Analys
Brent crude again heading towards the $60/bl danger-zone
Following its intraday low of $59.45/bl last week the Brent August contract staged a mild rebound this week and reached an intraday high of $64.1/bl on Monday before falling back down again. This morning it is selling off 1.9% to $61.1/bl on numbers from API last night indicating that US crude oil inventories probably rose 4.85 m bl last week.
US crude stocks have been rising almost uninterrupted since mid-march. Until late April that was partially along a seasonally normal rise in US crude stocks and thus less pressing. Since early May however the US crude stocks have just continued higher during a period where they usually decline. That is probably why Brent crude managed to reach its ytd high in late April but has been heading lower since then. Depressed by counter seasonally rising US crude stocks now standing 32 m bl above the 5yr average. Thus news by API that they probably continued to rise for yet another week last week is not taken lightly by the market. Negative equity markets this morning is not helping the matter either with “Quitaly” risk (Italy exiting the Euro) being one of the negatives.
With Brent crude selling off towards $61/bl this morning it has again come dangerously close to the 38.2% Fibo retracement level of $60.07/bl for Brent Aug contract or $59.74/bl for the rolling front month contract below which there is basically no support before $51.43/bl for the Aug contract or $49.93/bl for the rolling front month contract.
The big question is of course why US crude stocks are rising?
If there were no pipeline, refinery or quality issues a rise in US crude and/or product stocks would correctly be interpreted as a residual reflection of a running surplus in the global oil market. A part of this surplus would then naturally pile up in the US as well as everywhere else. Rising US crude and product stocks would then be a telling sing of a global oil market in surplus. This is the natural and instinctive financial market interpretation of the rising US oil inventories: “Wow, the global market must really be running a large surplus if US stocks are rising this much!”
The Brent crude oil curve has however been trading in sharp backwardation until late May pointing instead to a physically very tight global oil market. Since then the Brent backwardation has come off a bit along with speculative sell-off but it is still trading in backwardation. Usually a sell-off in financial oil contracts will lead to a softening in the curve structure as the sell-off mostly takes place at the front end of the curve.
The natural and instinctive interpretation that rising US crude stocks is a reflection of a running surplus in the global oil market does thus not seem to be fully consistent with the backwardated Brent crude curve structure.
The fact is that in the US today we do have pipeline, refinery and quality issues blurring the picture. These issues are leading to a widening Brent to WTI price spread. The wider it gets the more it means that the US has local oil market issues which are not necessarily an equal reflection of the same issues in the global oil market.
- US shale crude oil production continues to rise by the day (+83,000 bl/d MoM in June according to the US EIA). Building of pipeline capacity is under way but is lagging with a lot more capacity coming online late 2019 and 2020. Thus crude oil is for now naturally backing up in the US, depressing WTI and widening the Brent to WTI price spread.
- US refineries have for several reasons been running well below normal and thus processed significantly less crude oil than normal (5yr). In our calculations they have processed 31 m bl/d less than normal since week 6.
- US shale crude oil is very light and contains lots of gasoline. This leads to a natural overproduction of gasoline with such stocks now again above the 5yr average and the gasoline crack has come off again. US refineries may thus prefer to import more medium sour crude and process less shale crude oil thus leading to rising US crude stocks.
In total there has been a significant amount of refinery capacity out for spring maintenance/turnaround. These have now started to ramp up again and will thus process much more crude oil going forward. US refinery utilization is also rising.
There are obviously sensible concerns for the health of the global economy due to the ongoing US/China trade war with fears that global oil demand growth may falter.
Historically though it is quite rare that global oil demand grows by less than 1.0% per year. Intra-year though the global oil demand may look very gloomy. That is however usually a reflection of a refinery inventory cycle where refineries becomes concerned for global oil product demand, they buy less crude and sell more products from their inventories. Just 1-2% tweak in their normal behaviour drives rippling waves into the global oil market. In the end though it most often turns out that oil demand for the year turned out to be not all that bad after all.
We do think that rising US oil inventories may not be an excellent reflection of the health of the global oil market and as such that the market may over-sell Brent crude on the back of what is happening in the US oil market / US oil inventories.
This is especially so now that we again rapidly are narrowing in on the very important Brent crude oil support level around the $60/bl line. If broken it opens up for a significant over-sell down to towards the $50/bl line.
Ch1: Brent and WTI forward crude curves. Brent still in backwardation
Ch2: Changes in speculative positions do impact the crude curve structure as buying and selling mostly takes place in the front end of the curves. Thus contango and backwardation is not totally a reflection of physical market
Ch3: Brent crude and WTI curve structures in terms of time spreads of the 2 month contract minus the 6 month contract. Usually they track closely: Same shape = same fundamentals. Significant divergence since late 2018
Ch4: Net long specs in Brent and WTI have come off but still room for further sell-off if markets sour more
Ch5: US crude inventories on the rise. Most damaging has been the rise after week 17/18 as US crude stocks usually decline after that. Counter seasonal crude stock rise is bad news
Ch6: Total US crude, gasoline and mid-dist stocks have however risen less dramatically
Ch7: Global refinery outage has been very high this spring. They are now coming back on-line thus consuming and processing more crude oil. But as we seen have seen the Brent crude oil curve is already in backwardation.
Ch8: The Brent Aug contract Fibo retracement levels. No real support before $51.4/bl if $60.07/bl is broken
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
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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