Analys
Crude oil higher as Hurricanes disrupt crude supply rather than crude demand (refinery processing of crude)
Crude oil comment – Crude oil higher as Hurricanes disrupt crude supply rather than crude demand (refinery processing of crude)
All since the end of July we have seen Brent crude trading fairly range bound between $50/b and $53.64/b. This week it broke upwards out of this trend. Brent crude hit an intraday low of $50.58/b last Wednesday on the fear that Hurricane Harvey would disrupt U.S. Gulf refineries’ consumption of crude oil for a lengthy period of time. I.e. lower refinery activity would give lower crude consumption and thus lower crude prices. When refineries gave signals that damage was not too great and restarts were on the table then Brent crude rose back up and then continued higher.
While the fear last week was for reduced oil processing by refineries due to hurricane Harvey, the coin has now flipped. Now the concern is that this may be a heavy hurricane season with the risk of substantial disruptions to crude oil production in the Gulf of Mexico. The US EIA yesterday reported that US crude oil production last week was down 749 kb/d WoW to 8,781 kb/d which is the lowest since December last year.
Following Harvey we now have Katia, Irma and Jose queuing up with Irma of course getting most attention as it leaves devastation in its trail as it heads for Florida. What we have seen of hurricanes so far this season may of course not be a good predictor for the rest of the hurricane season but it still setts the mind to expect more of the same. I.e. potentially more disruptions of supply.
The take from the sell-off down to $50.58/b last week is that there is little risk to the downside of $50/b at the moment. The Saudi oil put is firmly in place. Cutting exports to 6.6 mb/d in August (lowest since 2011), lifting official selling prices for all grades for October delivery while stating that Saudi Arabia goes full ahead for the Aramco IPO in 2018. They are not dropping the ball anytime soon. In addition we have seen the implied US shale oil rig count declining three weeks in a row now for the first time since May 2016.
On the upside price action the market will now look at technical references. I.e. highs from earlier in 2017 both for the Brent November contract as well as for the rolling 1mth Brent contract. For the November contract we have $55.33/b (25th May), $57.41/b (12th April) and then $60.08/b (3rd Jan). In references to historical values for the front end rolling Brent contract we comparably have $54.67/b (25th May, but already reached yesterday), $56.65/b (12th April) and then $58.37/b (3rd Jan).
The ball is definitely in the court of the bulls at the moment and the price action is looking towards earlier highs this year. However, when we look forward towards 2018 we do have concerns for the global oil market balance.
We expect US crude and NGL production growth to be very strong with lots of drilled but uncompleted wells ready to be completed. The declining drilling rig count right now is thus more a bullish sentiment driver than having a strong fundamental value. Combined with a still high level of commissioning of legacy non-OPEC crude oil production in 2018 we foresee the need for production management by OPEC+ all through 2018.
Thus bullish price moves this autumn towards the higher end of the $50ies/b should be utilized for those who need to hedge the downside price risk for 2018. When the Aramco IPO is done or if OPEC+ falls apart there is definitely downside price risk on the table in 2018. We must not forget that the current market tightness with declining oil inventories is as of now artificially managed by OPEC+. If it had not been for OPEC+ we would have been running a surplus.
This evening we again have the weekly US rig count data at 19.00 CET. We expect to see yet another week of declining US shale oil rig count. Sentiment wise it should help Brent crude to take out highs from earlier in 2017.
Ch1: Hurricane Harvey is taking out supply, not just demand
Ch2: Three weeks in a row of declining US shale oil rig count (implied)
Now three weeks in a row for the first time since May 2016
Ch3: Brent crude goal One: $55.33/b
Brent crude November contract price references from earlier in 2017
$55.33/b highlighted as next in line to reach for the Nov Brent contract
Ch4: Brent crude goal two and three: $56.65/b and then $58.37/b
Brent crude rolling front month price references from earlier in 2017
Bulls eying high of the year from Jan 3rd at $58.37/b
Ch5: Three hurricanes now in action
Is this what we should expect for the rest of the hurricane season?
More dissruptions to come all through the season?
Ch6: With Irma soon to make landfall but with not too much impact on oil infrastructure
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
Brent testing the 200dma at USD 78.6/b with API indicating rising US oil inventories
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Analys
Crude oil comment: Big money and USD 80/b
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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