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Crude oil comment – Strong rise in US oil inventories, but oil companies’ spending cuts accelerates

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SEB - Prognoser på råvaror - CommodityIn terms of my oil view: Repeated lows during H1-16. Gradual recovery medium term. Price recovery likely to be gradual rather than stellar. I think the oil price is going to have a rough time during H1-16 with a strong rise in global oil inventories and that we are probably going to see new lows in prices ahead. Thus I don’t think that from here onwards it is happy days are here again with a strong rise in the oil price from here. I think it would be negative for the oil market balance if the oil price repeated what it did last year with a rapid rise from January low to above $60/b in May/June last year. This would not induce the neccessary adjustments needed to balance the market and would push the point in time when the market finally moves into balance further out in time. HOWEVER, I do believe that there is good risk/reward in buying Brent crude oil with delivery December 2016 at $35/b. It saw a low close of $33.9/b last week and currently trades at $37.5/b and thus not too far away. I think that the longer dated contracts should not trade much lower than what we have recently witnessed. I did expect the 2020 Brent crude oil price to traded down towards $50/b before it would stabilize after long, long decline from $100/b in mid-2014. The contract traded down to $45.9/b last week and now trades at $49/b. So I think the sell-off in the longer dated contracts probably should be fairly done by now. So what remains from here is probably some more contango, more discount for front end contracts versus longer dated contracts, due to strongly rising inventories. The main argument why the price recovery is likely to be gradual rather than stellar is: 1) No quick fix balancing of the market from OPEC as in the previous two oil price cycles. The oil price needs to do the job of balancing the market and that is a more length process than an OPEC quick fix. 2) Flexible shale oil supply which can ramp up rather quickly is likely to restrict the oil price from moving up too quickly during the period when the market needs to run a deficit in order to draw down current record oil inventories.

Crude oil comment – Strong rise in US oil inventories, but oil companies’ spending cuts accelerates
Brent crude gained 4.3% yesterday with a close of $31.8/b. Thus the rise in oil prices which started Thursday last week was not all dead after all after Monday’s 5.2% decline. Intraday high yesterday was $31.8/b and thus only $1.3/b below the 30 dma line. While we do not in general place too much emphasis on such measures they certainly have an important role in the volatile short term picture. This morning the 30 dma sits at $33.8/b and not very far avway from the Brent crude oil price this morning of $31.2/b. The 30 dma still has the potential to work as a magnet on the oil price in the short term picture. One of the bullish drivers yesterday was a statement by Iraqi’s oil minister saying that Russia and Saudi Arabia had become more flexible regarding possible production cuts. In our view there is no chance at all that we are going to see a production cut from OPEC this spring. Saudi Arabia’s strategy of not cutting and instead demanding that a balancing of the market shall happen outside of OPEC is still intact. At the moment we are seeing massive capex cuts outside of OPEC, thus the strategy is obviously working. It just takes some time. The latest signals from the US oil space is that Hess cuts its capital spending for 2016 by 40%, Continental by 66% and Noble by 50% for 2016 which will lead to reduced production by up to 10% y/y already in 2016 in the US shale oil space. Such a decline in US shale oil production is however probably already factore into most oil market balance projections for 2016. This morning the oil price falls back 1.9% to $31.2/b on the back of bearish indicative oil inventory data in the US last night. The API yesterday indicated that US oil inventories changed as follows last week:

Bloomberg concensus

The API thus saw in its partial data set reported by its members a much stronger rise than what was consensus in Bloomberg yesterday. Usually the API data are in the ball-park correct. So do expect a solid rise in US inventory data today at 16.30 CET. As we have stated before, if global inventories outside of the US are starting to struggle to store more oil, then a major part of the running global oil surplus needs to be stored in the US. Assuming a running surplus of 1.5 mbpd on average in H1-16 it would indicated that US oil inventories could rise by some 10 mb per week. Total US crude and product inventories have risen by 5.5 mb per week on average during the last 10 weeks, but has average 9.9 mb per week the last 4 weeks. During the first 10 weeks of the year US total oil inventories normally rise by some 1.1 mb per week and by 2.4 mb per week the first 5 weeks of the year.

US oil inventories. Marker in organge is if API indicative numbers last night is what comes out of US data today at 16.30 CET.

US commcercial crude, gasoline and distillate stocks

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Analys

Tightening fundamentals – bullish inventories from DOE

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The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

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

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.

US DOE, inventories, change in million barrels per week
US crude inventories excl. SPR in million barrels
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Analys

Bombs to ”ceasefire” in hours – Brent below $70

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A classic case of “buy the rumor, sell the news” played out in oil markets, as Brent crude has dropped sharply – down nearly USD 10 per barrel since yesterday evening – following Iran’s retaliatory strike on a U.S. air base in Qatar. The immediate reaction was: “That was it?” The strike followed a carefully calibrated, non-escalatory playbook, avoiding direct threats to energy infrastructure or disruption of shipping through the Strait of Hormuz – thus calming worst-case fears.

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

After Monday morning’s sharp spike to USD 81.4 per barrel, triggered by the U.S. bombing of Iranian nuclear facilities, oil prices drifted sideways in anticipation of a potential Iranian response. That response came with advance warning and caused limited physical damage. Early this morning, both the U.S. President and Iranian state media announced a ceasefire, effectively placing a lid on the immediate conflict risk – at least for now.

As a result, Brent crude has now fallen by a total of USD 12 from Monday’s peak, currently trading around USD 69 per barrel.

Looking beyond geopolitics, the market will now shift its focus to the upcoming OPEC+ meeting in early July. Saudi Arabia’s decision to increase output earlier this year – despite falling prices – has drawn renewed attention considering recent developments. Some suggest this was a response to U.S. pressure to offset potential Iranian supply losses.

However, consensus is that the move was driven more by internal OPEC+ dynamics. After years of curbing production to support prices, Riyadh had grown frustrated with quota-busting by several members (notably Kazakhstan). With Saudi Arabia cutting up to 2 million barrels per day – roughly 2% of global supply – returns were diminishing, and the risk of losing market share was rising. The production increase is widely seen as an effort to reassert leadership and restore discipline within the group.

That said, the FT recently stated that, the Saudis remain wary of past missteps. In 2018, Riyadh ramped up output at Trump’s request ahead of Iran sanctions, only to see prices collapse when the U.S. granted broad waivers – triggering oversupply. Officials have reportedly made it clear they don’t intend to repeat that mistake.

The recent visit by President Trump to Saudi Arabia, which included agreements on AI, defense, and nuclear cooperation, suggests a broader strategic alignment. This has fueled speculation about a quiet “pump-for-politics” deal behind recent production moves.

Looking ahead, oil prices have now retraced the entire rally sparked by the June 13 Israel–Iran escalation. This retreat provides more political and policy space for both the U.S. and Saudi Arabia. Specifically, it makes it easier for Riyadh to scale back its three recent production hikes of 411,000 barrels each, potentially returning to more moderate increases of 137,000 barrels for August and September.

In short: with no major loss of Iranian supply to the market, OPEC+ – led by Saudi Arabia – no longer needs to compensate for a disruption that hasn’t materialized, especially not to please the U.S. at the cost of its own market strategy. As the Saudis themselves have signaled, they are unlikely to repeat previous mistakes.

Conclusion: With Brent now in the high USD 60s, buying oil looks fundamentally justified. The geopolitical premium has deflated, but tensions between Israel and Iran remain unresolved – and the risk of missteps and renewed escalation still lingers. In fact, even this morning, reports have emerged of renewed missile fire despite the declared “truce.” The path forward may be calmer – but it is far from stable.

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Analys

A muted price reaction. Market looks relaxed, but it is still on edge waiting for what Iran will do

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Brent crossed the 80-line this morning but quickly fell back assigning limited probability for Iran choosing to close the Strait of Hormuz. Brent traded in a range of USD 70.56 – 79.04/b last week as the market fluctuated between ”Iran wants a deal” and ”US is about to attack Iran”. At the end of the week though, Donald Trump managed to convince markets (and probably also Iran) that he would make a decision within two weeks. I.e. no imminent attack. Previously when when he has talked about ”making a decision within two weeks” he has often ended up doing nothing in the end. The oil market relaxed as a result and the week ended at USD 77.01/b which is just USD 6/b above the year to date average of USD 71/b.

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

Brent jumped to USD 81.4/b this morning, the highest since mid-January, but then quickly fell back to a current price of USD 78.2/b which is only up 1.5% versus the close on Friday. As such the market is pricing a fairly low probability that Iran will actually close the Strait of Hormuz. Probably because it will hurt Iranian oil exports as well as the global oil market.

It was however all smoke and mirrors. Deception. The US attacked Iran on Saturday. The attack involved 125 warplanes, submarines and surface warships and 14 bunker buster bombs were dropped on Iranian nuclear sites including Fordow, Natanz and Isfahan. In response the Iranian Parliament voted in support of closing the Strait of Hormuz where some 17 mb of crude and products is transported to the global market every day plus significant volumes of LNG. This is however merely an advise to the Supreme leader Ayatollah Ali Khamenei and the Supreme National Security Council which sits with the final and actual decision.

No supply of oil is lost yet. It is about the risk of Iran closing the Strait of Hormuz or not. So far not a single drop of oil supply has been lost to the global market. The price at the moment is all about the assessed risk of loss of supply. Will Iran choose to choke of the Strait of Hormuz or not? That is the big question. It would be painful for US consumers, for Donald Trump’s voter base, for the global economy but also for Iran and its population which relies on oil exports and income from selling oil out of that Strait as well. As such it is not a no-brainer choice for Iran to close the Strait for oil exports. And looking at the il price this morning it is clear that the oil market doesn’t assign a very high probability of it happening. It is however probably well within the capability of Iran to close the Strait off with rockets, mines, air-drones and possibly sea-drones. Just look at how Ukraine has been able to control and damage the Russian Black Sea fleet.

What to do about the highly enriched uranium which has gone missing? While the US and Israel can celebrate their destruction of Iranian nuclear facilities they are also scratching their heads over what to do with the lost Iranian nuclear material. Iran had 408 kg of highly enriched uranium (IAEA). Almost weapons grade. Enough for some 10 nuclear warheads. It seems to have been transported out of Fordow before the attack this weekend. 

The market is still on edge. USD 80-something/b seems sensible while we wait. The oil market reaction to this weekend’s events is very muted so far. The market is still on edge awaiting what Iran will do. Because Iran will do something. But what and when? An oil price of 80-something seems like a sensible level until something do happen.

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