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A tight July counters OPEC+ efforts to calm the market

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityBrent crude fell back 1.1% yesterday to $74.73/bl while it intraday was down as much as 2.4% to $73.74/bl following the forceful message from Russia and Saudi Arabia on Saturday that they have already geared up production and will deliver whatever is needed by the market. The simple story is that OPEC+ cut production through 2017 till today, drew down inventories to “normal levels” and lifted the oil price to a satisfactory level of $70-80/bl and now they are done. In other words the orchestrated steady draw down of inventories is over as well as the continuous rise in the oil price. At least until OPEC+ has exhausted its spare capacity. Oil market conditions in July however look like they might be quite strained anyhow.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

The oil market conditions in July do however look like they are going to be tight. Russia, Saudi Arabia and some of the other OPEC+ members are likely going to increase production by some 0.7 to 1.0 m bl/d. Saudi Arabia looks like it is going to produce some 10.5 to 10.6 m bl/d in July vs. 10.0 m bl/d in May. This will however to a large degree be eaten up by increased domestic summer heating demand. On the supply side we have however lost 350 k bl/d in Canada and 400 k bl/d in Libya while Venezuela continues to decline. The WTI August contract has jumped to a one dollar premium to the September contract reflecting the tight situation. US Cushing crude stocks where WTI is priced has declined five weeks in a row to low levels and will likely continue to decline through July and August as US refineries are running close to flat out. Thus at least for July the market looks like it is going to be tight and that is why oil prices are bid and take little notice of elevated risk aversion in equities and bonds.

Saudi Arabia increased its production by 0.3 m bl/d to 10.3 m bl/d in June according to Energy Aspects and is set to lift it to 10.5 or 10.6 m bl/d in July. The June production lift is however already in the market and thus most likely reflected in the oil price. Russia is likely to lift its production by some 02 m bl/d to 11.2 m bl/d and UAE, Kuwait and Iraq are likely to add some more as well. So all in all versus May there will be internal production increases by some 0.7 to 1 m bl/d. A significant amount of the increase from Saudi Arabia is however eaten up by higher domestic consumption due oil fired power production for air conditioning through the hot summer.

These additions are however countered by declines of 400 k bl/d in Libya (don’t know how long) and 350 k bl/d in Canada (through July) as well as further likely declines in Venezuela.

An oil transformer/upgrader with a 350 k bl/d capacity in Fort McMurray, Alberta, Canada blew up on Wednesday 20th. This will halt supply of 350 k bl/d of high quality low sulphur crude normally flowing to the US and Cushing Oklahoma.

In Libya, General Haftar who is controlling the eastern side of the country has now handed all oil assets in that region to the National Oil Company (NOC) in Benghazi (east) thus defying the internationally recognized NOC in Tripoli (west). The recent loss of 400 k bl/d of supply in Libya may thus be a more permanent situation. The NOC in Benghazi has earlier tried in vain to export oil out of Libya without channelling the proceeds to the NOC in Tripoli. And now it looks like they are trying again. The effect is likely going to be a production in Libya of around 0.5 m bl/d rather than 1.0 m bl/d which it has produced a while now.

US refineries will now run close to max capacity all through July and August which will help to draw down US crude oil inventories. US Cushing Oklahoma crude stocks have already been drawing down for five weeks in a row and this trend now seems likely to continue through July and August.

Ch1: US Cushing crude oil stocks are ticking lower

 US Cushing crude oil stocks are ticking lower

Ch2: WTI crude price premium for front month contract over the second month jumping

WTI crude price premium for front month contract over the second month jumping

Ch3. Libya’s crude oil production may move down to around 0.5 m bl/d as General Haftar has handed the oil assets in the east to the authorities in Benghazi which are not recognized by the international community

Libya’s crude oil production may move down to around 0.5 m bl/d as General Haftar has handed the oil assets in the east to the authorities in Benghazi which are not recognized by the international community

 

Analys

Tightening fundamentals – bullish inventories from DOE

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SEB - analysbrev på råvaror

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

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

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.

US DOE, inventories, change in million barrels per week
US crude inventories excl. SPR in million barrels
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Analys

Bombs to ”ceasefire” in hours – Brent below $70

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SEB - analysbrev på råvaror

A classic case of “buy the rumor, sell the news” played out in oil markets, as Brent crude has dropped sharply – down nearly USD 10 per barrel since yesterday evening – following Iran’s retaliatory strike on a U.S. air base in Qatar. The immediate reaction was: “That was it?” The strike followed a carefully calibrated, non-escalatory playbook, avoiding direct threats to energy infrastructure or disruption of shipping through the Strait of Hormuz – thus calming worst-case fears.

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

After Monday morning’s sharp spike to USD 81.4 per barrel, triggered by the U.S. bombing of Iranian nuclear facilities, oil prices drifted sideways in anticipation of a potential Iranian response. That response came with advance warning and caused limited physical damage. Early this morning, both the U.S. President and Iranian state media announced a ceasefire, effectively placing a lid on the immediate conflict risk – at least for now.

As a result, Brent crude has now fallen by a total of USD 12 from Monday’s peak, currently trading around USD 69 per barrel.

Looking beyond geopolitics, the market will now shift its focus to the upcoming OPEC+ meeting in early July. Saudi Arabia’s decision to increase output earlier this year – despite falling prices – has drawn renewed attention considering recent developments. Some suggest this was a response to U.S. pressure to offset potential Iranian supply losses.

However, consensus is that the move was driven more by internal OPEC+ dynamics. After years of curbing production to support prices, Riyadh had grown frustrated with quota-busting by several members (notably Kazakhstan). With Saudi Arabia cutting up to 2 million barrels per day – roughly 2% of global supply – returns were diminishing, and the risk of losing market share was rising. The production increase is widely seen as an effort to reassert leadership and restore discipline within the group.

That said, the FT recently stated that, the Saudis remain wary of past missteps. In 2018, Riyadh ramped up output at Trump’s request ahead of Iran sanctions, only to see prices collapse when the U.S. granted broad waivers – triggering oversupply. Officials have reportedly made it clear they don’t intend to repeat that mistake.

The recent visit by President Trump to Saudi Arabia, which included agreements on AI, defense, and nuclear cooperation, suggests a broader strategic alignment. This has fueled speculation about a quiet “pump-for-politics” deal behind recent production moves.

Looking ahead, oil prices have now retraced the entire rally sparked by the June 13 Israel–Iran escalation. This retreat provides more political and policy space for both the U.S. and Saudi Arabia. Specifically, it makes it easier for Riyadh to scale back its three recent production hikes of 411,000 barrels each, potentially returning to more moderate increases of 137,000 barrels for August and September.

In short: with no major loss of Iranian supply to the market, OPEC+ – led by Saudi Arabia – no longer needs to compensate for a disruption that hasn’t materialized, especially not to please the U.S. at the cost of its own market strategy. As the Saudis themselves have signaled, they are unlikely to repeat previous mistakes.

Conclusion: With Brent now in the high USD 60s, buying oil looks fundamentally justified. The geopolitical premium has deflated, but tensions between Israel and Iran remain unresolved – and the risk of missteps and renewed escalation still lingers. In fact, even this morning, reports have emerged of renewed missile fire despite the declared “truce.” The path forward may be calmer – but it is far from stable.

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Analys

A muted price reaction. Market looks relaxed, but it is still on edge waiting for what Iran will do

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SEB - analysbrev på råvaror

Brent crossed the 80-line this morning but quickly fell back assigning limited probability for Iran choosing to close the Strait of Hormuz. Brent traded in a range of USD 70.56 – 79.04/b last week as the market fluctuated between ”Iran wants a deal” and ”US is about to attack Iran”. At the end of the week though, Donald Trump managed to convince markets (and probably also Iran) that he would make a decision within two weeks. I.e. no imminent attack. Previously when when he has talked about ”making a decision within two weeks” he has often ended up doing nothing in the end. The oil market relaxed as a result and the week ended at USD 77.01/b which is just USD 6/b above the year to date average of USD 71/b.

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

Brent jumped to USD 81.4/b this morning, the highest since mid-January, but then quickly fell back to a current price of USD 78.2/b which is only up 1.5% versus the close on Friday. As such the market is pricing a fairly low probability that Iran will actually close the Strait of Hormuz. Probably because it will hurt Iranian oil exports as well as the global oil market.

It was however all smoke and mirrors. Deception. The US attacked Iran on Saturday. The attack involved 125 warplanes, submarines and surface warships and 14 bunker buster bombs were dropped on Iranian nuclear sites including Fordow, Natanz and Isfahan. In response the Iranian Parliament voted in support of closing the Strait of Hormuz where some 17 mb of crude and products is transported to the global market every day plus significant volumes of LNG. This is however merely an advise to the Supreme leader Ayatollah Ali Khamenei and the Supreme National Security Council which sits with the final and actual decision.

No supply of oil is lost yet. It is about the risk of Iran closing the Strait of Hormuz or not. So far not a single drop of oil supply has been lost to the global market. The price at the moment is all about the assessed risk of loss of supply. Will Iran choose to choke of the Strait of Hormuz or not? That is the big question. It would be painful for US consumers, for Donald Trump’s voter base, for the global economy but also for Iran and its population which relies on oil exports and income from selling oil out of that Strait as well. As such it is not a no-brainer choice for Iran to close the Strait for oil exports. And looking at the il price this morning it is clear that the oil market doesn’t assign a very high probability of it happening. It is however probably well within the capability of Iran to close the Strait off with rockets, mines, air-drones and possibly sea-drones. Just look at how Ukraine has been able to control and damage the Russian Black Sea fleet.

What to do about the highly enriched uranium which has gone missing? While the US and Israel can celebrate their destruction of Iranian nuclear facilities they are also scratching their heads over what to do with the lost Iranian nuclear material. Iran had 408 kg of highly enriched uranium (IAEA). Almost weapons grade. Enough for some 10 nuclear warheads. It seems to have been transported out of Fordow before the attack this weekend. 

The market is still on edge. USD 80-something/b seems sensible while we wait. The oil market reaction to this weekend’s events is very muted so far. The market is still on edge awaiting what Iran will do. Because Iran will do something. But what and when? An oil price of 80-something seems like a sensible level until something do happen.

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