Analys

Brent crude is crawling higher but its feet are slipping

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27 februari, 2017

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Price action – Marginal gains in the front but losses in the back end curve

From Friday to Friday last week Brent 1mth crude gained 0.3% to $55.99/b. Longer dated contracts however continued to erode with the Brent December 2020 contract losing 1.1% to $54.84/b. In perspective it closed at the lowest level since April 2016 last week when it closed at $54.47/b last Wednesday. With muted price action the volatility naturally continued lower last week with 30 day rolling annualized volatility for the 1mth contract ending last week at 20.3% down from 25.1% Friday the week before. We have not seen such a low level of volatility since October 2014 and it is likely to continue yet lower. Probably heading to 15%. Shale oil flexibility clearly helps to mute the price action. In addition the market is now close to balance and lower volatility is natural in such a situation. However, the longer term normal volatility in the crude oil market is about 30%. Thus we are probably heading towards half of the historical normal level.

OPEC is tightening up the front end market but reviving US crude oil production is softening the medium term balance

OPEC is delivering on cuts thus driving the market increasingly into backwardation. This is pushing front month contract higher versus longer dated contracts. However, longer dated contracts are slipping thus leaving the Brent 1mth contract with little gain despite a gradual shift to backwardation. There is still some contango in the very front of the forward curve but overall the Brent 1mth contract is now trading above the Brent Dec-2020 contract. At close on Friday we had Brent 1mth at 55.99/b and Dec-2020 at 54.84/b. Thus for Brent 1mth, it is trying to crawl higher but its feet are slipping. Longer dated contracts are slipping.

OPEC is tightening up the front, but recovering US shale production is loosening up the longer dated part of the balance. That is why the longer dated contracts are slipping. US crude production last week rose above 9 mb/d for the first time since April 2016. For lower 48 production (where shale is the lion’s share), production rose by 17 kb/d w/w. Multiply by 52 and you get an annualized US production growth rate of 0.9 mb/d YoY. I.e. US shale oil production growth is back! If the +17 kb/d w/w was only noise it would mean nothing, but it is a trend. Our projection is for US shale oil production to grow at 18 kb/d w/w in February, 23 kb/d w/w in March and then gradually rising to 36 kb/d w/w in September equaling an annualized production growth rate of 1.9 mb/d before the growth rate is moderating after that again.

Since October 2016 US crude production has on averaged increased by 27.6 kb/d w/w. Most of this is probably not due to recovering shale oil production but rather due to commissioning of prior investments in the Gulf of Mexico. However, now onwards US crude production is going to increase on a weekly basis due to recovering US shale oil production.

OPEC is successful in its effort to dry up the market and shifting the crude oil forward curve into backwardation. It had probably hoped for a situation where the longer dated contracts stands at $55-60/b with Brent 1mth contract trading at a backwardation premium of some $5/b above that. It will probably get its $5/b backwardation premium but longer dated contracts are likely to slip lower thus leaving OPEC with limited gain at the front end of the curve. We still think that Brent crude will average $57.5/b in Q2-17 as also the front end of the curve is flipping into backwardation. The erosion in the longer dated contracts is likely to continue.

US oil rig count last week increased 5 rigs but implied shale oil rig count went up by 12 as directional and vertical count fell back. Over the last two weeks the US implied shale oil rig count is up by 15 or 7.5/week which is marginally higher than our projected 7 rigs per week for H1-17. This shifts our dynamic price forecast for 2019 marginally lower from $68.3/b to $67.9/b.

Over the last two weeks weekly inventory data for the US, EU, Singapore and floating storage has moved down by 3.1 mb and 9.7 mb respectively last two weeks. OPEC’s medicine is working shifting the market increasingly into backwardation as a result. Declining inventories – that’s the proof of the pudding. That makes investors bullish. Not surprisingly speculative positions in WTI increased yet higher to a new record last week.

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Stronger inventory build than consensus, diesel demand notable

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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Analys

Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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19 februari, 2025

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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Analys

Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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7 dagar sedan

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17 februari, 2025

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.