Analys

The long game is the wrong game (from short term intervention to longer term structural battle)

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9 år sedan

den

26 maj, 2017

OPEC yesterday decided to roll existing cuts over for another 9 months lasting all the way to March 2018. Maintaining production cuts also in Q1-18 was however communicated as a measure mainly to avoid driving inventories higher again in the demand wise seasonally weak first quarter of the year. To the surprise of many the market did not take the deal well and Brent crude oil fell $4.6% to a close of the day of $51.46/b with a low of the day of $51.03/b.

In hindsight we can now clearly say that there must have been a substantial amount of anticipation in the market for not only an extension of cuts but also for deeper cuts. Saudi Arabia’s communication to the market ahead of the meeting has clearly been misinterpreted when he stated that OPEC “will do whatever it takes” to draw inventories down to the 5 year average. The market view must have been that what OPEC & Co. did in H1-17 was far from enough. Thus “whatever it takes” should be MORE. Thus the moment Khalid Al-Falih said to reporters in Vienna yesterday at 10:20 CEST that “deeper cuts are not needed”, that was when the oil price started to fall. Long speculative positions which had run hard into the meeting and then instead ran for cover when the oil price started to tumble.

When OPEC launched the cuts last year they were dubbed as a “short term intervention”. Now it increasingly starts to look like a long haul structural battle. We do think that OPEC’s decision to cut will drive inventories down towards normal by the end of the year. Thus yesterday’s decision by OPEC & Co. is in our view making $60/b a sensible target for the front month Brent crude at the end of 2017. Thus as such we think that yesterday’s sell-off should be used as a buying opportunity. At the same time however it is likely leading to another 9 months during which a positive crude oil price signal leads US shale oil production to accelerate yet more.

US shale oil production has accelerated massively since November when OPEC & Co. decided to cut production. US crude oil production is now up more than 600 kb/d since the start of December 2016 which is more than the total 558 kb/d in pledged cuts from the 11 countries which have joined OPEC in cutting production at the moment. Their cuts are now basically wiped out. The US shale oil stimulus from the price gains following OPEC’s decision to cut in November has added some 250 shale oil rigs to the market. If we assume that there will not be a single additional US shale oil rig added to the market from July 2017 and all through to the end of 2018 we still expect that US crude oil production will grow by 0.5 mb/d y/y in 2017, 1.5 mb/d y/y in 2018 and by 1 mb/d y/y in 2019. However, as a consequence of the extension of the cuts all until March 2018 we are likely going to see a more supportive oil price and thus yet more US shale oil rigs being added to the market over the coming 9 months of cuts. In our view this is likely going to flip the global supply/demand balance for 2018 and 2019 into surplus.

Thus OPEC is increasingly painting itself into a corner. OPEC’s choice next year will be
1) Roll some cuts forward in both 2018 and 2019 (longer term structural battle) or
2) Put 1.8 mb/d of production cuts (OPEC & Co.) back into the market. Produce at will and let the price regulate the market yet again. I.e. the oil price needs to drop in order to push non-OPEC production lower in order to make room for OPEC & Co’s production revival.

It is often said that generals always fight the previous war meaning that they use tactics and strategy from the last war because that is what they know even if these are outdated. In a way this is what OPEC & Co are doing. In a shale oil world they should have med the cuts quick and dirty. It should definitely have been a short term intervention and not a long term structural battle. In the old days when non-OPEC production solely consisted of conventional oil production with a lead time from investments to production of some 5 years then gradual, enduring cuts did work. Now however keeping cuts going just leaves US shale oil producers all the time in the world to respond and revive. Rather than OPEC & Co cutting 1.8 mb/d for a full 5 quarters (2017 + Q1-18) they should rather have cut production by 3 mb/d for one quarter. That would have left little time for US shale oil players to ramp up investments and thus have limited the cumulative production impact on 2018 and 2019.

At yesterday’s meeting they should have decided massive cuts in Q3-17 and then no more. That would have been the right medicine for the market. Draw down the inventories in a flash. No lengthy time for US shale oil producers to revive and voila, inventories down to normal. A flat or backwardated crude oil forward curve where the mid-term WTI forward curve could be kept in check from there onwards.

It is still not too late for Saudi Arabia to follow this kind of strategy. They have basically promised what they are going to produce over the next 9 months. They could possibly do all of it in Q3-17. Rather than placing production at 10.06 mb/d for 9 months (a cut of 486 kb/d) they could instead produce 9.07 mb/d for the three months in Q3-17 which would mean a cut of 1.458 kb/d versus its October 2017 level. That would have drawn the inventories down by an additional 90 mb in Q3-17. At the same time Saudi Arabia should sell a comparable amount of volumes on a forward basis 2018 and 2019. This would help to prevent the medium term forward curve from rising. Thus again limiting the price signals and hedging opportunities for US shale oil producers.

Khalid Al-Falih has said that US shale oil producers are not the enemy. He welcomes their production revival. However, it still needs to be managed in the right way. At least as long as OPEC & Co is trying to manage the market. And the right way in our view is quick and dirty cuts. Do it all in one go rather than extended and do manage the price level of the mid-term forward crude oil prices.

JPM this morning cut its 2018 Brent crude oil price outlook to $45/b. That is great news for OPEC & Co because it will help to hold price expectations low for 2018 and 2019 and thus help to keep the mid-term forward crude prices in check and thus help to limit the positive price signals to US shale oil producers and thus limit further strong additions and activations of rigs.

As of now however the picture is for a lengthy nine months of additional production cuts and thus more US shale oil rigs being activated driving both 2018 and 2019 into surplus. As such there is increasing concern in the market for the exit from cuts. It is easy to take 1.8 mb/d off the market (1.2 mb/d for OPEC and 0.6 for Co.). With further revival of US shale oil it will be increasingly difficult to put the volumes back into the market again. An exit strategy was not discussed at the OPEC meeting. “We will cross that bridge when we get there” was Khalid Al-Falih’s comment. The market is worried however that come April 2018 then OPEC & Co moves back to “produce at will”. If that was the case following 5 quarters of US shale oil stimulating production cuts from OPEC & Co that would mean that the front month Brent crude oil price probably would have to move down to $35/b in order to slow down US shale oil production again.

With increasingly a surplus becoming the likely outlook for 2018 and 2019 (due to nine more months of cuts) the price outlook for these years increasingly becomes tied to OPEC & Co’s strategy of rolling cuts yet further down the road or not.

For now we are positive to oil prices for the rest of the year in 2017 where we expect OECD inventories at normal level at the end of 2017 with the Brent crude curve moving into backwardation with the front end contract standing at $60/b. We then expect the market price structure to be as follows. The WTI 18 month contract standing at $52.5/b. The Brent crude 18 month contract standing at a $2.5/b premium at $55/b and lastly the front month Brent crude oil contract having a $5/b premium backwardation the 18 months contract thus placing Brent crude front month contract at $60/b at year end 2017.

We are however increasingly concerned about the oil market balance and thus oil prices in 2018 and 2019. The fact that Algeria’s Energy Minister, Noureddine Bouterfa, was replaced in a minister re-shuffle yesterday is concerning. He was at the heart of last year’s negotiations. He was the oil diplomat which criss-crossed between OPEC and non-OPEC members to make the production cut deal last year happen. Thus losing him as oil minister is probably not a good thing with respect to further cuts beyond March 2018.

Annons

Global supply/demand oil market balance:

This is what OPEC hopes for:

This is however probably what they might get:

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

Market Still Betting on Timely Resolution, But Each Day Raises Shortage Risk

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15 timmar sedan

den

20 april, 2026

Redaktionen

Down on Friday. Up on Monday. The Brent June crude oil contract traded down 5.1% last week to a close of $90.38/b. It reached a high of $103.87/b last Monday and a low of $86.09/b on Friday as Iran announced that the Strait of Hormuz was fully open for transit. That quickly changed over the weekend as the US upheld its blockade of Iranian oil exports while Iran naturally responded by closing the SoH again. The US blew a hole in the engine room of the Iranian ship TOUSKA and took custody of the ship on Sunday. Brent crude is up 5.6% this morning to $95.4/b.

Bjarne Schieldrop, Chief analyst commodities, SEB

The cease-fire is expiring tomorrow. The US has said it will send a delegation for a second round of negotiations in Islamabad in Pakistan. But Iran has for now rejected a second round of talks as it views US demands as unrealistic and excessive while the US is also blocking the Strait of Hormuz.

While Brent is up 5% this morning, the financial market is still very optimistic that progress will be made. That talks will continue and that the SoH will fully open by the start of May which is consistent with a rest-of-year average Brent crude oil price of around $90/b with the market now trading that balance at around $88/b.

Financial optimism vs. physical deterioration. We have a divergence where the financial market is trading negotiations, improvements and resolution while at the same time the physical market is deteriorating day by day. Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.

Financial markets are betting that a US/Iranian resolution will save us in time from violent shortages down the road. But every day that the SoH remains closed is bringing us closer to a potentially very painful point of shortages and much higher prices.

The US blockade is also a weapon of leverage against its European and Asian allies. When Iran closed the SoH it held the world economy as a hostage against the US. The US blockade of the SoH is of course blocking Iranian oil exports. But it is also an action of disruption directed towards Europe and Asia. The US has called for the rest of the world to engaged in the war with Iran: ”If you want oil from the Persian Gulf, then go and get it”. A risk is that the US plays brinkmanship with the global oil market directed towards its European and Asian allies and maybe even towards China to force them to engage and take part. Maybe unthinkable. But unthinkable has become the norm with Trump in the White House.

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Analys

TACO (or Whatever It Was) Sends Oil Lower — Iran Keeps Choking Hormuz

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4 veckor sedan

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24 mars, 2026

Redaktionen

Wild moves yesterday. Brent crude traded to a high of $114.43/b and a low of $96.0/b and closed at $99.94/b yesterday.

US – Iran negotiations ongoing or not? What a day. Donald Trump announced that good talks were ongoing between Iran and the US and that the 48 hour deadline before bombing Iranian power plants and energy infrastructure was postponed by five days subject to success of ongoing meetings. Iranian media meanwhile stated that no meetings were ongoing at all.

Today we are scratching our heads trying to figure out what yesterday was all about.

Friends and family playing the market? Was it just Trump and his friends and family who were playing with oil and equity markets with $580m and $1.46bn in bets being placed by someone in oil and equity markets just 15 minutes before Trump’s announcement?

Was Trump pulling a TACO as he reached his political and economic pain point: Brent at $112/b, US Gas at $4/gal, SPX below 200dma and US 10yr above 4.4%?

Different Iranian factions with Trump talking with one of them? Are there real negotiations going on but with the US talking to one faction in Iran while another, the hardliners, are not involved and are denying any such negotiations going on?

Extending the ultimatum to attack and invade Kharg island next weekend? Or, is the five day delay of the deadline a tactical decision to allow US amphibious assault ships and marines to arrive in the Gulf in the upcoming weekend while US and Israeli continues to degrade Iranian military targets till then. And then next weekend a move by the US/Israel to attack and conquer for example the Kharg island?

We do not really know which it is or maybe a combination of these.

We did get some kind of TACO ydy. But markets have been waiting for some kind of TACO to happen and yesterday we got some kind of TACO. And Brent crude is now trading at $101.5/b as a result rather than at $112-114/b as it did no the high yesterday.

But what really matters in our view is the political situation on the ground in Iran. Will hardliners continue to hold power or will a more pragmatic faction gain power?

If the hardliners remain in power then oil pain should extend all the way to US midterm elections. The hardliners were apparently still in charge as of last week. Iran immediately retaliated and damaged LNG infrastructure in Qatar after Israel hit Iranian South Pars. The SoH was still closed and all messages coming out of Iran indicated defiance. Hardliners continues in power has a huge consequence for oil prices going forward. The regime has played its ’oil-weapon’ (closing or chocking the Strait of Hormuz). It is using it to achieve political goals. Deterrence: it needs to be so politically and economically expensive to attack Iran that it won’t happen again in the future. Or at least that the US/Israel thinks 10-times over before they attack again. The highest Brent crude oil closing price since the start of the war is $112.19/b last Friday. In comparison the 20-year inflation adjusted Brent price is $103/b. So Brent crude last Friday at $112.19/b isn’t a shockingly high price. And it is still far below the nominal high of $148/b from 2008 which is $220/b if inflation adjusted. So once in a lifetime Iran activates its most powerful weapon. The oil weapon. It needs to show the power of this weapon and it needs to reap political gains. Getting Brent to $112/b and intraday high of $119.5/b (9 March) isn’t a display of the power of that weapon. And it is not a deterrence against future attacks.

So if the hardliners remain in power in Iran, then the SoH will likely remain chocked all the way to US midterm elections and Brent crude will at a minimum go above the historical nominal high of $148/b from 2008.

Thus the outlook for the oil price for the rest of the year doesn’t depend all that much of whether Trump pulls a TACO or not. Stops bombing or not. It depends more on who is in charge in Iran. If it is the hardliners, then deterrence against future attacks via chocking of the SoH and high oil prices is the likely line of action. It is impacting the world but the Iranian ’oil-weapon’ is directed towards the US president and the the US midterm elections.

If a pragmatic faction gets to power in Iran, then a very prosperous future is possible. However, if power is shifting towards a more pragmatic faction in Iran then a completely different direction could evolve. Such a faction could possibly be open for cooperation with the US and the GCC and possibly put its issues versus Israel aside. Then the prosperity we have seen evolving in Dubai could be a possible future also for Iran.

Annons

So far it looks like the hardliners are fully in charge. As far as we can see, the hardliners are still fully in control in Iran. That points towards continued chocking of the SoH and oil prices ticking higher as global inventories (the oil market buffers) are drawn lower. And not just for a few more weeks, but possibly all the way to the US midterm elections.

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Analys

Oil stress is rising as the supply chains and buffers are drained

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1 månad sedan

den

17 mars, 2026

Redaktionen

A brief sigh of relief yesterday as oil infra at Kharg wasn’t damaged. But higher today. Brent crude dabbled around a bit yesterday in relief that oil infrastructure at Iran’s Kharg island wasn’t damaged. It traded briefly below the 100-line and in a range of $99.54 – 106.5/b. Its close was near the low at $100.21/b.

No easy victorious way out for Trump. So no end in sight yet. Brent is up 3.2% today to $103.4/b with no signs that the war will end anytime soon. Trump has no easy way to declare victory and mission accomplished as long as Iran is in full control of the Strait of Hormuz while also holding some 440 kg of uranium enriched to 60% and not far from weapons grade at 90%. As long as these two factors are unresolved it is difficult for Trump to pull out of the Middle East. Naturally he gets increasingly frustrated over the situation as the oil price and US retail gas prices keeps ticking higher while the US is tied into the mess in the Middle East. Trying to drag NATO members into his mess but not much luck there.

When commodity prices spike they spike 2x, 3x, 4x or 5x. Supply and demand for commodities are notoriously inflexible. When either of them shifts sharply, the the price can easily go to zero (April 2022) or multiply 2x, 3x, or even 5x of normal. Examples in case cobalt in 2025 where Kongo restricted supply and the price doubled. Global LNG in 2022 where the price went 5x normal for the full year average. Demand for tungsten in ammunition is up strongly along with full war in the middle east. And its price? Up 537%.

Why hasn’t the Brent crude oil price gone 2x, 3x, 4x or 5x versus its normal of $68/b given close to full stop in the flow of oil of the Strait of Hormuz? We are after all talking about close to 20% of global supply being disrupted. The reason is the buffers. It is fairly easy to store oil. Commercial operators only hold stocks for logistical variations. It is a lot of oil in commercial stocks, but that is predominantly because the whole oil system is so huge. In addition we have Strategic Petroleum Reserves (SPRs) of close to 2500 mb of crude and 1000 mb of oil products. The IEA last week decided to release 400 mb from global SPR. Equal to 20 days of full closure of the Strait of Hormuz. Thus oil in commercial stocks on land, commercial oil in transit at sea and release of oil from SPRs is currently buffering the situation.

But we are running the buffers down day by day. As a result we see gradually increasing stress here and there in the global oil market. Asia is feeling the pinch the most. It has very low self sufficiency of oil and most of the exports from the Gulf normally head to Asia. Availability of propane and butane many places in India (LPG) has dried up very quickly. Local prices have tripled as a result. Local availability of crude, bunker oil, fuel oil, jet fuel, naphtha and other oil products is quickly running down to critical levels many places in Asia with prices shooting up. Oman crude oil is marked at $153/b. Jet fuel in Singapore is marked at $191/b.

Oil at sea originating from Strait of Hormuz from before 28 Feb is rapidly emptied. Oil at sea is a large pool of commercial oil. An inventory of oil in constant move. If we assume that the average journey from the Persian Gulf to its destinations has a volume weighted average of 13.5 days then the amount of oil at sea originating from the Persian Gulf when the the US/Israel attacked on 28 Feb was 13.5 days * 20 mb/d = 269 mb. Since the strait closed, this oil has increasingly been delivered at its destinations. Those closest to the Strait, like Pakistan, felt the emptying of this supply chain the fastest. Propane prices shooting to 3x normal there already last week and restaurants serving cold food this week is a result of that. Some 50-60% of Asia’s imports of Naphtha normally originates from the Persian Gulf. So naphtha is a natural pain point for Asia. The Gulf also a large and important exporter of Jet fuel. That shut in has lifted jet prices above $200/b.

To simplify our calculations we assume that no oil has left the Strait since that date and that there is no increase in Saudi exports from Yanbu. Then the draining of this inventory at sea originated from the Persian Gulf will essentially look like this:

The supply chain of oil at sea originating from the Strait of Hormuz is soon empty. Except for oil allowed through the Strait of Hormuz by Iran and increased exports from Yanbu in the Red Sea. Not included here.

Oil at sea is falling fast as oil is delivered without any new refill in the Persian Gulf. Waivers for Russian crude is also shifting Russian crude to consumers. Brent crude will likely start to feel the pinch much more forcefully when oil at sea is drawn down another 200 mb to around 1000 mb. That is not much more than 10 days from here.