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Iran – Reactive Saudi means price will tick higher



SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

Saudi Arabia pre-emptively and proactively lifted oil production last year in anticipation of US sanctions towards Iran. Sanctions were supposed to be more or less “cold turkey” starting November last year but Donald caved in and handed out a large portion of waivers. The result was that the pre-emptive production increase by OPEC+ last year instead managed to crash the oil price down to below $50/bl. Saudi Arabia is unlikely to make the same mistake again and is in our view likely to be reactive this time. First see how much oil supply is really lost and then increase production according to needs.

That means that the oil price is likely going to continue on its current bull-ride for a while before Saudi Arabia (++) decides to pitch in with substantially more production.

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

Iran probably exported about 2 m bl/d in March according to tanker tracker news. That is down 1 m bl/d from one year ago when they exported about 3.0 m bl/d liquids.

South Korea, India, Japan imported 0.75 m bl/d in March. They are likely going to comply fully so that their imports will likely fall to close to zero in May/June.

China imported 0.61 m bl/d in March versus waivers allowed by the US of 0.36 m bl/d. China has strongly opposed the US sanctions towards Iran: “The US is reaching beyond its jurisdiction” and “Our cooperation with Iran is open, transparent, lawful and legitimate”. We think that China can’t and won’t back down this time and that we could easily see an increase of Chinese oil imports from Iran up towards maybe 1.0 m bl/d

China Iran oil imports to increase and more Iran oil under the radar. There will also be an increasing amount of oil exports out of Iran which will go “under the sanctions radar”. This could probably amount to some 0.5 m bl/d and were probably already standing at around 0.3 m bl/d in March. So if China lifts imports from 0.6 m bl/d in March to instead 1.0 m bl/d and “under the radar” exports increase from 0.3 m bl/d in March to instead 0.5 m bl/d then Iran oil exports will continue at around 1.5 m bl/d versus around 2.0 m bl/d in March

Increasing collision course between the US and China. The “cold turkey” Iran sanctions from the US will force China to decide what to do, to hold its turf and claim its right to import oil from Iran. It will drive Iran closer to China and enable China to settle yet more oil in renminbi.

Russia is unlikely to hold back production in 2H-19. It reduced its production by some 0.2 m bl/d to 11.3 m bl/d in March in order to comply with the OPEC+ agreement from early December. It’ll probably lift production back up to 11.5 m bl/d in 2H-19 and then tick higher. It has been sensibly reluctant to pre-emptively promise to hold back production in 2H-19 and stated very clearly that it’ll manage production according to circumstances and that these circumstances will be evaluated when they meet with OPEC+ in Vienna in June 25/26.

Russian willingness to cut probably vanishes around $65/bl. Saudi Arabia would happily see the oil price back up at $85/bl. Russia’s willingness to cut in order to support the oil price probably vanishes around $65/bl. Russia is all-in joining Saudi Arabia on production cuts in times of surplus, rising stocks and Brent below $50/bl. It has however communicated very clearly that it is not all too eager to hold the oil price much above $65/bl as it will boost shale oil investments and production. That is alright as long as we are losing more and more supply from Iran and Venezuela. But what if those supplies come back into the market while US shale production growth is booming at the same time? Thus better to be safe than sorry and keep the oil price at around $65/bl and US shale oil activity at medium temperature.  

The market will lose some 0.5 – 1.0 m bl/d. We cannot really know how much supply will now be lost from Iran. We don’t think it will go to zero but rather that exports will decline from 2.0 m bl/d in March to instead some 1.0 – 1.5 m bl/d along with increasing imports by China and “unknowns”. I.e. the market will lose some 0.5 – 1.0 m bl/d. OPEC+ can easily adjust for this. Saudi Arabia could actually do it alone.

Saudi Arabia (OPEC+) in very good control of the market. OPEC+ in general and Saudi Arabia specifically will have a very good handle of the supply situation of the oil market. I.e. Saudi will put current cuts partially back into the market and can then cut again at a later time instead.

John Bolton aiming for Iran regime shift. It has been stated that Donald Trump does not know what he want to achieve in the Middle East but that John Bolton does: a regime shift. The zero waivers is a victory for John Bolton’s politics. It increases the risk for turmoil in the Middle East.

A higher oil price is good for the US. Donald Trump has for a long time tried to aim for a low oil price in support of the US consumer and his core voters. His economic advisors have however this spring argued that a high oil price is now increasingly positive for the US economy as a whole as it is now increasingly becoming a net oil exporter. The negative for the consumers is increasingly outweighed by the positives for the oil producers. Thus Donald going for no waivers means that Donald is now increasingly siding with the producers rather than the consumers.

A more fragile oil market balance and yet more supply from the US. Less oil from Iran and a higher oil price means more US shale oil drilling and more supply growth from the US. But we are also getting a more fragile oil market. Supply from Venezuela continues to decline while supply from Libya and Nigeria is unstable as well.

Crude quality matters – IMO 2020 and diesel. Global oil supply is losing more and more medium to heavy sour crude oil which instead is largely replaced by ultralight US shale oil supply. The former is rich on medium to heavy molecule chains where the heavy chains can be converted to medium. The ultralight is rich on gasoline and light products which cannot be converted to medium elements. Medium elements mean Diesel, Gasoil and Jet fuel. Due to new fuel regulations in global shipping from 1 January 2020 the global shipping fleet will consume a lot more diesel/Gasoil like molecules. So less supply of diesel/Gasoil rich crudes but more demand means yet stronger mid-dist cracks.

Medium sour crude is typically the crude Saudi Arabia and OPEC and Russia. So if the world is craving for more Diesel, Gasoil and Jet fuel it is also craving for more of this crude. It means that Saudi Arabia and Russia (and OPEC) are in very good control of the oil market, even better than headline numbers indicate due to quality issues.

Ch1: Iran consumes some 1.7 m bl/d. In addition to 2.7 m bl/d of crude production in March 2019 it probably also produced some 0.95 m bl/d of condensates with total production of liquids of about 3.65 m bl/d. Exports thus probably stood at around 2.0 m bl/d in March which is also what tanker tracker data indicates. Exports are probably going to decline to about 1.0 to 1.5 m bl/d in May June

Iran consumes oil

Ch2: Implied Iran hydro carbon liquids exports in m bl/d. US IEA data up to Sep 2018. Last data point estimated by SEB

Implied Iran hydro carbon liquids exports in m bl/d

Ch3: Saudi Arabia, UAE and Russia can easily lift production by 1.5 m bl/d

Saudi Arabia, UAE and Russia can easily lift production by 1.5 m bl/d
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Not below USD 70/b and aiming for USD 80/b



SEB - analysbrev på råvaror

Saudi Arabia again reminded the global oil market who is king. Oil price is ticking carefully upwards today as investors are cautious after having burned their fingers in the production cut induced rally to (almost) USD 90/b which later faltered. We expect more upside price action later today in the US session. The 1 m b/d Saudi cut in July is a good tactic for the OPEC+ meeting on 4-6 July. Unwind if not needed or force all of OPEC+ to formal cut or else….Saudi could unwind in August. The cut will unite Saudi/Russia and open for joint cuts if needed. I.e. it could move Russia from involuntary reductions to deliberate reductions

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

Adjusting base-lines and formalizing and extending May cuts to end of 2024. OPEC+ this weekend decided to extend and formalize the voluntary agreement of cuts in May. These cuts will now be and overall obligation for the group to produce 40.5 m b/d  on average in 2024 (not including natural gas liquids). There were some adjustments to reference production levels where African members got lower references as they have been unable to fill their quotas. UAE on the other hand got a 200 k b/d increase in its reference production level to match actual capacity increases. It was also a discussion of whether to change the baseline for Russia’s production. But these changes in baselines won’t make any immediate changes to production.

Unilateral cut of 1 m b/d by Saudi in July. The big surprise to the market was the unilateral 1 m b/d cut of Saudi Arabia for July. To start with it is for July only though it could be extended. The additional cut will 

1) Make sure the oil price won’t fall below 70
2) Prevent inventories from rising
3) Help prevent capex spending in upstream oil and gas globally is not getting yet another trough
4) Make for a great tactical negotiation setup for next OPEC+ meeting on 4-6 July
       a) If the 1 m b/d July cut is unnecessary, then it will be un-winded for August
       b) If it indeed was needed then Saudi can strong-arm rest of OPEC+ to make a combined cut from August. Else Saudi could revive production by 1 m b/d from August and price will fall.
5) It is roughly aligning actual production by Russia and Saudi Arabia. Actually it is placing Saudi production below Russian production. But basically it is again placing the two core OPEC+ members on equal footing. Thus opening the door for combined Saudi/Russia cuts going forward if needed.

Saudi produced / will produce /Normal production:
April: 10.5
May: 10.0
June: 10.0
July: 9.0
Normal prod: 10.1

Oil price to strengthen further. Especially into the US session today. We expect crude oil prices to strengthen further and especially into the US session today. Price action has been quite careful in response to the surprise 1 m b/d cut by Saudi Arabia so far today. Maybe it is because it is only for one month. But mostly it is probably because the market in recent memory experienced that the surprise cut for May sent the Dated Brent oil price to USD 88.6/b in mid-April before it again trailed down to almost USD 70/b. So those who joined the rally last time got burned. They are much more careful this time around.

USD 80/b is the new USD 60/b and that is probably what Saudi Arabia is aiming for. Not just because that is what Saudi Arabia needs but also because that is what the market needs. We have seen a sharp decline in US oil rig count since early December last year and that has taken place at an average WTI price of USD 76/b and Brent average of USD 81/b. Previously the US oil rig count used to expand strongly with oil prices north of USD 45/b. Now instead it is declining at prices of USD 75-80/b. Big difference. Another aspect is of course inflation. US M2 has expanded by 35% since Dec 2019 and so far US CPI has increased by 17% since Dec 2019. Assume that it will rise altogether by 30% before all the stimulus money has been digested. If the old oil price normal was USD 60/b then the new should be closer to USD 80/b if adjusting for a cumulative inflation increase of 30%. But even if we just look at nominal average prices we still have USD 80/b as a nominal average from 2007-2019. But that is of course partially playing with numbers.

Still lots of concerns for a global recession, weakening oil demand and lower oil prices due to the extremely large and sharp rate hikes over the past year. That is the reason for bearish speculators. But OPEC+ has the upper hand. This is what we wrote recently on that note: ”A recession is no match for OPEC+”

Aligning Saudi production with Russia. Russian production has suffered due to sanctions. With a 1 m b/d cut in July Saudi will be below Russia for the first time since late 2021. Russia and Saudi will again be equal partners. This opens up for common agreements of cuts. Reduced production by Russia since the invasion has been involuntary. Going forward Russia could make deliberate cuts together with Saudi.

Graph over Russia and Saudi oil production
Source: Rystad data

Short specs in Brent and WTI at 205 m barrels as of Tuesday last week. They will likely exit shorts and force the oil price higher.

Short specs in Brent and WTI
Source: Blberg data

Long vs. Short specs in Brent and WTI at very low level as of Tuesday last week. Will probably bounce back up.

Long vs. Short specs in Brent and WTI
Source: Blbrg data

US oil rig count has declined significantly since early Dec-2022 at WTI prices of USD 76/b and Brent of USD 81/b (average since Dec-2022).

US oil rig count
Source: Blbrg data

Historical oil prices in nominal and CPI adjusted terms. Recent market memory is USD 57.5/b average from 2015-2019. But that was an extremely bearish period with booming US shale oil production.

Historical oil prices in nominal and CPI adjusted terms.
Source: Blberg data. SEB graph and calculations
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A recession is no match for OPEC+



SEB - analysbrev på råvaror

History shows that OPEC cuts work wonderfully. When OPEC acts it changes the market no matter how deep the crisis. Massive 9.7 m b/d in May 2020. Large cuts in Dec 2008. And opposite: No-cuts in 2014 crashed the price. OPEC used to be slow and re-active. Now they are fast and re-active. Latest cut indicates a ”reaction-function” with a floor price of USD 70/b. Price could move lower than that in May, but JMMC meeting on 4 June and full OPEC+ meeting on 5-6 July would then change the course. Fresh cuts now in May will likely drive market into deficit, inventory draws, stronger prices. Sell-offs in May should be a good buying opportunities

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

Production cuts by OPEC+ do work. They work wonderfully. Deep cuts announced by OPEC in December 2008 made the oil price bottom at USD 33.8/b on Christmas Eve. That is USD 48.3/b adj. for CPI. The oil price then collapsed in 2014 when it became increasingly clear during the autumn that OPEC would NOT defend the oil price with confirmation of no-cuts in December that year.  The creation of OPEC+ in the autumn of 2016 then managed to drive the oil price higher despite booming US shale oil production. A massive 9.7 m b/d cut in production in May 2020 onward made the oil price shoot higher after the trough in April 2020. 

Historical sequence pattern is first a price-trough, then cuts, then rebound. This history however points to a typical sequence of events. First we have a trough in prices. Then we get cuts by OPEC(+) and then the oil price shoots back up. This probably creates an anticipation by the market of a likewise sequence this time. I.e. that the oil price first is going to head to USD 40/b, then deep cuts by OPEC+ and then the rebound. If we get an ugly recession.

But OPEC+ is faster and much more vigilant today. Historically OPEC met every half year. Assessed the situation and made cuts or no cuts in a very reactive fashion. That always gave the market a long lead-time both in terms of a financial sell-off and a potential physical deterioration before OPEC would react.

But markets are faster today as well with new information spreading to the world almost immediately. Impact of that is both financial and physical. The financial sell-off part is easy to understand. The physical part can be a bit more intricate. Fear itself of a recession can lead to a de-stocking of the oil supply chain where everyone suddenly starts to draw down their local inventories of crude and products with no wish to buy new supplies as demand and prices may be lower down the road. This can then lead to a rapid build-up of crude stocks in the hubs and create a sense of very weak physical demand for oil even if it is still steady.

Deep trough in prices is possible but would not last long. Faster markets and faster OPEC+ action means we could still have a deep trough in prices but they would not last very long. Oil inventories previously had time to build up significantly when OPEC acted slowly. When OPEC then finally made the cuts it would take some time to reverse the inventory build-up. So prices would stay lower for longer. Rapid action by OPEC+ today means that inventories won’t have time to build up to the same degree if everything goes wrong with the economy. Thus leading to much briefer sell-offs and sharper and faster re-bounds.

OPEC+ hasn’t really even started cutting yet. Yes, we have had some cuts announced with 1.5 m b/d reduction starting now in May. But this is only bringing Saudi Arabia’s oil production back to roughly its normal level around 10 m b/d following unusually high production of 11 m b/d in Sep 2022. So OPEC+ has lots of ”dry powder” for further cuts if needed.

OPEC reaction function: ”USD 70/b is the floor”. The most recent announced production cut gave a lot of information. It was announced on 2nd of April and super-fast following the 20th of March when Dated Brent traded to an intraday low of USD 69.27/b.

JMMC on 4 June and OPEC+ meeting on 5-6 July. Will cut if needed. OPEC+ will now spend the month of May to assess the effects of the newest cuts. The Joint Ministerial Monitoring Committee (JMMC) will then meet on 4 June and make a recommendation to the group. If it becomes clear at that time that further cuts are needed then we’ll likely get verbal intervention during June in the run-up to 5-6 July and then fresh cuts if needed.

Oil man Biden wants a price floor of USD 70/b as well. The US wants to rebuild its Strategic Petroleum Reserves (SPR) which now has been drawn down to about 50%. It stated in late 2022 that it wanted to buy if the oil price fell down to USD 67 – 72/b. Reason for this price level is of course that if it falls below that then US shale oil production would/could start to decline with deteriorating energy security for the US. Latest signals from the US administration is that the rebuilding of the SPR could start in Q3-23.

A note on shale oil activity vs. oil price. The US oil rig count has been falling since early December 2022 and has been doing so during a period when the Dated Brent price has been trading around USD 80/b.

IMF estimated social cost-break-even oil price for the different Middle East countries. As long as US shale oil production is not booming there should be lots of support within OPEC+ to cut production in order to maintain the oil price above USD 70/b. Thus the ”OPEC+ reaction-function” of a USD 70/b floor price. But USD 80/b would even satisfy Saudi Arabia.

IMF estimated social cost-break-even oil price for the different Middle East countries
Source: SEB graph, Bloomberg, IMF

US implied demand and products delivered is holding up nicely YoY and on par with 2019. So far at least. Seen from an aggregated level.

US implied demand and products delivered
Source: SEB graph and calculations, Blberg, US DOE

Total US crude and product stocks including SPR. Ticking lower. Could fall faster from May onward due to fresh cuts by OPEC+ of 1.5 m b/d

Total US crude and product stocks including SPR.
Source: SEB graph and calculations, Bloomberg, DOE

An oil price of USD 95/b in 2023 would place cost of oil to the global economy at 3.3% of Global GDP which is equal to the 2000 – 2019 average.

Oil cost as share of global economy
Source: SEB calculations and graph, Statista, BP
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Mixed signals on demand but world will need more oil from OPEC but the group is cutting



SEB - analysbrev på råvaror

A world where OPEC(+) is in charge is a very different world than we are used to during the ultra-bearish 2015-19 period where US shale AND offshore non-OPEC production both were booming. Brent averaged USD 58/b nominal and USD 70/b in real terms that period. The Brent 5yr contract is trading at USD 66/b nominal or USD 58.6/b in real-terms assuming no market power to OPEC+ in 2028. Could be, but we don’t think so as US Permian shale is projected by major players to peak next 5yrs. When OPEC(+) is in charge the group will cut according to needs. For Saudi that is around USD 85/b but maybe as high as USD 97/b if budget costs rise with inflation

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

No major revisions to outlook by the IEA last week in its monthly Oil Market Report.

Total demand to rise 2 m b/d, 90% of demand growth from non-OECD and 57% from Jet fuel. Total demand to rise by 2 m b/d YoY to 101.9 m b/d where 90% of the gain is non-OECD. Jet fuel demand to account for 57% of demand growth as global aviation continues to normalize post Covid-19. Demand for 2022 revised down by 0.1 m b/d and as a result so was the 2023 outlook (to 101.9 m b/d). Non-OPEC supply for 2023 was revised up by 0.1 m b/d. Call-on-OPEC 2023 was reduced by 0.2 m b/d as a result to 29.5 m b/d. Call-on-OPEC was 28.8 m b/d in Q4-22. The group produced 28.94 m b/d in Mar (Argus).

World will need more oil from OPEC. Call-on-OPEC to rise 1.6 m b/d from Q4-22 to Q4-23. IEA is forecasting a call-on-OPEC in Q4-23 of 30.4 m b/d. The world will thus need 1.6 m b/d more oil from OPEC YoY in Q4-23 and 0.46 m b/d more than it produced in March. Counter to this though the OPEC group decided to cut production by 1 m b/d from May to the end of the year. So from May onward the group will produce around 28 m b/d while call-on-OPEC will be 29.1 m b/d, 30.3 m b/d and 30.4 m b/d in Q2,3,4-23.

If the IEA is right about demand then the coming OPEC cuts  should drive inventories significantly lower and oil prices higher.

But the market doesn’t quite seem to buy into this outlook. If it had then prices would have moved higher. Prices bumped up to USD 87.49/b intraday on 12 April but have since fallen back and Brent is falling back half a percent today to USD 85.9/b.

Market is concerned for declining OECD manufacturing PMI’s. It is of course the darkening clouds on the macro-sky which is making investors concerned about the outlook for oil products demand and thus crude oil demand. Cross-currents in global oil product demand is making the situation difficult to assess. On the one hand there are significant weakening signals in global diesel demand along with falling manufacturing PMIs. The stuff which makes the industrial world go round. Manufacturing, trucking, mining and heavy duty vehicles all need diesel. (Great Blbrg story on diesel here.) Historically recessions implies a cyclical trough in manufacturing activity, softer diesel demand and falling oil prices. So oil investors are naturally cautious about buying into the bull-story based on OPEC cuts alone.

Cross-currents is making demand growth hard to assess. But the circumstances are much more confusing this time around than in normal recession cycles because: 1) Global Jet fuel demand is reviving/recovering post Covid-19 and along with China’s recent reopening. IEA’s assessment is that 57% of global demand growth this year will be from Jet fuel. And 2) Manufacturing PMIs in China and India are rising while OECD PMIs are falling.

These cross-currents in the demand picture is what makes the current oil market so difficult to assess for everyone and why oil prices are not rallying directly to + USD 100/b. Investors are cautious. Though net-long specs have rallied 137 m b to 509 m b since the recent OPEC cuts were announced.

The world will need more oil from OPEC in 2023 but OPEC is cutting. The IEA is projecting that non-OPEC+ supply will grow by 1.9 m b/d YoY and OPEC+ will decline by 0.8 m b/d and in total that global supply will rise 1.2 m b/d in 2023. In comparison  global demand will rise by 2.0 m b/d. At the outset this is a very bullish outlook but the global macro-backdrop could of course deteriorate further thus eroding the current projected demand growth of 2 m b/d. But OPEC can cut more if needed since latest cuts have only brought Saudi Arabia’s production down to its normal level.

OPEC has good reasons to cut production if it can. IEA expects global oil demand to rise 2 m b/d YoY in 2023 and that call-on-OPEC will lift 1.6 m b/d from Q4-22 to Q4-23. I.e. the world needs more oil from OPEC in 2023. But OPEC will likely produce closer to 28 m b/d from May to Dec following latest announced production cuts

Source: SEB graph, IEA, Argus

Market has tightened with stronger backwardation and investors have increased their long positions

Source: SEB calculations and graphs. Blbrg data

Net long specs in Brent + WTI has bounced since OPEC announcement on coming cuts.

Source: SEB calculations and graph, Blbrg data

Saudi Arabia’s fiscal cost-break-even was USD 85/b in 2021 projected the IMF earlier. Don’t know when it was projected, but looks like it was before 2020 and thus before the strong rise in inflation. If we add 15% US inflation to the 2021 number we get USD 97/b. Inflation should lift budget costs in Saudi Arabia as it is largely a USD based economy. Though Saudi Arabia’s inflation since Q4-19 is reported as 8% to data while Saudi cost-of-living-index is up by 11%. Good reason for Saudi Arabia to cut if it can cut without loosing market share to US shale.

Source: SEB graph, IMF data

Adjusting for inflation both on a backward and forward basis. The 5yr Brent price is today at USD 66.3/b but if we adjust for US 5yr inflation it is USD 58.6/b in real terms. That is basically equal to the average Brent spot price from 2015-2019 which was very bearish with booming shale and booming offshore non-OPEC. Market is basically currently pricing that Brent oil market in 5yrs time will be just as bearish as the ultra-bearish period from 2015-2019. It won’t take a lot to beat that when it comes to actual delivery in 2028.

Source: SEB calculations and graph, Blbrg data

Nominal Brent oil prices and 5yr Brent adj. for 5yr forward inflation expectations only

Source: SEB claculations and graph, Blbrg data

ARA Diesel cracks to Brent were exceptionally low in 2020/21 and exceptionally high in 2022. Now they are normalizing. Large additions to refining capacity through 2023 will increase competition in refining and reduce margins. Cuts by OPEC+ will at the same time make crude oil expensive. But diesel cracks are still significantly higher than normal. So more downside before back to normal is achieved.

Source: SEB graph and calculations. Blbrg data
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