Brent oil update 27 June

Technical:

• We did, according to our expectations, get another downturn last week, and made a false break below the theoretical target, $45.04
• We are now into the fourth day of positive returns and yesterday’s price action strengthens our bullish view. We thus argues that the risk for another downturn the coming days has declined

Fundamental:

• Except for one week, we have seen crude oil inventory draws since April, which we expect will continue
• Refinery maintenance have during the spring been unusually high (and thereby lower refinery demand)
• Chinese gasoline demand was strong in May
• Q3 is generally a period of high refinery demand, which should draw down inventories faster
• Furthermore, Saudi crude oil export usually declines during Q3 due to high local demand from air condition usage
• The current low oil prices have made shale oil investors reluctant to invest, which is seen in increased high-yield bond returns. This tightens the liquidity provided to shale oil rigs, and increase their costs. Furthermore, shale oil rigs have a harder time to find personnel, which also adds to the cost inflation

Risk on the downside

• Shale oil rigs have become more productive (See Crude oil comment from last week), which might result in a lower inflection point (where the market stops adding shale oil rigs). What force is strongest? Productivity increase or cost inflation?
• Since there is approximately 6 weeks from a certain price on the WTI 18 month price until we see effect on shale oil rig count, we will not see the effect of todays’ low prices until another 4-6 week. In the meantime, we might see more shale oil rigs added to the market, which can add bearish sentiment in the short run.
• The DOE crude oil inventory stats on Wednesday can of course surprise on the bearish side which might result in another short term sell-off

Our official crude oil forecasts (from Feb report)
Q3-17: $55.0/b
Q4-17: $52.5/b
2018: $60.0/b

Best regards,
Anders Söderberg