Analys

Another geopolitical jolt for oil markets?

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5 år sedan

den

21 januari, 2020

Redaktionen

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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Brent crude is now trading below its nominal 2018-19 average in EUR/barrel terms

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18 timmar sedan

den

25 april, 2025

Redaktionen

Brent crude gained a meager 0.65% yesterday with a close of USD 66.55/b. That was not much given that US equity markets rallied 2% yesterday with Nasdaq now is almost back to its pre ”Liberation Day” level. Brent crude is trading unchanged this morning with little impulse to do anything it seems.

Bjarne Schieldrop, Chief analyst commodities, SEB

Equity markets have gotten a boost along with easing US tariff rhetoric. The Brent crude oil price has however not gotten the same rebound and is today still trading USD 8.5/b lower than its USD 75/b level from 2 April.

Two factors at hand here: Expectations of softer growth and more oil from OPEC+. One is that global growth in 2025 will still take a hit with softer growth and thus softer oil demand growth due to the US tariff-turmoil. Even if rhetoric has eased. The second is that OPEC+ has upped its production plans with a softer market as a result going forward. The latter message to the market happened almost at the same time as the ”Liberation Day” on 2 April.

Spot market still as tight as it was on 2 April. Still, the front-end market is more or less equally tight today as it was on 2 April. The average Brent, WTI and Dubai 1-3mth time-spread is USD 1.4/b today versus USD 1.5/b on 2. April.

The market setup/pricing is thus that the market is still tight, but that surplus will come. Either because global growth will slow due to US Tariff-turmoil or because OPEC+ will add more barrels.

Will OPEC+ resolve its internal quarrels? Worth remembering on the latter is that the latest more aggressive OPEC+ production growth plan is due to internal quarrels over quota breaches by Iraq and Kazakhstan. OPEC+ could potentially ease those growth plans just as quickly if the internal quarrel is resolved.

Brent crude in EUR/barrel is now trading at the nominal level from 2018-2019. That is nominal! Not taking account of any kind of inflation which cumulatively is up 20-30% since primo 2018. The average, nominal Brent crude oil price in 2018-2019 was EUR 59.1/b. The front-month Brent crude oil price is now EUR 58.4/b. And Brent forward 36mth is only EUR 55.5/b and in real terms one could subtract some 5-10% for the next three years from that nominal forward price. Quite sweet for consumers!

Brent has rebounded along with equities (here US Russel 2000 index in orange), but the rebound in oil has become more hesitant the latest days. Brent still trading USD 8.5/b below its pre ”Liberation Day” of USD 75/b

Brent crude forward curves. Today versus 2 April (’Liberation Day’). Still a tight current market but now with expectation that surplus is coming.

The Brent crude oil price versus the average Brent, WTI and Dubai 1-3mth time-spread. The latter is today on par with where it was on 2 April while the Brent 1mth price is down USD 8.5/b.

Brent crude in EUR/b is down to its 2018-2019 nominal price level. Not bad for euro-based oil consumers!!

Yearly averages for Brent crude in EUR/barrel. The Brent 1mth in EUR/barrel is today trading below its nominal average from 2018-2019 of EUR 59.1/b. And 36mth forward Brent is trading at only EUR 55.5/b. And that is nominally both ways. Add in some 20-30% inflation since primo 2018 and 5-10% additional inflation next three years. Think real terms!

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Analys

OPEC+ tensions resurface: Brent slides to $66.6

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2 dagar sedan

den

24 april, 2025

Redaktionen

Brent crude prices have lost the positive momentum seen from Monday evening through midday yesterday. The price initially bottomed out at USD 65.7 per barrel on Monday afternoon, before climbing steadily by USD 3 to USD 68.7 on Wednesday morning. However, that upward momentum quickly reversed course. Brent tumbled nearly USD 3.4, hitting a weekly low of USD 65.3 per barrel before recovering some losses. As of this morning, it trades at USD 66.6 – a reflection of continued and substantial volatility.

Ole R. Hvalbye, Analyst Commodities, SEB

Market fundamentals have largely remained in the background, with tariff rhetoric still dominating headlines. However, yesterday’s drop was clearly driven by the supply side of the equation, after reports emerged that several OPEC+ members are pushing for an accelerated oil output increase in June.

The timing of this move – amid global trade uncertainty and softening demand – may seem counterintuitive. But internal rifts within OPEC+ appear to be taking precedence. In May, Saudi Arabia already surprised the market with an output hike aimed at disciplining quota violators. That move failed to restrict Kazakhstan, the group’s largest overproducer, and has now triggered discussions of yet another sizeable production boost in June.

A later statement from Kazakhstan’s energy ministry, pledging renewed compliance, may have helped lift crude prices slightly this morning.

The next OPEC+ meeting is set for May 5, with the proposed June output hike expected to top the agenda. The group will likely choose between a scheduled, incremental increase of 138,000 barrels per day, or a more aggressive jump of 411,000 barrels per day – equivalent to ish three months’ worth of increases rolled into one. The latter scenario would put downward pressure on oil prices and highlight deepening tensions within OPEC+, while also exacerbating concerns in a market already clouded by weak demand expectations.

Although the final decision on volumes remains unclear, OPEC+ has demonstrated it still has pricing power, and that it can pull prices lower quickly if it chooses to do so.

________

US DOE DATA

U.S. refinery activity picked up in the week ending April 18, with crude inputs rising by 326,000 barrels per day to a total of 15.9 million. Utilization rates also climbed to 88.1%. Gasoline output strengthened to 10.1 million barrels per day, while distillate fuel production edged lower to 4.6 million.

Crude imports declined by 412,000 barrels per day to 5.6 million last week. Over the past month, import volumes have averaged 6.1 million barrels per day – down 6.8% compared to the same period a year ago. Gasoline and distillate imports came in at 858,000 and 97,000 barrels per day, respectively.

Inventories were mixed. Crude oil inventories (excl. SPR) rose slightly by 0.2 million barrels to 443.1 million, still 5% below the five-year average. Gasoline inventories posted a sharp draw of 4.5 million barrels and are now 3% under seasonal norms. Diesel inventories dropped by 2.4 million barrels, leaving levels 13% below the five-year average. Propane inventories rose by 2.3 million but remained 7% under typical levels. Total commercial petroleum inventories saw a net decline of 0.7 million barrels on the week.

Product demand was generally stable. Total products supplied averaged 19.9 million barrels per day over the last four weeks, up 0.4% year-on-year. Gasoline demand slipped by 0.4%, while distillates and jet fuel rose sharply, by 12.8% and 13.8%, respectively.

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Analys

Nam, nam, nam. Give me more 36mth forward Brent crude in EUR/barrel

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3 dagar sedan

den

23 april, 2025

Redaktionen

Brent carried higher by relief rally across markets as Trump backs away from sacking Powel. Brent crude rose 1.8% ydy to USD 67.44/b with an intraday high of USD 68.04/b. The gain was driven by a relief rally across markets as it became clear that Trump would not try to force out Powel from his role as chair of the US Fed. US equities rallied more than 2.5% as a result and pulled oil along upwards in relief. The gains continue this morning both in equities and oil with the latter up 1.2% to USD 68.25/b.

Forward oil in euro looks very appealing for consumers. Even after recent oil price gains. A weaker USD and a lower oil price at the same time recently has strongly lifted the appeal for oil purchases by non-US denominated oil consumers. The euro has rallied against the USD. On Monday Brent closed at EUR 57.57/b while the 3yr forward Brent price closed at a nominal EUR 53.95/b when the forward fx rate is applied. But this is nominal three years forward basis. If we also assume that Eurozone inflation will average 2% pa. for the next three years, then the real forward euro price for oil is even lower. The price for Brent crude today is EUR 60.1/b for the front-month while the 36mth contract is EUR 55.1/b when the forward eurusd rate of 1.2 is applied. If we also assume a 2% annual inflation for three years then the real forward price is only EUR 51.9/b. Compare this to the average nominal price of Brent crude from 2015 to 2019, the shale oil boom-years, when Brent crude only averaged USD 58.5/b and EUR 51.3/b. This period was the tragic oil-years when US shale oil companies were chasing volumes rather than profits with many of them going bankrupt as a result. Even after the recent rally in Brent crude oil prices, the forward 36mth price in EUR is still relatively cheap in historical terms and especially so when the 36mth real forward price is taken into account.

The 36mth real forward price for Brent crude in EUR/b is almost down to the ”valley of death” period from 2015 to 2019 when Brent crude nominally averaged USD 58.5/b and EUR 51.3/b. That was the period when US shale oil producers aimed for volume over profits which led many of them to bankruptcy.