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Crude oil comment – The Saudi $40/b put?

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityYesterday Brent front mth traded as low as $43.59/b ydy morning and looked ready to dive below the Aug low of $42.23/b. The sell-off ydy morning was a follow through of the deterioration last week but it was also accompanied by a solid sell-off in industrial metals where nickel sold off close to 5% with most of the action taking place in during the Asian session.

Saudi Arabian equities rose to the highest level in four weeks in response a comment by Saudi Arabia’s oil minister stating that “OPEC and other crude oil producers are working to stabilize the market”. This attracted little attention during the early trading ydy. However, the oil price jumped 4.8% from morning low when the statement was reiterated in the flowing news ydy: “Saudi government ready to do what it takes for stable oil market” and “Saudi ready to cooperate with OPEC and non-OPEC for stable prices”. At the end of the day Brent crude was only up 0.4% closing at $44.83/b. The fairly limited gain was probably down to the fact that we have heard much of a similar story before thus it was hard to interpret what it really meant.

The Saudi $40/b put. We are pretty confident that Saudi Arabia has no plan to cut production from current level without cooperation from the other OPEC members and maybe even from non-OPEC members. It is impossible to envision that Saudi would go it alone in the face of rising exports from Iran and Iraq thus requiring double action from Saudi Arabia. If anything at all the statement could mean that Saudi will see to it that the oil price does not collapse completely into the realm of $20-40/b. However, it could actually require quite a bit from Saudi to avoid this in the face of rising oil inventories, increasing contango (spot discount to forward prices), rising US interest rates and capital costs to hold oil in storage and lastly a continued stronger USD into H1-16. Thus if Saudi Arabia now launches the “Saudi put”, i.e. no risk for Brent prices below $40/b, then naturally front month Brent crude oil needs to rise in order to balance upside and downside risks. What was very clear from the statement is that it contained no mentioning of higher prices, just stabilization. In other words there is nothing in the cards for a substantial tightening of the market and substantially higher oil prices. The oil market still needs to stabilize by itself with continued low oil prices to stimulate demand and dampen non-OPEC supply. There is absolutely no plan here as far as we can see by OPEC to artificially and substantially tightening up the market thus substantially driving the oil price higher. We are not totally confident that there is any substance and reality behind the concept of a “Saudi $40/b put”. Action and not only words will be required to drive substance into the concept.

Irrespective of yesterday’s statements we still think that the oil price has a challenging time ahead as we move into H1-16 weakness with rising stocks, higher contango and a likely stronger USD.

Iran’s oil minister Bijan Namdar Zanganeh yesterday displayed little belief that there was any strong intention behind the statement. However, he did reiterate that OPEC has a responsibility for oil market stability. Again no mentioning of any responsibility or action regarding the price level. This resonates well with statements by Saudi earlier that “we don’t control the price level”. OPEC can in other words help to dampen too violent swings in the oil market, but not the oil price level itself which will have to be found through a continuous price discovery in the market place in the face of improving and changing extraction technology, competition with other fuels, changing demand growth and supply investment cycles.

OPEC meeting Dec 4 in Vienna. We expect to see more statements and speculations surrounding OPEC as we move closer to the December 4 OPEC meeting in Vienna. We expect no change in strategy even though many members whish for a higher price. “The market has to rebalance by itself” will be the strategy as far as we can see.

This morning the Brent crude price is up another 1.1% to $45.3/b along with a somewhat softer USD and some recovery in industrial metals. News of a military jet crashing in Syria is a reminder that there is still substantial risk in the Middle East.

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Analys

Brent prices slip on USD surge despite tight inventory conditions

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Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

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

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Oil inventories
Oil inventories
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Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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SEB - analysbrev på råvaror

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

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

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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