Analys
Market at unease over high Brent specs and OPEC+ 2018 decision but Brent backwardation should attract yet more long Brent specs
OPEC compliance is back in focus as compliance fell in September to 990 kb/d of cust versus a pledge of 1200 kb/d for the cutters. OPEC’s meeting on November 30th in Vienna thus coming into focus. Market is concernd for oil market balance in 2018 and is starting to feel at unease over whether OPEC+ will cut all through 2018 or not. We think they need to but we also think they will.
Brent net long managed money reached a record high level the week before last. It fell back only marginally last week. Brent crude is thus at risk to the downside if speculators/investors decides to take yet more money off the table. Thus correction since Brent 1mth reached a new ytd high the week before last may not be over. The general backdrop for Brent does however continue to be positive. The global financial and economic backdrop is positive. Oil inventories continues to decline on the back of strong oil demand growth and cuts by OPEC+ with the result that Brent backwardation should continue to strengthen. Thus even if we see a correction in Brent now driven by speculative money we should see more money heading for Brent long specs going forward. Not less.
From Friday to Friday the Brent Dec-17 contract lost 2.9% closing the week at $55.62/b. The longer dated contract Brent Dec-2020 lost 1.7% with a close of $54.06/b.
Last week’s sell-off was clearly a continuation of the sell-off that kicked in when Brent crude front month reached a new year to date high the week before last when it printed $59.49/b.
To us the sell-off seems technically driven as a counter reaction to Brent crude front month reaching a new year to date high. Net long Brent speculative positions reached its highest historical level in the week before last (records back to 2011) while it fell back marginally last week. With such high levels it does not take much for a correction to take place.
The general back-drop last week was positive with global equities gaining 1%, industrial metals gaining 2.4% while natural gas and coal gaining 3.8% (ARA coal Dec-18) and 1% (EU gas Q4-18).
On oil specifics we saw US crude, distillates and gasoline stocks declining 7 mb while global floating storage of crude and products fell 16 mb. In sum there were a lot of supportive winds last week but Brent crude countered it with a continued to sell off as record high specs took money off the table in a technical reaction to the high print of the year in the week before last.
This morning Brent crude has been trading in positive and negative territory but clos to unchanged and undecided.
In focus this morning is OPEC compliance for September which fell back slightly from August. The members with pledges delivered a cut of 990 kb/d of in September versus pledges of 1.2 mb/d. The OPEC producers with no obligations to cut have increased production by 530 kb/d (versus their October production). In effect OPEC’s total cuts versus its 2017 October level only amounted to 460 kb/d in September.
This is negative since it not a lot. It is positive since inventories are falling rapidly despite the fact that OPEC in total is not cutting a lot. However, the 990 kb/d held back by the cutters in OPEC in September will move back into the market at some point in time in the future again.
Some concern now is that OPEC’s exports will rise since the peak domestic oil demand in OPEC is behind us. In addition refineries will move off-line for autumn maintenance also reducing off-take for crude. OPEC’s upcoming meeting on Nov 30th is putting the spot light back on the 2018 balance. Will they or won’t they roll cuts beyond 1Q18? In our view it is needed and that view is shared by many. Our view is also that they will roll cuts forward since the magnitude of needed cuts is manageable. However the issue creates unease in the market as we run towards the Nov 30th meeting and proper decision by OPEC (+ Russia etc) some time in 1Q18.
Have we now come to the end of the correction we have seen the last two weeks? Brent speculative positions are still close to record high with room to pull more money off the table. However, the backdrop is still fairly positive as inventories continue to draw down which should be supportive for further strengthening of the backwardation of the Brent crude forward curve which is attractive for long positions.
In our view the Backwardation of the Brent crude forward curve is likely to continue to attract yet more money into additional net long speculative positions. This is because the backwardation hands investors/speculators a positive roll yield even if the Brent front month only trades sideways. And as we see in the rest of financial markets there is lots of money chasing yield in a low yield world. Over the past 20 trading days the Brent backwardation measured on the back of the 1-3 mth Brent time spread has averaged an annualized positive roll yield of +3.9%.
Thus despite the fact that net long Brent spec is close to record high we should see more passive money being allocated to Brent long positions. As long as inventories continue to draw down as they currently do with further strengthening of the Brent backwardation. As long as alternative yields around the world is very low as they are. As long as the general global growth outlook looks positive as it does with strong oil demand growth. Yes then we should see more long specs heading to Brent.
The current sell-off may thus not be too deep. The general backdrop is positive. Inventories are declining. Brent backwardation is likely to strengthen further and yet more passive money is likely going to head the Brent long positions.
Ch1: Brent 1-3 mth annualized roll-yield in the positive – Attracting long specs
Passive money likely to continue to roll into long front end Brent positions with a positive roll yield
Ch2: WTI oil in dollar allocation still well below prior highs
But the WTI curve is in contango so no rush to enter additional longs there
Ch3: Brent net long allocation recently reached record high of close to USD 30 billion
Thus plenty of room for a pull-back as we have seen the last two weeks
But Brent backwardation is likely to lure yet more passive long allocations to Brent front end contracts
Ch4: Brent net long managed money allocations at uncomfortable high levels
Ch5: Brent net long managed money allocations at uncomfortable high levels
Ch6: OPEC cutters delivered close to promissed cuts even though they inched slightly higher in Sep
Ch7: OPEC cutters and no-cutters. Net cuts of only 460 kb/d. But cutters deliver close to target
Ch8: OPEC total production. Not cutting all that much. Ytd YoY OPEC’s production is down only 115 kb/d
Ch9: Inventories continue to fall in weekly data
Ch10: Crude forward curves. Sell-off along the curve but Brent still in backwardation
Ch11: US oil rig count down by 2 last week
Ch12: US shale oil rigs count change. Price – rig relationship not what it used to be
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.
Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.
US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.
The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.
Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.
US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.
Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
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.
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