Analys

More from Venezuela and Iran means smaller pie for Saudi

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1 år sedan

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24 oktober, 2023

Production in Venezuela and Iran is on the rise and is set to rise further in the coming months and in 2024. Combined their production could grow by 0.8 m b/d YoY to 2024 (average year to average year). The IEA projected in its latest OMR (Oct-2023) that call-on-OPEC will fall to 28.3 m b/d in 2024, a decline of 0.5 m b/d. This combination would drive implied call-on-Saudi from 10.4 m b/d in 2023 to only 9.1 m b/d in 2024 and as low as 8.6 m b/d in Q1-24 if Saudi Arabia has to do all the heavy lifting alone. Wider core OPEC cooperation may be required.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

The IEA is out in the news today projecting peak oil demand this decade with global demand standing at no more than 102 m b/d towards the end of this decade. If so it would imply a call-on-Non-OPEC of only 66.4 m b/d in 2028 assuming that OPEC in general will demand a market share of 30 m b/d + NGL of 5.6 m b/d. The IEA (Oct-23) projects non-OPEC production to average 68.8 m b/d in 2024. That’s already 2.4 m b/d more than what would be sustainable over time if global oil demand is set to peak later this decade. Oil producers in general cannot have a production growth strategy in a peak oil demand world.

The US has decided to lift sanctions towards Venezuela for six months (18 April) as a measure to tempt it to move towards more democratic processes. And if it does, then the lifting of sanctions could continue after the 6 months. A primary opposition election took place this weekend with lawmaker Maria Corina Machado currently holding 93% of the vote count. Venezuela will next year hold a presidential election but fair play seems unlikely with Maduro in charge. The lifting of sanctions allows Venezuela’s PdV to resume exports to all destinations. Bans on new, foreign investments in the oil and gas sector are also lifted though Russian entities and JV’s are still barred.

Venezuela produced 0.8 m b/d in September and indicates that it can lift production by 0.2 m b/d by year and with more rigs and wells by 0.5 m b/d to 1.3 m b/d in the medium term.

Oil production in Iran has been on a steady rise since its low-point of 2.0 m b/d in 2020. Last year it produced 2.5 m b/d. In September it produced 3.1 m b/d, but Iran’s oil minister says production now is at 3.3 m b/d. Iran’s rising production and exports is not about the US being more lenient in its enforcement of sanctions towards Iran. It is more about Iran finding better ways to circumvent them but even more importantly that China is importing more and more oil from Iran.

Production by Iran and Venezuela is recovering. YoY production from the two could rise by close to 0.8 m b/d in 2024. This will lead to a decline in call-on-Saudi oil.

Oil production by Iran and Venezuela — Source: SEB graph and asessments, Blbrg data and news

The IEA estimated in its latest OMR report that call-on-OPEC will fall from 28.8 m b/d in 2023 to 28.3 m b/d in 2024. If all OPEC members except Saudi Arabia produces the same amount in 2024 as in 2023, then the need for Saudi Arabia’s oil (call-on-Saudi) will fall from a healthy 10.4 m b/d in 2023 to a still acceptable 9.9 m b/d in 2024. Its normal production is roughly 10 m b/d.

If however production by Iran and Venezuela rise by a combined 0.5 m b/d YoY in 2024, then call-on-Saudi will fall to 9.4 m b/d which is not so good but still manageable. But if Iran’s oil minister is correct when he says that its current production now is at 3.3 m b/d, then it is not far fetched to assume that Iran’s oil production may average maybe 3.4-3.5 m b/d in 2024. That would yield a YoY rise of 0.6 m b/d just for Iran. If we also assume that Venezuela manages to lift its production from 0.8 m b/d this year to 1.0 m b/d in 2024, then the combined growth from the two is closer to 0.8 m b/d. That would push call-on-Saudi down to only 9.1 m b/d which is not good at all. It would require Saudi Arabia to produce at its current production of 9.0 m b/d all through 2024.

The IEA further estimates that call-on-OPEC will average 27.7 m b/d in Q1-24. If we assume Iran @ 3.4 m b/d and Venezuela @ 1.0 m b/d then call-on-Saudi in Q1-24 will only be 8.6 m b/d. I.e. Saudi Arabia will have to cut production further to 8.6 m b/d in Q1-24. At that point Saudi Arabia will likely need or like other core OPEC members like Iraq, Kuwait and UAE as well as Russia to join in.

Implied call-on-Saudi. Call-on-OPEC is set to decline from 28.8 m b/d to 28.3 m b/d to 2024. If all OPEC members produced the same in 2024 as in 2023 then call-on-Saudi would fall by 0.5 m b/d to 9.9 m b/d. But if Venezuela and Iran increases their combined production by 0.8 m b/d YoY in 2024 then call-on-Saudi falls to 9.1 m b/d.

If we look a little broader on this topic and also include Libya, Nigeria and Angola we see that this group of OPEC members produced 11.4 m b/d in 2010, 10.1 m b/d in 2017 and only 5.1 m b/d at the low-point in August 2020. The decline by these OPEC members has of course the other OPEC and OPEC+ members to stem the rising flood of US shale oil production. The production from this unfortunate group of OPEC-laggards is however now on the rise reaching 7.5 m b/d in September. With more from Iran and Venezuela it could rise to 8.0 m b/d in 2024. Production from Nigeria and Angola though still looks to be in gradual decline while Libya looks more sideways. So for the time being it is all about the revival of Iran and Venezuela.

The unfortunate OPEC-laggards had a production of 11.4 m b/d in 2010. But production then fell to only 5.1 m b/d in August 2020. It helped the rest of OPEC’s members to manage the huge increase in US shale oil production. Production from these countries are now on the rebound. Though Nigeria and Angola still seems to be in gradual decline.

Oil production of some OPEC countries — Source: SEB graph, Blbrg data

What everyone needs to be attentive to is that call-on-OPEC and even more importantly call-on-Saudi can only erode to a limit before Saudi/OPEC/Russia will have to take action. Especially if the forecast for needed oil from OPEC/Saudi for the nearest 2-3 years is in significant decline. Then they will have to take action in the sense that they stop defending the price and allows the price to fall sharply along with higher production. And yet again it is US shale oil producers who will have to take the brunt of the pain. They are the only oil producers in the world who can naturally and significantly reduce their production rather quickly. I.e. the US shale oil players will have to be punished into obedience, if possible, yet one more time.

We don’t think that it is any immediate risk for this to happen as US shale oil activity is slowing while global oil demand has rebounded following Covid-lockdowns. But one needs to keep a watch on projections for call-on-OPEC and call-on-Saudi stretching 1-2-3 years forward on a continuous basis.

In its medium term oil market outlook, Oil2023, the IEA projected a fairly healthy development for call-on-OPEC to 2028. First bottoming out at 29.4 m b/d in 2024 before rising gradually to 30.6 m b/d in 2028. The basis for this was a slowing though steady rise in global oil demand to 105.7 m b/d in 2028 together with stagnant non-OPEC production due to muted capex spending over the past decade. But this projection has already been significantly dented and reduced in IEA’s latest OMR from October where call-on-OPEC for 2024 is projected at only 28.3 m b/d.

In a statement today the IEA projects that global oil demand will peak this decade and consume no more than 102 m b/d in the late 2020ies due to (in large part) rapid growth in EV sales. This would imply a call-on-OPEC of only 26.9 m b/d in 2028. It is not a viable path for OPEC to produce only 26.9 m b/d in 2028. Especially if production by Iran and Venezuela is set to revive. I.e. OPEC’s pie is shrinking while at the same time Iran and Venezuela is producing more. In this outlook something will have to give and it is not OPEC.

One should here turn this on its head and assume that OPEC will produce 30 m b/d in 2028. Add OPEC NGLs of 5.6 m b/d and we get 35.6 m b/d. If global oil demand in 2028 stands at only 102 m b/d then call-on-Non-OPEC equates to 66.4 m b/d. That is 3.1 m b/d less than IEA’s non-OPEC production projection for 2028 of 69.5 m b/d but also higher than non-OPEC production projection of 68.8 m b/d (IEA, Oct-23) is already 2.4 m b/d too high versus what is a sustainable level.

Annons

What this of course naturally means is that oil producers in general cannot have production growth as a strategy in a peak-oil-demand-world with non-OPEC in 2024 already at 2.4 m b/d above its sustainable level.

The US is set to growth its hydrocarbon liquids by 0.5 m b/d YoY in 2024. But in a zero oil demand growth world that is way, way too much.

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Analys

Crude oil comment: Mixed U.S. data skews bearish – prices respond accordingly

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10 timmar sedan

den

15 november, 2024

Redaktionen

Since market opening yesterday, Brent crude prices have returned close to the same level as 24 hours ago. However, before the release of the weekly U.S. petroleum status report at 17:00 CEST yesterday, we observed a brief spike, with prices reaching USD 73.2 per barrel. This morning, Brent is trading at USD 71.4 per barrel as the market searches for any bullish fundamentals amid ongoing concerns about demand growth and the potential for increased OPEC+ production in 2025, for which there currently appears to be limited capacity – a fact that OPEC+ is fully aware of, raising doubts about any such action.

Ole R. Hvalbye, Analyst Commodities, SEB

It is also notable that the USD strengthened yesterday but retreated slightly this morning.

U.S. commercial crude oil inventories increased by 2.1 million barrels to 429.7 million barrels. Although this build brings inventories to about 4% below the five-year seasonal average, it contrasts with the earlier U.S. API data, which had indicated a decline of 0.8 million barrels. This discrepancy has added some downward pressure on prices.

On the other hand, gasoline inventories fell sharply by 4.4 million barrels, and distillate (diesel) inventories dropped by 1.4 million barrels, both now sitting around 4-5% below the five-year average. Total commercial petroleum inventories also saw a significant decline of 6.5 million barrels, helping to maintain some balance in the market.

Refinery inputs averaged 16.5 million barrels per day, an increase of 175,000 barrels per day from the previous week, with refineries operating at 91.4% capacity. Crude imports rose to 6.5 million barrels per day, an increase of 269,000 barrels per day.

Over the past four weeks, total products supplied averaged 20.8 million barrels per day, up 1.8% from the same period last year. Gasoline demand increased by 0.6%, while distillate (diesel) and jet fuel demand declined significantly by 4.0% and 4.6%, respectively, compared to the same period a year ago.

Overall, the report presents mixed signals but leans slightly bearish due to the increase in crude inventories and notably weaker demand for diesel and jet fuel. These factors somewhat overshadow the bullish aspects, such as the decline in gasoline inventories and higher refinery utilization.

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Crude oil comment: Fundamentals back in focus, with OPEC+ strategy crucial for price direction

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2 dagar sedan

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14 november, 2024

Redaktionen

Since the market close on Monday, November 11, Brent crude prices have stabilized around USD 72 per barrel, after briefly dipping to a monthly low of USD 70.7 per barrel yesterday afternoon. The momentum has been mixed, oscillating between bearish and cautious optimism. This morning, Brent is trading at USD 71.9 per barrel as the market adopts a “wait and see” stance. The continued strength of the US dollar is exerting downward pressure on commodities overall, while ongoing concerns about demand growth are weighing on the outlook for crude.

As we noted in Tuesday’s crude oil comment, there has been an unusual silence from Iran, leading to a significant reduction in the geopolitical risk premium. According to the Washington Post, Israel has initiated cease-fire negotiations with Lebanon, influenced by the shifting political landscape following Trump’s potential return to the White House. As a result, the market is currently pricing in a reduced risk of further major escalations in the Middle East. However, while the geopolitical risk premium of around USD 4-5 per barrel remains in the background, it has been temporarily sidelined but could quickly resurface if tensions escalate.

The EIA reports that India has now become the primary source of oil demand growth in Asia, as China’s consumption weakens due to its economic slowdown and rising electric vehicle sales. This highlights growing concerns over China’s diminishing role in the global oil market.

From a fundamental perspective, we expect Brent crude to remain well above USD 70 per barrel in the near term, but the outlook hinges largely on the upcoming OPEC+ meeting in early December. So far, the cartel, led by Saudi Arabia and Russia, has twice postponed its plans to increase production this year. This decision was made in response to weakening demand from China and increasing US oil supplies, which have dampened market sentiment. The cartel now plans to implement the first in a series of monthly hikes starting in January 2025, after originally planning them for October. Given the current supply dynamics, there appears to be limited room for additional OPEC volumes at this time, and the situation will likely be reassessed at their December 1st meeting.

The latest report from the US API showed a decline in US crude inventories of 0.8 million barrels last week, with stockpiles at the Cushing, Oklahoma hub falling by a substantial 1.9 million barrels. The “official” figures from the US DOE are expected to be released today at 16:30 CEST.

In conclusion, over the past month, global crude oil prices have fluctuated between gains and losses as market participants weigh US monetary policy (particularly in light of the election), concerns over Chinese demand, and the evolving supply strategy of OPEC+. The coming weeks will be critical in shaping the near-term outlook for the oil market.

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Analys

Crude oil comment: Iran’s silence hints at a new geopolitical reality

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3 dagar sedan

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12 november, 2024

Redaktionen

Since the market opened on Monday, November 11, Brent crude prices have declined sharply, dropping nearly USD 2.2 per barrel in just over a day. The positive momentum seen in late October and early November has largely dissipated, with Brent now trading at USD 71.9 per barrel.

Several factors have contributed to the recent price decline. Most notably, the continued strengthening of the U.S. dollar remains a key driver, as it gained further overnight. Meanwhile, U.S. government bond yields showed mixed movements: the 2-year yield rose, while the 10-year yield edged slightly lower, indicating larger uncertainty.

Adding to the downward pressure is ongoing concern over weak Chinese crude demand. The market reacted negatively to the absence of a consumer-focused stimulus package, which has led to persistent pricing in of subdued demand from China – the world’s largest crude importer and second-largest crude consumer. However, we anticipate that China recognizes the significance of the situation, and a substantial stimulus package is imminent once the country emerges from its current balance sheet recession: where businesses and households are currently prioritizing debt reduction over spending and investment, limiting immediate economic recovery.

Lastly, the geopolitical risk premium appears to be fading due to the current silence from Iran. As we have highlighted previously, when a “scheduled” retaliatory strike does not materialize quickly, it reduces any built-in price premium. With no visible retaliation from Iran yesterday, and likely none today or tomorrow, the market is pricing in diminished geopolitical risk. Furthermore, the outcome of the U.S. with a Trump victory may have altered the dynamics of the conflict entirely. It is plausible that Iran will proceed cautiously, anticipating a harsh response (read sanctions) from the U.S. should tensions escalate further.

Looking ahead, the market will be closely monitoring key reports this week: the EIA’s Weekly Petroleum Status Report on Wednesday and the IEA’s Oil Market Report on Thursday.

In summary, we believe that while the demand outlook will eventually stabilize, the strong oil supply continues to act as a suppressing force on prices. Given the current supply environment, there appears to be little room for additional OPEC volumes at this time, a situation the cartel will likely assess continuously on a monthly basis going forward.

With this context, we maintain moderately bullish for next year and continue to see an average Brent price of USD 75 per barrel.

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