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It’s artificial, but is still real and prices will tick higher

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7 år sedan

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23 april, 2018

Donald’s tweet on Friday that the OPEC cartel is keeping oil prices artificially high sent Brent crude down to an intraday low of $72.88/bl. The market later in the day totally disregarded the tweet sending Brent to its highest close of the week at $74.06/bl, up $0.4/bl on the day, +2% w/w and the highest close since November 2014. Of course Donald is totally right. The market is artificially tight because the OPEC+ cartel has deliberately cut production. In total its production is down 1.7 m bl/d versus Oct 2016. In our view there were deliberate cuts of 2,052 k bl/d in February if we cut out involuntary cuts of 810 k bl/d and production gains of 1,146 k bl/d. Of course Donald is right that it is the OPEC+ cartel which is driving the market. Tell us something new! That has been the case since their decision in October 2016. Of course the cartel has been lucky since their strategy has been supported by synchronised global growth and very strong oil demand growth as well as production in Venezuela falling like a rock. If it had not been for the very strong global oil demand growth their strategy would probably have been very close to failure since US crude oil production is reviving so strongly. In our estimate they will not be able to exit their cuts in 2019 without driving global inventories back up again. That is why an extension of their agreement to 2019 is on the agenda for the meeting in Vienna on June 20/21/22. So the market is artificially tight but it is the oil market reality of today. They are cutting, oil demand is strong, inventories are going down and prices are moving higher. The OPEC+ cartel will in our view be in control of the market in 2019 unless we have a global recession. They can put some of their cuts back into the market, but not all. Any involuntary production cuts by Venezuela, Libya, Mexico or possibly Iran will of course be welcomed by the deliberate cutters in the group.

Bjarne Schieldrop, Chief analyst commodities

If it had not been for cuts by the OPEC+ cartel since January 2017 we would probably have had an oil price still somewhere around $50-55/b

Since a 2017 high of 3059.7 in May 2017 the commercial OECD oil inventories have declined 218 million barrels which equals a 0.8 m bl/d daily draw down on average through the period. On average through that period the production of OPEC+ has been 1.4 m bl/d below its October 2016 production level in a mix of deliberate cuts, gains and involuntary cuts. Since the world is bigger than the OECD inventories there has probably been some inventory draws in non-OECD stocks as well. So while the OECD drawdown implied global deficit since May 2017 is 0.8 m bl/d the actual deficit may have been higher, but probably not higher than the net effective cuts of OPEC+ of 1.4 m bl/d over the same period. So yes, our view sides with Donald Trump that if it had not been for cuts by the OPEC+ cartel since January 2017 we would probably have had an oil price still somewhere around $50-55/b or even maybe sub-$50/bl.

There have however hardly been any negative responses to the OPEC+ cartel’s actions up until now on Friday with the tweet by Donald Trump. Not even Donald has acted before now even though production cuts have been going on since the start of 2017. Mostly the action by the cartel has been viewed positively across the board. I cannot remember to have seen any negative takes on it before now. Mostly the take has been that OPEC+ has been doing the world a favour.

OPEC+ has driven the global oil sector out of its investment hysteresis and out of its deep, dark abyss of despair and back into action

Through its cuts, inventory draws and higher prices OPEC+ has driven the global oil sector out of its investment hysteresis and out of its deep, dark abyss of despair and back into action. That is probably a good thing since it will help to reduce the risk for a significant undershoot in supply down the road due to the deep investment cuts in new conventional supply since 2014. And the jury is still out whether we will be able to dodge that bullet when the pipeline of legacy green field conventional oil investments from before 2014 starts to run dry in 2020. Our view is that there is clearly upside price risk due to this on this time horizon.

For the time being we remain bullish for Brent crude oil prices as OPEC+ cuts are intact, their agreement will and must be extended to 2019 at their June 20/21/22 in order to avoid raising inventories in 2019. For the rest of 2018 we expect inventories do draw lower with added supply risk due to Venezuela, Libya and possibly Iran.

If Donald wants to do something he can sign the sanction waivers on May 12 in order to safeguard Iranian crude oil supply. Else his dear voters and consumers are likely to face higher gasoline prices this summer.

Ch1: OPEC+ deliberate cuts, involuntary cuts and gains

Ch2: OPEC+showing who are doing what versus October 2018

C3: Crude and product weekly inventory data versus start of year. Heading lower. Down 23 m bl last week

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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1 dag sedan

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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2 dagar sedan

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.