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Hitting $70/bl – Are there any buyers left?

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityYesterday Brent crude hit the 2015 high of $69.63/bl before crossing the $70/bl line with an intraday high of $70.05/bl (and thus the highest since 2014) while in the end closing below again at $69.26/bl (+0.09% on the day). We think that the market is as bullish as it gets at this point with little further upside left for now. Next week we are likely going to see that US shale oil production continues to grow at a marginal, annualized pace of about 1.2 m bl/d (+100 k bl/d from Jan to Feb). Later in the week the IEA will publish the OECD inventories. We expect that they are getting increasingly closer to the five year rolling average which likely is OPEC & Co’s target. Speculative positions are record high and technically at the most over-bought level since 2011. Today Donald Trump may give crude oil prices a last “omph” upwards as he’s likely to refuse to waive the Iran sanctions for a second time. However, this is probably as good as it gets on the upside this time around.

We have had an almost uninterrupted crude oil price rally since June 21st last year supported by declining inventories, declining USD Index, rising global PMIs, disruptions of important oil pipelines, renewed promises by OPEC & Co, no uptick in US oil rig count, increasing risk for renewed sanctions towards Iran and lastly biting cold US weather.

This relentless bull-rally has attracted more and more speculative money into the front end of the crude oil curve while producers have utilized the opportunity to sell further out.

This has led to an increasing steepening backwardation of the Brent crude oil curve. This has attracted yet more speculative money into oil because of the increasing positive roll-yield. Investors are now hand a marginal annualized return of 8% even if Brent spot only goes sideways. Backwardation and rising speculative positions typically feed on it selves.

Today the net long speculative position in Brent and WTI crude is record high in contract and at or very close to record positioning in dollar terms at close to $80bn.

While US east coast oil traders today are shrouded in bitter cold weather they will in 10 days’ time be sitting in above normal temperatures again.

Next week we’ll have the US EIA drilling productivity report (Jan 16) which we expect will show that US shale oil production will grow by close to 100 k bl/d/mth from Jan to Feb which is equal to a marginal annualized production growth rate of 1.2 m bl/d. Thus US shale oil production is growing strongly due to a high and increasing completion of wells.

Later in the week on Fri 19th we’ll have the IEA report which is likely to show that the OECD inventories are getting increasingly closer to the rolling 5-year average. OPEC & Co has promised the market to bring inventories down to the 5-year average but has not explicitly stated which 5-year normal. The market expects cuts to be maintained to the end of 2018. However, if the target is reached then OPEC & Co could gradually increase production.

Do remember Iran’s oil minister earlier in the week stating that OPEC does not want Brent above $60/bl since they fear it will stimulate US shale oil production too much. Well, next week we are likely going to see evidence of continued strongly growing US shale oil production and OECD inventories getting rapidly closer to the rolling 5-year average.

Crude oil statsOECD inventories

Bjarne Schieldrop
Chief Commodity Analyst
SEB

Analys

OPEC+ holds back on December increase while US produces more

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OPEC+ will not to lift production by 180 kb/d in December as planned. Of course an effort to prevent the oil price from sliding lower. US crude oil production is at the same time ticking up by 38 kb/d/month in September and the growth pace looks like it is ticking higher by the month as new US shale oil production is growing faster than losses in existing production. US crude oil reached a new, all-time high of 13.4 mb/d in August. The US is not making it easy for OPEC+. The group is trying to tell the US: ”Slow your growth, because we need to produce more!”. To no wain it looks. Iranian sabre-rattling helps to lift Brent this morning.

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

Brent crude fell 3.9% last week in a sense of eased Iranian-Israeli tensions. Brent crude traded in a range of USD 70.72 – 76.05/b last week and closed down 3.9% week on week on Friday at USD 73.1/b. The low point last week was driven by relief that the Israeli retaliation towards Iran looked fairly limited with no damage to either oil infrastructure or nuclear installations. Muted rhetoric from Iran Iran to start with also helped to drive the price to its low point last week. Iranian rhetoric with promises of re-retaliation increased through the week and the oil price rose along with that towards the end of the week. What is for sure is that there will be more rocket exchanges between Iran and Israel to come. That barrier is totally broken.

But tensions are rising again as Iranian re-retaliation is in the planning. News this morning (Wall Street Journal) is that Iran is planning a ’Strong and complex’ re-retaliation attack on Israel at some point after the US election. The article also states that the Israeli attack on Iran on 26 October severely damaged parts of Iran’s air defenses. This isn’t over.

OPEC+ holds back planned increase in December to avoid price declines. Brent rises 2% to USD 74.5/b this morning as OPEC+ decides to delay its planned increase of 180 kb/d in December. The planned increase of a total of 2.2 mb/d over a 12 month period has however not been called off. That still hangs over the market as a dark cloud. It tells the market that there is limited upside in the oil price in the year to come. Global demand acceleration in 2025 – OPEC+ will take that. Disruptions in supply in 2025 – OPEC+ will step in and take that. It is only a massive loss of supply involving the Strait of Hormuz which would be out of the hands of OPEC+ to cover.

US crude oil production at new all-time high in August of 13.4 mb/d. Not making it easy for OPEC+. US production reaches new all-time high in August at 13.4 mb/d. Monthly controlled data released in late October showed that US crude oil production increased by 195 kb/d to 13.4 mb/d and a new all-time high in August. US NGLs increase by 135 kb/d to 7.03 mb/d as well. If we add together US crude, NGLs, bio, refinery gains and adjustments, then total US liquids probably came in at 23.13 mb/d in August. With US liquids demand at 20.4 mb/d it leads to a net US liquids export of 2.7 mb/d

US shale oil production growth pace is ticking higher. US shale oil production grew at a marginal, annualized pace of 451 kb/d/month in September. The annualized growth pace was 401 kb/d in August. The pace is picking up. US shale oil producers are not making it easy for OPEC+.

US crude oil production reached a new all-time high in August at 13.4 mb/d. Production of NGLs also increased. US crude + NGLs + bio + refinery gains + adjustments puts US total liquids production at more than 23.1 mb/d in August.

US crude oil production reached a new all-time high in August
Source: Graph by SEB, data by US EIA

US shale oil production grew at a marginal, annualized pace of 451 kb/d in. The growth pace is picking up as new production grows faster than legacy losses. 

US shale oil production grew at a marginal
Source: SEB calculations and graph. Data by US EIA.
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Brent rises on prospect of Middle East flare-up

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Brent crude prices have extended their recent rally, reaching USD 74.3 per barrel this morning, marking a gain of USD 1.25 per barrel since last evening.

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

Earlier in the week, signals pointed towards a potential de-escalation in Middle East tensions, with Israel reportedly considering a US-led initiative to address the conflict in Lebanon. However, as noted in yesterday’s crude oil comment, Israel’s military chief issued a strong warning, vowing a significant response should Iran attempt further aggression.

Fueling the recent surge in oil prices are reports from Axios (an American news outlet) suggesting that Iran is preparing to launch a retaliatory strike on Israel from Iraqi territory in the coming days. This heightens the likelihood of additional hostilities potentially erupting before the US election on November 5th.

According to the source, the anticipated attack would likely involve drones and ballistic missiles, with Iran potentially relying on allied militias in Iraq to carry it out. This approach may be a strategic effort by Tehran to avert a direct potential Israeli re-re-retaliation on Iranian soil.

While the situation in the Middle East could escalate sooner than expected, both Israel and Iran seem reluctant to ignite a full-scale regional war. Thus, any additional responses from Iran might remain restrained, similar to Israel’s limited strike last weekend, hence primarily intended as a demonstration of strength rather than an invitation to open warfare.

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Crude oil comment: Recent ’geopolitical relief’ seems premature

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Brent crude oil prices have rebounded from a low of USD 70.7 per barrel on Tuesday to USD 72.7 per barrel currently. Since Friday, the market experienced a significant nosedive, with prices collapsing by almost USD 6 per barrel. This drop was triggered by the long-awaited Israeli attack on Iran, which was milder than anticipated and did not target any oil infrastructure. The market’s reaction – a textbook example of ”buy on rumors, sell on news” – reflected this.

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

In the past two days, however, prices have rebounded, driven by tightening US crude stockpiles (reported yesterday), ongoing potential for further unrest in the Middle East, and rumors that OPEC+ may delay its planned oil output hike, originally scheduled for December. Currently, Brent crude is nearing USD 73 per barrel.

Geopolitically, there are both potential risks and reliefs: An Israeli minister suggested that hostilities with Hezbollah might end by the year’s end. Nevertheless, Israel’s military chief has issued a stern warning, promising a severe response against Iran if it launches further attacks on Israel.

The market’s recent ”geopolitical relief” seems premature, with oil prices swiftly dropping 3-4 USD per barrel from last Friday’s close of approximately USD 76. The threat of further escalations with Iran persists, indicating possible future volatility without any immediate diplomatic solutions.

Much depends on Iran’s reaction. Will their responses escalate tensions, or will they seek to de-escalate, considering the limited damage inflicted? The drop in oil prices suggests that Israel’s attacks did not cause substantial damage, reassuring the market temporarily by not affecting oil installations.

However, it is uncertain if this was Israel’s final move. There could be additional minor and targeted attacks, potentially leading to repeated assaults to diminish Iran’s military capabilities. i.e., there could be more rounds of such attacks from Israel before Iran manages to do anything. Israel lives in constant fear and is tired of getting rockets from left, right, and center, and likely wants to eliminate Hezbollah, Hamas, the Houthis, and Iran’s ability to continue with this.

Further influencing oil prices, recent US DOE data showed a reduction in US crude inventories by 0.5 million barrels last week, slightly less than the API’s reported 0.6-million-barrel drop but significantly less than Bloomberg’s consensus forecast of a 1.4-million-barrel increase. Moreover, reductions were also observed in gasoline and distillate (diesel) inventories, exceeding market expectations and offering bullish signals at a drawdown of 2.7 and 0.97 million barrels respectively.

Looking forward, attention is on OPEC+’s plans to gradually increase production starting this December. The market is split, with rumors suggesting potential delays in OPEC+’s output increase. These delays, along with the ongoing drawdown in US inventories, could further bolster Brent prices fundamentally. However, we believe OPEC is likely to stick to a production increase in December to maintain integrity.

As of now, the OPEC+ production hike of 2.2 million barrels until December 2025 together with a weakened macroeconomic picture and fears of a long-lasting economic slowdown in China is holding a lid on global oil prices. Yet, during 2025 we believe the cartel will likely continuously evaluate the planned production increase, to see if its room for those volumes. We don’t see them going for full punishment and flooding the oil market like they did in 2014/15 and 2020. With oil prices, over time, in the low 70-dollar range we see that OPEC will reconsider the volumes that are to enter the market every single month.

In the current short-term market environment, an oil price of below USD 73 per barrel is still a buying opportunity. Yet, the oil price is not going to shoot up over USD 80 per barrel any time soon, but there is more upside than downside and it pays to be secured.

Additionally, the historical average oil price over the last 20 years is around USD 75 per barrel. Adjusted for inflation, the actual average price would be about USD 90-95 per barrel. Given the current macroeconomic and geopolitical climate, which is far from normal, securing prices on the upside and being cautious about betting on a significant price drop is prudent.

Key events next week include the US election and a legislative session in China, the world’s largest crude importer. China’s economic policies are crucial, significantly influencing global demand growth each year.

In conclusion, while US inventory data offers some bullish signs, the overarching impacts of OPEC decisions and Middle Eastern geopolitical tensions are significant factors that will drive prices higher.

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