Följ oss

Analys

A two currency oil market

Publicerat

den

SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityChina today launched its long awaited yuan denominated oil contract at the International Energy Exchange (INE) in Shanghai. Seven crude streams from UAE, Qatar, Oman, Yemen Iraq and China will define the pricing of the contract. There is substantial scepticism towards the contract. Most of the sceptical arguments will in our view dissipate over time as rules, regulations and capital controls are adapted and adjusted as time goes by. The Chinese government likely has plenty of leverage to make the contract a success making it into an Asian oil benchmark representing a vibrant and growing oil demand which today accounts for 27% of global demand.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

The launch of the contract will open up for international participation in China’s commodity market for the first time. International oil players will need to hold renminbi books reflecting an oil market which here onwards will roll on two currency wheels.

The rapidly rising risk that Donald, Mike and John will tear up the current Iranian nuclear deal in mid-May makes it likely that Iran will accept crude oil settlement in renminbi in not too long in order to avert the risk of renewed dollar sanctions which it experienced so painfully from 2012 to 2015.

Price action: Brent jumps while equities fall as Venezuela and Iran supply risk increases on John Bolton

The front month Brent crude oil contract jumped 2.2% on Friday to $70.45/bl on news that John Bolton was replacing Lt. Gen. H:R: McMaster as the US national security advisor. John Bolton is known to be abrasive, undiplomatic, deeply conservative and nationalistic with hawkish views on Iran and North Korea. As such he matches both Donald Trump and his new secretary of state Mike Pompeo. It is now difficult to see how the Iran Nuclear deal can survive beyond mid-May when a new round of US waivers is needed to carry the deal forward yet another quarter, unless of course the deal is significantly re-worked. Apparently however the non-US signatories to the Iran nuclear deal are still in the dark with respect to what and how Donald Trump want’s the deal to be re-written. The May waiver deadline is approaching rapidly and as far as we know there is no real work in progress in order to re-work the deal. The appointment of John Bolton also increases the risk for sanctions towards Venezuela. Venezuela’s oil production and export is already in free fall but hanging on a thread by US refineries who are supplying Venezuela with naphtha in exchange of heavy crude oil. Venezuela would not be able to export much oil without the naphtha or light crude which is critical for diluting its heavy crude to a quality which is exportable. Thus US oil sanctions towards Venezuela would cut the last thread.

A two currency oil market

After years and years of waiting the Chinese Yuan denominated oil contract quoted at the Shanghai International Energy Exchange (INE) is finally here. China did try to launch an oil futures contract back in 1993 but it basically blew up due to uncontrollable price volatility. This time around China has taken good time to prepare the launch of its new oil contract in order to make sure that there is no second round flop like in 1993. China last year became the world’s top oil importer with an average import of 8.4 m bl/d. At the same time it is also the world’s sixth biggest oil producer with an average production last year of 3.8 m bl/d.

Seven crude streams in the INE contract with characteristics close to the Dubai crude slate

Seven deliverable crude streams in Shanghai will be used to settle the INE crude oil contract. They originate from UAE, Oman, Qatar, Yemen and China itself. The crude streams are distinctly different from the light, sweet crude benchmarks of Brent crude and WTI. The INE crude streams are on average (across the different grades) required to have an API gravity of more than 29.6 and a sulphur content of less than 2%. In comparison the WTI benchmark is very light with an API of 39.6 and only about 0.24% sulphur. As such the INE benchmark is distinctly different from both Brent crude and WTI. It is however very close to the Dubai crude oil marker which has an API of 31 and a sulphur content of 2%. As such one could say that the INE contract is the Dubai marker in Asia quoted in renminbi.

The new INE contract could be a representation of 27 m bl/d of vibrant Asian oil demand

The new Chinese oil contract will likely over time come to represent Asian oil demand in general. In 2018 Asian demand is set to average 27 m bl/d (IEA) or 27% of global consumption. It has been argued that the new benchmark will be a bad price hedge for oil deliveries in other places in Asia than Shanghai. This is based on the assumption that the oil price fundamentally is set either in the US (WTI), in the Gulf (Dubai marker) or in Europe (Brent). And as such it should mathematically be better to hedge with one of these three price points rather than the new Chinese INE contract. However, if the driver of the global oil market and thus oil price dynamics is instead really set by the vibrant oil demand in Asia rather than the three mentioned oil price benchmarks then it would clearly be better to hedge with the INE contract.

In our view the new INE contract is not an effort to replace the existing global crude oil benchmarks. It is instead filling a needed vacuum in the global oil market: A marker for the Asian market. It has been argued that the existing crude benchmarks are successful since they are located at hubs with both large production and consumption. But this is also actually true for the new benchmark with China being the sixth largest oil producer in the world as well as the biggest oil importer in the world.

The INE contract has several disadvantages but these are likely to dissipate over time

To start with the INE contract seems to have several disadvantages. It will have limited trading hours with the last trading slot ending at 0700 am GMT and thus just before the London market opens. The Chinese government has also set crude oil storage costs at twice the global average level in order to avoid excessive price volatility due from potential games between the physical market and the new INE contract. Such high storage costs will be negative for the necessary interplay and price discovery between the local physical market (derived from storage economics) and the INE financial instruments. Another reason for the very high storage cost may be to avoid commodity storage games used for shadow financing and circumvention of capital controls which has flourished for other commodities traded in China. The quotation of the INE contract in renminbi will also be a negative as seen by most current oil market participants in the current dollar dominated oil market. And lastly Chinese capital controls and unpredictable regulations will also be a concern for many potential participants.

Many of these negatives will however dissipate over time. Trading hours will expand, storage costs will normalize, general capital controls will ease and rules and regulations will stabilize. And lastly the renminbi will be more and more accepted currency world-wide. The Chinese government does have time to adjust and the current mode of the INE market is launch phase with some trail and error. The front month INE contract is actually the September 2018 contract allowing plenty of time for adjustment. So we do not think that one should judge the contract in the early phase on the many negative traits which have been highlighted.

Annons

Gratis uppdateringar om råvarumarknaden

*

Plenty of participants ready to transact – Open interest will be the measure of success

More than 6,000 trading accounts have been opened for the INE contract including China’s largest oil companies and 150 brokerage firms. Larger foreign financial institutions like J.P.Morgan have also opened accounts. To further attract foreign participants the Chinese Government has waived income taxes for foreign investors for the first three years. An addition attraction of the INE oil contract is that it will be the first time foreigners will be able to trade commodities in China.

We agree that over time it will be the size of the number of open contracts and not turnover per se which will be the sign of success for the contract. So the open interest in the INE contract will be the parameter to watch. It will be the fingerprint showing that the INE contract fills a need and is actively used as a hedging tool.

The Chinese government has power to tilt the market towards the new contract

The Chinese government has a lot of power in order to ensure that the INE contract becomes a success with widespread use. The easy way is of course to demand that all domestic crude oil purchasing is done with settlement versus the INE contract benchmark. In that way any oil producer who would like to sell oil to China would have to accept the INE contract and settlement in renminbi. China could of course also lean on the countries who cooperate with China on the Belt and Road Initiative (BRI) with six major infrastructure projects in overdrive this year. Asking the involved countries in these BRI projects to use or support the new INE oil contract could be a natural request.

We think that the launch of the INE contract in China is a natural development reflecting that China is the world’s top oil importer, the sixth largest oil producer and a natural benchmark for oil prices in Asia. However, essentially what it all boils down to is that China wants to be able to purchase its oil in renminbi. There are several countries already on-board: Russia, Venezuela, Nigeria and Angola are all already selling oil to China in renminbi. We assume that UAE, Oman, Qatar, Yemen and Iraq also are accepting renminbi as payment for crude delivered to China since six of the seven crude streams in the INE contract originates from them.

No Iranian crude slates in the INE contract yet but Iran should be a natural participant

It is surprising to see that there are no crude oil streams from Iran in the new INE contract. The Iran Heavy crude stream with API = 30.2 and Sulphur = 1.8% should be a natural match the INE crude slate profile.

Iran is one of the countries which have been heavily hit by the weaponized USD. In 2012 the US applied pressure through the SWIFT system. It blocked clearing for every Iranian bank, froze $100 billion of Iranian assets which together with other measures helped to block Iranian oil exports which roughly dropped 1 m bl/d due to this.

US pressure is building up against the Iran nuclear deal – should naturally drive Iran towards the INE contract

Now pressure is rising rapidly towards Iran. In the US forces are gathering to tear apart the Iran nuclear deal with the recent appointment of Mike Pompeo as US secretary of state and John Bolton as the US national security advisor. Donald Trump together with these two now looks ready to tear apart the current Iran nuclear deal as waivers are up for renewal in mid-May. The Saudi crown prince Mohammed bin Salman also seemed to apply pressure against Iran at his meeting with Donald Trump. Thus Saudi Arabia seems like it is sticking with the US while Iran, Iraq, Oman, UAE, Qatar and Yemen are drifting over towards China. China and the US are at the same time drifting apart amid increasing trade tensions with political tensions in the South China Sea being the icing on the cake so to speak. It seems highly plausible in our view that Iran in not too long with explicitly state that they also accept payment in renminbi for oil sales to China.

Saudi Arabia however seems for the time being to stick even tighter to the dollar-oil deal which the House of Saud presumably struck with Nixon and Kissinger back in 1974 in exchange for protection and geopolitical support.

Crude slates in the INE contract

Annons

Gratis uppdateringar om råvarumarknaden

*

Crude slates in the INE contract

Ch1: Yes, the INE September contract started to trade first time on 26 March 2018

INE September contract started to trade first time on 26 March 2018

Ch2: Brent crude went opposite of equities last week

Brent crude went opposite of equities last week

Ch3: Weekly US, EU, Singapore and Floating stocks lower 2nd week

Weekly US, EU, Singapore and Floating stocks lower 2nd week

Analys

Crude stocks fall again – diesel tightness persists

Publicerat

den

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
Fortsätt läsa

Analys

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

Publicerat

den

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
Fortsätt läsa

Analys

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

Publicerat

den

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.

Fortsätt läsa

Guldcentralen

Aktier

Annons

Gratis uppdateringar om råvarumarknaden

*

Populära