Analys
More downside short term – Turn to bullish in mid-November
Brent crude shed 4.2% yesterday closing at $76.44/bl. It has traded slightly to the upside this morning but more downside seems likely in the short term. Bloomberg consensus is that US crude stocks fell 3.7 million barrels last week with EIA data due today at 16:30 CET. Member data from US API last night however indicated a 9.9 million barrel increase in US crude stocks last week. Over the past three week U.S. crude stocks increased by an average of 7 million barrels per week. Inventories do normally increase at this time of year but only by some 3 million barrels per week as refineries turn around their machines for winter operations. One key reason for the strong increase in U.S. crude stocks currently is the fact that export pipelines are full while domestic production continues to increase. It is thus good reason to expect that U.S. crude stocks continued to increase some 4 million barrels above the seasonal norm. I.e. we should expect data today at 16:30 CET to show a crude stock build of around 7 million barrels last week. This will likely push both the WTI price and the Brent crude oil price further down today.
Bjarne Schieldrop, Chief analyst commodities
The bearish crude oil price action yesterday was clearly impacted by bearish equity markets, falling 10 year interest rates, rising gold prices and a clear risk-off sentiment. The bearish oil market sentiment was in addition impacted by bearish oil talk by the Saudi Arabian energy minister Khalid Al-Falih who highlighted how Saudi Arabia could increase production both to 11 m bl/d and to 12 m bl/d if needed. The phrasing hade a very clear bearish touch to it in our view.
Mohammed bin Salman (MbS) is in a tough situation at the moment though not at all as tough a situation as Jamal Khashoggi who is actually dead. Since he came to power in 2017 he has consolidated his power, eliminated his rivals and side stepped government institutions and channelled all control into his own hands. MbS has taken very active, direct charge since he came to power (2017). There is no evidence yet tying MbS directly to the liquidation of Jamal Khashoggi though there are probably few who doubt that he was explicitly behind the matter.
MbS is today the ruling prince in Saudi Arabia but he is still not actually the king. He is not either really guaranteed to become the next king. The current ruling king in Saudi Arabia, the 82 year old King Salman bin Abdulaziz Al Saud can still appoint another prince to follow in his footsteps.
As such the communication from the Turkish pm Erdogan is interesting. In yesterday’s media message he did not mention the ruling prince MbS by a word but he praised the ruling king in Saudi Arabia and emphasized that the people behind the killing of Jamal Khashoggi must be taken to court and punished. To us this reads like trying to get MbS out of the way.
MbS today needs his remaining supporters more than ever. His future as king is probably at stake. As such we believe that he now listens much more carefully to Donald Trump’s call for more oil and a lower oil price in the run-up to the US mid-term election on November 6. It is in this context that we interpret Khalid Al-Falih’ bearish oil statement yesterday.
For the time being and the next 2-3 weeks during US refinery turnarounds we’ll have rising US crude stocks. We are also likely to get a further strengthening in the USD (normally strong seasonal dollar gains in November) which likely will hurt emerging market equities and currencies which again is negative for commodities in general. In addition we are also likely to get further bearish verbal intervention Khalid Al-Falih.
We expect most of this to turn to bullish again around mid-November. Donald Trump really wants a fairly high oil price since it creates both US oil independence and a lot of jobs. So after November 6 we are unlikely to hear any more bearish oil talk from him. MbS now also needs a higher oil price more than ever given the loss of friends, supporters as well as backing from international finance so bearish Saudi oil talk should also be a thing of the past. Normally US crude stocks should start to decline again in November though uncertain due to the full export pipelines. In addition the Iran sanctions will likely start to materialize in the form of declining oil inventories some time in November as US sanctions towards Iran fully kicks in on November 4. In general the Brent crude oil market looks tight spot wise but a bearish WTI currently helps to drive all oil benchmarks lower. But contango and rising crude stocks is really primarily in the US.
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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