Analys
More for longer and highly vulnerable ($75-85/bl)


The message from Saudi Arabia is now that it will take longer than first expected before production is fully back to normal. We are also getting military assessments saying that attacks of the nature seen on Saturday in Saudi Arabia are fundamentally difficult to protect against and that you basically need to take out the threat before it lifts off the ground. So more for longer and highly vulnerable for future, comparable attacks is the current assessment.
That is all together more bullish than the market action during most of Monday trading session when Brent crude after the first initial spike to close to $72/bl quite quickly fell back again to ~$65/bl.
We have lived so long now with abundant and booming US shale oil production growth that it is hard to shake the market out of its overwhelming sense of affluence. And in some aspects the market has some rights in being relaxed as OECD commercial inventories in July stood some 300 m bl above where they were in mid-summer 2014 while non-OPEC supply will grow strongly in 2020.
The current cooling global economic growth is also having a strongly dampening impact on the oil market sentiment. We don’t need to go further back than late April when we had a Brent crude oil price of close to $75/bl. Following Saturday’s strike at the center of the global oil market the oil price did not even manage to get up to the level where Brent traded for more normal reasons in April. That tells you that there is quite a broad based sentiment holding a bearish hand over the market.
It has been reported that US shale oil players are utilizing the bounce in the oil prices as an opportunity to add forward hedges at higher prices. I.e. their main take at the moment is that oil prices will likely fall back again rather than spiral upwards. So take the added gain in prices and run.
Speculators with short positions in the market may however think differently in the face of more outage for longer in Saudi Arabia and fundamentally vulnerable installations versus future potential attacks. It would be sensible to cut the losses and close such short positions for now in our view given the latest information. Consumers who have held back on forward buying in the hope for lower forward prices for 2020 and 2021 may also cave in and buy before a potential new attack on Saudi Arabia’s oil installations materializes.
Thus while market participants are still quite relaxed about the whole situation they may now gradually start to change their mind with shorts likely covering positions and consumers buying before any new attacks potentially can occur.
So what about counter attacks? Saudi Arabia is now fully blaming Iran (or at least saying it was Iranian military material) and has stated that the attack was a mix of Iranian drones and rockets. Given the severity of the attack on Saturday it is difficult to see how Saudi Arabia cannot retaliate. But if Saudi Arabia is fundamentally vulnerable and unable to protect itself from comparable future attacks how can they retaliate? It would seem to be more or less like asking for yet more damages to Saudi Arabia’s oil infrastructure down the road.
Donald Trump on the other hand has pulled away from “Locked and loaded” and stated that what he meant was that the US is loaded with oil and with no need for Middle East oil. What a great twist!!
When Donald Trump kicked out the US national security adviser John Bolton one week ago it looked like Donald Trump wanted to move towards negotiations with Iran’s president Hassan Rouhani.
If the US now joins in with Saudi Arabia with a retaliatory attack on Iran it would weaken president Rouhani while it would strengthen the position of Iran’s Revolutionary Guard which is probably the once who stood behind Saturday’s attack on Saudi Arabia in the first place. I.e. it would strongly reduce the possibility for the US to move down a negotiating path with president Rouhani which is probably what is needed in order to get out of this mess.
Ram Yavne, a retired brigadier general in the Israel Defense Forces has stated according to Bloomberg: “Iranian’s have tried several times to raise the price of oil to show the world that the price for blocking Iran’s ability to produce oil is very high”.
Even though the US now has become more or less self sufficient with oil (at least if you include imports from Canada) and that it does not need to entangle it selves in armed conflicts in the Middle East in order to safeguard supply of oil there it’s economy still strongly impacted by higher or lower oil prices.
Thus a sharply higher oil price will be an additional negative headwind for a slowing global economy and a slowing US economy. As such it is also a threat to the re-election of Donald Trump in November 2020 who need happy consumers in a blossoming US economy to re-elect him.
It is difficult to see how we are going to get out of this mess, but it may seem like Iran has a very strong position. With little effort it can do a lot of damage to both Saudi Arabia and to Donald Trumps potential to be re-elected. If Donald Trump will have to eat humble pie or can get out of this without loosing face remains to be seen but this is indeed a tricky situation.
For now the market is preparing itself for a likely counter attack from Saudi Arabia towards Iran (with potential further snowballing effect) unless Donald Trump is able to miraculously diffuse it.
With respect to oil prices we think that the latest assessment of the situation in Saudi Arabia looks more severe than what it looked like on Sunday. On Sunday we expected that the Brent crude oil price would jump to $65-70/bl which is what we have seen today. Given the latest information from Saudi Arabia of ”more outage for longer” and military assessments of ”highly vulnerable for future comparable attacks” we think a higher oil price is warranted. Again it will in the end boil down to details on how much the market actually looses of supply. But a Brent crude oil price trading around $75-85/bl sees highly sensible to us in the current situation.
Analys
A sharp weakening at the core of the oil market: The Dubai curve

Down to the lowest since early May. Brent crude has fallen sharply the latest four days. It closed at USD 64.11/b yesterday which is the lowest since early May. It is staging a 1.3% rebound this morning along with gains in both equities and industrial metals with an added touch of support from a softer USD on top.

What stands out the most to us this week is the collapse in the Dubai one to three months time-spread.
Dubai is medium sour crude. OPEC+ is in general medium sour crude production. Asian refineries are predominantly designed to process medium sour crude. So Dubai is the real measure of the balance between OPEC+ holding back or not versus Asian oil demand for consumption and stock building.
A sharp weakening of the front-end of the Dubai curve. The front-end of the Dubai crude curve has been holding out very solidly throughout this summer while the front-end of the Brent and WTI curves have been steadily softening. But the strength in the Dubai curve in our view was carrying the crude oil market in general. A source of strength in the crude oil market. The core of the strength.
The now finally sharp decline of the front-end of the Dubai crude curve is thus a strong shift. Weakness in the Dubai crude marker is weakness in the core of the oil market. The core which has helped to hold the oil market elevated.
Facts supports the weakening. Add in facts of Iraq lifting production from Kurdistan through Turkey. Saudi Arabia lifting production to 10 mb/d in September (normal production level) and lifting exports as well as domestic demand for oil for power for air con is fading along with summer heat. Add also in counter seasonal rise in US crude and product stocks last week. US oil stocks usually decline by 1.3 mb/week this time of year. Last week they instead rose 6.4 mb/week (+7.2 mb if including SPR). Total US commercial oil stocks are now only 2.1 mb below the 2015-19 seasonal average. US oil stocks normally decline from now to Christmas. If they instead continue to rise, then it will be strongly counter seasonal rise and will create a very strong bearish pressure on oil prices.
Will OPEC+ lift its voluntary quotas by zero, 137 kb/d, 500 kb/d or 1.5 mb/d? On Sunday of course OPEC+ will decide on how much to unwind of the remaining 1.5 mb/d of voluntary quotas for November. Will it be 137 kb/d yet again as for October? Will it be 500 kb/d as was talked about earlier this week? Or will it be a full unwind in one go of 1.5 mb/d? We think most likely now it will be at least 500 kb/d and possibly a full unwind. We discussed this in a not earlier this week: ”500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d”
The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily. That core strength helped to keep flat crude oil prices elevated close to the 70-line. Now also the Dubai curve has given in.

Brent crude oil forward curves

Total US commercial stocks now close to normal. Counter seasonal rise last week. Rest of year?

Total US crude and product stocks on a steady trend higher.

Analys
OPEC+ will likely unwind 500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d in one go could be in the cards

Down to mid-60ies as Iraq lifts production while Saudi may be tired of voluntary cut frugality. The Brent December contract dropped 1.6% yesterday to USD 66.03/b. This morning it is down another 0.3% to USD 65.8/b. The drop in the price came on the back of the combined news that Iraq has resumed 190 kb/d of production in Kurdistan with exports through Turkey while OPEC+ delegates send signals that the group will unwind the remaining 1.65 mb/d (less the 137 kb/d in October) of voluntary cuts at a pace of 500 kb/d per month pace.

Signals of accelerated unwind and Iraqi increase may be connected. Russia, Kazakhstan and Iraq were main offenders versus the voluntary quotas they had agreed to follow. Russia had a production ’debt’ (cumulative overproduction versus quota) of close to 90 mb in March this year while Kazakhstan had a ’debt’ of about 60 mb and the same for Iraq. This apparently made Saudi Arabia angry this spring. Why should Saudi Arabia hold back if the other voluntary cutters were just freeriding? Thus the sudden rapid unwinding of voluntary cuts. That is at least one angle of explanations for the accelerated unwinding.
If the offenders with production debts then refrained from lifting production as the voluntary cuts were rapidly unwinded, then they could ’pay back’ their ’debts’ as they would under-produce versus the new and steadily higher quotas.
Forget about Kazakhstan. Its production was just too far above the quotas with no hope that the country would hold back production due to cross-ownership of oil assets by international oil companies. But Russia and Iraq should be able to do it.
Iraqi cumulative overproduction versus quotas could reach 85-90 mb in October. Iraq has however steadily continued to overproduce by 3-5 mb per month. In July its new and gradually higher quota came close to equal with a cumulative overproduction of only 0.6 mb that month. In August again however its production had an overshoot of 100 kb/d or 3.1 mb for the month. Its cumulative production debt had then risen to close to 80 mb. We don’t know for September yet. But looking at October we now know that its production will likely average close to 4.5 mb/d due to the revival of 190 kb/d of production in Kurdistan. Its quota however will only be 4.24 mb/d. Its overproduction in October will thus likely be around 250 kb/d above its quota with its production debt rising another 7-8 mb to a total of close to 90 mb.
Again, why should Saudi Arabia be frugal while Iraq is freeriding. Better to get rid of the voluntary quotas as quickly as possible and then start all over with clean sheets.
Unwinding the remaining 1.513 mb/d in one go in October? If OPEC+ unwinds the remaining 1.513 mb/d of voluntary cuts in one big go in October, then Iraq’s quota will be around 4.4 mb/d for October versus its likely production of close to 4.5 mb/d for the coming month..
OPEC+ should thus unwind the remaining 1.513 mb/d (1.65 – 0.137 mb/d) in one go for October in order for the quota of Iraq to be able to keep track with Iraq’s actual production increase.
October 5 will show how it plays out. But a quota unwind of at least 500 kb/d for Oct seems likely. An overall increase of at least 500 kb/d in the voluntary quota for October looks likely. But it could be the whole 1.513 mb/d in one go. If the increase in the quota is ’only’ 500 kb/d then Iraqi cumulative production will still rise by 5.7 mb to a total of 85 mb in October.
Iraqi production debt versus quotas will likely rise by 5.7 mb in October if OPEC+ only lifts the overall quota by 500 kb/d in October. Here assuming historical production debt did not rise in September. That Iraq lifts its production by 190 kb/d in October to 4.47 mb/d (August level + 190 kb/d) and that OPEC+ unwinds 500 kb/d of the remining quotas in October when they decide on this on 5 October.

Analys
Modest draws, flat demand, and diesel back in focus

U.S. commercial crude inventories posted a marginal draw last week, falling by 0.6 million barrels to 414.8 million barrels. Inventories remain 4% below the five-year seasonal average, but the draw is far smaller than last week’s massive 9.3-million-barrel decline. Higher crude imports (+803,000 bl d WoW) and steady refinery runs (93% utilization) helped keep the crude balance relatively neutral.

Yet another drawdown indicates commercial crude inventories continue to trend below the 2015–2022 seasonal norm (~440 million barrels), though at 414.8 million barrels, levels are now almost exactly in line with both the 2023 and 2024 trajectory, suggesting stable YoY conditions (see page 3 attached).
Gasoline inventories dropped by 1.1 million barrels and are now 2% below the five-year average. The decline was broad-based, with both finished gasoline and blending components falling, indicating lower output and resilient end-user demand as we enter the shoulder season post-summer (see page 6 attached).
On the diesel side, distillate inventories declined by 1.7 million barrels, snapping a two-week streak of strong builds. At 125 million barrels, diesel inventories are once again 8% below the five-year average and trending near the low end of the historical range.
In total, commercial petroleum inventories (excl. SPR) slipped by 0.5 million barrels on the week to ish 1,281.5 million barrels. While essentially flat, this ends a two-week streak of meaningful builds, reflecting a return to a slightly tighter situation.
On the demand side, the DOE’s ‘products supplied’ metric (see page 6 attached), a proxy for implied consumption, softened slightly. Total demand for crude oil over the past four weeks averaged 20.5 million barrels per day, up just 0.9% YoY.
Summing up: This week’s report shows a re-tightening in diesel supply and modest draws across the board, while demand growth is beginning to flatten. Inventories remain structurally low, but the tone is less bullish than in recent weeks.


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