Analys
Crude oil comment: Market battling between spike-risk versus 2025 surplus

Brent crude falls back as day by day goes by with no Israeli retaliation. Market focus returns to concerns for surplus in 2025. Brent crude fell 7.6% last week following a rally to USD 81.16/b the week before when it felt like a retaliatory attack by Israel on Iran was imminent with all targets possible. Israel has promised that ”Iran will pay” for its attack on Israel on 1 October when it fired 200 ballistic missiles at Israel.
But days passed by and no retaliation happened. Fears that Israel will go after Iranian oil installations and nuclear facilities also seems to have faded. Biden has urged Israel to not hit such targets. Israel has said that it will make its own choices so it is still an open risk that Israel could indeed hit Iranian oil installations.
Last week we had yet another report from the IEA where it predicts that OPEC must cut yet another 0.9 mb/d in 2025 to keep the market in balance. That keeps the fear going for lower oil prices in 2025. All in all Brent fell back 7.6% last week to a close on Friday at USD 73.06/b.
This morning it is back up to USD 73.3/b (+0.4%) which is not much and less than the 1% gain in industrial metals. So most likely it has very little to do with increased fears for an Israeli retaliation.
To us it seems like close to certain that Israel will indeed retaliate at some point. Likely hard and forceful and not a muted retaliation like in April. Leaked US intelligence documents over the weekend show rather extensive Israeli preparations for a retaliation on Iran involving three Israeli airfields including F-15s and refueling aircrafts. So market today most likely also thinks that the Israeli retaliation will come and a hard one as well. If so it will likely lead to yet another re-retaliation by Iran with a risk for spiraling effects which in the end could involve Iranian oil installations etc., etc.
But as long as nothing happens on a day to day basis, the oil price falls back with market focus circling back to concerns over a surplus of oil in 2025 where OPEC needs to cut another 0.9 mb/d to keep it in balance according to the latest report from the IEA. Though only 0.7 mb/d if FSU production is unchanged. OPEC+ planning to add barrels to the market from December onward makes that look even worse of course.
From backwardation-market in 2022/23/24 to contango-market in 2025? Over the past three years the oil market has been running tight. Tight on products and tight on crude. The long-dated Brent crude five year contract, or the 60 month contract, has been very stable at close to USD 70/b. The front-end Brent crude contract however has traded at a premium of USD 28/b, USD 15/b and USD 12/b for 2022, 2023 and 2024 respectively versus the 60 month contract.
If the oil market next year flips to a surplus with rising inventories then the market should naturally flip to a contango-market. The implication of that is that the front-end Brent contract will trade at a discount to the longer dated Brent price. The Brent 1 month price would then typically be USD 70/b (long-dated 60mth price) minus some discount of maybe USD 5-10/b. Implying a Brent 1 month price of USD 60-65/b. This is what the oil bears are eyeing for 2025 and why we have seen such overly bearish positioning lately.
Counter to such a development would be possible damage to Iranian oil supplies due to the forthcoming Israeli retaliation. Or in the following re-re-re-re-retaliations after that. Or that Donald Trump is elected president and more strictly enforces sanctions on Iranian oil exports thus making room for more exports from the rest of OPEC+.
Brent crude 1mth contract minus the 60mth contract. Market shifting between contango-market (negative) and backwardation-market (positive).

Brent crude 1mth contract minus the 60mth contract. Market shifting between contango-market (negative) and backwardation-market (positive).

Analys
All eyes on OPEC V8 and their July quota decision on Saturday

Tariffs or no tariffs played ping pong with Brent crude yesterday. Brent crude traded to a joyous high of USD 66.13/b yesterday as a US court rejected Trump’s tariffs. Though that ruling was later overturned again with Brent closing down 1.2% on the day to USD 64.15/b.

US commercial oil inventories fell 0.7 mb last week versus a seasonal normal rise of 3-6 mb. US commercial crude and product stocks fell 0.7 mb last week which is fairly bullish since the seasonal normal is for a rise of 4.3 mb. US crude stocks fell 2.8 mb, Distillates fell 0.7 mb and Gasoline stocks fell 2.4 mb.
All eyes are now on OPEC V8 (Saudi Arabia, Iraq, Kuwait, UAE, Algeria, Russia, Oman, Kazakhstan) which will make a decision tomorrow on what to do with production for July. Overall they are in a process of placing 2.2 mb/d of cuts back into the market over a period stretching out to December 2026. Following an expected hike of 137 kb/d in April they surprised the market by lifting production targets by 411 kb/d for May and then an additional 411 kb/d again for June. It is widely expected that the group will decide to lift production targets by another 411 kb/d also for July. That is probably mostly priced in the market. As such it will probably not have all that much of a bearish bearish price impact on Monday if they do.
It is still a bit unclear what is going on and why they are lifting production so rapidly rather than at a very gradual pace towards the end of 2026. One argument is that the oil is needed in the market as Middle East demand rises sharply in summertime. Another is that the group is partially listening to Donald Trump which has called for more oil and a lower price. The last is that Saudi Arabia is angry with Kazakhstan which has produced 300 kb/d more than its quota with no indications that they will adhere to their quota.
So far we have heard no explicit signal from the group that they have abandoned the plan of measured increases with monthly assessments so that the 2.2 mb/d is fully back in the market by the end of 2026. If the V8 group continues to lift quotas by 411 kb/d every month they will have revived the production by the full 2.2 mb/d already in September this year. There are clearly some expectations in the market that this is indeed what they actually will do. But this is far from given. Thus any verbal wrapping around the decision for July quotas on Saturday will be very important and can have a significant impact on the oil price. So far they have been tightlipped beyond what they will do beyond the month in question and have said nothing about abandoning the ”gradually towards the end of 2026” plan. It is thus a good chance that they will ease back on the hikes come August, maybe do no changes for a couple of months or even cut the quotas back a little if needed.
Significant OPEC+ spare capacity will be placed back into the market over the coming 1-2 years. What we do know though is that OPEC+ as a whole as well as the V8 subgroup specifically have significant spare capacity at hand which will be placed back into the market over the coming year or two or three. Probably an increase of around 3.0 – 3.5 mb/d. There is only two ways to get it back into the market. The oil price must be sufficiently low so that 1) Demand growth is stronger and 2) US shale oil backs off. In combo allowing the spare capacity back into the market.
Low global inventories stands ready to soak up 200-300 mb of oil. What will cushion the downside for the oil price for a while over the coming year is that current, global oil inventories are low and stand ready to soak up surplus production to the tune of 200-300 mb.
Analys
Brent steady at $65 ahead of OPEC+ and Iran outcomes

Following the rebound on Wednesday last week – when Brent reached an intra-week high of USD 66.6 per barrel – crude oil prices have since trended lower. Since opening at USD 65.4 per barrel on Monday this week, prices have softened slightly and are currently trading around USD 64.7 per barrel.

This morning, oil prices are trading sideways to slightly positive, supported by signs of easing trade tensions between the U.S. and the EU. European equities climbed while long-term government bond yields declined after President Trump announced a pause in new tariffs yesterday, encouraging hopes of a transatlantic trade agreement.
The optimisms were further supported by reports indicating that the EU has agreed to fast-track trade negotiations with the U.S.
More significantly, crude prices appear to be consolidating around the USD 65 level as markets await the upcoming OPEC+ meeting. We expect the group to finalize its July output plans – driven by the eight key producers known as the “Voluntary Eight” – on May 31st, one day ahead of the original schedule.
We assign a high probability to another sizeable output increase of 411,000 barrels per day. However, this potential hike seems largely priced in already. While a minor price dip may occur on opening next week (Monday morning), we expect market reactions to remain relatively muted.
Meanwhile, the U.S. president expressed optimism following the latest round of nuclear talks with Iran in Rome, describing them as “very good.” Although such statements should be taken with caution, a positive outcome now appears more plausible. A successful agreement could eventually lead to the return of more Iranian barrels to the global market.
Analys
A shift to surplus will likely drive Brent towards the 60-line and the high 50ies

Brent sinks lower as OPEC+ looks likely to lift production in July by another 400 kb/d. Brent crude declined 0.7% yesterday to USD 64.44/b and traded in a range of USD 63.54 – 65.03/b. This morning Brent is down another 0.7% to USD 64/b along with expectations that OPEC+ will lift its production quota by another 411 kb/d in July.

Kazakhstan would be in breach even if the whole 2.2 mb/d of voluntary cuts are unwounded. The eight countries behind the 2.2 mb/d of voluntary cuts, the V8, have lifted their production quotas by close to 950 kb/d from April to June with unwinding starting in April. Over the coming week towards the end of May, the group will discuss what to do with quotas in July. Market expectations as well as indications from within the group is for another 411 kb/d hike also in July. Higher oil demand during summer both in the Middle East and globally is one reason for the hikes. Most of the additional production will not leave the Middle East but be consumed locally this summer. But Kazakhstan is also a major problem. The country produced 1.77 mb/d in April and 300 kb/d above its quota level. To maintain cohesion and credibility the group needs internal cooperation and harmony. Kazakhstan seems to have no plans to reduce production down to its quota. The alternative solution to reestablish internal harmony is to lift quotas up to where production is. The problem is that Kazakhstan only accounts for less than 5% of the overall production of V8. Thus even after unwinding all of the 2.2 mb/d, the quota of Kazakhstan would not rise much more than 100 kb/d. Far from the country’s overproduction of 300 kb/d in April.
A shift to surplus will likely drive Brent towards the 60-line and high 50ies. Losing front-end backwardation implies Brent crude down to the 60-line and high 50ies. Currently the Brent crude curve holds a front-end backwardation premium of USD 1.5/b versus the November price currently at USD 62.6/b. A result of an oil market which is still tight here and now. But if OPEC+ lifts production to a level where the market starts to run a surplus, then the front-end contract will flip from a USD 1.5/b premium vs. 4 months out to instead a comparable USD 1.5/b discount to 4 months out. That would bring the front-end contract down towards the 60-line and the high 50ies. This because a full out contango market usually also will drive the deferred contracts a bit lower as well. But this may not be all doom and gloom. A softer USD and a lower oil price is a powerful combo for global consumption. Global oil stocks are also low. This will help to cushion the downside.
Brent crude forward curve. Surplus and full contango would eradicate the front-end backwardation and drive Brent crude down towards the 60-line and high 50ies.

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