Analys
Bulls recover their confidence as US crude stocks draws lower
Over the past week we have seen some sharp moves to the downside with Brent trading down to below $47/b before recovering. The sell-off was partly in a joint sell-off together with industrial metals. Possibly on the back of general commodity profit taking as some indications pointed to a peak in growth momentum.
There is clearly a widespread consensus that OPEC will roll cuts over into H2-17. The decision is however still ahead of us and as such is an uncertain element which creates some hesitation in the market. Better safe than sorry and as such we are likely to head into the meeting most likely at the low side of the prise spectre with a bounce up after the meeting with what now seems likely a positive decision by OPEC to roll cuts over into H2-17. Trading Brent crude at around $51-52/b ahead of the meeting with a jump up to $56/b post the meeting seems sensible.
We have seen some aired concerns that oil demand growth is coming in much weaker than expected with a growth rate as low as 0.8 mb/d y/y in H1-17. We find it hard to believe at the moment that there should be reason to be concerned for such a soft global oil demand growth in 2017. Overall oil demand growth is quite steady and fairly well related to overall global economic growth. In 2014 we had the exact same kind of concern where oil demand at times was estimated as low as 0.7 mb/d y/y. In hindsight though it has been adjusted up to 1.4% y/y for that year or +1.3 mb/d oil demand growth in 2014.
The US EIA on Tuesday released its monthly Short Term Energy Outlook (STEO) for May. It adjusted global supply up by 0.2% for both 2017 and 2018 while demand was lifted by 0.1% for each year. Net it saw a global surplus of 0.17 mb/d and 0.47 mb/d respectively for the two years. With a slightly higher projected surplus it adjusted its Brent and WTI price forecast down by 3% each for 2017 to $52.6/b and $50.7/b respectively for the two grades. The price forecast for 2018 was kept unchanged at $57.1/b and $55.1/b respectively for Brent and WTI. With a projected surplus for both 2017 and 2018 it naturally saw no draw down in OECD inventories neither in 2017 nor in 2018. It projected OECD ending stocks to end 2018 at 3109 mb which was 2.2% higher than in its April report and above the 2016 ending stock level of 2967 mb. Such an outlook should mean that the contango in the crude oil curves should be just as deep in 2017 as in 2018. It is a bit difficult to understand why they have a higher price forecast for 2018 than for 2017 when inventories are rising in 2018. The forecast for 2018 is actually 8.5% higher in 2018 than for 2017. The only explanation for such a view is that cost inflation will push prices higher.
US crude oil inventories yesterday showed a decline of 5.8 mb last week with gasoline declining 0.2 mb and distillates declining 1.6 mb. That gave the market back a lot of confidence. Total crude and product stocks in the US has actually been falling since mid-February but very high inventories for crude specifically has created lots of discomfort for the oil bulls this spring. Yesterday however some of those concerns were eased. The US EIA also estimated US crude production to be 9.3 mb/d last week (+21 kb/d w/w). In its STEO report on the EIA projected that US crude production would rise to 9.7 mb/d in November 2017 and thus pas its prior peak of 9.6 mb/d.
In perspective it is good to take a look at the current global rig count. It stood at 3656 rigs in 2014 while it stood at 2065 rigs in March according to OPEC. Also, it actually fell 42 rigs mth/mth from February. From 2014 to the latest count there is a drop of 43%. If we adjust for US shale oil volume productivity where today’s 600 shale oil rigs are as effective as 1200 rigs in 2014 we still get that the effective real decline in oil rigs is about 30% since 2014. Our ball-park figure is that only 20% of global upstream oil investments are needed to cover the global oil demand growth of some 1.3 mb/d y/y. The other 80% of upstream investments are basically used to produce oil that will counter declining production in existing production. The same goes for oil rigs. Only 20% of the rigs are needed to cover oil demand growth. The other 80% are needed to cover declines. Thus a 20% decline in real, global rig count will lead to no growth in global oil production. The above rig count does however not dissect between rigs used for prospecting versus rigs used to create production rigs. And as such the decline gives a misleading picture since prospecting for oil was the first to be cut in the downturn.
In the shorter term price picture we believe that Brent crude front month will head towards $51-52/b ahead of the OPEC meeting. Technically it then first out needs to break above $51.1/b and then more importantly above $51.67/b. Breaking above the later would technically be a goodbye to the downside technical correction we have had lately.
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.
Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.
US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.
The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.
Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.
US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.
Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
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.
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