Analys

Another geopolitical jolt for oil markets?

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5 år sedan

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21 januari, 2020

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Oil prices surged in the first week of the new year following a US airstrike which killed Qassem Soleimani, the head of the Iranian Revolutionary Guards’ overseas forces. Tensions are rife in the region as the Iraqi parliament has since voted to expel US military from their soil prompting US President Trump to threaten sanctions against the country. Brent, which was trading at around $59/barrel at the end of Q3 last year, was hovering around $69/barrel on 8 Jan 2020.

In our annual outlook for 2020 published last month, we stressed that oil markets have not been pricing at a reasonable level of geopolitical risk premium given the fragility in the Middle East. In this blog, we will review why we believe that to be the case, analyse what is being priced in by oil futures curves and discuss where oil markets may head from here.

The missing geopolitical risk premium

Brent prices were trading around $85/barrel in October 2018 when the US announced sanctions against Iran. Since then, prices have fallen considerably as markets have been fixated on demand growth destruction on account of lukewarm global economic growth. But the period in between has not been devoid of volatility. What has been most curious is how quickly oil prices have reset after spiking sharply every time a ‘geopolitical’ event has taken place. The most vivid example of this came in September 2019 when Saudi oil facilities were hit by a drone attack raising major oil supply concerns among global markets. Prices fell back quickly when Saudi authorities assured markets that the damage was well within their control (See Figure 1). We believe a reasonable level of geopolitical risk premium has been missing from oil prices given the tensions in the region in recent months. Recent price action may be an early sign that markets are beginning to price in this premium to take us closer to a fairer price range for Brent around $70-$75/barrel.

Figure 1: Geopolitical risk premium has vanished from oil prices

What the backwardated futures curves tell us

A backwardated futures curve typically indicates that people are willing to pay more for prompt delivery than wait, suggesting near-term tightness for the commodity. Brent and WTI curves have become considerably more backwardated in the last three months (See Figure 2). Front-end prices started rising in October last year when markets started to price in further supply cuts by the Organisation of the Petroleum Exporting Countries (OPEC). OPEC and its allies, known as OPEC+ delivered by cutting supplies by 0.5mn barrels per day to bring total cuts to 1.7mn barrels per day compared to October 2018 levels. The steep backwardation in the curves, however, tells us that oil futures are pricing in the following:

Supply will be plentiful over longer maturities as any tightness from a near-term shock may be offset by more sources of oil opening up (e.g. OPEC could loosen supply)
Geopolitical risks are gradually getting priced in making the curve steeper at the front end.

If geopolitical tensions persist, or indeed escalate, oil prices are likely to experience upward pressure. Front end prices for oil can be volatile and, in recent months, oil curves have become more backwardated following geopolitical events before flattening out again. To infer that a geopolitical risk premium has been reasonably priced in, the backwardation would need to persist while the risks remain alive.

Figure 2: Brent and WTI curves have become more backwardated

WTI futures oil curves — Source: Bloomberg, WisdomTree. Data as at 06 January 2020.

The events from last week have had a slightly bigger impact on Brent, which is a more international oil benchmark, compared to WTI, which tends to be impacted more by US supply and demand dynamics.

Where do we go from here?

Oil markets are likely to remain reactive to developments between US and Iran. An outright conflict between the two could result in a major supply shock and the Strait of Hormuz could become inaccessible to a third of global oil volume which currently flows through it. Equally, a de-escalation in the most recent tensions may calm market nerves and lower oil prices yet again as they have following other geopolitical incidents in the region over the last year.

Given the uncertainty and the stakes, rationality would dictate that markets bake a geopolitical risk premium into oil prices until we see a meaningful resolution of major issues between the US and Iran. As tensions persist, markets will likely become more cognizant of this and oil prices will be supported. If however markets become complacent yet again and the premium erodes before all issues are resolved, oil could serve as a very good hedge for geopolitical risks as prices theoretically would rise whenever a geopolitical ‘event’ takes place.

A futures curve is said to be backwardated when its spot or cash price is higher than the forward price. The opposite situation is called contango in which the forward price is higher than the spot or cash price.

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

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Saudi won’t break with OPEC+ to head calls for more oil from Trump

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3 dagar sedan

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28 januari, 2025

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Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.

Bjarne Schieldrop, Chief analyst commodities, SEB

Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.

US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.

The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.

Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.

US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.

Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. — Source: SEB graph and calculations, US EIA data

Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.

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Analys

Brent rebound is likely as Biden-sanctions are creating painful tightness

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3 dagar sedan

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27 januari, 2025

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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)

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Analys

Brent testing the 200dma at USD 78.6/b with API indicating rising US oil inventories

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1 vecka sedan

den

23 januari, 2025

Redaktionen

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