Analys
Market likely to rewrite all Brent crude forecasts for 2018

Exactly two weeks ago we argued that Brent crude would probably reach $65/b before Christmas. And wow has that delivered quicker than we thought. Of course yesterday’s 3.5% jump to $54.27/b (intraday high of $54.44/b) did come on the back of the political events in Saudi Arabia. Princes, billionaires and ministers were arrested and accused of corruption while the real reason of course was to secure the way to the throne for Prince Mohammed Bin Salman (MBS). In our view the events in Saudi Arabia this weekend were merely a catalyst which drove the oil price higher and more quickly than expected. In general we see little reason to be concerned for the supply of Saudi Arabia’s production. That was probably also the main view by European traders yesterday as Brent crude traded only marginally up in the European season (aligned with some positive moves in metals) before US traders came into the market and kicked it higher.
What is really at the heart of why we think everyone now will revise their Brent crude forecasts for 2018 is the realisation that the Brent crude 1 month contract, the Brent “spot price”, is not really what the US shale oil players are getting for their crude oil. Whatever unhedged oil the US shale oil players currently are producing they will only get $57.3/b or the WTI 1 month price. And they won’t even get that as there is a transportation cost from the well-head to Cushing Oklahoma as a discount to that as well.
More importantly is what’s dictating shale oil players’ profitability for new investments, new drilling and additional wells. That is not the front month WTI price but the 1.5 year forward WTI price (the WTI 18 month contract) at which they can hedge new investments. And that price yesterday closed at only $53.3/bl. I.e. for new investments US shale oil players are only offered $53.3/bl for delivery at Cushing Oklahoma which is far away from the current Brent 1mth price of $64/b.
The WTI 18 mth contract traded as high as $57.4/b earlier in the year. So while the Brent 1mth price is rising to new highs of the year and highest since 2015, the WTI 18mth contract is still 3 dollar lower than its high this year and not at all giving a strong stimulating investment push for shale oil producers.
This is clearly a dream come true for OPEC. That they can have a high Brent 1mth price close to $65/b while at the same time not giving a strong price stimulus to US shale oil producers as they are only offered $53.3/bl on the curve. Yes, Christmas did indeed come early for OPEC this year! Then of course the question is whether Christmas will last all of 2018 or not. So what is at the heart of this Christmas present?
It is two-fold.
One is the increasing Brent crude oil backwardation with the Brent 1mth contract trading at a $5.1/bl premium to the the Brent 18mth contract. This comes partly as a result of the constant draw down in global crude oil inventories and partly due to the increasing net long Brent speculative positioning. And yes there is a relationship between backwardation and speculative length. When net length is increasing the backwardation is increasing.
At the moment net long Brent is at an all-time high. That will of course not last for ever. So in the next market turn when specs pull out the level of backwardation will soften somewhat as well. However, assume that OPEC+ will “hold” the market all through 2018 so that inventories continue yet lower. Not necessarily steeply lower but at least ticking lower. Then the Brent crude oil backwardation should not fall back to zero. Rather it should hold up at some level and then strengthen with declining stocks. In perspective the Brent 1 to 18 mth backwardation time spread traded around $7/b from mid-2011 to mid-2014 when Brent crude traded around $110/b. So the $5/b backwardation may be a bit rich as we are not quite back to a 2011-2014 situation quite yet.
The second and more important one is the increasing Brent to WTI spread we have witnessed this year. And it is not just in the front of the curves where the spread has widened out. It has happened all along the curve. In January the Brent 18mth to WTI 18 mth spread only traded at $1/b while it now trades at close to $6/bl.
When we look at global oil inventories they have been drawing down relentlessly since mid-March this year. In the US we have seen that oil product stocks have drawn down to normal with middle distillate stocks there down to below now ahead of winter. US crude stocks have however been a much more tedious and slow draw down as they in total still stand more than 100 mbl above a fair normal. However, if we split out the US mid-Continent which contains Cushing Oklahoma stocks where the WTI crude is priced we see that non-mid-Continent US crude stocks have been drawn down rapidly. The mid-Continent stocks however are actually now higher than a year ago and rising. And since this is where the WTI crude is priced it is holding down the WTI price.
The WTI crude curve is actually still in contango at the front end of the curve due to this. And since stocks in the mid-Continent are rising higher there is an increasing risk that the WTI crude price might break down into deeper front end contango and an even wider Brent to WTI spread and thus a lower WTI 1mth price.
We are thus likely going to witness a yet widening divergence between Brent and WTI crude oil price. Especially in the front. That is also why the net long speculative positions in WTI is not at an all-time-high as is the case with Brent positions. And those with a long position in WTI are at risk for a break-down in the WTI prices as the mid-Continent stocks continues to rise.
A key question for us at the moment (which we are unable to answer) is whether the rising crude stocks in the US mid-Continent now is due to natural bottlenecks due to lack of pipeline investments or whether it is due to damaged infrastructure following the Hurricane Harvey.
If it is the first then the bottleneck is probably of a lasting character. Then US shale producers have probably reached the short/medium term transportation capacity of getting their oil to the market. It will of course not last for ever as there is always possible to lay more pipes, but it takes time. In that case the Brent crude oil price can continue to rally without having to worry too much because the WTI price which then is stuck in surplus in the mid-US Continent. Then there is no point for US shale oil producers to increase production as they cannot easily get it to market. And the subdued WTI price will be the one telling them not to invest more and not to produce more since it will be low due to high mid-Continent stocks.
If the rising mid-Continental stocks are due to Hurricane Harvey damages then it might be quicker to mend. Then the Brent to WTI spread should contract from current levels once the Harvey damage is mended.
Looking at the US mid-Continent stocks we see that they started to rise at the end of August which was right at the time of Hurricane Harvey and has gone up by some 10 mbl since then. However, this might not be a good indication that Harvey is the culprit as inventories normally rise some 4 mbl during this period anyhow.
We are not quite sure whether it is Hurricane Harvey damage which drives US mid-Continental stocks higher or whether it is structural under investments in pipelines. However, as US shale oil production continues to rise (as we think it will in 2018) the pressure in terms of utilization of US oil pipeline transportation capacities will be increasingly taxed which is likely to hold the Brent – WTI price spread high.
So Brent crude oil price forecasts for 2018 are likely going to be revised up across the board as they now are likely to incorporate a more substantial Brent – WTI 1mth price spread for 2018. Current Brent crude 2018 Bloomberg consensus forecast currently stand at $56/bl with market pricing at $62/bl while SEB’s standing forecast from September is $55/bl.
The fundamental assumption for most forecasting methodologies is still that US shale oil is on the margin. For a long time the assumption has been that US shale oil can deliver almost unlimited at WTI $50/b. That assumption is now breaking down. US shale oil producers have not made money this year with investors now DEMANDING that they deliver profits and not just promises. While it is difficult to say exactly at what level they will create profits it is natural to shift the shale oil base floor price assumption from $50/bl to $55/bl. I.e. assuming that US shale oil production is not going through the roof with a WTI 18 mth price at $55/b. I.e. the WTI price is allowed to trade at $55/bl both in spot and on the curve without creating surplus havoc in the global market.
We thus expect revisions of Brent crude oil forecasts to assume a WTI 1mth crude price delivered at around $55/bl next year and then with a Brent 1mth to WTI 1mth price spread to Brent on top of some $5-7/bl thus placing Brent forecasts for 2018 at around $60-62/bl. Such assumptions are likely to affect our own Brent crude oil forecast for 2018 when we revise it in February next year.
Ch1) US commercial crude oil stocks less the US mid-continent are drawing down rapidly
Getting close to normal by end of year
Ch2) US mid-Continent stocks (Pad2) have however rising and above last year.
This is where WTI crude is priced in Cushing Oklahoma and is why the WTI crude curve has front end contango with risk for deeper contango
Ch3) US shale oil regions
Ch4) Not all shale oil producers need to pass through Cushing Oklahoma
But the exact magnitude and location of bottlenecks getting shale oil to the U.S. Gulf we don’t know.
Looks like Eagle Ford and Permian have more options to bypass Cushing getting right to the US Gulf.
Are Eagle Ford and Permian producers actually getting a price closer to seaborne crude prices than to WTI?
Ch5) Brent and WTI crude curves moving higher over last two weeks
Ch6) Brent 1mth contract has rallied to close to $65/b.
Steepening Brent backwardation and widening Brent – WTI crude spreads has left the WTI 18 mth contract in the doldrums no higher than $53.3/b
Ch7) The WTI 18 mth forward price at $53.3/b still short of year high of $57.4/b
Ch8) Brent 1mth to WTI 1mth crude spread has blown out
Ch9) And US crude oil is flushing out of the US as exports as a result of the strong widening in Brent to WTI
But as we see above it is not flowing out of the US mid-Continent where WTI is priced
Ch10) US shale oil players are kicking drilling rigs out of the US at a WTI 18mth curve price of $50/bl
They can of course drill more but then they are begging a higher forward WTI price.
Risk for a smoke and mirror in these statistics as shale players are currently running some 100 drilling rigs more than they need.
They need to kick they out in order to align drilling with completions which still ran at a surplus in September as they drilled more than they completed.
We expect shale players to kick out 5-10 rigs every week to Christmas.
It will be sentiment bullish, but unlikely to impact completions all that much in 2018 as they have a load full of DUCs they can complete in 2018
Ch11) US shale players kicking out rigs at a WTI18 curve price of $50/bl
Ch12) Will shale players hold their horses as the mid-term WTI forward price moves higher?
Good reasons to believe that they will kick out more drilling rigs at WTI curve $50/b as investors demand profits
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
Waiting for the surplus while we worry about Israel and Qatar

Brent crude makes some gains as Israel’s attack on Hamas in Qatar rattles markets. Brent crude spiked to a high of USD 67.38/b yesterday as Israel made a strike on Hamas in Qatar. But it wasn’t able to hold on to that level and only closed up 0.6% in the end at USD 66.39/b. This morning it is starting on the up with a gain of 0.9% at USD 67/b. Still rattled by Israel’s attack on Hamas in Qatar yesterday. Brent is getting some help on the margin this morning with Asian equities higher and copper gaining half a percent. But the dark cloud of surplus ahead is nonetheless hanging over the market with Brent trading two dollar lower than last Tuesday.

Geopolitical risk premiums in oil rarely lasts long unless actual supply disruption kicks in. While Israel’s attack on Hamas in Qatar is shocking, the geopolitical risk lifting crude oil yesterday and this morning is unlikely to last very long as such geopolitical risk premiums usually do not last long unless real disruption kicks in.
US API data yesterday indicated a US crude and product stock build last week of 3.1 mb. The US API last evening released partial US oil inventory data indicating that US crude stocks rose 1.3 mb and middle distillates rose 1.5 mb while gasoline rose 0.3 mb. In total a bit more than 3 mb increase. US crude and product stocks usually rise around 1 mb per week this time of year. So US commercial crude and product stock rose 2 mb over the past week adjusted for the seasonal norm. Official and complete data are due today at 16:30.
A 2 mb/week seasonally adj. US stock build implies a 1 – 1.4 mb/d global surplus if it is persistent. Assume that if the global oil market is running a surplus then some 20% to 30% of that surplus ends up in US commercial inventories. A 2 mb seasonally adjusted inventory build equals 286 kb/d. Divide by 0.2 to 0.3 and we get an implied global surplus of 950 kb/d to 1430 kb/d. A 2 mb/week seasonally adjusted build in US oil inventories is close to noise unless it is a persistent pattern every week.
US IEA STEO oil report: Robust surplus ahead and Brent averaging USD 51/b in 2026. The US EIA yesterday released its monthly STEO oil report. It projected a large and persistent surplus ahead. It estimates a global surplus of 2.2 m/d from September to December this year. A 2.4 mb/d surplus in Q1-26 and an average surplus for 2026 of 1.6 mb/d resulting in an average Brent crude oil price of USD 51/b next year. And that includes an assumption where OPEC crude oil production only averages 27.8 mb/d in 2026 versus 27.0 mb/d in 2024 and 28.6 mb/d in August.
Brent will feel the bear-pressure once US/OECD stocks starts visible build. In the meanwhile the oil market sits waiting for this projected surplus to materialize in US and OECD inventories. Once they visibly starts to build on a consistent basis, then Brent crude will likely quickly lose altitude. And unless some unforeseen supply disruption kicks in, it is bound to happen.
US IEA STEO September report. In total not much different than it was in January

US IEA STEO September report. US crude oil production contracting in 2026, but NGLs still growing. Close to zero net liquids growth in total.

Analys
Brent crude sticks around $66 as OPEC+ begins the ’slow return’

Brent crude touched a low of USD 65.07 per barrel on Friday evening before rebounding sharply by USD 2 to USD 67.04 by mid-day Monday. The rally came despite confirmation from OPEC+ of a measured production increase starting next month. Prices have since eased slightly, down USD 0.6 to around USD 66.50 this morning, as the market evaluates the group’s policy, evolving demand signals, and rising geopolitical tension.

On Sunday, OPEC+ approved a 137,000 barrels-per-day increase in collective output beginning in October – a cautious first step in unwinding the final tranche of 1.66 million barrels per day in voluntary cuts, originally set to remain off the market through end-2026. Further adjustments will depend on ”evolving market conditions.” While the pace is modest – especially relative to prior monthly hikes – the signal is clear: OPEC+ is methodically re-entering the market with a strategic intent to reclaim lost market share, rather than defend high prices.
This shift in tone comes as Saudi Aramco also trimmed its official selling prices for Asian buyers, further reinforcing the group’s tilt toward a volume-over-price strategy. We see this as a clear message: OPEC+ intends to expand market share through steady production increases, and a lower price point – potentially below USD 65/b – may be necessary to stimulate demand and crowd out higher-cost competitors, particularly U.S. shale, where average break-evens remain around WTI USD 50/b.
Despite the policy shift, oil prices have held firm. Brent is still hovering near USD 66.50/b, supported by low U.S. and OECD inventories, where crude and product stocks remain well below seasonal norms, keeping front-month backwardation intact. Also, the low inventory levels at key pricing hubs in Europe and continued stockpiling by Chinese refiners are also lending resilience to prices. Tightness in refined product markets, especially diesel, has further underpinned this.
Geopolitical developments are also injecting a slight risk premium. Over the weekend, Russia launched its most intense air assault on Kyiv since the war began, damaging central government infrastructure. This escalation comes as the EU weighs fresh sanctions on Russian oil trade and financial institutions. Several European leaders are expected in Washington this week to coordinate on Ukraine strategy – and the prospect of tighter restrictions on Russian crude could re-emerge as a price stabilizer.
In Asia, China’s crude oil imports rose to 49.5 million tons in August, up 0.8% YoY. The rise coincides with increased Chinese interest in Russian Urals, offered at a discount during falling Indian demand. Chinese refiners appear to be capitalizing on this arbitrage while avoiding direct exposure to U.S. trade penalties.
Going forward, our attention turns to the data calendar. The EIA’s STEO is due today (Tuesday), followed by the IEA and OPEC monthly oil market reports on Thursday. With a pending supply surplus projected during the fourth quarter and into 2026, markets will dissect these updates for any changes in demand assumptions and non-OPEC supply growth. Stay tuned!
Analys
The path of retaking market share goes through a lower price

OPEC+ on Sunday decided to lift production caps by an additional 137 kb/d in October. Thereby starting to unwind the last tranche of voluntary cuts of 1.66 mb/d. It will unwind this last tranche gradually until the end of 2026 depending on market conditions it said.

Brent closed on Friday at USD 65.5/b. The market is up at USD 66.7/b this morning. That is below the high on Friday and USD 2.4/b below where it closed on Tuesday last week. So while the decision by the group was less aggressive than the market feared on Friday afternoon, it was still a very different from the group than what most market participants expected at the beginning of last week.
Our expectation last week was for the group to unwind the remaining 1.66 mb/d of voluntary cuts over only three months to the end of this year and get done with it. But the group decided on a slower path. It will not shock its way back to a larger market share like it tried without much luck in 2014/15/16. It will instead push steadily, steadily and take it back. Allowing US shale oil players time to step aside. But step aside they must.
The implied message from the group this weekend was 1) They are in the process of retaking market share and 2) As long as the price is USD 65.5/b (close on Friday) the group will revive more production.
What we know is that this process of retaking market share by OPEC+ goes through a lower oil price. And that lower price is below USD 65.5/b. A lower price to stimulate more demand. A lower price to hamper supply by non-OPEC+ (predominantly US shale oil).
The fact that Brent crude is still trading at USD 66.6/b despite this very explicit message from the group this weekend is down to still low US and OECD crude and product inventories. The front-end backwardation of the Brent futures curve is a reflection of this tightness. But this tightness will ease along with more oil from OPEC+ over the coming months. The Brent crude oil forward curve will then flip into full contango all along the curve. We then expect the front-end of the Brent curve to trade around USD 55/b with WTI close to USD 50/b.
At the beginning of this year BNEF estimated US shale oil cost break even levels to be in a range from USD 40/b to USD 60/b with a volume weighted average of USD 50/b. The latter our calculation. So a WTI price at the middle of that range is probably what is needed to force activity in US shale oil activity yet lower.
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