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The IEA has just taken a walk into outer space but will come back to Earth at a later

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SEB - Prognoser på råvaror - CommodityPrice action – Oil prices contaiged by broad based risk-off in financial markets
The sell-off in oil prices yesterday was basically risk-off in markets in general contagien the oil market where net long money had piled up six weeks in a row just shy of the Feb high long spec. Speculative money were taken off the table yesterday on broad based risk-off contagion and oil prices along the crude forward curve fell as a result. Little oil specific about it. Today oil prices are down 0.8% with Brent at $51.5/b with a little more sell-off following the IEA report but most of the sell-off came before the report.

Crude oil comment – The IEA has just taken a walk into outer space but will come back to Earth at a later stage
** The August IEA report: **
1) Demand revised down for 2015 (-0.2 mb/d) and 2016 (-0.42 mb/d) on new data
2) Demand revised down for 2017 and 2018 by 0.33 mb/d and 0.37 mb/d due to 2015 and 2016 revisions!!!
3) Demand growth for 2017 lifted from 1.4 mb/d y/y to to 1.5 mb/d y/y. So demand growth 2017 is seen stronger.
4) OECD inventories fell in Q2-17 by 9.2 mb (Mar to Jun) versus an average seasonal increase of 46.6 mb from 2010 to 2014. So strong counter seasonal draw in inventories in Q2-17
5) Provisional data for July shows further draws in inventories with largest US crude stock draw in 3 years
6) Due to lower demand projections (rippling down of 15 and 16 revisions) the IEA’s call-on-OPEC declined by 0.4 mb/d for both 17 &18 to 32.6 and 32.4 mb/d resp

**Why the IEA report is a confusing report**
Demand level in 15 and 16 is water under the bridge. We know we don’t know what it was and we know that the IEA don’t know either.
What we do know is that OECD inventories went sideways in H1-16 and then downwards in H2-16.
With its latest numbers (“IEA’s spread sheet exercise”) the IEA now calculates a 2016 surplus of +0.9 mb/d for 2017. But where is that surplus?!!! OECD inventories went DOWN in 2016!!
A 0.9 mb/d surplus in 2016 would mean that inventories actually should have increased somewhere by 329 mb. We don’t know where.

The proof of the pudding (inventories declined) is that 2016 was in balance to deficit. It was not a surplus of 0.9 mb/d. That surplus number is purely a spread sheet exercise number with no match to inventories.

Further we see that inventories are drawing down solidly counter seasonally in Q2-17 and further in July.

The positive take which matters from IEA August report is that:

1) Demand growth for 2017 is stronger than expected and revised higher. (More to come in our view. I.e. we expect 2017 demand growth to be revised yet higher further down the road)
2) Inventories are drawing down solidly (counter cyclically) in Q2-17 and continue to do so in July

Price action in the market is a Brent crude forward curve in backwardation at the front end of the forward curve reflecting that inventories are drawing down.
That the inventory draws are artificially managed by OPEC+ in 2017 is of course another matter and another story.
That 2018 poses a lot of challenges for the oil market with still strong non-OPEC production growth and thus need for OPEC+ management of the oil market balance is also another story.
What is striking is that there is a big mismatch between IEA’s oil market balance for 2016 and what we saw of inventory draws rather than a 329 mb inventory rise implied by a calculated 0.9 mb/d surplus.
Thus their “reset” of oil demand levels for 2017 and 2018 (on the back of 2015 and 2016 revisions) must be off the mark as well.

The IEA has just taken a walk into outer space but will come back to Earth at a later stage

Ch1: OECD inventories – Declined y/y in 2016 with especial decline in H2-16
Solid counter seasonal decline in Q2-17 versus 2010 to 2014 average seasonality

OECD inventories – Declined y/y in 2016 with especial decline in H2-16

Ch2: US crude, gasoline and disstillates inventories – The strong draw down continues

US crude, gasoline and disstillates inventories – The strong draw down continues

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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More from OPEC+ means US shale has to gradually back off further

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The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

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

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly. 

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

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Tightening fundamentals – bullish inventories from DOE

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The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

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

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.

US DOE, inventories, change in million barrels per week
US crude inventories excl. SPR in million barrels
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Bombs to ”ceasefire” in hours – Brent below $70

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A classic case of “buy the rumor, sell the news” played out in oil markets, as Brent crude has dropped sharply – down nearly USD 10 per barrel since yesterday evening – following Iran’s retaliatory strike on a U.S. air base in Qatar. The immediate reaction was: “That was it?” The strike followed a carefully calibrated, non-escalatory playbook, avoiding direct threats to energy infrastructure or disruption of shipping through the Strait of Hormuz – thus calming worst-case fears.

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

After Monday morning’s sharp spike to USD 81.4 per barrel, triggered by the U.S. bombing of Iranian nuclear facilities, oil prices drifted sideways in anticipation of a potential Iranian response. That response came with advance warning and caused limited physical damage. Early this morning, both the U.S. President and Iranian state media announced a ceasefire, effectively placing a lid on the immediate conflict risk – at least for now.

As a result, Brent crude has now fallen by a total of USD 12 from Monday’s peak, currently trading around USD 69 per barrel.

Looking beyond geopolitics, the market will now shift its focus to the upcoming OPEC+ meeting in early July. Saudi Arabia’s decision to increase output earlier this year – despite falling prices – has drawn renewed attention considering recent developments. Some suggest this was a response to U.S. pressure to offset potential Iranian supply losses.

However, consensus is that the move was driven more by internal OPEC+ dynamics. After years of curbing production to support prices, Riyadh had grown frustrated with quota-busting by several members (notably Kazakhstan). With Saudi Arabia cutting up to 2 million barrels per day – roughly 2% of global supply – returns were diminishing, and the risk of losing market share was rising. The production increase is widely seen as an effort to reassert leadership and restore discipline within the group.

That said, the FT recently stated that, the Saudis remain wary of past missteps. In 2018, Riyadh ramped up output at Trump’s request ahead of Iran sanctions, only to see prices collapse when the U.S. granted broad waivers – triggering oversupply. Officials have reportedly made it clear they don’t intend to repeat that mistake.

The recent visit by President Trump to Saudi Arabia, which included agreements on AI, defense, and nuclear cooperation, suggests a broader strategic alignment. This has fueled speculation about a quiet “pump-for-politics” deal behind recent production moves.

Looking ahead, oil prices have now retraced the entire rally sparked by the June 13 Israel–Iran escalation. This retreat provides more political and policy space for both the U.S. and Saudi Arabia. Specifically, it makes it easier for Riyadh to scale back its three recent production hikes of 411,000 barrels each, potentially returning to more moderate increases of 137,000 barrels for August and September.

In short: with no major loss of Iranian supply to the market, OPEC+ – led by Saudi Arabia – no longer needs to compensate for a disruption that hasn’t materialized, especially not to please the U.S. at the cost of its own market strategy. As the Saudis themselves have signaled, they are unlikely to repeat previous mistakes.

Conclusion: With Brent now in the high USD 60s, buying oil looks fundamentally justified. The geopolitical premium has deflated, but tensions between Israel and Iran remain unresolved – and the risk of missteps and renewed escalation still lingers. In fact, even this morning, reports have emerged of renewed missile fire despite the declared “truce.” The path forward may be calmer – but it is far from stable.

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