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Analys

OPEC+ is holding good cards and a steady course

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SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

OPEC+ is to meet virtually in Vienna today for its official half-yearly meeting. The bull-recipe is still intact: ”Reviving demand, muted US shale oil response and controlled/restrained supply from OPEC+”. This will drive inventories yet lower and prices yet higher. There are no signs of division within the group and we expect it to hold on to a steady course with very good control of the market. We stick to our forecast of a Brent crude oil price averaging USD 75/bl in Q3-21 with Brent at times trading to USD 80 – 85/bl. Come Q4-21 however we think that the group increasingly will have to consider reviving US shale oil production.

Brent crude jumped above USD 70/bl for the first time since May 2019 on signals from OPEC+ of continued reviving demand and a tightening market with plenty of room for more oil from the group in H2-2021.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Today OPEC+ will meet virtually in Vienna for their official half yearly meeting to discuss and decide on production strategies for the second half of this year. Yesterday its Joint Technical Committee (JTC) presented its outlook for the supply/demand balance for the rest of the year. It depicted continued reviving demand and a tightening balance with an expected inventory draw of 2 – 2.5 m bl/d from August to December.

What it shows is that it is most likely plenty of room (and need) for a further increase of supply from the group beyond the planned increase of 2.1 m bl/d from May to July. It also makes it much easier for the group to accommodate the return of Iranian supplies to the market.

There are still very few signs of internal strife within the group. The group is thus likely to keep on going on a steady course. The bull-recipe for the oil market is still intact: “Reviving demand, muted US shale oil response together with controlled and restrictive supply from OPEC+” thus resulting in further declines in inventories and thus yet higher oil prices.

Given that the group now meets on a monthly basis it is less of a challenge to lay out a production strategy for H2-2021 since it can adjust and revise its plan on a monthly basis. I.e. it doesn’t need to have a full crystal ball view of how H2-2021 will play out.

The natural thing for the group to do now that global oil inventories are close to the 2015-19 average is to signal an additional increase of 2 m bl/d from August to December thus leading to an anticipated inventory draw of 0.5 m bl/d during that period if the JTC is correct in its projections on Monday.

The group signalled yesterday that the return of Iranian supplies will be gradual and managed and won’t create any supply shock into the market. Between 1-1.5 m bl/d of Iranian oil exports are probably already in the market. Thus a return of Iranian supplies probably implies an added supply of about 1 – 1.5 m bl/d of crude and condensates.

The likely continued strong oil demand revival in H2-2021 is handing OPEC+ with a good hand of cards to play from and there is no indication that they won’t play it wisely and for what it’s worth.

Looking into 2022 and beyond is however much more difficult. Supply is then likely to increase from Canada, Brazil, Russia, Kazakhstan, Iran, Iraq, Libya and of course also the US. Eventually also of course in Venezuela.

With respect to US shale oil. It is not so that nothing is happening. From January to April the number of completed shale oil wells increased by 8% on average every month and 10% in April. Losses in underlying production is currently running at 424 k bl/d per month. New production from the 754 completed wells in April however yielded close to 400 k bl/d that month. Another 10% increase in completed wells in May will leave US shale oil production at a steady state production level. Yet another 10% increase in completions in June would then place US shale oil production on an annualized production growth pace of 500 k bl/d without any further increase in the number of completed wells beyond June. Add in production growth of NGLs and you have a solid production growth rate in the US. And with respect to drilling rigs. That number is increasing as well even though not at the wild pace seen from June 2019 onwards it is still rising at a rate of about 15 – 20 rigs per month thus placing US shale oil into expanding territory as the number of drilling rigs surpasses the 450 mark needed for expansion sometime in July/August this year. Expansion for 2022 that is.

Thus OPEC+ will need to keep a close eye on US shale oil players. If it looks like they aim to eat into the market share of OPEC+ by expanding too much then they are bound to be taught yet another lesson of low prices.

Our standing forecast for quite some time now is for Brent crude to average USD 75/bl in Q3-2021. That means that Brent crude at times is likely to trade to USD 80/bl to USD 85/bl. This will help to drag 2022/23 forward prices up towards USD 70/bl. Producers should bid their time well and look closely at securing forward hedges at such levels.

As the autumn progresses we expect US shale oil producers to show more vigour with reviving activity and rising production leading to a more cautious oil market and likely softer oil prices in Q4-21.

Current crude oil forward prices curves versus the 50 year real average crude oil price in 2019 USD according to BP. One should not expect oil prices to deliver at USD 70-80-90/bl in the years to come.

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Current crude oil forward prices curves versus the 50 year real average crude oil price in 2019 USD according to BP.
Source: SEB, Bloomberg, BP

Analys

Crude stocks fall again – diesel tightness persists

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SEB - analysbrev på råvaror

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.

Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.

Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).

Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.

On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.

US DOE Inventories
US Crude inventories
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Analys

Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

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SEB - analysbrev på råvaror

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.

OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.

Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent  crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.

This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.

The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Dubai medium sour crude oil marker
Source: SEB graph, calculations and highlights. Bloomberg data

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

The Brent crude oil forward curve (latest in white)
Source: Bloomberg
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Analys

Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

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SEB - analysbrev på råvaror

Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.

Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.

For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.

Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.

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