Analys
Carried higher by declining US oil rigs and declining oil inventories (and speculators rolling into the front end of the curve)
Crude oil comment – Carried higher by declining US oil rigs and declining oil inventories (and speculators rolling into the front end of the curve)
Inventories continue to decline steeply in weekly data with declines of 21 mb last week and 48 mb over the last two weeks, 59 mb over the last 6 weeks and 173 mb since mid-March (including floating storage / oil in transit). As a result the forward Brent crude oil curve continuous to bend further into backwardation in a way we have not seen since back in 2014.
The backwardated Brent crude curve is like honey for bees for investors and speculators as it hands investors with long positions at the front end of the curve with a positive roll yield even if the Brent crude spot price only moves sideways from here. So even if you as an investor is only neutral to oil prices it still makes sense to hold a long front month Brent crude position. Over the last 14 trading days the average, annualized Brent 1mth roll yield is 5.8% pa and today it stands at 9.9% annualized return. I.e. that is if the spot price moves sideways over the next 12 months and the backwardation continues at current steepness.
In a close to zero interest rate world this Brent backwardation positive roll yield must be like honey for bees. Speculative positions for Brent crude have not yet been updated this week. But if we look at positions published one week ago we see that the net long Brent crude position by managed money stood at the 46th highest level in 52 weeks and has probably increased further since then.
Those who hold a plain long Brent 1mth position will get a roll yield due to the current backwardation. However, they are also exposed to the downside in case we get a setback in crude oil prices. There are probably in addition a lot of speculators who only want to speculate on the backwardation itself thus placing a long Brent 1mth contract against a short Brent 6mth contract betting on further inventory draws and yet steeper backwardation. Adding such speculations adds to the steepness of the backwardation during the process when speculators add them on to their books.
We also have passive Brent crude speculators holding long Brent crude ETFs which automatically places the financial long Brent position at the 12mth horizon when the Brent curve is in contango (to avoid steep losses from rolling in front end contango) but then automatically shifts this over to a Brent 1mth position when the curve shifts into backwardation. Thus when the curve naturally shifts into backwardation then the speculative shift will add to this due to the automatic selling out of long specs held on the 12mth horizon while adding length in the front end.
Inventories continue lower and the Brent crude curve continues to steepen due to both natural (inventory declines) reasons and speculative pressures. In addition we have sentimental support for the oil complex by the fact that US oil rigs have declined five out of the last six weeks. The decline is quite steep even though the relevant WTI forward crude prices have traded close to $50/b during the last 10 weeks. Thus US shale is currently saying: WTI @ $50/b is not enough for adding rigs at the moment. Actually it is too little.
Thus the arrows are pointing to higher levels (also supported by technical indicators) with ytd high of $58.37/b within reach as we now traded at $57.2/b. However, Brent speculative positions are getting stretched. Thus we will get a correction down the road. What the trigger might be is hard to say. An equity correction in combination with a USD rebound/rally (October and November usually strong dollar months), emerging market risk-off as well as a possible increasing concern for whether OPEC+ will roll forward its cuts beyond 1Q18 could be the outline for such a correction. The current steepening Brent backwardation would then get at setback as well. But as of now we are heading higher but beware of the of the altitude.
Ch1: Brent crude oil forward curves
Wider Brent to WTI in the front has rippled along the forward curve
Ch2: Brent to WTI December 2020 from zero spread start of year to more than four dollar now
Ch3: Brent crude two to three month price spread. Bending, bending further into backwardation
Ch4: But WTI is left in contango due to rising production, hurricane Harvey damages and lack of export capacity out of Cushing
Ch5: Hurricane Harvey induced outage of refineries is blowing over
Ch6: Inventories in weekly data continues to decline steeply
Down 173 mb since mid-March (-0.9 mb/d on average)
Ch7: Net long Brent spec (last data point published last week) at 46/52 week high
Ch8: Net long Brent spec (last data point published last week) at 46/52 week high
When specs take money off the table eventually it will pull prices lower as well
Ch9: WTI specs inching higher, but not same optimism as in Brent as WTI crude curve is in contango
Ch10: The number of US oil rigs is declining. Down five out of six weeks
It is saying WTI @ $50/b is not enough. We’ll pull rigs out of the market at that price
When the rally for Brent backwardation ends this message will help to lift Brent 2019 and 2020 prices
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent rebound is likely as Biden-sanctions are creating painful tightness
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