Analys

High risk for repeated attacks. Bearish concerns overstated

Publicerat

6 år sedan

den

27 september, 2019

Redaktionen

For two days in a row the Brent crude oil price has traded quite hard to the downside during intra-day trading before kicking back up again towards the close. A lot of the gains following the attacks on Saudi oil infrastructure almost two weeks ago have now been given back. Brent closed at $60.22/bl on Friday 13 September just before the attacks. Though having given back a lot of its gains (it spiked to $71.95/bl on Monday Sep 16) Brent has struggled to close below the $62/bl line.

What is notable is that following the Brent low close of $56.23/bl on 7 August Brent has been on a gradual trend higher irrespective of the attacks on Saudi Arabia. This matches well with the fact that US crude oil stocks declined by 70 million barrels from early July to early September.

The global oil market now seems to be so accustomed to living in oil affluence since 2014 that not even a damaging attack at the heart of the global oil market is able unnerve the market much with oil prices now just a tiny bit higher than before the attacks. Real action, real physical tightness in the spot market is probably what is needed to pull the market out of its current complacency.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

The market is now “bean-counting” how much oil is lost from the attacks. What really matters in our view is the repetition risk for new attacks. In our view this risk is very high but there is hardly any risk premium in the market for this as we can see.

The front-end of the Brent crude oil curve has been in backwardation continuously since early this year signalling a draw-down in crude oil inventories and a tight front-end crude oil market. This tightness has not manifested itself as elevated flat prices as the whole crude oil curve has been pushed down by bearish bearish sentiment for the global oil market balance for next year amid slowing global growth, strong non-OPEC production growth projections for 2020 and doubts over the abilities and willingness of OPEC+ to cut yet deeper if needed.

The global oil market is unlikely to run a 1 m bl/d surplus in 2020 due to IMO-2020 (barring a global recession). We do share some of the markets bearish concerns for next year, but we do not agree with all of them and we do not agree with the conclusion of many oil market balance forecasts for next year being strongly in surplus with need of further cuts by OPEC+ to prevent a strong rise in OECD stocks. And neither do we agree with the view that OPEC+ has its back against the wall and has lost so much oil production volume to booming US shale oil production that it has now basically run out of bullets with little capacity to cut further if needed.

One key element in the global oil market balance next year in our view is the IMO-2020 sulphur bunker oil regulations. We have worked on this issue extensively over the past three years and written numerous reports on the subject. It is of course a hot topic and almost everyone who is writing about oil has nowadays written a report about it. What puzzles us is that as far as we can see no one accounts for the IMO-2020 event in their supply/demand balances for 2020. We have at least not seen any specific IMO-2020 line item in any of the balances we have seen.

As a consequence of the IMO-2020 regulations our base assumption is that a ballpark 1 m bl/d of high sulphur residue / bunker oil will be barred from legal use in global transportation. It will either be burned for heat, power or be stored. Typical HFO 3.5% bunker demand today is 3.5 m bl/d. Legal plus cheating demand in global shipping in 2020 will likely be about 1 m bl/d. Our guestimate is that some 1.5 m bl/d will be converted and transformed in refineries to other compliant products.

So in our view the IMO-2020 effect will put about 1 m bl/d of high sulphur residue /bunker oil on the side-line of the global transportation market. This is a clear and straight forward tightening of the global liquids market. The global transportation market thus needs an additional 1 m bl/d of hydrocarbon liquids from other sources instead. That is the IMO-2020 tightening we expect to see and we cannot identify such an IMO-2020 item in the supply/demand balances anywhere else in the market.

Everybody talks about the adverse impact the IMO-2020 will have on the global oil market, but no one takes account of it in any way in their supply/demand balances. Thus everyone sees a 1 m bl/d surplus for 2020 instead of a balanced market as we do.

OPEC+ has not run out of bullets. The key producers are instead producing close to all-time-high or 5yr averages. A key assumption in the market’s highly bearish concerns for next year is the assumption that “OPEC+ has run out of bullets” with no ability or appetite to cut deeper if needed. “They are cutting and cutting but are not able to get the oil price higher” is the market’s view of OPEC+ currently. It is true that production from the group has fallen sharply but that is primarily due to the sharp involuntary losses from Iran, Venezuela and Mexico. The key players being Russia, Kuwait, Iraq, UAE and Saudi Arabia are however producing either close to all-time-high levels or normal averages. They have hardly given away a single barrel.

Apparently Saudi Arabia has been cutting deep and delivered much deeper cuts than what it has been obliged to according to the agreement at the end of last year. But Saudi Arabia is to a large degree just playing with our minds and views. Saudi Arabia boosted production from 9.9 m bl/d in March 2018 to a monthly high of 11.1 m bl/d in November 2018 and then agreed to cut from that level down to 10.5 m bl/d. As such its production 9.8 m bl/d in August seems like a deep cut and over-compliance. Saudi Arabia’s average production over the past 60 months was 10.15 m bl/d. So Saudi Arabia produced only 0.3 m bl/d below its 5 yr average in August.

Our view is thus that the key players with control over their production have not at all given away much volume to booming US shale oil production and are fully in a position to cut more if needed or if they decide to do so.

High speed to Saudi Aramco IPO = high oil price volatility and elevated risks for renewed attacks. Saudi Aramco is now pushing hard to speed up the Aramco IPO at least for its partial and initial listing in Saudi Arabia. Research teams from the world’s largest financial institutions are now working around the clock to finalize draft assessments by mid-October. An as of yet non-published time-schedule of the IPO has it that Saudi Aramco will announce its IPO-plans on October 20th.

The recent attack on Saudi Arabia’s oil infrastructure is in our view just the last attack in a line of many. The attack has made it very clear that Saudi Arabia’s oil infrastructure is highly vulnerable and that it is very difficult to protect against attacks of the character two weeks ago. The weapons used were probably fairly low cost but had high precision and can be launched from almost anywhere. The attackers have detailed information of Saudi Arabia’s oil infrastructure and obviously also understands where to attack with high precision in order to make maximum damage with relatively small explosives.

Annons

It is clear that the market will managed and overcome the latest damages and supply outage in Saudi Arabia and repairs will be done. It will however draw down global inventories further and reduce Saudi spare capacity for several months to come. We do however think that the risk for repetitions of the latest attack is very, very high unless source of the reason for the attack is solved. I.e. the Iran and Yemen issues need to be resolved and defused. As long as those issues are not resolved we expect renewed attacks to take place. Especially so in the run-up to the Saudi Aramco IPO as it will have a negative effect on the listing in our view.

Strengthening cracks on refinery runs, Saudi attack and IMO-2020. US refineries are now reducing runs and crude consumption in the weeks to come until they ramp up again in mid-October. Thus US crude inventories are likely to rise (as we saw in this week’s data release) while product inventories are likely to decline along seasonal trends. This is likely to put strength to oil product cracks. Saudi Arabia has also imported oil products from the global market in order to compensate for domestically reduced refinery runs which also add strength to product cracks. The IMO-2020 switch-over is also moving closer and closer and we expect a very strong transitional Gasoil demand from the global shipping market in Q4-19 and Q1-20 just as we move through the Nordic hemisphere heating season peak. We see significant upside price risk for gasoil cracks in those two quarters. We think it is just a matter of time before much stronger mid-dist cracks kicks in fully in the spot market with a bullish effect rippling down the forward crack curve.

In sum: Bearish risks for 2020 are overstated

Bullishly:

IMO-2020 will have a tightening effect of about 1 m bl/d
OPEC+ has not run out of bullets
High risk for repeated attacks and damages on Saudi Arabia oil infrastructure. Especially in the IPO run-up

Bearishly:

A global recession if it materializes would have a strong bearish impact on oil prices and market
A return of supply from Venezuela and/or Iran are clear bearish risks but we hold low probabilities for this

We expect Brent crude to average:

2020: $70/bl
2021: $70/bl

Relaterade ämnen:seb analys

Nästa

US shale oil production growth to slow sharply in 2020

Missa inte

More for longer and highly vulnerable ($75-85/bl)

Fortsätt läsa

Analys

The Mid-East anchor dragging crude oil lower

Publicerat

45 minuter sedan

den

14 oktober, 2025

Redaktionen

When it starts to move lower it moves rather quickly. Gaza, China, IEA. Brent crude is down 2.1% today to $62/b after having traded as high as $66.58/b last Thursday and above $70/b in late September. The sell-off follows the truce/peace in Gaze, a flareup in US-China trade and yet another bearish oil outlook from the IEA.

Bjarne Schieldrop, Chief analyst commodities, SEB

A lasting peace in Gaze could drive crude oil at sea to onshore stocks. A lasting peace in Gaza would probably calm down the Houthis and thus allow more normal shipments of crude oil to sail through the Suez Canal, the Red Sea and out through the Bab-el-Mandeb Strait. Crude oil at sea has risen from 48 mb in April to now 91 mb versus a pre-Covid normal of about 50-60 mb. The rise to 91 mb is probably the result of crude sailing around Africa to be shot to pieces by the Houthis. If sailings were to normalize through the Suez Canal, then it could free up some 40 mb in transit at sea moving onshore into stocks.

The US-China trade conflict is of course bearish for demand if it continues.

Bearish IEA yet again. Getting closer to 2026. Credibility rises. We expect OPEC to cut end of 2025. The bearish monthly report from the IEA is what it is, but the closer we get to 2026, the more likely the IEA is of being ball-park right in its outlook. In its monthly report today the IEA estimates that the need for crude oil from OPEC in 2026 will be 25.4 mb/d versus production by the group in September of 29.1 mb/d. The group thus needs to do some serious cutting at the end of 2025 if it wants to keep the market balanced and avoid inventories from skyrocketing. Given that IEA is correct that is. We do however expect OPEC to implement cuts to avoid a large increase in inventories in Q1-26. The group will probably revert to cuts either at its early December meeting when they discuss production for January or in early January when they discuss production for February. The oil price will likely head yet lower until the group reverts to cuts.

Dubai: The Mid-East anchor dragging crude oil lower. Surplus emerging in Mid-East pricing. Crude oil prices held surprisingly strong all through the summer. A sign and a key source of that strength came from the strength in the front-end backwardation of the Dubai crude oil curve. It held out strong from mid-June and all until late September with an average 1-3mth time-spread premium of $1.8/b from mid-June to end of September. The 1-3mth time-spreads for Brent and WTI however were in steady deterioration from late June while their flat prices probably were held up by the strength coming from the Persian Gulf. Then in late September the strength in the Dubai curve suddenly collapsed. Since the start of October it has been weaker than both the Brent and the WTI curves. The Dubai 1-3mth time-spread now only stands at $0.25/b. The Middle East is now exporting more as it is producing more and also consuming less following elevated summer crude burn for power (Aircon) etc.

The only bear-element missing is a sudden and solid rise in OECD stocks. The only thing that is missing for the bear-case everyone have been waiting for is a solid, visible rise in OECD stocks in general and US oil stocks specifically. So watch out for US API indications tomorrow and official US oil inventories on Thursday.

No sign of any kind of fire-sale of oil from Saudi Arabia yet. To what we can see, Saudi Arabia is not at all struggling to sell its oil. It only lowered its Official Selling Prices (OSPs) to Asia marginally for November. A surplus market + Saudi determination to sell its oil to the market would normally lead to a sharp lowering of Saudi OSPs to Asia. Not yet at least and not for November.

The 5yr contract close to fixed at $68/b. Of importance with respect to how far down oil can/will go. When the oil market moves into a surplus then the spot price starts to trade in a large discount to the 5yr contract. Typically $10-15/b below the 5yr contract on average in bear-years (2009, 2015, 2016, 2020). But the 5yr contract is usually pulled lower as well thus making this approach a moving target. But the 5yr contract price has now been rock solidly been pegged to $68/b since 2022. And in the 2022 bull-year (Brent spot average $99/b), the 5yr contract only went to $72/b on average. If we assume that the same goes for the downside and that 2026 is a bear-year then the 5yr goes to $64/b while the spot is trading at a $10-15/b discount to that. That would imply an average spot price next year of $49-54/b. But that is if OPEC doesn’t revert to cuts and instead keeps production flowing. We think OPEC(+) will trim/cut production as needed into 2026 to prevent a huge build-up in global oil stocks and a crash in prices. But for now we are still heading lower. Into the $50ies/b.

Fortsätt läsa

Analys

More weakness and lower price levels ahead, but the world won’t drown in oil in 2026

Publicerat

1 vecka sedan

den

7 oktober, 2025

Redaktionen

Some rebound but not much. Brent crude rebounded 1.5% yesterday to $65.47/b. This morning it is inching 0.2% up to $65.6/b. The lowest close last week was on Thursday at $64.11/b.

The curve structure is almost as week as it was before the weekend. The rebound we now have gotten post the message from OPEC+ over the weekend is to a large degree a rebound along the curve rather than much strengthening at the front-end of the curve. That part of the curve structure is almost as weak as it was last Thursday.

We are still on a weakening path. The message from OPEC+ over the weekend was we are still on a weakening path with rising supply from the group. It is just not as rapidly weakening as was feared ahead of the weekend when a quota hike of 500 kb/d/mth for November was discussed.

The Brent curve is on its way to full contango with Brent dipping into the $50ies/b. Thus the ongoing weakening we have had in the crude curve since the start of the year, and especially since early June, will continue until the Brent crude oil forward curve is in full contango along with visibly rising US and OECD oil inventories. The front-month Brent contract will then flip down towards the $60/b-line and below into the $50ies/b.

At what point will OPEC+ turn to cuts? The big question then becomes: When will OPEC+ turn around to make some cuts? At what (price) point will they choose to stabilize the market? Because for sure they will. Higher oil inventories, some more shedding of drilling rigs in US shale and Brent into the 50ies somewhere is probably where the group will step in.

There is nothing we have seen from the group so far which indicates that they will close their eyes, let the world drown in oil and the oil price crash to $40/b or below.

The message from OPEC+ is also about balance and stability. The world won’t drown in oil in 2026. The message from the group as far as we manage to interpret it is twofold: 1) Taking back market share which requires a lower price for non-OPEC+ to back off a bit, and 2) Oil market stability and balance. It is not just about 1. Thus fretting about how we are all going to drown in oil in 2026 is totally off the mark by just focusing on point 1.

When to buy cal 2026? Before Christmas when Brent hits $55/b and before OPEC+ holds its last meeting of the year which is likely to be in early December.

Brent crude oil prices have rebounded a bit along the forward curve. Not much strengthening in the structure of the curve. The front-end backwardation is not much stronger today than on its weakest level so far this year which was on Thursday last week.

The front-end backwardation fell to its weakest level so far this year on Thursday last week. A slight pickup yesterday and today, but still very close to the weakest year to date. More oil from OPEC+ in the coming months and softer demand and rising inventories. We are heading for yet softer levels.

Fortsätt läsa

Analys

A sharp weakening at the core of the oil market: The Dubai curve

Publicerat

2 veckor sedan

den

3 oktober, 2025

Redaktionen

Down to the lowest since early May. Brent crude has fallen sharply the latest four days. It closed at USD 64.11/b yesterday which is the lowest since early May. It is staging a 1.3% rebound this morning along with gains in both equities and industrial metals with an added touch of support from a softer USD on top.

What stands out the most to us this week is the collapse in the Dubai one to three months time-spread.

Dubai is medium sour crude. OPEC+ is in general medium sour crude production. Asian refineries are predominantly designed to process medium sour crude. So Dubai is the real measure of the balance between OPEC+ holding back or not versus Asian oil demand for consumption and stock building.

A sharp weakening of the front-end of the Dubai curve. The front-end of the Dubai crude curve has been holding out very solidly throughout this summer while the front-end of the Brent and WTI curves have been steadily softening. But the strength in the Dubai curve in our view was carrying the crude oil market in general. A source of strength in the crude oil market. The core of the strength.

The now finally sharp decline of the front-end of the Dubai crude curve is thus a strong shift. Weakness in the Dubai crude marker is weakness in the core of the oil market. The core which has helped to hold the oil market elevated.

Facts supports the weakening. Add in facts of Iraq lifting production from Kurdistan through Turkey. Saudi Arabia lifting production to 10 mb/d in September (normal production level) and lifting exports as well as domestic demand for oil for power for air con is fading along with summer heat. Add also in counter seasonal rise in US crude and product stocks last week. US oil stocks usually decline by 1.3 mb/week this time of year. Last week they instead rose 6.4 mb/week (+7.2 mb if including SPR). Total US commercial oil stocks are now only 2.1 mb below the 2015-19 seasonal average. US oil stocks normally decline from now to Christmas. If they instead continue to rise, then it will be strongly counter seasonal rise and will create a very strong bearish pressure on oil prices.

Will OPEC+ lift its voluntary quotas by zero, 137 kb/d, 500 kb/d or 1.5 mb/d? On Sunday of course OPEC+ will decide on how much to unwind of the remaining 1.5 mb/d of voluntary quotas for November. Will it be 137 kb/d yet again as for October? Will it be 500 kb/d as was talked about earlier this week? Or will it be a full unwind in one go of 1.5 mb/d? We think most likely now it will be at least 500 kb/d and possibly a full unwind. We discussed this in a not earlier this week: ”500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d”

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily. That core strength helped to keep flat crude oil prices elevated close to the 70-line. Now also the Dubai curve has given in.