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More from Venezuela and Iran means smaller pie for Saudi

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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. 

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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.

Implied call-on-Saudi.
Source: SEB graph and calculations, IEA data

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. 

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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.

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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Call-on-OPEC

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Metals rallied ahead of spot fundamentals, but better times are indeed ahead

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Industrial metals rallied close to 25% from 1 Dec-2023 to 20 May-2024 as marginal optimism replaced recession fears. But prices have pulled back a bit since then as economic growth optimism has run ahead of spot fundamentals. Industrial metals prices rallied close to 25% from 1 Dec-2023 to 20 May-2024. A solid gain on the back of reviving optimism as global manufacturing PMI’s rose from depressed levels in December to now just above the 50-line. Speculative money rolled into the space to catch a ride on economic revival as well as wanting to hold commodities as a sort of protection against inflation. But the actual state of the global economy isn’t all that strong yet.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Rather it is quite weak in absolute terms with the global manufacturing PMI barely just above the 50-line and barely in expansionary territory. Thus, prompt weaknesses can be seen in many places in both metals and energy with rising inventories and weakening curve structures and premiums. The price rally has thus been on a collision course with spot fundamentals. And that eventually helped to bring metals prices back down a bit since 20 May.

That said we do hold the view that there are better times ahead. Consumer prices are cooling, Covid-19 induced inflation is fading and central banks across the world are set to lower policy rates over the coming year. The ECB just cut its policy rate by 0.25% which is the first cut in 5 years. We think other central banks will follow suite as inflation cools around the world. And that is the real start of economic revival. The global economy will then shift from current patchy growth here and there to a more broad-based upturn. And as such the investors who have driven the bull-train so far will likely be right in the end. It is just a bit early.

Brent Crude. Steady as we go: OPEC+ keeps on holding large volumes off market to support prices. The group has flagged that it wants to return volumes to market but is in no hurry to do so. Fading shale oil growth is shifting market power back to OPEC+.

Nat gas TTF. Crisis behind us but still some tightness. The crisis is now clearly behind us, but the market is still on the tight side with some need for demand destruction as the global LNG market has not yet fully managed to compensate lost Russian gas.

EUA carbon. The trough is behind us. Back to EUR 100/ton in 2025. The EUA price crashed to EUR 49.54/ton intraday on 23 Feb depressed by a crash in nat gas prices, low emissions and front-loading of supply. Prepare for EUR 100/ton or more in 2025.

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Aluminum 3mth. Too far, too fast. Back to USD 2400/ton before gains in 2025. Aluminum has rallied more than USD 400/ton since February to now USD 2613/ton without support from a comparable gain in coal prices or drawdown in inventories. Helped higher by speculative appetite and increased friction in global trade flows due to new sanctions on Russian metals.

Copper 3mth. Prompt market not that tight. Back above USD 10,000/ton in 2025. The LME 3mth rallied to USD 10,889/ton (LME 3mth) and US Comex copper rallied to USD 11,285/ton. Rally was driven by tightness in the US (IRA++) and speculators frontrunning economic acceleration and global copper deficit. But signs of physical weaknesses many places to be seen in premiums and curves. Flat price now coming back off.  But back up above USD 10,000/ton in 2025 and later as market tightens.

Nickel 3mth. Dragged along with the copper rally but Indonesia still looking to grab more market share. The LME 3mth nickel price rallied to USD 21,615/ton in May, dragged along with the industrial metals rally. But decline has been sharp since then. We are not very bullish on Nickel going forward as Indonesia seems to focus on growing market share rather than profits.

Zinc: Joined the rally. Now back down to USD 2800/ton which could be fair price nearest years. The zinc price spent a long time around USD 2500/ton before rallying to USD 3139/ton. But USD 2800/ton will likely be a fair price for zinc the nearest years.

SEB commodities price outlook
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ECB rate cut and assurances from OPEC+ lifts Brent back to 80

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Back up to the 80-line. Brent crude rose to a close of  USD 79.87/b yesterday and recovered another 1.9% of its recent losses. This morning Brent crude is trading just above the 80-line (+0.2%) aligning well with some smaller gains in industrial metals as well as gains in Asian equities. Market focusing on US payrolls later today. Too hot or too cold?

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Reassurances from OPEC+ helps to drive Brent back up. Brent dropped to USD 76.76/b (intraday) on Tuesday following the OPEC+ meeting last Sunday. That was the lowest since early February this year. Shocked by the price drop, OPEC+ was propelled to issue statements with assurances that they didn’t really mean what they said or say what they meant and that they in no way is shifting away from ”price over volume” with a shift to an aggressive claw-back of market shares. At least not yet. And yes, the group did state explicitly last Sunday that they would only put the 2 m b/d of voluntary cuts back into the market from Q4-24 to Q3-25 if market circumstances would allow it. And no one really believes that there will be room for the return of that volume to the market in that period. So basically it won’t happen. But the issued statements last Sunday still rings very clear to the market: The current production cuts by OPEC+ are not forever. So to all non-OPEC+ producers: Do prepare, do make room, for the return of these volumes. in the years to come. The frustration among the member states of the cartel must be rising steadily as quarter after quarter is passing by and yet again there is no room to return their cuts back into the market. 

ECB rate cuts gives hopes for economic acceleration and oil demand growth. ECB yesterday reduced its policy rate for the first time since 2016 as inflation is coming under control. The hope is that this is the beginning of further rate cuts across many central banks around the world as inflation is coming under control not just in Europe but also across most of the world. And of course further that this will be the start of a more broad based economic acceleration and thus stronger oil demand growth. That is for sure what OPEC+ is hoping for. That stronger oil demand growth will make room for a return of the group’s cuts.

US crude oil production rises to 13.18 m b/d in March, a mere 77 k b/d MoM gain. The US EIA projected in its May report that US crude oil production will continue to rise to 13.9 m b/d by Dec-2025. A slower, but still steady going growth in supply. The latest gains could however indicate that US crude production may flatten totally rather than rise further as current oil prices have done nothing to stimulate further drilling activity in US oil production since November last year. The official monthly US crude oil production for March came in at 13.18 m b/d. It is a recovery following a hard winter with difficult drilling conditions. But it is still below the Dec production level. Nothing would be sweeter news for OPEC+ than seeing US crude production fully flatten here onward. And it would indeed be the correct choice of action by US shale oil producers given that non-OPEC+ producers now has gotten notice: Cuts are not forever.

US crude oil production rises to 13.18 m b/d in March and a mere gain of 77 k b/d MoM and still below Dec-2025.

US crude oil production rises to 13.18 m b/d in March and a mere gain of 77 k b/d MoM and still below Dec-2025.
Source: SEB graph, Blbrg data feed, US EIA data

US EIA is projecting that US crude production will continue to rise and rise though more gradually

US EIA is projecting that US crude production will continue to rise and rise though more gradually
Source: SEB graph, Blbrg data feed, US EIA data
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Crude oil comment: Fundamentals are key – more volatility ahead

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This week, Brent Crude prices have declined by USD 2.5 per barrel (3%) since the market opened on Monday. The key driver behind this movement was the OPEC+ meeting last Sunday. Initially, prices fell sharply, with Brent touching USD 76.76 per barrel on Tuesday (June 4th); however, there has been a slight recovery since, with current trading around USD 78.5/bl.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Despite ongoing macroeconomic concerns, price movements have been relatively subdued in the first half of 2024, largely driven by fundamental factors—specifically, concerns around supply and demand, where US DOE data and OPEC+ strategy, remain central to price dynamics.

The US inventory report on Wednesday contributed to bearish market sentiment due to an overall increase in commercial inventories. Following the report, prices dipped approximately USD 1/bl before returning to earlier levels in the week.

According to the US DOE, there was a build in US crude inventories of 1.2 million barrels last week, totaling 455.9 million barrels—around 4% below the five-year average for this period, yet significantly less than the 4.1 million barrels anticipated by the API on Tuesday (see page 11 attached). Gasoline inventories also rose by 2.1 million barrels, slightly less than API’s 4 million barrel expectation, and remain about 1% below the five-year average. Meanwhile, distillate (diesel) inventories saw a substantial increase of 3.2 million barrels, maintaining a position 7% under the five-year average but exceeding the expected 2 million barrels projected by API.

Globally, bearish to sideways price movements during May can be attributed to a healthy build in global crude inventories coupled with stagnant demand. US DOE data exemplifies this with both an increase in commercial crude inventories and rising crude oil imports, which averaged 7.1 million barrels per day last week—a 300k barrel increase from the previous week. Over the past four weeks, crude oil imports averaged 6.8 million barrels per day, reflecting a 3.5% increase compared to the same period last year.

Product demand shows signs of weakening. Gasoline products supplied to the US market averaged 9.1 million barrels a day, a 1% decrease from the previous year, while distillate supplied averaged 3.7 million barrels a day, down a significant 3.4% from last year. In contrast, jet fuel supply has increased by 13% compared to the same four-week period last year.

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OPEC+ Strategic Shifts

OPEC+ has markedly shifted its strategy from focusing solely on price stability to a dual emphasis on price and volume (more in yesterday’s crude oil comment). Since the COVID-19-induced demand collapse in May 2020, OPEC+ has adeptly managed supply levels to stabilize the market. This dynamic is evolving; OPEC+ no longer adjusts supplies solely based on global demand shifts or non-OPEC+ production changes.

Echoing a strategic move similar to Saudi Arabia’s in 2014, OPEC+ has signaled a nuanced approach. The alliance has planned no production changes for Q3-24 to align supply with expected seasonal demand increases, aiming to maintain market balance. Beyond that, there’s a plan to gradually reintroduce 2 million barrels per day from Q4-24 to Q3-25, with an initial increase of 750,000 barrels per day by January 2025. However, this plan is flexible and subject to adjustment depending on market conditions.

The IEA’s May report forecasts a decrease in OPEC’s call by 0.5 million barrels per day by 2025—a potential loss in market share, which OPEC+ finds unacceptable. The group has openly rejected further cuts, signaling an end to its willingness to lose market share to maintain price stability.

This stance serves as a clear warning to non-OPEC+ producers, particularly US shale operators, that the market shares gained since 2020 are not theirs to keep indefinitely. OPEC+ is determined to reclaim its volumes, potentially influencing future production decisions across the global oil industry. Producers now face the strategic decision to potentially scale back on production increases for 2025.

The confluence of a continuing build in US inventories and OPEC+’s strategic shifts has led to market reactions. In the wake of OPEC+ rhetoric, evaluating the fundamentals is now more important than ever, and increased volatility is expected.

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Even though OPEC+ has signaled its intention to reclaim market share, it plans to maintain current production levels for the next three months while continuously evaluating the situation. Today, Prince Abdulaziz bin Salman, the Saudi Energy Minister, spoke at the International Economic Forum in St. Petersburg. He highlighted that Sunday’s agreement, like many before it, retains the option to ’pause or reverse’ production changes if deemed necessary. This statement subtly emphasizes that maintaining oil price stability and market balance remains a primary focus for OPEC+. Such rhetoric introduces a new dimension of uncertainty that market participants will need to consider going forward.

If the price continues to fall, OPEC+ remains intent on reclaiming ’their volumes,’ betting on a decrease in non-OPEC supply later this year and into 2025. A potentially weaker oil price, within the USD 70-80/bl range for the remainder of 2024, could help alleviate current inflationary pressures. This in turn may lead to earlier central bank rate cuts and a quicker economic recovery in 2025, thereby reviving global oil demand to the benefit of OPEC+.

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