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Crude oil comment – The dissconnect and the reconnect

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SEB - Prognoser på råvaror - CommodityBrent crude sold off 4.7% ydy to a close of $48.38/b (1 mth contract) while in the longer dated contracts we saw the December 2020 contract lose 2.1% to trade down to $51.15/b which was the lowest level since April 2016. Early this morning the Dec 2020 contract traded as low as $50.5/b. At the time of writing the 1 mth Brent contract is up 0.5% to $48.6/b after having traded as low as $46.64/b in the early hours of the day.

The discussion is going left, right and centre for explanations of why we have such a sharp sell-off in commodities in general and oil specifically. Is the macro backdrop deteriorating? The decline in US consumer confidence by 5 points from March to April as well as a topping over of the global manufacturing PMI at the same time might have been a queue to macro driven investors to take profits on commodities in general. The general view is however that the macro backdrop is fine. That US Q1 growth weakness is transitory and that Chinese infrastructure contractor order intake was strong in Q1-17. Chinese tightening liquidity settings aiming to prevent overheating and too much speculative activity is probably a part of the reason for the sell-off in metals. As such it seems like there is a disconnect between the general macro-view which looks overall positive and the current commodity sell-off which is blood red. Graphing global PMI to commodities does however paint a picture of a fairly good relationship. Is the commodity sell-off an indicator that the somewhat rosy macro view is wrong? Probably not seems to be the main view so far.

Another angel for the sell-off in crude oil is US gasoline. Looking at the sell-off in crude oil we can see that the sell-off has been preceded by a sell-off in gasoline. Gasoline and the driving season is normally a bullish element this time of year. Counter to normal we have instead had a sell-off in gasoline which has been feeding into a bearish pressure on crude oil as well. So weakening US gasoline prices clearly are partly to blame for the latest crude sell-off.

Rapidly rising US crude oil production in combination with elevated net long speculative positions in WTI has of course been important foundation for the current sell-off. Speculators have been taking cover as the price moved into technically bearish territory. On Tuesday next week the US EIA will publish its last monthly energy report before OPEC’s meeting on May 25th. It is likely to lift its projected US crude oil production for 2018 yet another 150 – 200 kb/d as it accounts for the 35 oil rigs which were added to the market in April.

Hardly anyone seems to doubt that OPEC will roll over its cuts from H1 to H2 and Russia also seems to be positive for such a decision. This is probably the biggest disconnect in the oil sell-off. OPEC seems positive for cuts, Russia seems positive and the general market expectation is for a roll-over of cuts into H2. A decision to roll over cuts into H2-17 when OPEC meets on May 25th in Vienna will clearly lift Brent crude oil prices back up towards $55/b. As such the current sell-off to $46-47-48/b is clearly a disconnect to the consensus that OPEC will cut in H2-17. Cutting in H2-17 will however stimulate more US oil rigs to enter the market thus leading to higher production in 2018 and 2019. As such a decision to cut on May 25th will be a sacrifice of the balance and oil prices for 2018 and 2019 as it will shift both of those years into strict surplus.

But for now the sell-off is a disconnect to the view that OPEC will cut. As such it is a good buy ahead of the OPEC meeting which is now less than three weeks ahead. Unless of course OPEC totally caves in and instead lets oil production flow unhindered. That would be a vindication of prior Saudi oil minister Ali al-Naimi’s earlier aired view that cutting production is not a good idea as it would only lead to lower volume but not necessarily a higher price. Saudi Arabia may however have too much at stake with its planned Saudi Aramco IPO planned for early 2018 to let the oil flow loose quite yet. Thus betting on the consensus for a cut and buying the current sell-off may not be such a bad idea and strattegy. Rather we think it is a good strattegy to buy into the current sell-off at the moment ahead of the upcoming OPEC meeting.

On the one hand there is now a dissconnect between a strong belief in an OPEC cut versus a current weak oil prices. On the other hand though one might also say that the oil price finally has reconnected with shale oil fundamentals. If the oil market is in no need for yet more oil in 2018 then there is no need to activate yet more oil rigs in the US right now. At the moment we forecast 2018 to be close to balanced. As such the mid-term WTI crude price curve should traded at about $47/b (empirical rig count inflection point versus prices). The 1-2 year WTI forward curve at the time of writing trades at $47.8/b. But that reconnect looks likely to be foreced apart again if/when OPEC decides to roll cuts over into H2-17. In that case the reconnect is postponed to 2018. Post the Saudi Aramco IPO.

Ch1: Global growth momentum topping out?
Graphically yes, but general view is that global growth is fine and that US Q1-17 weakness is transitory

Global growth momentum topping out?

Ch2: Commodity prices are softening anyhow

Commodity prices are softening anyhow

Ch3: Gasoline prices usually a bullish factor into the US driving seasson – But this time it has been a bearish factor dragging crude prices lower

Gasoline prices usually a bullish factor into the US driving seasson – But this time it has been a bearish factor dragging crude prices lower

Ch4: Relationship between US mid-term WTI forward prices and weekly US oil rig additions
The inflection point is from April/May/June last year

Relationship between US mid-term WTI forward prices and weekly US oil rig additions

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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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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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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Brent crude sticks around $66 as OPEC+ begins the ’slow return’

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Brent crude touched a low of USD 65.07 per barrel on Friday evening before rebounding sharply by USD 2 to USD 67.04 by mid-day Monday. The rally came despite confirmation from OPEC+ of a measured production increase starting next month. Prices have since eased slightly, down USD 0.6 to around USD 66.50 this morning, as the market evaluates the group’s policy, evolving demand signals, and rising geopolitical tension.

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

On Sunday, OPEC+ approved a 137,000 barrels-per-day increase in collective output beginning in October – a cautious first step in unwinding the final tranche of 1.66 million barrels per day in voluntary cuts, originally set to remain off the market through end-2026. Further adjustments will depend on ”evolving market conditions.” While the pace is modest – especially relative to prior monthly hikes – the signal is clear: OPEC+ is methodically re-entering the market with a strategic intent to reclaim lost market share, rather than defend high prices.

This shift in tone comes as Saudi Aramco also trimmed its official selling prices for Asian buyers, further reinforcing the group’s tilt toward a volume-over-price strategy. We see this as a clear message: OPEC+ intends to expand market share through steady production increases, and a lower price point – potentially below USD 65/b – may be necessary to stimulate demand and crowd out higher-cost competitors, particularly U.S. shale, where average break-evens remain around WTI USD 50/b.

Despite the policy shift, oil prices have held firm. Brent is still hovering near USD 66.50/b, supported by low U.S. and OECD inventories, where crude and product stocks remain well below seasonal norms, keeping front-month backwardation intact. Also, the low inventory levels at key pricing hubs in Europe and continued stockpiling by Chinese refiners are also lending resilience to prices. Tightness in refined product markets, especially diesel, has further underpinned this.

Geopolitical developments are also injecting a slight risk premium. Over the weekend, Russia launched its most intense air assault on Kyiv since the war began, damaging central government infrastructure. This escalation comes as the EU weighs fresh sanctions on Russian oil trade and financial institutions. Several European leaders are expected in Washington this week to coordinate on Ukraine strategy – and the prospect of tighter restrictions on Russian crude could re-emerge as a price stabilizer.

In Asia, China’s crude oil imports rose to 49.5 million tons in August, up 0.8% YoY. The rise coincides with increased Chinese interest in Russian Urals, offered at a discount during falling Indian demand. Chinese refiners appear to be capitalizing on this arbitrage while avoiding direct exposure to U.S. trade penalties.

Going forward, our attention turns to the data calendar. The EIA’s STEO is due today (Tuesday), followed by the IEA and OPEC monthly oil market reports on Thursday. With a pending supply surplus projected during the fourth quarter and into 2026, markets will dissect these updates for any changes in demand assumptions and non-OPEC supply growth. Stay tuned!

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