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
Analys
Rebound to $65: trade tensions ease, comeback in fundamentals

After a sharp selloff in late April and early May, Brent crude prices bottomed out at USD 58.5 per barrel on Monday, May 5th – the lowest level since April 9th. This was a natural reaction to higher-than-expected OPEC+ supply for both May and June.

Over the past week, however, oil prices have rebounded strongly, climbing by USD 7.9 per barrel on a week-over-week basis. Brent peaked at USD 66.4 per barrel yesterday afternoon before sliding slightly to USD 65 per barrel this morning.
Markets across the board saw significant moves yesterday after the U.S. and China agreed to temporarily lower tariffs and ease export restrictions for 90 days. Scott Bessent announced, the U.S. will lower its tariffs on Chinese goods to 30%, while China will reduce its tariffs on U.S. goods to 10%. While this is a temporary measure, the intent to reach a longer-term agreement is clearly gaining momentum. That said, the U.S. administration has layered tariffs extensively, making the exact average rate hard to pin down – estimates suggest it now sits around 20%.
In short, the macroeconomic outlook improved swiftly: equities rallied, long-term interest rates climbed, gold prices declined, and the USD strengthened. By yesterday’s close, the S&P 500 rose 3.3% and the Nasdaq jumped 4.4%, essentially recovering the losses sustained since April 2nd.
That said, some form of positive news was expected from the weekend meeting, and now oil markets appear to be pausing after three days of strong gains. Attention is shifting from U.S.-China trade de-escalation back toward market fundamentals and geopolitical developments in the Middle East.
On the supply side, the market is pricing in relaxed restrictions on Iranian crude exports after President Trump signaled progress in nuclear negotiations over the weekend. Further talks are expected within the next week.
Meanwhile, President Trump is visiting Saudi Arabia today – the key OPEC+ player – which has ramped up production to discipline non-compliant members by pressuring oil prices. This aligns well with U.S. interests, especially with the administration pushing for lower crude and refined product prices for its US domestic voters.
With Brent hovering around USD 65, it’s unlikely that oil prices will dominate the agenda during the Saudi visit. Instead, discussions are expected to focus on broader geopolitical issues in the Middle East.
Looking ahead, OPEC+ is expected to continue with its monthly meetings and market assessments. The group appears focused on navigating internal disputes and responding to shifts in global demand. Importantly, the recent increase in output doesn’t suggest an oversupplied market here and now – seasonal demand in the region also rises during the summer months, absorbing some of the additional barrels.
Analys
Whipping quota cheaters into line is still the most likely explanation

Strong rebound yesterday with further gains today. Brent crude rallied 3.2% with a close of USD 62.15/b yesterday and a high of the day of USD 62.8/b. This morning it is gaining another 0.9% to USD 62.7/b with signs that US and China may move towards trade talks.

Brent went lower on 9 April than on Monday. Looking back at the latest trough on Monday it traded to an intraday low of USD 58.5/b. In comparison it traded to an intraday low of USD 58.4/b on 9 April. While markets were in shock following 2 April (’Liberation Day’) one should think that the announcement from OPEC+ this weekend of a production increase of some 400 kb/d also in June would have chilled the oil market even more. But no.
’ Technically overbought’ may be the explanation. ’Technically overbought’ has been the main explanation for the rebound since Monday. Maybe so. But the fact that it went lower on 9 April than on Monday this week must imply that markets aren’t totally clear over what OPEC+ is currently doing and is planning to do. Is it the start of a flood or a brief period where disorderly members need to be whipped into line?
The official message is that this is punishment versus quota cheaters Iraq, UAE and Kazakhstan. Makes a lot of sense since it is hard to play as a team if the team strategy is not followed by all players. If the May and June hikes is punishment to force the cheaters into line, then there is very real possibility that they actually will fall in line. And voila. The May and June 4x jumps is what we got and then we are back to increases of 137 kb/d per month. Or we could even see a period with no increase at all or even reversals and cuts.
OPEC+ has after all not officially abandoned cooperation. It has not abandoned quotas. It is still an overall orderly agenda and message to the market. This isn’t like 2014/15 with ’no quotas’. Or like full throttle in spring 2020. The latter was resolved very quickly along with producer pain from very low prices. It is quite clear that Saudi Arabia was very angry with the quota cheaters when the production for May was discussed at the end of March. And that led to the 4x hike in May. And the same again this weekend as quota offenders couldn’t prove good behavior in April. But if the offenders now prove good behavior in May, then the message for July production could prove a very different message than the 4x for May and June.
Trade talk hopes, declining US crude stocks, backwardated Brent curve and shale oil pain lifts price. If so, then we are left with the risk for a US tariff war induced global recession. And with some glimmers of hope now that US and China will start to talk trade, we see Brent crude lifting higher today. Add in that US crude stocks indicatively fell 4.5 mb last week (actual data later today), that the Brent crude forward curve is still in front-end backwardation (no surplus quite yet) and that US shale oil production is starting to show signs of pain with cuts to capex spending and lowering of production estimates.
Analys
June OPEC+ quota: Another triple increase or sticking to plan with +137 kb/d increase?

Rebounding from the sub-60-line for a second time. Following a low of USD 59.3/b, the Brent July contract rebounded and closed up 1.8% at USD 62.13/b. This was the second test of the 60-line with the previous on 9 April when it traded to a low of USD 58.4/b. But yet again it defied a close below the 60-line. US ISM Manufacturing fell to 48.7 in April from 49 in March. It was still better than the feared 47.9 consensus. Other oil supportive elements for oil yesterday were signs that there are movements towards tariff negotiations between the US and China, US crude oil production in February was down 279 kb/d versus December and that production by OPEC+ was down 200 kb/d in April rather than up as expected by the market and planned by the group.

All eyes on OPEC+ when they meet on Monday 5 May. What will they decide to do in June? Production declined by 200 kb/d in April (to 27.24 mb/d) rather than rising as the group had signaled and the market had expected. Half of it was Venezuela where Chevron reduced activity due to US sanctions. Report by Bloomberg here. Saudi Arabia added only 20 kb/d in April. The plan is for the group to lift production by 411 kb/d in May which is close to 3 times the monthly planned increases. But the actual increase will be much smaller if the previous quota offenders, Kazakhstan, Iraq and UAE restrain their production to compensate for previous offences.
The limited production increase from Saudi Arabia is confusing as it gives a flavor that the country deliberately aimed to support the price rather than to revive the planned supply. Recent statements from Saudi officials that the country is ready and able to sustain lower prices for an extended period instead is a message that reviving supply has priority versus the price.
OPEC+ will meet on Monday 5 May to decide what to do with production in June. The general expectation is that the group will lift quotas according to plans with 137 kb/d. But recent developments add a lot of uncertainty to what they will decide. Another triple quota increase as in May or none at all. Most likely they will stick to the original plan and decide lift by 137 kb/d in June.
US production surprised on the downside in February. Are prices starting to bite? US crude oil production fell sharply in January, but that is often quite normal due to winter hampering production. What was more surprising was that production only revived by 29 kb/d from January to February. Weekly data which are much more unreliable and approximate have indicated that production rebounded to 13.44 mb/d after the dip in January. The official February production of 13.159 mb/d is only 165 kb/d higher than the previous peak from November/December 2019. The US oil drilling rig count has however not change much since July last year and has been steady around 480 rigs in operation. Our bet is that the weaker than expected US production in February is mostly linked to weather and that it will converge to the weekly data in March and April.
Where is the new US shale oil price pain point? At USD 50/b or USD 65/b? The WTI price is now at USD 59.2/b and the average 13 to 24 mth forward WTI price has averaged USD 61.1/b over the past 30 days. The US oil industry has said that the average cost break even in US shale oil has increased from previous USD 50/b to now USD 65/b with that there is no free cashflow today for reinvestments if the WTI oil price is USD 50/b. Estimates from BNEF are however that the cost-break-even for US shale oil is from USD 40/b to US 60/b with a volume weighted average of around USD 50/b. The proof will be in the pudding. I.e. we will just have to wait and see where the new US shale oil ”price pain point” really is. At what price will we start to see US shale oil rig count starting to decline. We have not seen any decline yet. But if the WTI price stays sub-60, we should start to see a decline in the US rig count.
US crude oil production. Monthly and weekly production in kb/d.

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