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Brent crude is crawling higher but its feet are slipping

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

SEB - Prognoser på råvaror - CommodityFrom 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

Oil projectionsOPEC 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.

Analys

Brent crude ticks higher on tension, but market structure stays soft

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Brent crude has climbed roughly USD 1.5-2 per barrel since Friday, yet falling USD 0.3 per barrel this mornig and currently trading near USD 67.25/bbl after yesterday’s climb. While the rally reflects short-term geopolitical tension, price action has been choppy, and crude remains locked in a broader range – caught between supply-side pressure and spot resilience.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Prices have been supported by renewed Ukrainian drone strikes targeting Russian infrastructure. Over the weekend, falling debris triggered a fire at the 20mtpa Kirishi refinery, following last week’s attack on the key Primorsk terminal.

Argus estimates that these attacks have halted ish 300 kbl/d of Russian refining capacity in August and September. While the market impact is limited for now, the action signals Kyiv’s growing willingness to disrupt oil flows – supporting a soft geopolitical floor under prices.

The political environment is shifting: the EU is reportedly considering sanctions on Indian and Chinese firms facilitating Russian crude flows, while the U.S. has so far held back – despite Bessent warning that any action from Washington depends on broader European participation. Senator Graham has also publicly criticized NATO members like Slovakia and Hungary for continuing Russian oil imports.

It’s worth noting that China and India remain the two largest buyers of Russian barrels since the invasion of Ukraine. While New Delhi has been hit with 50% secondary tariffs, Beijing has been spared so far.

Still, the broader supply/demand balance leans bearish. Futures markets reflect this: Brent’s prompt spread (gauge of near-term tightness) has narrowed to the current USD 0.42/bl, down from USD 0.96/bl two months ago, pointing to weakening backwardation.

This aligns with expectations for a record surplus in 2026, largely driven by the faster-than-anticipated return of OPEC+ barrels to market. OPEC+ is gathering in Vienna this week to begin revising member production capacity estimates – setting the stage for new output baselines from 2027. The group aims to agree on how to define “maximum sustainable capacity,” with a proposal expected by year-end.

While the IEA pegs OPEC+ capacity at 47.9 million barrels per day, actual output in August was only 42.4 million barrels per day. Disagreements over data and quota fairness (especially from Iraq and Nigeria) have already delayed this process. Angola even quit the group last year after being assigned a lower target than expected. It also remains unclear whether Russia and Iraq can regain earlier output levels due to infrastructure constraints.

Also, macro remains another key driver this week. A 25bp Fed rate cut is widely expected tomorrow (Wednesday), and commodities in general could benefit a potential cut.

Summing up: Brent crude continues to drift sideways, finding near-term support from geopolitics and refining strength. But with surplus building and market structure softening, the upside may remain capped.

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Analys

Volatile but going nowhere. Brent crude circles USD 66 as market weighs surplus vs risk

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Brent crude is essentially flat on the week, but after a volatile ride. Prices started Monday near USD 65.5/bl, climbed steadily to a mid-week high of USD 67.8/bl on Wednesday evening, before falling sharply – losing about USD 2/bl during Thursday’s session.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Brent is currently trading around USD 65.8/bl, right back where it began. The volatility reflects the market’s ongoing struggle to balance growing surplus risks against persistent geopolitical uncertainty and resilient refined product margins. Thursday’s slide snapped a three-day rally and came largely in response to a string of bearish signals, most notably from the IEA’s updated short-term outlook.

The IEA now projects record global oversupply in 2026, reinforcing concerns flagged earlier by the U.S. EIA, which already sees inventories building this quarter. The forecast comes just days after OPEC+ confirmed it will continue returning idle barrels to the market in October – albeit at a slower pace of +137,000 bl/d. While modest, the move underscores a steady push to reclaim market share and adds to supply-side pressure into year-end.

Thursday’s price drop also followed geopolitical incidences: Israeli airstrikes reportedly targeted Hamas leadership in Doha, while Russian drones crossed into Polish airspace – events that initially sent crude higher as traders covered short positions.

Yet, sentiment remains broadly cautious. Strong refining margins and low inventories at key pricing hubs like Europe continue to support the downside. Chinese stockpiling of discounted Russian barrels and tightness in refined product markets – especially diesel – are also lending support.

On the demand side, the IEA revised up its 2025 global demand growth forecast by 60,000 bl/d to 740,000 bl/d YoY, while leaving 2026 unchanged at 698,000 bl/d. Interestingly, the agency also signaled that its next long-term report could show global oil demand rising through 2050.

Meanwhile, OPEC offered a contrasting view in its latest Monthly Oil Market Report, maintaining expectations for a supply deficit both this year and next, even as its members raise output. The group kept its demand growth estimates for 2025 and 2026 unchanged at 1.29 million bl/d and 1.38 million bl/d, respectively.

We continue to watch whether the bearish supply outlook will outweigh geopolitical risk, and if Brent can continue to find support above USD 65/bl – a level increasingly seen as a soft floor for OPEC+ policy.

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Analys

Waiting for the surplus while we worry about Israel and Qatar

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Brent crude makes some gains as Israel’s attack on Hamas in Qatar rattles markets. Brent crude spiked to a high of USD 67.38/b yesterday as Israel made a strike on Hamas in Qatar. But it  wasn’t able to hold on to that level and only closed up 0.6% in the end at USD 66.39/b. This morning it is starting on the up with a gain of 0.9% at USD 67/b. Still rattled by Israel’s attack on Hamas in Qatar yesterday. Brent is getting some help on the margin this morning with Asian equities higher and copper gaining half a percent. But the dark cloud of surplus ahead is nonetheless hanging over the market with Brent trading two dollar lower than last Tuesday.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Geopolitical risk premiums in oil rarely lasts long unless actual supply disruption kicks in. While Israel’s attack on Hamas in Qatar is shocking, the geopolitical risk lifting crude oil yesterday and this morning is unlikely to last very long as such geopolitical risk premiums usually do not last long unless real disruption kicks in.

US API data yesterday indicated a US crude and product stock build last week of 3.1 mb. The US API last evening released partial US oil inventory data indicating that US crude stocks rose 1.3 mb and middle distillates rose 1.5 mb while gasoline rose 0.3 mb. In total a bit more than 3 mb increase. US crude and product stocks usually rise around 1 mb per week this time of year. So US commercial crude and product stock rose 2 mb over the past week adjusted for the seasonal norm. Official and complete data are due today at 16:30.

A 2 mb/week seasonally adj. US stock build implies a 1 – 1.4 mb/d global surplus if it is persistent. Assume that if the global oil market is running a surplus then some 20% to 30% of that surplus ends up in US commercial inventories. A 2 mb seasonally adjusted inventory build equals 286 kb/d. Divide by 0.2 to 0.3 and we get an implied global surplus of 950 kb/d to 1430 kb/d. A 2 mb/week seasonally adjusted build in US oil inventories is close to noise unless it is a persistent pattern every week.

US IEA STEO oil report: Robust surplus ahead and Brent averaging USD 51/b in 2026. The US EIA yesterday released its monthly STEO oil report. It projected a large and persistent surplus ahead. It estimates a global surplus of 2.2 m/d from September to December this year. A 2.4 mb/d surplus in Q1-26 and an average surplus for 2026 of 1.6 mb/d resulting in an average Brent crude oil price of USD 51/b next year. And that includes an assumption where OPEC crude oil production only averages 27.8 mb/d in 2026 versus 27.0 mb/d in 2024 and 28.6 mb/d in August.

Brent will feel the bear-pressure once US/OECD stocks starts visible build. In the meanwhile the oil market sits waiting for this projected surplus to materialize in US and OECD inventories. Once they visibly starts to build on a consistent basis, then Brent crude will likely quickly lose altitude. And unless some unforeseen supply disruption kicks in, it is bound to happen.

US IEA STEO September report. In total not much different than it was in January

US IEA STEO September report. In total not much different than it was in January
Source: SEB graph. US IEA data

US IEA STEO September report. US crude oil production contracting in 2026, but NGLs still growing. Close to zero net liquids growth in total.

US IEA STEO September report. US crude oil production contracting in 2026, but NGLs still growing. Close to zero net liquids growth in total.
Source: SEB graph. US IEA data
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