Analys
Oil price is mostly fundamentals, not geopolitical risk premium
Brent crude has recovered to above USD 90/b again. Risk premium due to Israel/Gaza? Maybe not so much at all. Latest data from the IEA indicates that the global oil market ran an implied deficit of 2.1 m b/d in August, a deficit of 0.7 m b/d in September and a likely deficit of 1.2 m b/d in Q4-23. Inventory draws have mostly taken place in floating stocks and in non-OECD. Inventories which are typically harder to track. Demand growth of 2.3 m b/d this year has more or less entirely taken place in non-OECD. As such it is not so strange that inventory draws have first taken place just there as well. But if we continue to run a deficit of 1.2 m b/d in Q4-23 then we should eventually see OECD stocks starting to draw down as well. This should keep oil prices well supported in Q4-23. The US EIA last week lifted its outlook for Brent crude for 2024 to USD 95/b (+7) on the back of slowing US shale oil growth leaving OPEC in good control of the market.
Brent crude sold off sharply at the end of September as longer dated bond yields rallied and markets feared that central banks would keep rates high for longer leading to a recession in the end with associated weak oil demand and falling oil price. One can of course question if that is the right interpretation. If market had really turned bearish on the economic outlook (recession, crash,..), then longer dated bond yields should have gone down and not up as they did. Hm, well, maybe oil was just ripe for a bearish correction following a long upturn in prices since late June and only needed some kind of bearish catalyst story to set off that correction in late September. The sell-off was short-lived as the attack on Israel by Hamas on 7 October made oil jump back up above USD 90/b again. The low-point in the recent sell-off was a close of USD 84/b on 6 October. With Brent crude now at USD 90/b the most immediate interpretation is that we now have a USD 6/b risk premium in the oil price due to Israel/Hamas/Gaza. The fear is that the conflict might spiral out and eventually lead to real loss of supply with Iran being most at risk there. But such geopolitical risk premiums are usually short-lived unless actual supply disruptions occur. The most immediate fear is that the US would impose harsher sanctions towards Iran which is Hamas’ biggest backer. But US Treasury Secretary Jannet Yellen stated on 11 Oct that the US has no plans to impose new sanctions on Iran.
So let’s leave possible recession fears as well as geopolitical risk premiums aside and instead just look at the current state and the outlook for the oil market. The three main monthly oil market reports from IEA, US EIA and OPEC were out last week. One thing that stands out is a continued disagreement of what oil demand is today and what it will be tomorrow. On 2024 the IEA and the EIA partially agrees while OPEC is in a camp of its own. But one thing is to have strongly diverging outlooks for demand in 2024. Another is to have extremely wide estimates for what demand is here and now in Q4-23. This shows that there is still a very high uncertainty of what is actually the current state of the oil market. Deficit, balanced, surplus?
The most prominent of the three reports, the IEA, made few changes to its overall projects vs. its September report. Changes were typically +/- 100 k b/d or less for most items. The reports was however still very interesting with respect to clues to what is the actual state of the market balance. The proof of the pudding is always the change in oil inventories and as such always in hindsight. IEA data showed that global oil inventories declined by 63.8 m b in August which equals a deficit of 2.1 m b/d. Preliminary inventory data for September indicates an implied deficit of 0.7 m b/d.
Important here is that the stock draws in August mostly took place in oil on water and in non-OECD. These stocks are typically less easily observable. Oil markets are often highly focused on more easily observable data like the weekly US oil inventories as well as EU and Japan. The US commercial crude and product stocks have moved upwards since week 35 (late August) so that in the last data point the US commercial stocks are only 10 m b below the 2015-19 seasonal average. This has undoubtedly been a bearish factor for oil prices lately and probably contributed to the sell-off in late September, early October.
US crude and product stocks (excl. SPR)
1) The global August and September (indic.) inventory data from IEA gives credibility to its current assessment of the global oil market. For Q4-23 it estimates Call-on-OPEC at 29.3 m b/d. Russia and Saudi Arabia last week held a joint statement heralding that they would keep production at current level to the end of year. With OPEC production steady at 28 m b/d it implies a global oil market deficit of 1.2 m b/d. For H1-24 its estimates a call-on-OPEC of 27.7 m b/d. This means that Saudi Arabia and Russia will likely stick to their current production levels also in H1-24. But then the market will likely be balanced rather than in deficit like it has been in Q3-23 and Q4-23.
2) The global oil market is very large with significant dynamical time lags. IEA estimates a global consumption growth this year of 2.3 m b/d. China accounts for 77% of this and non-OECD accounts for 97%. So oil demand growth this year is all taking place in non-OECD. As such it is not so surprising that inventory draws have been taking place there and on-water rather than in the OECD. But a global deficit will eventually involve also the OECD inventories. The demand-pull this year has been all about non-OECD. First you draw down non-OECD supply chains, inventories and on-water oil. Then you start to pull more oil from the wider market which eventually involve a draw-down also in OECD inventories. IEA’s estimate of an implied deficit of about 1.2 m b/d in Q4-23. So if we have already drawn down non-OECD supply chains and oil on water we might start to see a significant draw in OECD stocks in Q4-23 if the market runs an estimated 1.2 m b/d as estimated by the IEA.
3) Worth noting however is IEA’s warning that higher oil prices are starting to hurt demand. Demand in Nigeria, Pakistan and Egypt are all down 10% or more while US demand for gasoline also has shown significant demand weaknesses. For 2024 the IEA only projects a global demand growth of 0.9 m b/d YoY along with weaker global economic growth. Non-OPEC production continues to grow robustly at 1.3 m b/d with the result that call-on-OPEC falls from 28.8 m b/d this year to 28.3 m b/d next year. This is of course negative for OPEC and gives a bearish tint to the oil market next year. But it is still not so weak that OPEC will give up on holding the price where they (Saudi/Russia) want it to be. But implies that Saudi/Russia/OPEC will have to stick to current production levels through most of 2024.
Floating crude oil stocks in million barrels
Higher last week and today as sanctions bite harder than recession fears. Brent crude gained 2% last week with a close on Friday of USD 73.63/b. It traded in a range of USD 71.8-74.17/b. It traded mostly higher through the week despite sharp, new selloffs in equities along with US consumer expectations falling to lowest level since 2013 (Consumer Conf. Board Expectations.) together with signals of new tariffs from the White House. Ahead this week looms the ”US Liberation Day” on April 2 when the White House will announce major changes in the country’s trade policy. Equity markets are down across the board this morning while Brent crude has traded higher and lower and is currently up 0.5% at USD 74.0/b at the moment.
New US sanctions towards Iran and Venezuela and threats of new sanctions towards Russia. New sanctions on Venezuela and Iran are helping to keep the market tight. Oil production in Venezuela reached 980 kb/d in February following a steady rise from 310 kb/d in mid-2020 while it used to produce 2.3 mb/d up to 2016. Trump last week allowed Chevron to import oil from Venezuela until 27 May. But he also said that any country taking oil or gas from Venezuela after 2 April will face 25% tariffs on any goods exported into the US. Trump is also threatening to sanction Russian oil further if Putin doesn’t move towards a peace solution with Ukraine.
The OPEC+ to meet on Saturday 5 April to decide whether to lift production in May or not. The OPEC+ Joint Ministerial Monitoring Committee will meet on Saturday 5 April to review market conditions, compliance by the members versus their production targets and most importantly decide whether they shall increase production further in May following first production hike in April. We find it highly likely that they will continue to lift production also in May.
OPEC(+) crashed the oil price twice to curb US shale, but it kicked back quickly. OPEC(+) has twice crashed the oil price in an effort to hurt and disable booming US shale oil production. First in 2014/15/16 and then in the spring of 2020. The first later led to the creation of OPEC+ through the Declaration of Cooperation (DoC) in the autumn of 2016. The second was in part driven by Covid-19 as well as a quarrel between Russia and Saudi Arabia over market strategy. But the fundamental reason for that quarrel and the crash in the oil price was US shale oil producers taking more and more market share.
The experience by OPEC+ through both of these two events was that US shale oil quickly kicked back even bigger and better yielding very little for OPEC+ to cheer about.
OPEC+ has harvested an elevated oil price but is left with a large spare capacity. The group has held back large production volumes since Spring 2020. It yielded the group USD 100/b in 2022 (with some help from the war in Ukraine), USD 81/b on average in 2023/24 and USD 75/b so far this year. The group is however left with a large spare capacity with little room to place it back into the market without crashing the price. It needs non-OPEC+ in general and US shale oil especially to yield room for it to re-enter.
A quick crash and painful blow to US shale oil is no longer the strategy. The strategy this time is clearly very different from the previous two times. It is no longer about trying to give US shale oil producers a quick, painful blow in the hope that the sector will stay down for an extended period. It is instead a lengthier process of finding the pain-point of US shale oil players (and other non-OPEC+ producers) through a gradual increase in production by OPEC+ and a gradual decline in the oil price down to the point where non-OPEC+ in general and US liquids production especially will gradually tick lower and yield room to the reentry of OPEC+ spare capacity. It does not look like a plan for a crash and a rush, but instead a tedious process where OPEC+ will gradually force its volumes back into the market.
Where is the price pain-point for US shale oil players? The Brent crude oil price dropped from USD 84/b over the year to September last year to USD 74/b on average since 1 September. The values for US WTI were USD 79/b and USD 71/b respectively. A drop of USD 9/b for both crudes. There has however been no visible reaction in the US drilling rig count following the USD 9/b fall. The US drilling rig count has stayed unchanged at around 480 rigs since mid-2024 with the latest count at 484 operating rigs. While US liquids production growth is slowing, it is still set to grow by 580 kb/d in 2025 and 445 kb/d in 2026 (US EIA).
US shale oil average cost-break-even at sub USD 50/b (BNEF). Industry says it is USD 65/b. BNEF last autumn estimated that all US shale oil production fields had a cost-break-even below USD 60/b with a volume weighted average just below USD 50/b while conventional US onshore oil had a break-even of USD 65/b. A recent US Dallas Fed report which surveyed US oil producers did however yield a response that the US oil industry on average needed USD 65/b to break even. That is more than USD 15/b higher than the volume weighted average of the BNEF estimates.
The WTI 13-to-24-month strip is at USD 64/b. Probably the part of the curve controlling activity. As such it needs to move lower to curb US shale oil activity. The WTI price is currently at USD 69.7/b. But the US shale oil industry today works on a ”12-month drilling first, then fracking after” production cycle. When it considers whether to drill more or less or not, it is typically on a deferred 12-month forward price basis. The average WTI price for months 13 to 24 is today USD 64/b. The price signal from this part of the curve is thus already down at the pain-point highlighted by the US shale oil industry. In order to yield zero growth and possibly contraction in US shale oil production, this part of the curve needs to move below that point.
The real pain-point is where we’ll see US drilling rig count starting to decline. We still don’t know whether the actual average pain-point is around USD 50/b as BNEF estimate it is or whether it is closer to USD 65/b which the US shale oil bosses say it is. The actual pain-point is where we’ll see further decline in US drilling rig count. And there has been no visible change in the rig count since mid-2024. The WTI 13-to-24-month prices need to fall further to reveal where the US shale oil industry’ actual pain-point is. And then a little bit more in order to slow production growth further and likely into some decline to make room for reactivation of OPEC+ spare capacity.
The WTI forward price curve. The average of 13 to 24 month is now USD 64.3/b.
The average 13-to-24-month prices on the WTI price curve going back to primo January 2022. Recently dropping below USD 65/b for some extended period.
Brent has defied bearish equities for three days but is losing its stamina today. Brent gained 0.3% yesterday with a close of USD 74.03/b, the highest close since 27 February and almost at the high of the day. It traded as low as USD 73.23/b. Brent has now defied the equity selloff three days in a row by instead ticking steadily higher. A sign of current spot tightness. This morning however it is losing some of its stamina and is down 0.5% at USD 73.7/b along with negative equities and yet higher gold prices.
The new US Iran sanctions is creating frictions in getting its oil to market and helps keeping oil market tight. Part of the current tightness is due to the new US sanctions on Iran which. Ships containing 17 mb of its oil now sits idle east of Malaysia waiting (Bloomberg) for ship-to-ship transfers with China teapot refineries the normal final destination. But the latest US sanctions has probably made these refineries much more cautious. More friction before Iranian oil is reaching its final destination if at all. Tighter market.
Lower Saudi OSPs for May is expected. A signal of a softer market ahead as OPEC+ lifts production. Saudi Aramco is expected to reduce it official selling price (OSPs) for Arab Light to Asia for May deliveries by USD 2/b. A measure to make its oil more competitive in relative to other crudes suppliers. It is also a sign of a softer market ahead. Naturally so since OPEC+ is set to lift production in April and also most likely in May. If Saudi Aramco reduces its OSPs to Asia for May across its segments of crudes, then it is a signal it is expecting softer oil market conditions. But news today is only discussing Arab Light while the main tightness int the market today is centered around medium sour crude segment. A lowering of the OSPs for the heavier and more sour grades will thus be a more forceful bearish signal.
Front-end backwardation may ease as the Brent May contract rolls off early next week. The Brent May future will roll off early next week. It will be interesting to see how that affects the front-end 1-3mth backwardation as it is shifted out into summer where a softer market is expected.
Brent is boring like crazy with 30dma annualized volatility of just 21%. Waiting for something to happen.
Brent crude has defied three days of bearish equity markets and ticked higher instead. Caving in a bit this morning with yet another day of bearish equities and bullish gold.
Last week, U.S. crude oil refinery inputs averaged 15.8 million barrels per day, an increase of 87k bl/day from the previous week. Refineries operated at 87% of their total operable capacity during the period. Gasoline production declined, averaging 9.2 million barrels per day (m bl/d), while distillate (diesel) production also edged lower to 4.5 m bl/d.
U.S. crude oil imports averaged 6.2 m bl/d, up 810k barrels from the prior week. Over the past four weeks, imports have averaged 5.7 m bl/d, representing an 11% YoY decline compared to the same period last year.
Where we place most of our attention – and what continues to influence short-term price dynamics in both WTI and Brent crude – remains U.S. crude and product inventories. Total commercial petroleum inventories (excl. SPR) rose by 3.2 m bl, a relatively modest build that is unlikely to trigger major price reactions. Brent crude traded at around USD 73.9 per barrel when the data was released yesterday afternoon (16:30 CEST) and has since slid by USD 0.4/bl to USD 73.5/bl this morning, still among the highest price levels seen in March 2025.
Commercial crude oil inventories (excl. SPR) fell by 3.3 m bl, contrasting with last week’s build and offering some price support, though the draw was less severe than the API’s reported -4.6 m bl. Crude inventories now stand at 433.6 m bl, about 5% below the five-year average for this time of year. Gasoline inventories declined by 1.4 m bl (API: -3.3 m bl), though they remain 2% above the five-year average. Diesel inventories fell by 0.4 m bl (API: -1.3 m bl), leaving them 7% below seasonal norms.
Over the past four weeks, total products supplied – a proxy for U.S. demand – averaged 20.2 m bl/d, up 0.5% compared to the same period last year. Gasoline supplied averaged 8.9 m bl/d, down 0.2%, while diesel supplied came in at 3.9 m bl/d, up 1.8%. Jet fuel demand also showed strength, rising 3.9% over the same four-week period.
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