Analys

High risk for repeated attacks. Bearish concerns overstated

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6 år sedan

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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

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Annons

Analys

Whipping quota cheaters into line is still the most likely explanation

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7 timmar sedan

den

7 maj, 2025

Redaktionen

Strong rebound yesterday with further gains today. Brent crude rallied 3.2% with a close of USD 62.15/b yesterday and a high of the day of USD 62.8/b. This morning it is gaining another 0.9% to USD 62.7/b with signs that US and China may move towards trade talks.

Bjarne Schieldrop, Chief analyst commodities, SEB

Brent went lower on 9 April than on Monday. Looking back at the latest trough on Monday it traded to an intraday low of USD 58.5/b. In comparison it traded to an intraday low of USD 58.4/b on 9 April. While markets were in shock following 2 April (’Liberation Day’) one should think that the announcement from OPEC+ this weekend of a production increase of some 400 kb/d also in June would have chilled the oil market even more. But no.

’ Technically overbought’ may be the explanation. ’Technically overbought’ has been the main explanation for the rebound since Monday. Maybe so. But the fact that it went lower on 9 April than on Monday this week must imply that markets aren’t totally clear over what OPEC+ is currently doing and is planning to do. Is it the start of a flood or a brief period where disorderly members need to be whipped into line?

The official message is that this is punishment versus quota cheaters Iraq, UAE and Kazakhstan. Makes a lot of sense since it is hard to play as a team if the team strategy is not followed by all players. If the May and June hikes is punishment to force the cheaters into line, then there is very real possibility that they actually will fall in line. And voila. The May and June 4x jumps is what we got and then we are back to increases of 137 kb/d per month. Or we could even see a period with no increase at all or even reversals and cuts.

OPEC+ has after all not officially abandoned cooperation. It has not abandoned quotas. It is still an overall orderly agenda and message to the market. This isn’t like 2014/15 with ’no quotas’. Or like full throttle in spring 2020. The latter was resolved very quickly along with producer pain from very low prices. It is quite clear that Saudi Arabia was very angry with the quota cheaters when the production for May was discussed at the end of March. And that led to the 4x hike in May. And the same again this weekend as quota offenders couldn’t prove good behavior in April. But if the offenders now prove good behavior in May, then the message for July production could prove a very different message than the 4x for May and June.

Trade talk hopes, declining US crude stocks, backwardated Brent curve and shale oil pain lifts price. If so, then we are left with the risk for a US tariff war induced global recession. And with some glimmers of hope now that US and China will start to talk trade, we see Brent crude lifting higher today. Add in that US crude stocks indicatively fell 4.5 mb last week (actual data later today), that the Brent crude forward curve is still in front-end backwardation (no surplus quite yet) and that US shale oil production is starting to show signs of pain with cuts to capex spending and lowering of production estimates.

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Analys

June OPEC+ quota: Another triple increase or sticking to plan with +137 kb/d increase?

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5 dagar sedan

den

2 maj, 2025

Redaktionen

Rebounding from the sub-60-line for a second time. Following a low of USD 59.3/b, the Brent July contract rebounded and closed up 1.8% at USD 62.13/b. This was the second test of the 60-line with the previous on 9 April when it traded to a low of USD 58.4/b. But yet again it defied a close below the 60-line. US ISM Manufacturing fell to 48.7 in April from 49 in March. It was still better than the feared 47.9 consensus. Other oil supportive elements for oil yesterday were signs that there are movements towards tariff negotiations between the US and China, US crude oil production in February was down 279 kb/d versus December and that production by OPEC+ was down 200 kb/d in April rather than up as expected by the market and planned by the group.

All eyes on OPEC+ when they meet on Monday 5 May. What will they decide to do in June? Production declined by 200 kb/d in April (to 27.24 mb/d) rather than rising as the group had signaled and the market had expected. Half of it was Venezuela where Chevron reduced activity due to US sanctions. Report by Bloomberg here. Saudi Arabia added only 20 kb/d in April. The plan is for the group to lift production by 411 kb/d in May which is close to 3 times the monthly planned increases. But the actual increase will be much smaller if the previous quota offenders, Kazakhstan, Iraq and UAE restrain their production to compensate for previous offences.

The limited production increase from Saudi Arabia is confusing as it gives a flavor that the country deliberately aimed to support the price rather than to revive the planned supply. Recent statements from Saudi officials that the country is ready and able to sustain lower prices for an extended period instead is a message that reviving supply has priority versus the price.

OPEC+ will meet on Monday 5 May to decide what to do with production in June. The general expectation is that the group will lift quotas according to plans with 137 kb/d. But recent developments add a lot of uncertainty to what they will decide. Another triple quota increase as in May or none at all. Most likely they will stick to the original plan and decide lift by 137 kb/d in June.

US production surprised on the downside in February. Are prices starting to bite? US crude oil production fell sharply in January, but that is often quite normal due to winter hampering production. What was more surprising was that production only revived by 29 kb/d from January to February. Weekly data which are much more unreliable and approximate have indicated that production rebounded to 13.44 mb/d after the dip in January. The official February production of 13.159 mb/d is only 165 kb/d higher than the previous peak from November/December 2019. The US oil drilling rig count has however not change much since July last year and has been steady around 480 rigs in operation. Our bet is that the weaker than expected US production in February is mostly linked to weather and that it will converge to the weekly data in March and April.

Where is the new US shale oil price pain point? At USD 50/b or USD 65/b? The WTI price is now at USD 59.2/b and the average 13 to 24 mth forward WTI price has averaged USD 61.1/b over the past 30 days. The US oil industry has said that the average cost break even in US shale oil has increased from previous USD 50/b to now USD 65/b with that there is no free cashflow today for reinvestments if the WTI oil price is USD 50/b. Estimates from BNEF are however that the cost-break-even for US shale oil is from USD 40/b to US 60/b with a volume weighted average of around USD 50/b. The proof will be in the pudding. I.e. we will just have to wait and see where the new US shale oil ”price pain point” really is. At what price will we start to see US shale oil rig count starting to decline. We have not seen any decline yet. But if the WTI price stays sub-60, we should start to see a decline in the US rig count.

US crude oil production. Monthly and weekly production in kb/d.

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Analys

Unusual strong bearish market conviction but OPEC+ market strategy is always a wildcard

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1 vecka sedan

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30 april, 2025

Redaktionen

Brent crude falls with strong conviction that trade war will hurt demand for oil. Brent crude sold off 2.4% yesterday to USD 64.25/b along with rising concerns that the US trade war with China will soon start to visibly hurt oil demand or that it has already started to happen. Tariffs between the two are currently at 145% and 125% in the US and China respectively which implies a sharp decline in trade between the two if at all. This morning Brent crude (June contract) is trading down another 1.2% to USD 63.3/b. The June contract is rolling off today and a big question is how that will leave the shape of the Brent crude forward curve. Will the front-end backwardation in the curve evaporate further or will the July contract, now at USD 62.35/b, move up to where the June contract is today?

The unusual ”weird smile” of Brent forward curve implies unusual strong bearish conviction amid current prompt tightness. the The Brent crude oil forward curve has displayed a very unusual shape lately with front-end backwardation combined with deferred contango. Market pricing tightness today but weakness tomorrow. We have commented on this several times lately and Morgan Stanly highlighted how unusual historically this shape is. The reason why it is unusual is probably because markets in general have a hard time pricing a future which is very different from the present. Bearishness in the oil market when it is shifting from tight to soft balance usually comes creeping in at the front-end of the curve. A slight contango at the front-end in combination with an overall backwardated curve. Then this slight contango widens and in the end the whole curve flips to full contango. The current shape of the forward curve implies a very, very strong conviction by the market that softness and surplus is coming. A conviction so strong that it overrules the present tightness. This conviction flows from the fundamental understanding that ongoing trade war is bad for the global economy, for oil demand and for the oil price.

Will OPEC+ switch to cuts or will it leave balancing to a lower price driving US production lower? Add of course also in that OPEC+ has signaled that it will lift production more rapidly and is currently no longer in the mode of holding back to keep Brent at USD 75/b due to an internal quarrel over quotas. That stand can of course change from one day to the next. That is a very clear risk to the upside and oil consumers around should keep that in the back of their minds that this could happen. Though we are not utterly convinced of the imminent risk of this. Before such a pivot happens, Iraq and Kazakhstan probably have to prove that they can live up to their promised cuts. And that will take a few months. Also, OPEC+ might also like to see where the pain-point for US shale oil producers’ price-vise really is today. So far, we have seen no decline in the number of US oil drilling rigs in operation which have steadily been running at around 480 rigs.

With a surplus oil market on the horizon, OPEC+ will have to make a choice. How shale this coming surplus be resolved? Shall OPEC+ cut in order to balance the market or shall lower oil prices drive pain and lower production in the US which then will result in a balanced market? Maybe it is the first or maybe the latter. The group currently has a bloated surplus balance which it needs to slim down at some point. And maybe now is the time. Allowing the oil price to slide. Economic pain for US shale oil producers to rise and US oil production to fall in order to balance the market and make room OPEC+ to redeploy its previous cuts back into the market.

Surplus is not yet here. US oil inventories likely fell close to 2 mb last week. US API yesterday released indications that US crude and product inventories fell 1.8 mb last week with crude up 3.8 mb, gasoline down 3.1 mb and distillates down 2.5 mb. So, in terms of a crude oil contango market (= surplus and rising inventories) we have not yet moved to the point where US inventories are showing that the global oil market now indeed is in surplus. Though Chinese purchases to build stocks may have helped to keep the market tight. Indications that Saudi Arabia may lift June Official Selling Prices is a signal that the oil market may not be all that close to unraveling in surplus.

The low point of the Brent crude oil curve is shifting closer to present. A sign that the current front-end backwardation of the Brent crude oil curve is about to evaporate.