Analys

Venezuela is bullish but S&P 500 still looks like the driver

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5 år sedan

den

25 januari, 2019

Brent crude has gained 21% since Christmas eve following a comparable 12.4% recovery in the S&P 500 index. So just as the sell-off in Brent crude went more or less hand in hand with the equity sell-off this autumn the Brent crude recovery has gone hand in hand with the recovery of the S&P 500 so far this year. There is of course a fundamental story for the oil rebound as well with cuts by OPEC+, US shale oil rig count decline and declining production in Venezuela and Iran (and others). But what the equity-oil relationship through the autumn up to now is telling us is that if the current equity rebound falters with a renewed sell-off in the S&P 500 then the Brent crude oil price is likely to falter as well.

Donald Trump’s call for a regime shift in Venezuela with his outright support for opposition politician Juan Guaidó has led to a gain in the value of government bonds in Venezuela and thus seen as a positive development by bond investors on a general basis. Impacts on Venezuela’s oil production in the short to medium term is however another matter. To us it looks like more chaos and further decline in crude production.

Bjarne Schieldrop, Chief analyst commodities

A ban on oil imports from Venezuela to the US would likely only hurt US refineries which needs the heavy oil from Venezuela to blend with ultralight shale oil. Venezuela’s crude would probably just travel to other parts of the world instead of to the US. So an import ban to the US would probably not tighten the oil market as such. Tighter sanctions towards the Venezuelan economy with the goal of toppling the current Maduro regime would however most likely lead to a further rapid deterioration in Venezuela’s oil production which of course is directly bullish for the oil market. Eventually moving to the other side of chaos with an eventual Juan Guaidó regime holding hands with the US would then of course turn things around again as it would lay the foundation for a revival in crude production in Venezuela again but that seems to be way down the road from here.

As far as we understand it is not at all impossible for the US refineries to process ultralight US shale oil as it is today without blending it with heavy crude from Mexico or Venezuela. It is more that it is not optimal. Many of the US refineries were built for medium sour crude from the Middle East. In such complex refineries there are a lot of expensive post processing units following the division of the oil molecules in the atmospheric and vacuum distillation stage. All these post processing units have specific volume capacities calibrated to the molecule distribution in medium sour crude. So if US refineries process outright ultralight US shale oil in the distillation stage then many of the post processing units will run at sub-par volumes. Even the distillation stage may not be able to run at optimal capacity. I.e. it is technically and economically sub-optimal for these refineries to run shale oil outright but not necessarily difficult. It is mostly about economics. So a lower shale oil crude price versus product prices should facilitate this. The gasoline crack to Brent crude has however crashed to below zero and made it much more difficult. Or said in another way: A yet lower shale oil crude price is needed.

US crude and product inventories have sky-rocketed adding close to 90 m bl since late July last year of which 60 m bl have been added since late December. At the moment the market does not care too much about this since OPEC+ is cutting and production in Iran is falling (with further falls in Venezuela to be expected) while US well completions and rig count has started to decline. So the remedy for the booming inventories is on the way. If however the US S&P 500 recovery sours before the remedy shows signs of working (declining inventories) then crude oil prices would most likely follow the S&P 500 index lower.

A price-path dependent oil market. In our crude oil projection for 2019 we have projected Brent crude to average $55/bl in Q1-19 and we are well above that level now. It is important to note the strong price path dependence of today’s crude oil market. If we get a higher oil price now we’ll have more drilling more well completions and a higher oil production in the following quarters. It may feel good with Brent at $61/bl right now for global oil producers, but it may not be so good for the oil market in H2-19 as it will lead to a higher US crude oil production then.

US shale oil production slows. In this week’s US EIA drilling productivity report we see that well completions have come down thus reacting to the decline in crude oil prices in H2-18. Losses in existing production rose to a new high of 530 k bl/d/mth while new production before losses rose to 602 k bl/d/mth for February. Marginal, annualized production growth thus fell to only 0.86 m bl/d/yr as new production growth slowed and moved closer to the rising legacy loss in the existing production.

Ch1: Crude prices and the S&P 500 continue hand in hand.

Ch2: US crude and product stocks have rallied. Up close to 90 m bl since late July of which close to 60 m bl since late December. But remedy is on the way with cuts by OPEC+ so the market has not cared too much about this since late December

Ch3: Refining margins have been murdered by the crash in the gasoline crack (to Brent). Now gasoil and diesel cracks are also ticking lower as we moves towards the later part of the Nordic hemisphere winter.

Ch4: Not so difficult to be booming shale oil as long as some 3 m bl/d is removed from supply from other suppliers. Booming US shale oil supply in the US is bad for Iran. The higher it goes the more room it gives Donald Trump to tighten Iran sanctions yet tighter.

Ch5: Brent crude curve has flattened significantly since the low of 24 December

Ch6: The shale oil volume weighted WTI crude price has come down from $72.3/bl. But it has rebounded back to close to $55/bl which would imply “medium shale oil heat” if it stays at that price level. Access to capital is probably just as important as the oil price.

Ch7: US oil rig count has ticked lower but not all that much yet

Ch8: The local Permian crude oil price traded at a huge discount versus Brent and WTI at times in 2018 as lack of pipelines out of Permian basin led to land-locked oil in the Permian

Ch9: Permian is obviously no longer very land-locked with respect to getting its oil to Cushing Oklahoma WTI and Permian prices are now almost equal again.

Ch10: Losses in existing US shale oil production will be 530 k bl/d/mth in February according to the US EIA. The most ever. I.e. more and more new wells need to be completed in order to counter this rising loss.

Ch11: Number of completed shale oil wells moved sideways in Oct and Nov and then down in December.

Ch12: A lower level of well completions led to a lower level of “new production”. Losses in existing production continued to increase. The gap between new production and losses thus narrowed so net production growth slowed to lowest growth rate since mid-2017.

Ch13: Well completions per month now only running at 153 (13%) wells above steady state (when US shale oil production growth = 0). That is the lowest since mid-2017. Due to strongly rising legacy loss the well completions only need to decline by another 153 wells per month to drive US shale oil production growth to a halt.

Ch14: Shale players are however still drilling way more than they are able or willing to complete. There is thus probably a significant inventory of DUCs which they can complete without drilling. So there is room for drilling rigs to decline significantly without a comparably significant decline in well completions.

Ch15: Well productivity ticks higher at a pace of about 5-10% per year. But number of completed wells/mth is more important

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Analys

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

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4 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

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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.