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Crude oil comment: Iran 180 degrees?

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SEB - Prognoser på råvaror - CommodityIf you mess with the Middle East then the most natural thing to expect is that you will get a high oil price in return. Donald Trump of course knows this but he still tries to fight it as he whish for a lower oil price leading into the US mid-term election. Last week ahead of the Algerian OPEC/non-OPEC JMMC weekend-meeting he verbally charged into the market again. But it was to no help as the group of producers promised no more than they already had promised earlier. “OPEC+” produced 49.8 m bl/d in Aug (ex. Bahrain & Congo in lack of good data) while its pledged target is 50.1 m bl/d.

Oil importing and oil consuming countries have always been fearful that the oil rich Middle East countries could cut off oil supply and thereby drive their economies to a grinding halt. They have been fearful of a repeat of oil supply being chocked off like in the 70ies and 80ies. Deliberate or not. Fearful of a Mid-East oil embargo.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

These days Donald Trump is playing hard ball with Iran: “We’ll drive your oil exports to zero unless you renegotiate the JCPOA nuclear deal”. Feeling confident that the US these days is almost self-sufficient with oil. What if Iran took him up on this and instead turned it around with Iran saying: “There will be no oil exports out of Iran at all unless the US ratifies the JCPOA deal again as is”.

It is true that the US is getting close to self-sufficiency in terms of oil supply. As such Donald Trump can feel confident versus challenging Iran. The US economy and its consumers are however still exposed to high oil prices. And Donald Trump is especially exposed and vulnerable right now leading up to the US mid-term election on November 6th which is just two days after the US sanctions against Iran kicks in fully and legally. Donald Trump probably wants low oil prices, low gasoline prices, happy consumers and happy voters leading up to the mid-term elections.

It is however doubtful that the US as well as Donald Trump really want low oil prices in the longer term as it is really high prices which will make the US totally hydrocarbon liquid independent in not too long. But in the short term to November 6th he probably wants to see muted oil prices. There is thus probably a brief window of opportunity where Iran could turn the situation around 180˚ from being a victim of oil sanctions from the US to instead playing hard ball right back and declare an oil embargo to the world. After all Iran is one of the key oil suppliers in the world. It is also on good terms with Iraq with which it potentially could persuade to cooperate for a few months. And in the current fairly tight oil market it would not take much oil off the market to drive the oil price spiky higher.

In terms of oil prices there is suddenly a lot of talk about $100/bl. And it is of course some merit to it. Market is getting tight as we lose more and more supply from Iran and Venezuela. If we look at the price distribution of daily Brent crude oil front month prices since January 2005 till today we see that the price rarely stays in the price range from $80 – 100/bl. It has historically either been lower or higher. This is of course purely statistical and to a large degree a play with numbers. Nonetheless it does make some sense logically.

The oil market is basically hardly ever in balance. It is either too much or too little. It is very hard to balance it just right. That means that the oil market naturally will move between the two extremes of

  • Low price: “Demand boost & Supply destruction”, or
  • High price: “Supply boost & Demand destruction”

And since 2005 the middle ground between these two seems to be the $80 – 100/bl range where it is neither of the two.

So those who are calling out for $100/bl should probably, statistically lift their target to a range of $100 – 120/bl.

We have currently no strong view for $100/bl but in general our view is that “OPEC+” is getting less and less control of upside price risk as its reserve capacity increasingly is eroded.

If Iran decides to play hard ball with the US and give Donald Trump what he is asking for: “No exports out of Iran” then Iran still has some 2.5 m bl/d of hydro carbon liquids exports which it could halt. That would definitely drive the oil price to $120/bl or higher in today’s market.

Ch1: Distribution of daily Brent crude oil prices. Not a lot from $80 – 100/bl as the oil market is normally either in surplus or deficit

: Distribution of daily Brent crude oil prices. Not a lot from $80 – 100/bl as the oil market is normally either in surplus or deficit

Ch2: Production of “OPEC+” got close to the pledged target in August. No promises of more than that as of yet.

Production of “OPEC+” got close to the pledged target in August. No promises of more than that as of yet.

Ch3: Iran production, consumption and implied exports. Exports have fallen some 500 k bl/d but there is still another 2.5 m bl /d at stake

Iran production, consumption and implied exports. Exports have fallen some 500 k bl/d but there is still another 2.5 m bl /d at stake

Analys

Lowest since Dec 2021. Kazakhstan likely reason for OPEC+ surprise hike in May

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Collapsing after Trump tariffs and large surprise production hike by OPEC+ in May. Brent crude collapsed yesterday following the shock of the Trump tariffs on April 2 and even more so due to the unexpected announcement from OPEC+ that they will lift production by 411 kb/d in May which is three times as much as expected. Brent fell 6.4% yesterday with a close of USD 70.14/b and traded to a low of USD 69.48/b within the day. This morning it is down another 2.7% to USD 68.2/b. That is below the recent low point in early March of USD 68.33/b. Thus, a new ”lowest since December 2021” today.

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

Kazakhstan seems to be the problem and the reason for the unexpected large hike by OPEC+ in May. Kazakhstan has consistently breached its production cap. In February it produced 1.83 mb/d crude and 2.12 mb/d including condensates. In March its production reached a new record of 2.17 mb/d. Its crude production cap however is 1.468 mb/d. In February it thus exceeded its production cap by 362 kb/d.

Those who comply are getting frustrated with those who don’t. Internal compliance is an important and difficult issue when OPEC+ is holding back production. The problem naturally grows the bigger the cuts are and the longer they last as impatience grows over time. The cuts have been large, and they have lasted for a long time. And now some cracks are appearing. But that does not mean they cannot be mended. And it does not imply either that the group is totally shifting strategy from Price to Volume. It is still a measured approach. Also, by lifting all caps across the voluntary cutters, Kazakhstan becomes less out of compliance. Thus, less cuts by Kazakhstan are needed in order to become compliant.

While not a shift from Price to Volume, the surprise hike in May is clearly a sign of weakness. The struggle over internal compliance has now led to a rupture in strategy and more production in May than what was previously planned and signaled to the market. It is thus natural to assign a higher production path from the group for 2025 than previously assumed. Do however remember how quickly the price war between Russia and Saudi Arabia ended in the spring of 2020.

Higher production by OPEC+ will be partially countered by lower production from Venezuela and Iran. The new sanctions towards Iran and Venezuela can to a large degree counter the production increase from OPEC+. But to what extent is still unclear.

Buy some oil calls. Bullish risks are never far away. Rising risks for US/Israeli attack on Iran? The US has increased its indirect attacks on Iran by fresh attacks on Syria and Yemen lately. The US has also escalated sanctions towards the country in an effort to force Iran into a new nuclear deal. The UK newspaper TheSun yesterday ran the following story: ON THE BRINK US & Iran war is ‘INEVITABLE’, France warns as Trump masses huge strike force with THIRD of America’s stealth bombers”. This is indeed a clear risk which would lead to significant losses of supply of oil in the Middle East and probably not just from Iran. So, buying some oil calls amid the current selloff is probably a prudent thing to do for oil consumers.

Brent crude is rejoining the US equity selloff by its recent collapse though for partially different reasons. New painful tariffs from Trump in combination with more oil from OPEC+ is not a great combination.

Brent crude is rejoining the US equity selloff by its recent collapse though for partially different reasons.
Source: SEB selection and highlights, Bloomberg graph and data
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Analys

Tariffs deepen economic concerns – significantly weighing on crude oil prices

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Brent crude prices initially maintained the gains from late March and traded sideways during the first two trading days in April. Yesterday evening, the price even reached its highest point since mid-February, touching USD 75.5 per barrel.

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

However, after the U.S. president addressed the public and unveiled his new package of individual tariffs, the market reacted accordingly. Overnight, Brent crude dropped by close to USD 4 per barrel, now trading at USD 71.6 per barrel.

Key takeaways from the speech include a baseline tariff rate of 10% for all countries. Additionally, individual reciprocal tariffs will be imposed on countries with which the U.S. has the largest trade deficits. Many Asian economies end up at the higher end of the scale, with China facing a significant 54% tariff. In contrast, many North and South American countries are at the lower end, with a 10% tariff rate. The EU stands at 20%, which, while not unexpected given earlier signals, is still disappointing, especially after Trump’s previous suggestion that there might be some easing.

Once again, Trump has followed through on his promise, making it clear that he is serious about rebalancing the U.S. trade position with the world. While some negotiation may still occur, the primary objective is to achieve a more balanced trade environment. A weaker U.S. dollar is likely to be an integral part of this solution.

Yet, as the flow of physical goods to the U.S. declines, the natural question arises: where will these goods go? The EU may be forced to raise tariffs on China, mirroring U.S. actions to protect its industries from an influx of discounted Chinese goods.

Initially, we will observe the effects in soft economic data, such as sentiment indices reflecting investor, industry, and consumer confidence, followed by drops in equity markets and, very likely, declining oil prices. This will eventually be followed by more tangible data showing reductions in employment, spending, investments, and overall economic activity.

Ref oil prices moving forward, we have recently adjusted our Brent crude price forecast. The widespread imposition of strict tariffs is expected to foster fears of an economic slowdown, potentially reducing oil demand. Macroeconomic uncertainty, particularly regarding tariffs, warrants caution regarding the pace of demand growth. Our updated forecast of USD 70 per barrel for 2025 and 2026, and USD 75 per barrel for 2027, reflects a more conservative outlook, influenced by stronger-than-expected U.S. supply, a more politically influenced OPEC+, and an increased focus on fragile demand.

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US DOE data:

Last week, U.S. crude oil refinery inputs averaged 15.6 million barrels per day, a decrease of 192 thousand barrels per day from the previous week. Refineries operated at 86.0% of their total operable capacity during this period. Gasoline production increased slightly, averaging 9.3 million barrels per day, while distillate (diesel) production also rose, averaging 4.7 million barrels per day.

U.S. crude oil imports averaged 6.5 million barrels per day, up by 271 thousand barrels per day from the prior week. Over the past four weeks, imports averaged 5.9 million barrels per day, reflecting a 6.3% year-on-year decline compared to the same period last year.

The focus remains on U.S. crude and product inventories, which continue to impact short-term price dynamics in both WTI and Brent crude. Total commercial petroleum inventories (excl. SPR) increased by 5.4 million barrels, a modest build, yet insufficient to trigger significant price movements.

Commercial crude oil inventories (excl. SPR) rose by 6.2 million barrels, in line with the 6-million-barrel build forecasted by the API. With this latest increase, U.S. crude oil inventories now stand at 439.8 million barrels, which is 4% below the five-year average for this time of year.

Gasoline inventories decreased by 1.6 million barrels, exactly matching the API’s reported decline of 1.6 million barrels. Diesel inventories rose by 0.3 million barrels, which is close to the API’s forecast of an 11-thousand-barrel decrease. Diesel inventories are currently 6% below the five-year average.

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Over the past four weeks, total products supplied, a proxy for U.S. demand, averaged 20.1 million barrels per day, a 1.2% decrease compared to the same period last year. Gasoline supplied averaged 8.8 million barrels per day, down 1.9% year-on-year. Diesel supplied averaged 3.8 million barrels per day, marking a 3.7% increase from the same period last year. Jet fuel demand also showed strength, rising 4.2% over the same four-week period.

USD DOE invetories
US crude inventories
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Analys

Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today

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Brent crude rallied to a high of USD 75.29/b yesterday, but wasn’t able to hold on to it and closed the day at USD 74.49/b. Brent crude has now crossed above both the 50- and 100-day moving average with the 200dma currently at USD 76.1/b. This morning it is trading a touch lower at USD 74.3/b

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

Brent riding a rollercoaster between bullish sanctions and bearish tariffs. Biden sanctions drove Brent to USD 82.63/b in mid-January. Trump tariffs then pulled it down to USD 68.33/b in early March with escalating concerns for oil demand growth and a sharp selloff in equities. New sanctions from Trump on Iran, Venezuela and threats of such also towards Russia then drove Brent crude back up to its recent high of USD 75.29/b. Brent is currently driving a rollercoaster between new demand damaging tariffs from Trump and new supply tightening sanctions towards oil producers (Iran, Venezuela, Russia) from Trump as well.

’Liberation day’ is today putting demand concerns in focus. Today we have ’Liberation day’ in the US with new, fresh tariffs to be released by Trump. We know it will be negative for trade, economic growth and thus oil demand growth. But we don’t know how bad it will be as the effects comes a little bit down the road. Especially bad if it turns into a global trade war escalating circus.

Focus today will naturally be on the negative side of demand. It will be hard for Brent to rally before we have the answer to what the extent these tariffs will be. Republicans lost the Supreme Court race in Wisconsin yesterday. So maybe the new Tariffs will be to the lighter side if Trump feels that he needs to tread a little bit more carefully.

OPEC+ controlling the oil market amid noise from tariffs and sanctions. In the background though sits OPEC+ with a huge surplus production capacity which it now will slice and dice out with gradual increases going forward. That is somehow drowning in the noise from sanctions and tariffs. But all in all, it is still OPEC+ who is setting the oil price these days.

US oil inventory data likely to show normal seasonal rise. Later today we’ll have US oil inventory data for last week. US API indicated last night that US crude and product stocks rose 4.4 mb last week. Close to the normal seasonal rise in week 13.

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