Analys
Crude oil comment: Mixed Feelings
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Over the past week, Brent crude oil prices have averaged just above USD 80 per barrel. Currently, Brent crude is trading at USD 81.5 per barrel, up from a low of USD 78.4 per barrel on Tuesday evening, following increased geopolitical risks involving Iran. Additionally, Wednesday marked a fifth consecutive weekly drawdown in US crude inventories and a dovish stance from Fed Chair Powell ahead of today’s noon CEST OPEC monitoring committee meeting.
![Ole R. Hvalbye, Analyst Commodities, SEB](https://ravarumarknaden.se/wp-content/uploads/ole-r-hvalbye-seb.jpg)
Geopolitical factors, along with market fundamentals, are playing an increasingly significant role in influencing oil prices. Tensions escalated with Israel’s assassination of a Hamas political leader in Tehran early Wednesday. This incident prompted harsh rhetoric from both sides: Iran’s leader, Ayatollah Khamenei, called for a direct attack on Israel, while Israeli Prime Minister Netanyahu warned of challenging days ahead.
The market remains in a wait-and-see mode. Geopolitical experts do not anticipate a major escalation between the two countries but expect ongoing tit-for-tat strikes on near-border military facilities. While we do not foresee a major oil price rally with Iran more involved, the situation is tense, and regional uncertainty has increased.
The American Petroleum Institute (API) had anticipated a significant drawdown of 4.5 million barrels in crude oil inventories, but actual DOE figures showed a slightly smaller decrease of 3.4 million barrels, still indicating a considerable reduction (page 11 attached). For gasoline inventories, the DOE reported a larger-than-expected decrease of 3.7 million barrels, compared to the API’s estimate of a 1.9 million barrel decline, suggesting potentially stronger demand than anticipated.
In contrast, distillate (diesel) inventories, expected by the API to decrease by 0.3 million barrels, unexpectedly increased by 1.5 million barrels according to the DOE. Additionally, propane/propylene inventories saw an increase of 2.9 million barrels, significantly (16%) above historical norms.
Overall, with crude oil and gasoline inventories approximately 3-4% below and diesel inventories around 7% below the five-year averages, market conditions appear tighter than usual. This has contributed to a USD 1.1 per barrel increase in Brent crude since yesterday evening.
On a bearish note, ongoing concerns about the strength of Chinese oil demand are capping price gains. China’s manufacturing Caixin PMI indicated a deterioration in the sector, falling to 49.8 in July from 51.8, below market expectations of 51.5. This is a bearish signal for global crude markets.
Lastly, it is unlikely that the OPEC JMMC panel will implement any major policy changes at today’s meeting. However, there is some uncertainty about whether OPEC+ will maintain its current plans to reintroduce some supply from October amid the increased risk of a market surplus.
Today’s meeting will signal upcoming strategies. Another recommendation for a production hike from Q4-24 would be significantly bearish for the oil market. Looking ahead, OPEC+ might: cut more in 2025 to maintain oil prices around USD 85 per barrel; aim for a ”soft oil price landing” at around USD 65-70 per barrel; or increase production by 2.2 million barrels per day, potentially crashing the price to USD 45 per barrel.
As it stands, the first option seems most probable. Global oil demand and US production will be crucial in determining OPEC+’s strategy. The concerning Chinese PMI figures are not favorable for global demand and pose challenges for OPEC+. However, EIA data from Monday showed US crude production stabilizing at 13.2 million barrels per day, not exceeding last year’s Q4 figures (page 10 attached). This stability may bolster OPEC+’s confidence to maintain market control and adhere to its plan.
Analys
Crude oil comment: cautious watching
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Brent crude prices have declined by slightly above USD 4 per barrel since Monday’s close, dropping from a high of USD 81.2 on Monday evening to the current price of USD 77. This decrease reflects the market’s nervous anticipation of Israel’s response to Iran’s missile attack last Tuesday is slowly fading. The attack, which, despite involving approximately 200 ballistic missiles, reportedly caused limited damage – a fact still under verification.
![Ole R. Hvalbye, Analyst Commodities, SEB](https://ravarumarknaden.se/wp-content/uploads/ole-r-hvalbye-seb.jpg)
While retaliation from Israel is anticipated, the heightening tensions appear to be slowly subsiding, and the market is gradually less tilted to factor in potential escalations in the Middle East.
Historically, despite prolonged conflicts in regions like Russia-Ukraine and the Middle East, the global oil market has not experienced a loss of supply. This continued availability has contributed to a reduction in the geopolitical risk premium, prompting a more immediate focus on the market fundamentals and leading to the recent price retreat.
The drop in oil prices was further influenced by the disappointing lack of details regarding Chinese economic stimulus and was accompanied by a notable build in commercial crude inventories, reported at 5.81 million barrels. However, the latter was less of a price driver as the API figures released on Tuesday evening indicated a substantial increase in US crude stocks by 11 million barrels – the largest build in over eight months if confirmed by the DOE.
Additionally, the OPEC+ deal remains unchanged, with plans to increase production by 180,000 barrels per month starting December 2024, resulting in an increase of approximately 2.2 million barrels per day over the next 12 months. This strategy continues to exert downward pressure on global oil prices.
However, it’s crucial to recognize that the risk of price spikes has not been completely mitigated. The ongoing geopolitical risks, especially concerning Iran, continue to be a focal point. With Brent crude currently at USD 77 per barrel – returning to the robust price levels seen in late August – a significant and forceful Israeli response could jeopardize Iranian oil exports, potentially driving prices higher.
Despite US discouragement of Israeli strikes on Iranian oil infrastructure, recent discussions between Israeli Prime Minister Benjamin Netanyahu and US President Joe Biden do not guarantee that such actions will be avoided.
Given this backdrop, the market remains in a ”wait and see” mode, with considerable upside risks if the conflict escalates further and impacts energy infrastructure in the Persian Gulf. The nature of Israel’s impending retaliatory actions will likely dictate the conflict’s trajectory. We advise maintaining caution, yet suggest buying on dips(!), as the potential for upside risks outweighs the downside in the current volatile environment.
For more information of a potential worst-case scenario, read Tuesday’s crude oil comment: Brace for impact!
Analys
Crude oil comment: Brace for impact!
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Brent crude prices have soared by nearly USD 10 per barrel in just one week, escalating from a low of USD 69.9 on September 1st to the current USD 79.4 per barrel. Yesterday, Brent traded as high as USD 81.2 before retreating slightly in today’s session, reaching levels not seen since late August.
![Ole R. Hvalbye, Analyst Commodities, SEB](https://ravarumarknaden.se/wp-content/uploads/ole-r-hvalbye-seb.jpg)
Despite Saudi Arabia’s focus on volume over price and its intention to abandon the unofficial oil price target of USD 100 per barrel, the Kingdom is likely to increase production gradually by 180,000 barrels per month, amounting to a +2.2 million barrels per day increase over the next 12 months starting from December 2024. This bearish strategy led to plummeting prices in late September.
Price support has also come from China’s recent implementation of stimulus measures aimed at achieving its 5% growth target, primarily focusing on the stressed property market. In the short term, this stimulus is unlikely to translate into significant demand growth for Chinese oil. For context, the latest data on Chinese refinery utilization shows a slight improvement, though still well below the levels of 2023. Additionally, Chinese oil demand in August was down by approximately 6% year-over-year.
Setting aside Saudi Arabia’s defense of its market share and China’s economic measures, the spotlight is now on geopolitics – specifically, the escalating tensions in the Middle East, which are putting Iranian oil exports at risk and boosting Brent prices.
The market is holding its breath, awaiting Israel’s response to Iran’s missile attack last Tuesday. Approximately 200 ballistic missiles were launched, reportedly causing limited damage. However, retaliation is expected, and the market is pricing in the potential escalation of conflicts in the Middle East.
Leading up to the attack, speculative positions in Brent crude were at record lows, setting the stage for a sharp rebound following the missile strike on October 1st. Despite managed money purchasing 120 million barrels in the past three weeks from the September 10th low, this still marks the fourth-lowest position since 2011, according to ICE. This record bearish positioning was driven by deteriorating outlooks for major economies since the summer and the resulting subdued oil consumption growth.
Yet, these significant bearish positions also primed prices for a sudden surge following a shift in supply and demand. For instance, potential Israeli retaliation targeting Iran’s oil fields, refineries, and export terminals has driven prices dramatically higher. With this backdrop, there are substantial upside risks to both speculative positions and global oil prices if the conflicts escalate further and affect energy infrastructure in the Arabian Gulf.
Israeli retaliation could range from a limited strike, which might not provoke severe Iranian retaliation, allowing Iran to continue its crude exports to China at approximately 2 million barrels per day, to more severe attacks potentially provoking Iran to target oil infrastructures in the UAE and Saudi Arabia and to attempt to block the Strait of Hormuz which transports 18 million barrels per day of crude to the global market (20% of global oil consumption). This blockade could severely constrain supply, spiking oil prices given the already low US crude inventories.
Although the worst-case scenario of a severe escalation is unlikely, the region has been managing serious and escalating conflicts for some time. Just yesterday marked one year since the October 7th attack on Israel, and thus far, the global market has not lost any oil. The most severe market impact to date has been the rerouting of oil around Africa due to Houthi attacks on ships in the Red Sea.
Additionally, should Iran’s entire oil export capacity be disabled, the global market would lose roughly 2 million barrels per day of Iranian crude and condensate. Yet, with OPEC+ holding a spare capacity of nearly 6 million barrels per day – with Saudi Arabia alone able to boost production by nearly 3 million barrels per day – the global oil supply is robust. However, a significant reduction in spare capacity would naturally elevate oil prices, diminishing the global balancing buffer.
Despite the low probability of a worst-case scenario, the global markets remain on edge following the unexpected events like Russia’s invasion of Ukraine. Markets are exceedingly nervous about future developments. The upcoming retaliatory attack by Israel will likely set the tone for the conflict moving forward. Prepare for potentially higher prices and increased volatility!
Analys
Market on Edge Awaiting Israel’s Next Move Against Iran
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Brent crude jumped as much as 5.5% yesterday before it closed at USD 77.62/b (+5%). That is up USD 9/b since the recent low-point of USD 68.68/b on 10 Sep which was the lowest Brent price since December 2021. The jump yesterday was fueled by Biden saying that attacks on Iranian oil infrastructure was under discussion as a response to the 200 ballistic missiles Iran fired at Israel on Tuesday. Brent price this morning is mostly unchanged.
![Bjarne Schieldrop, Chief analyst commodities, SEB](https://ravarumarknaden.se/wp-content/uploads/bjarne-schieldrop-seb.jpg)
While we have seen a strong rebound in the oil price lately, the current price of USD 77.6/b is still below its close in August of USD 78.8/b and also well below the USD 80-85/b where Brent has comfortably been trading for more than 18 months. One should think that the latest escalation in the Middle East would have forced some short-covering of more than 250 mb of short oil positions in Brent and WTI. But so far at least not enough to spur Brent crude back to USD 80/b.
It is now almost one year since the Oct 7 attack on Israel. And so far the market has not lost a single drop of oil. The most severe impact on the oil market so far is the rerouting of oil around Africa due to Houthis firing rockets at ships in the Red Sea.
While Mid-East tensions are running high, the oil market is still deeply concerned about weak demand and a surplus oil in 2025. OPEC+ this week again confirmed that they will lift production by 180 kb/d in December. The plan is for a monthly increase by this amount for 12 months to November 2025. But even if they do lift production in December, it doesn’t necessarily mean that they will lift also in January. That remains to be decided. Saudi Arabia is clearly frustrated by the fact that Iraq, Kazakhstan and Russia haven’t complied fully with agreed quotas. And if your teammates do not play by the agreed rules, then how can you keep on playing. But they still have October and November to show that they are good palls.
Libya is also set to revive production in the coming days. Its production tumbled to less than 450 kb/d in August and averaged 600 kb/d in September. It will likely return back to around 1.2 mb/d rather quickly as internal political disagreements have been ironed out for now.
Ahead of us however is still the retaliatory attack by Iran on Israel. All options are probably weighted and Israel naturally have a long list of possible targets already made out. Which to choose? Oil installations? Other economic targets? Military installations? Nuclear facilities?,.. It is a fine balance. A forceful retaliation, but not so strong that it leads to an uncontrollable tit-for-tat escalation. Israel may utilize the situation to hit Iranian nuclear installations now that Hezbollah is partially sidelined.
Our expectations are that the Israeli retaliation will come rather quickly and probably before Oct 7. It probably won’t hit oil installations. Most likely it will hit military installations. Possibly Iran’s nuclear facilities. But if the later are hit then we are in for a real tit-for-tat escalation.
If all of Iran’s oil export capacity was to be taken out, then the world would lose around 1.7 mb/d of Iranian crude oil exports plus some 0.5 mb/d of condensate exports. OPEC+ now holds a spare capacity of 5-6 mb/d with Saudi Arabia alone able to lift production by 2-3 mb/d. UAE, Iraq and Kuwait can probably lift production by 1.5 to 2.0 mb/d and Russia by 1.0 mb/d. So world would not go dry for oil even if Iran’s oil exports are fully taken out. But spare capacity would be much lower and that would lift the oil price higher. But if Iran’s exports were taken out then we are talking full turmoil around the Strait of Hormuz. And the oil price would jump considerably and above USD 100/b as the risk of further escalation which might impact exports out of the Strait of Hormuz which carries close to 20% of all oil consumed in the world.
The rule of thumb in commodity markets is that if supply is severely restricted then the price will often spike to 5-10x its normal level. Most recent examples of this is global LNG prices which spiked to USD 385/boe when Russia chocked off gas supplies to Europe. So if worst came to worst and the Strait of Hormuz was closed for a month or more then Brent crude would likely spike to USD 350/b, the world economy would crater and the oil price would fall back to below USD 200/b again over some time. But the risk for this currently seems very remote and both the US and China would likely move in to try to reopen the Strait if it was closed. But when rockets are flying left, right and center, it is not so easy. But seeing where the oil price sits right now the market doesn’t seem to hold much probability for such a development at all.
But it is not so long ago that world markets were taken completely off-guard by the developments in Russia/Ukraine. So while probabilities for worst case scenarios are very low, everyone are still biting nails for what will happen the coming days as we await the retaliatory attack by Israel on Iran.
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