Analys
Crude oil comment – Strong rise in US oil inventories, but oil companies’ spending cuts accelerates
In 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:
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.
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Market is starting to take US/Iran headlines with a pinch of salt. Brent crude rose $2.8/b yesterday to an official close of $112.1/b. But after that it traded as low as $108.05/b before ending late night at around $109.7/b. Through the day it traded in a range of $106.87 – 112.72/b amid a flurry of news or rumors from Iran and the US. ”US temporary sanctions during negotiations” (falls alarm). ”We will bomb Iran” (not anyhow),… etc. While the market is still fluctuating to this kind of news flow, it is starting to take such headlines with a pinch of salt.
We’ll see. Maybe, maybe not. The Brent M1 contract is trading at $110.2/b this morning which very close to the average ticks through yesterday of $110.4/b.
Trump with bearish, verbal intervention whenever Brent trades above $110/b it seems. What seems to be a pattern is that Trump states something like ”very good negotiations going on with Iran”, ”New leaders in Iran are great,..”, ”Great progress in negotiations,…”, ”Deal in sight,..” etc whenever the Brent M1 contract trades above $110/b. An effort to cool the market. These hot air verbal interventions from Trump used to have a heavy bearish impact on prices, but they now seems to have less and less effect unless they are backed by reality.
As far as we can see there has been no real progress in the negotiations between the US and Iran with both sides still standing by their previous demands.
Iran is getting stronger while the cease fire lasts making a return to war for Trump yet harder. Iran is naturally in constant preparation for a return to war given Trump’s steady threats of bombing Iran again. Iran is naturally doing what ever is possible to prepare for a return to war. And every day the cease fire lasts it is better prepared. This naturally makes it more and more difficult and dangerous for the US to return to warring activity versus Iran as the consequences for energy infrastructure in the Persian Gulf will be more and more severe the longer the cease fire lasts. Israel seems to see it this way as well. That the war is not won and that current frozen state of a cease fire gives Iran opportunity to rebuild military and politically.
Global inventories are drawing down day by day. How much? In the meantime the Strait of Hormuz stays closed. There is varying measures and estimates of how much global inventories are drawing down. Our rough estimate, back of the envelope, is that global inventories are drawing down by at least some 10 mb/d or about 300 mb/d in a balance between loss of supply versus demand destruction. Other estimates we see are a monthly draw of 250-270 mb/d. The IEA only ’measured’ a draw in global observable stocks of 117 mb in April with oil on water rising 53 mb while on shore stocks fell 170 mb. But global stocks are hard to measure with large invisible, unmeasured stocks. As such a back of the envelope approach may be better.
Oil products is what the world is consuming. Oil product prices likely to rise while product stocks fall. Strategic Petroleum Reserves (SPR) are predominantly crude oil. Discharging oil from OECD SPR stocks, a sharp reduction in Chinese crude imports and a reduction in global refinery throughput of 6-7 mb/d has helped to keep crude oil markets satisfactorily supplied. But global inventories are drawing down none the less. And oil products is really what the world is consuming. So if global refinery throughput stays subdued, then demand will eventually have to match the supply of oil products. The likely path forward this summer is a steady draw down in jet fuel, diesel and gasoline. Higher prices for these. Then, if possible, higher refinery throughput and higher usage of crude in response to very profitable refinery margins. And lastly sharper draw in crude stocks and higher prices for these. But some 6 mb/d of oil products used to be exported through the Strait of Hormuz. And it may not be so easy to ramp up refinery activity across the world to compensate. Especially as Ukraine continues to damage Russian refineries as well as Russian crude production and export facilities.
Watch oil product stocks and prices as well as Brent calendar 2027. What to watch for this summer is thus oil product inventories falling and oil product premiums to crude rising. Another measure to watch is the Brent crude 2027 contract as it rises steadily day by day as the Strait of Hormuz stays closed and global oil inventories decline. The latter is close to the highest level since the start of the war and keeps rising.
The Brent M1 contract and the Brent 2027 prices and current price of jet fuel in Europe (ARA). All in USD/b
Our back of the envelope calculation of the global shortage created by the closure of the Strait of Hormuz. Note that 3.5 mb/d of discharge from SPR is also a draw. Note also that ’Forced demand loss’ of 2.5 mb/d is probably temporary and will fall back towards zero as logistics are sorted out leaving ’Price demand loss’ to do the job of balancing the market. Thus a shortfall of at least 9 mb/d created by the closure. More if SPR discharge is included and more if Forced demand loss recedes.
Brent is climbing higher. Front-month is at USD 106.3/bl this morning, close to a weekly high and a USD 9/bl jump from Mondays open. This is the move we flagged as a risk earlier in the week: the market shifting from ”a deal is around the corner” to ”this is going to take longer than we thought”.
Analyst Commodities, SEB
During April, rest-of-year Brent remained remarkably stable around USD 90/bl. A stability which rested on one single assumption: the SoH reopens around 1 May. That assumption is now slowly falling apart.
As we highlighted yesterday: every week of delay beyond 1 May adds (theoretically) ish USD 5/bl to the rest-of-year average, as global inventories draw 100 million barrels per week. i.e., a mid-May reopening implies rest-of-year Brent closer to USD 100/bl, and anything pushing into June or July takes us meaningfully higher.
What’s changed in the last 48 hours:
#1: The US military has formally warned that clearing suspected sea mines from SoH could take up to six months. That is a completely different timescale from what the financial market is pricing. Even a political deal tomorrow does not immediately reopen the strait.
#2: Trump has shifted his tone from urgency to ”strategic patience”. In yesterday’s press conference: ”Don’t rush me… I want a great deal.” The market is reading this as a president no longer feeling pressured by timelines, with the naval blockade running in the background.
#3: So far, the military activity is escalating, not de-escalating. Axios reports Iran is laying more mines in SoH. The US 3rd carrier strike group (USS George H.W. Bush) is arriving with two countermine vessels. Trump yesterday ordered the US Navy to destroy any Iranian boats caught laying mines. While CNN reports that the Pentagon is actively drawing up plans to strike Iranian SoH capabilities and individual Iranian military leaders if the ceasefire collapses. i.e., NOT a attitude consistent with an imminent deal!
Spot crude and product prices eased off the early-April highs on a combination of system rerouting and deal optimism. Both now weakening. Goldman estimates April Gulf output is reduced by 14.5 mbl/d, or 57% of pre-war supply, a number that keeps getting worse the longer this drags on.
Demand-side adaptation is ongoing: S. Korea has cut its Middle East crude dependence from 69% to 56% by pulling more from the Americas and Africa, and Japan is kicking off a second round of SPR releases from 1 May. But SPRs are finite.
Ref. to the negotiations, we should not bet on speed. The current Iranian leadership is dominated by genuine hardliners willing to absorb economic pain and run the clock to extract concessions. That is not a setup for a rapid resolution. US/Israeli media briefings keep framing the delay as ”internal Iranian divisions”, the reality is more complicated and points toward weeks and months, not days.
Our point is that the complexity is large, and higher prices have only just started (given a scenario where the negotiations drag out in time). The market spent April leaning on the USD 90/bl rest-of-year assumption; that case is diminishing by the hour. If ”early May reopening” is replaced by ”June, July or later” over the next week or two, both crude and products have meaningful room to reprice higher from here. There is a high risk being short energy and betting on any immediate political resolution(!).
Down on Friday. Up on Monday. The Brent June crude oil contract traded down 5.1% last week to a close of $90.38/b. It reached a high of $103.87/b last Monday and a low of $86.09/b on Friday as Iran announced that the Strait of Hormuz was fully open for transit. That quickly changed over the weekend as the US upheld its blockade of Iranian oil exports while Iran naturally responded by closing the SoH again. The US blew a hole in the engine room of the Iranian ship TOUSKA and took custody of the ship on Sunday. Brent crude is up 5.6% this morning to $95.4/b.
The cease-fire is expiring tomorrow. The US has said it will send a delegation for a second round of negotiations in Islamabad in Pakistan. But Iran has for now rejected a second round of talks as it views US demands as unrealistic and excessive while the US is also blocking the Strait of Hormuz.
While Brent is up 5% this morning, the financial market is still very optimistic that progress will be made. That talks will continue and that the SoH will fully open by the start of May which is consistent with a rest-of-year average Brent crude oil price of around $90/b with the market now trading that balance at around $88/b.
Financial optimism vs. physical deterioration. We have a divergence where the financial market is trading negotiations, improvements and resolution while at the same time the physical market is deteriorating day by day. Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.
Financial markets are betting that a US/Iranian resolution will save us in time from violent shortages down the road. But every day that the SoH remains closed is bringing us closer to a potentially very painful point of shortages and much higher prices.
The US blockade is also a weapon of leverage against its European and Asian allies. When Iran closed the SoH it held the world economy as a hostage against the US. The US blockade of the SoH is of course blocking Iranian oil exports. But it is also an action of disruption directed towards Europe and Asia. The US has called for the rest of the world to engaged in the war with Iran: ”If you want oil from the Persian Gulf, then go and get it”. A risk is that the US plays brinkmanship with the global oil market directed towards its European and Asian allies and maybe even towards China to force them to engage and take part. Maybe unthinkable. But unthinkable has become the norm with Trump in the White House.
Sommarväder skapar prisrally på elbörsen
Oil product price pain is set to rise as the Strait of Hormuz stays closed into summer
Solkraften pressar elpriserna dagtid
Michel Gubel ger sin syn på oljemarknaden