Analys
Increased OPEC power in 2021 requires demand revival
Brent crude rebounded almost 1% yesterday to $64.62/bl and continues to tick a little higher this morning but still below the $65/bl mark. The signing of the US – China trade deal has given optimism for a revival in global manufacturing and thus stronger oil demand growth and this is what gives the oil price some vigour. It is very hard for OPEC to fight a war on two fronts with both rising non-OPEC supply and weakening global oil demand growth at the same time. A potential revival in global manufacturing (and oil demand growth) would thus be a great relief for OPEC and remove a lot of downside price risk for the oil price. The oil price is at its current level at the mercy of OPEC and OPEC’s current strategy of “price over volume”. If global oil demand continues at last year’s weaker than normal 1% growth rate also in 2020 and 2021 then OPEC and its allies might be forced to switch strategy to “volume over price” once again.
The monthly oil market report from EIA on Tuesday projected a lukewarm but stable outlook for the global oil market in 2020 and 2021 with Brent crude oil prices projected to average $64.8/bl in 2020 rising to $67.5/bl in 2021. It lifted its US shale oil production projection a tad for 2020 (+0.15 m bl/d) and extended the projection to 2021 with an average YoY growth of 0.4 m bl/d in 2021. That is a far cry from latest years booming US shale oil production growth. A shale oil production growth of +0.4 m bl/d per year is still a lot of new oil though.
Key assumptions in the US EIA forecast is that global demand will grow by 1.3% p.a. for the coming two years and that OPEC will stick to its current “price over volume” strategy and continue to hold back supply. EIA’s supply/demand balance “allows” OPEC to produce 29.2 m bl/d on average through the forecast horizon. The sharp decline in the need for OPEC oil over the latest couple of years is projected to halt and stabilize at around that level and then rise marginally in 2021. I.e. it projects that OPEC will be handed back a little bit of volume and market power and thus room to manoeuvre towards the end of 2021. But not a lot.
If EIA’s forecast materializes with no major disruptions in middle east supply, then we are looking at a very stable oil market with low oil price volatility for the coming two years: US shale oil production growth is slowing down and OPEC’s challenged position over the latest years is stabilizing while global oil inventories are projected to stay elevated and plentiful.
The oil price is now getting some vigour on the back of the US – China trade deal with hopes for global manufacturing revival and stronger oil demand growth. If this materializes it will put OPEC on a more stable footing and thus increase the probability that they will be able to stick with “price over volume” throughout the forecast horizon to end of 2021.
But even with a historically normal oil demand growth of 1.3% per year the oil price will still be at the mercy of OPEC’s choice of market strategy even in 2021. The US EIA is projecting non-OPEC production to grow by 0.9 m bl/d in 2021. If global oil demand grows at 1.3% that year it will hand some volume back to OPEC. Global inventories will still be high at that point, but it could be the gradual start of some lost volume starting to return back to OPEC.
True oil market strength won’t come before non-OPEC production starts to grow more slowly than global oil demand growth. This would mean increased call-on-OPEC crude oil and would hand some of the lost volume over the past years back to OPEC again. It would place OPEC in proper control of the market again with significantly reduced risk for a switch to back to “volume over price” (which would lead to a collapse in the oil price).
The US EIA projects that non-OPEC production will grow at +0.9 m bl/d YoY in 2021. This is below the historical oil demand growth rate of about 1.3% YoY (about 1.3 m bl/d) and thus projects a possible return of volume back to OPEC. That’s the turning point OPEC is looking for. However, the increase in call-on-OPEC in 2021 cannot all that easily be realized as increased production because inventories will still be high. If OPEC wants to draw down inventories at that time, they will still need to hold back production at unchanged level. EIA’s outlook is positive for OPEC, but it is at the very end of the two-year forecast period and highly vulnerable if global oil demand growth is weak. Global manufacturing revival will thus be key.
Ch1: US EIA Supply/demand balance. Fairly stable with plenty of oil in the market. Could imply low price volatility if OPEC sticks to its “price over volume” strategy all through the period. Some deficit in 2021 hands some volume back to OPEC as non-OPEC production is projected to grow at only 0.9 m bl/d YoY that year versus normal oil demand growth of 1.3 m bl/d.
Ch2: EIA projects OECD inventories to rise in 2020 and then a marginal decline in 2021. Plenty of oil in the market next two years unless we get a considerable supply outage in the middle east.
Ch3: EIA’s historical and projected OPEC production. Stabilizing next two years after a steep decline past two years. I.e. OPEC’s position looks set to stabilize at around 29.2 m bl/d versus a production of 29.6 m bl/d in December. What the outlook shows is that oil prices forecasted by the US EIA are totally reliant on OPEC sticking with “price over volume” for the coming two years and only produce about 29.2 m bl/d. No more
Ch4: The US EIA lifted its projection for US shale oil production by 150 k bl/d in 2020 and extended its forecast to 2021. Steady growth rate of 0.4 m bl/d in 2021. No flat-lining from 2020 to 2021
Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.
Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.
US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.
The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.
Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.
US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.
Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
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.
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