Analys
Iranian nuclear negotiations at center stage
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
Source: SEB, Bloomberg
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.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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