfire.

Core OPEC members give a good lead

The OPEC and several other key producers including Russia have agreed to cut production by 1.8 million bbl/d for H1 2017 to reduce global glut, formally defined as retreating global stocks to normal levels, i.e. the five-year average. It is increasingly clear that the target will not be reached after the first six months of this year. Saudi Arabian oil minister Al-Falih opened up initially for an extension for H2 2017, and last week for nine months, including Q1 2018. Other core OPEC members have gradually confirmed the extension as well. We assume a Brent crude price of USD 50 fully reflects a six-month extension of OPEC production cuts.

Saudi Arabia supports extension

It has become obvious that Deputy Crown Prince Mohammed bin Salman, who has emerged as Saudi Arabia’s leading economic force, was the architect behind the Saudis’ policy U-turn in Doha, leading up to the cut at the official meeting in Vienna in November 2016. In our view, this was confirmed by the shuffle of the Kingdom’s oil minister, replacing Ali al-Naimi after two decades. If this were a game of chess, we would view this as a rokade.

Prince Mohammed has designated divesting Armaco at the top of his agenda, and that forms the basis of the Saudis’ policy and willingness to cut production in compensation for a short-term higher oil price.

Costly mistake

The savvy players recognise the danger of taking real action in cutting production. History is repeating itself. Higher prices have reversed the US production drop, extending the time it takes for the market to balance, and pushing the volume share away from OPEC and toward two non-cut participants, the US and lately also Libya.

We strongly argue it was too early for OPEC to take action. The rebalancing process had another year, perhaps two, before running its course. If OPEC had waited, a number of bankruptcies in the US energy sector would have played out, and some banks would have lost their faith in energy lending for a long time. Instead, US shale oil is growing at the same rate as it did before the 2014 oil slump and production is now higher than in 2014, which was about the time that OPEC initiated its strategy aimed at knocking off higher costs by flooding the market. Costs are dynamic, however, and the low-price era has pushed breakeven levels lower and provided a solid platform for future growth.

Russia: biggest loser in extension deal

We base our strong opinion of a low 30% chance of an implemented cut during the second half on Russia’s seasonal oil production pattern. Russia has shown its usual low interest in active cuts, and takes its cut from a very high October 2016 production as a reference point for the curbs. Russia has cut about 250,000 bbl/d from its pledge of a 300,000 bbl/d cut, but production is still 1.6% higher than in 2016 and export are 2.14% higher than in March 2016. The first quarter is seasonally weak in Russian crude production, while the second half is stronger, and cuts in the seasonal peak require a strong commitment. We doubt that Russia will turn down additional market share for the sake of Saudi Arabia’s Aramco divestment.

Russia has another reason to be careful in long-term cooperation with the Saudis. Russia has been successful in grabbing market share in China, the only oil consumer growing at any significant pace. This is not the right time to give up footprint anywhere, as competition will increase in all markets ahead.

“Everything is fine”

With little chance of action from Vienna on May 25, we think eroding compliance will set the tone after the May meeting. The oil price will likely hover at around USD 40/bbl when the agreement on production cuts vanishes, and an extension of production cuts will not come into question at the second OPEC meeting this year in November-December.

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Analys

Diesel concerns drags Brent lower but OPEC+ will still get the price it wants in Q3

Publicerat

9 timmar sedan

den

29 april, 2024

Redaktionen

Brent rallied 2.5% last week on bullish inventories and bullish backdrop. Brent crude gained 2.5% last week with a close of the week of USD 89.5/b which also was the highest close of the week. The bullish drivers were: 1) Commercial crude and product stocks declined 3.8 m b versus a normal seasonal rise of 4.4 m b, 2) Solid gains in front-end Brent crude time-spreads indicating a tight crude market, and 3) A positive backdrop of a 2.7% gain in US S&P 500 index.

Bjarne Schieldrop, Chief analyst commodities, SEB

Brent falling back 1% on diesel concerns this morning. But positive backdrop may counter it later. This morning Brent crude is pulling back 0.9% to USD 88.7/b counter to the fact that the general backdrop is positive with a weaker USD, equity gains both in Asia and in European and US futures and not the least also positive gains in industrial metals with copper trading up 0.4% at USD 10 009/ton. This overall positive market backdrop clearly has the potential to reverse the initial bearish start of the week as we get a little further into the Monday trading session.

Diesel concerns at center stage. The bearish angle on oil this morning is weak diesel demand with diesel forward curves in front-end contango and predictions for lower refinery runs in response this down the road. I.e. that the current front-end strength in crude curves (elevated backwardation) reflecting a current tight crude market will dissipate in not too long due to likely lower refinery runs.

But gasoline cracks have rallied. Diesel weakness is normal this time of year. Overall refining margin still strong. Lots of focus on weakness in diesel demand and cracks. But we need to remember that we saw the same weakness last spring in April and May before the diesel cracks rallied into the rest of the year. Diesel cracks are also very seasonal with natural winter-strength and likewise natural summer weakness. What matters for refineries is of course the overall refining margin reflecting demand for all products. Gasoline cracks have rallied to close to USD 24/b in ARA for the front-month contract. If we compute a proxy ARA refining margin consisting of 40% diesel, 40% gasoline and 20% bunkeroil we get a refining margin of USD 14/b which is way above the 2015-19 average of only USD 6.5/b. This does not take into account the now much higher costs to EU refineries of carbon prices and nat gas prices. So the picture is a little less rosy than what the USD 14/b may look like.

The Russia/Ukraine oil product shock has not yet fully dissipated. What stands out though is that the oil product shock from the Russian war on Ukraine has dissipated significantly, but it is still clearly there. Looking at below graphs on oil product cracks the Russian attack on Ukraine stands out like day and night in February 2022 and oil product markets have still not fully normalized.

Oil market gazing towards OPEC+ meeting in June. OPEC+ will adjust to get the price they want. Oil markets are increasingly gazing towards the OPEC+ meeting in June when the group will decide what to do with production in Q3-24. Our view is that the group will adjust production as needed to gain the oil price it wants which typically is USD 85/b or higher. This is probably also the general view in the market.

Change in US oil inventories was a bullish driver last week.

Crude oil time-spreads strengthened last week

ICE gasoil forward curve has shifted from solid backwardation to front-end contango signaling diesel demand weakness. Leading to concerns for lower refinery runs and softer crude oil demand by refineries down the road.

ARA gasoline crack has rallied towards while Gasoil crack has fallen back. Not a totally unusual pattern.

Proxy ARA refining margin with 40% gasoil crack, 40% gasoline crack and 20% bunker oil crack.

ARA diesel cracks saw the exact same pattern last year. Dipping low in April and May before rallying into the second half of the year. Diesel cracks have fallen back but are still clearly above normal levels both in spot and on the forward curve. I.e. the ”Russian diesel stress” hasn’t fully dissipated quite yet.

Net long specs fell back a little last week.

52-week ranking of net long speculative positions in Brent and WTI as well as 52-week ranking of the strength of the Brent 1-7 mth backwardation

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Analys

’wait and see’ mode

Publicerat

4 dagar sedan

den

25 april, 2024

Redaktionen

So far this week, Brent Crude prices have strengthened by USD 1.3 per barrel since Monday’s opening. While macroeconomic concerns persist, they have somewhat abated, resulting in muted price reactions. Fundamentals predominantly influence global oil price developments at present. This week, we’ve observed highs of USD 89 per barrel yesterday morning and lows of USD 85.7 per barrel on Monday morning. Currently, Brent Crude is trading at a stable USD 88.3 per barrel, maintaining this level for the past 24 hours.

Ole R. Hvalbye, Analyst Commodities, SEB

Additionally, there has been no significant price reaction to Crude following yesterday’s US inventory report (see page 11 attached):

US commercial crude inventories (excluding SPR) decreased by 6.4 million barrels from the previous week, standing at 453.6 million barrels, roughly 3% below the five-year average for this time of year.
Total motor gasoline inventories decreased by 0.6 million barrels, approximately 4% below the five-year average.
Distillate (diesel) inventories increased by 1.6 million barrels but remain weak historically, about 7% below the five-year average.
Total commercial petroleum inventories (crude + products) decreased by 3.8 million barrels last week.

Regarding petroleum products, the overall build/withdrawal aligns with seasonal patterns, theoretically exerting limited effect on prices. However, the significant draw in commercial crude inventories counters the seasonality, surpassing market expectations and API figures released on Tuesday, indicating a draw of 3.2 million barrels (compared to Bloomberg consensus of +1.3 million). API numbers for products were more in line with the US DOE.

Against this backdrop, yesterday’s inventory report is bullish, theoretically exerting upward pressure on crude prices.

Yet, the current stability in prices may be attributed to reduced geopolitical risks, balanced against demand concerns. Markets are adopting a wait-and-see approach ahead of Q1 US GDP (today at 14:30) and the Fed’s preferred inflation measure, “core PCE prices” (tomorrow at 14:30). A stronger print could potentially dampen crude prices as market participants worry over the demand outlook.

Geopolitical “risk premiums” have decreased from last week, although concerns persist, highlighted by Ukraine’s strikes on two Russian oil depots in western Russia and Houthis’ claims of targeting shipping off the Yemeni coast yesterday.

With a relatively calmer geopolitical landscape, the market carefully evaluates data and fundamentals. While the supply picture appears clear, demand remains the predominant uncertainty that the market attempts to decode.

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Analys

Also OPEC+ wants to get compensation for inflation

Publicerat

6 dagar sedan

den

23 april, 2024

Redaktionen

Brent crude has fallen USD 3/b since the peak of Iran-Israel concerns last week. Still lots of talk about significant Mid-East risk premium in the current oil price. But OPEC+ is in no way anywhere close to loosing control of the oil market. Thus what will really matter is what OPEC+ decides to do in June with respect to production in Q3-24 and the market knows this very well. Saudi Arabia’s social cost-break-even is estimated at USD 100/b today. Also Saudi Arabia’s purse is hurt by 21% US inflation since Jan 2020. Saudi needs more money to make ends meet. Why shouldn’t they get a higher nominal pay as everyone else. Saudi will ask for it

Brent is down USD 3/b vs. last week as the immediate risk for Iran-Israel has faded. But risk is far from over says experts. The Brent crude oil price has fallen 3% to now USD 87.3/b since it became clear that Israel was willing to restrain itself with only a muted counter attack versus Israel while Iran at the same time totally played down the counterattack by Israel. The hope now is of course that that was the end of it. The real fear has now receded for the scenario where Israeli and Iranian exchanges of rockets and drones would escalate to a point where also the US is dragged into it with Mid East oil supply being hurt in the end. Not everyone are as optimistic. Professor Meir Javedanfar who teaches Iranian-Israeli studies in Israel instead judges that ”this is just the beginning” and that they sooner or later will confront each other again according to NYT. While the the tension between Iran and Israel has faded significantly, the pain and anger spiraling out of destruction of Gaza will however close to guarantee that bombs and military strifes will take place left, right and center in the Middle East going forward.

Also OPEC+ wants to get paid. At the start of 2020 the 20 year inflation adjusted average Brent crude price stood at USD 76.6/b. If we keep the averaging period fixed and move forward till today that inflation adjusted average has risen to USD 92.5/b. So when OPEC looks in its purse and income stream it today needs a 21% higher oil price than in January 2020 in order to make ends meet and OPEC(+) is working hard to get it.

Much talk about Mid-East risk premium of USD 5-10-25/b. But OPEC+ is in control so why does it matter. There is much talk these days that there is a significant risk premium in Brent crude these days and that it could evaporate if the erratic state of the Middle East as well as Ukraine/Russia settles down. With the latest gains in US oil inventories one could maybe argue that there is a USD 5/b risk premium versus total US commercial crude and product inventories in the Brent crude oil price today. But what really matters for the oil price is what OPEC+ decides to do in June with respect to Q3-24 production. We are in no doubt that the group will steer this market to where they want it also in Q3-24. If there is a little bit too much oil in the market versus demand then they will trim supply accordingly.

Also OPEC+ wants to make ends meet. The 20-year real average Brent price from 2000 to 2019 stood at USD 76.6/b in Jan 2020. That same averaging period is today at USD 92.5/b in today’s money value. OPEC+ needs a higher nominal price to make ends meet and they will work hard to get it.

Price of brent crude — Source: SEB calculations and graph, Blbrg data

Inflation adjusted Brent crude price versus total US commercial crude and product stocks. A bit above the regression line. Maybe USD 5/b risk premium. But type of inventories matter. Latest big gains were in Propane and Other oils and not so much in crude and products

Total US commercial crude and product stocks usually rise by 4-5 m b per week this time of year. Gains have been very strong lately, but mostly in Propane and Other oils

Last week’s US inventory data. Big rise of 10 m b in commercial inventories. What really stands out is the big gains in Propane and Other oils

Take actual changes minus normal seasonal changes we find that US commercial crude and regular products like diesel, gasoline, jet and bunker oil actually fell 3 m b versus normal change.