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Iranian nuclear negotiations at center stage

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

Brent crude is trading like it is April with snow one day and sunshine the next. We currently have spring refinery maintenance with reduced processing of crude by refineries and rising crude stocks. The strength of the crude curve is weakening, floating crude stocks are rising, speculative positions in crude are taking some exit and Brent crude prices have been ticking lower. Gasoline refinery margins are however extremely strong and oil product demand is set to revive yet more in the months to come. Over the market however hangs a dark shadow of Iran nuclear negotiations in Vienna which if successful would add more crude to the market.

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

Brent crude traded down 2.9% last week with a close of USD 62.95/bl and is trading down another 0.5% this morning to USD 62.6/bl. Since 19 March Brent crude has averaged USD 63.4/bl. While currently not far from this average but in general it is clear that prices have been ticking lower since late March and still are.

Center stage in the oil market these days is the ongoing negotiations in Vienna where world powers are trying to revive the Iranian Nuclear deal (JCPOA) which Biden helped to create when he was Vice President under Obama. There is a lot of noise around the ongoing negotiations with a lot of crossing interests. Israel and Saudi Arabia probably both want Iran to be in constant lock-down rather than to revive. And the Iranian Revolutionary Gard might also want to see a continued status quo rather than a normalization and a reopening of the country as this might threaten its current grip on power. But fundamentally all parties in the negotiations in Vienna wants to see the JCPOA deal revived and reinstated. Thus, fundamentally the outcome should be successful in the end. When is of course a large open question with most observers predict a lengthy and difficult process with revival of Iranian production in late 2021 or into 2022. President Rouhani of Iran is however set to end his presidency in June this year with expectations that Iran’ hard-liners will take over which would make it more difficult to succeed. Thus, the window of opportunity might be quite narrow. And President Biden seems to want to undo all of Donald Trump’s deeds as quickly as possible. So sooner rather than later could be the outcome of the Vienna negotiations. But sitting far from Vienna this is hard to tell. But what is clear is that the ongoing Iranian nuclear negotiations in Vienna is posing a bearish risk for oil.

On the physical part of the crude oil market it is obvious that there is currently not a continued strong draw-down in crude stocks as we have seen previously, and which has underpinned the previously increasing Brent crude oil backwardation.

Refineries are currently in spring maintenance; Chinese crude stocks are reportedly very high and April/May refinery maintenance there is unusually strong this year as well. OPEC ME Gulf loadings rose 1.6 m bl/d month on month in March and OPEC+ production is set to rise further in May, June and July. Floating crude oil stocks have as a result of all this been ticking higher from a low of 80 m bl in February to now 106 m bl versus a normal of 50-60 m bl.

Parts of the weakness right now is clearly the refinery turnaround season in combination with further production increases lined up by OPEC+ in the months ahead (600, 700, 841 k bl/d for May, June, July).

But all is not grim, and the current crude oil weakness is clearly exacerbated by the ongoing refinery maintenance season.

If we instead look at the oil products, we see that US crude based products are only 1.5 m bl/d below the 2019 level. And US oil demand is set to revive more. Gasoline is being shipped from east of Suez to West Africa at the highest rate since 2016 and diesel is being shipped from Europe to the US in an unusual reverse flow.

So amid all the noise of Iran JCPOA negotiations, crude oil weakness, refinery maintenance it is easy to forget the broad, underlying fundamental here that vaccines are increasingly rolled out and product demand is on its way back in the US and a little later in the EU.

Brent crude oil prices have fallen back. Ticking lower since the recent fall from USD 69.63/bl. From recent high-close to to recent low-closes we have still spanned less than USD 10/bl. Normal pull-backs during price recoveries are typically USD 10-12/bl. Thus the pull-back is still not all that big.

Brent price
Source: SEB, Bloomberg

Backwardation of the Brent crude oil curve has consistently softened since late February when the front month contract traded at a premium of USD 6.6/bl vs the 12 months contract. It now trades at only USD 3.1/bl. In comparison this backwardation averaged USD 2.9/bl through 2018 and 2019. Thus, current backwardation is very normal though it is clearly on a weakening trend right now.

Brent price in backwardation
Source: SEB, Bloomberg

Net long speculative positions in Brent and WTI has declined about 100 m bl from 926 m bl in early March to now 825 m bl. In comparison the average position in 2019 was 733 m bl. Speculative positions are thus still some 100 m bl above this level and could draw down to below 600 m bl if speculators take more exits.

Net long oil
Source: SEB, Bloomberg

The time-spread of the Brent crude oil curve given as month 1 minus month 6 versus the ranking of net long speculative positions in Brent crude. The backwardation/contango of the Brent crude oil curve is not solely a reflection of the physical market. It is also a reflection of ebbs and flows of speculative positions. As these moves in and out of the front-end of the front-end contracts of the crude curve they typically drag front-end prices higher or lower versus longer dated contracts. Further speculative exits would weaken the Brent crude backwardation yet more (flatten the curve) with the front-end contract then moving closer to longer dated prices.

Time spread in oil
Source: SEB, Bloomberg

The 5-year Brent contract now trades at USD 55/bl which is just USD 3.5/bl below the average of the 5-year contract from Jan 2016 to Dec 2019 of USD 58.5/bl. Thus, longer dated Brent crude oil contracts are now very close to “normal” so to speak. In a total flattening of the Brent crude oil curve if crude stocks build more and speculative positions takes yet more exit the Brent crude prices would naturally decline to USD 55/bl where the longer dated contracts are located right now. Though this is not our main scenario it paints a picture of where Brent crude would naturally head if further bearishness unfolds. And in terms of price-pullbacks we have still not spanned a full USD 10/bl since the recent high close of USD 69.63/bl on 11 March. Pull-backs of USD 10-12/bl are normal during price recoveries.

5 year brent price
Source: SEB, Bloomberg

If we however look at oil products we see that gasoline refining margins are now USD 11/bl in Europe versus a more normal USD 5-6/bl. I.e. they are very strong. And with more to come. This reflects strengthening gasoline demand together with strong naphtha (for plastics) demand where both products are at the lighter end of the barrel. Diesel and middle distillate cracks are still weak versus normal as demand for jet fuel is still subdued. Fuel oil 3.5 cracks are weakening and reports are that floating stocks of 3.5% is building off the coast of Iraq as it struggles to process this part of the barrel. Increasing exports of medium sour crude from OPEC+ is also weakening this part of the complex while production of light sweet crude from the US is overall still ticking lower.

Oil
Source: SEB, Bloomberg

US oil product demand is now only 1.5 m bl/d below its 2019 level if we only count crude oil based products. And more demand is set to come back by the day as the US economy opens up over the coming 2 months. If we include propane and polypropylene then US product demand is already very close to normal.

US oil product demand
Source: SEB, Bloomberg

Global, floating crude stocks have ticked higher from a low of 80 m barrels and now at 106 m barrels. Current refinery maintenance is part of this. The trend and the goal of OPEC+ was to move down to 50-60 million barrels (normal). But not yet.

Global, floating crude stocks
Source: SEB, Bloomberg

US oil rig count did not rise last week and there is now an emerging difference between the activation of drilling rigs from June 2016 versus the one that started in September 2020. Will shale oil producers actually be true to their words that this time will be different and that they won’t spend all income on drilling and instead be prudent? This emerging picture is lending support to longer dated contracts for 2022/23/24

US oil rig count

Source: SEB, Bloomberg

Analys

Brent prices slip on USD surge despite tight inventory conditions

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SEB - analysbrev på råvaror

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

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

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Oil inventories
Oil inventories
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Analys

Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

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

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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