Analys
One year after USD -37.63/bl


It is exactly one year since WTI crashed to USD -37.63/bl. Yes, it was probably trading games involved. Yes, it was highly specific to storage and pipeline constraints at the pricing point of WTI in Cushing Oklahoma as Brent crude only fell to USD 19.33/bl. Yes, it was a price war between Russia and Saudi Arabia which broke out after the 6 March meeting. Yes, it was Covid-19 lock-downs which killed demand. But what really stands out looking back was that you don’t steal from the King. You don’t steal from OPEC. You don’t steal market shares from the world’ lowest cost producers. Try that again and you’ll get punished again.

The price war between Russia and Saudi Arabia which broke out after the 6 March meeting last year looked like an ill considered tantrum from a hot tempered Muhammed bin Salman in Saudi Arabia lashing out against Russia which did not want to play the ”hold back production, loose market share, get higher prices” game any more. And maybe such a tantrum was really what happen. Who knows.
But the underlying fundamentals story here was that US liquids production was growing like crazy. From Sep 2016 to Jan 2020 it grew by 6.6 m bl/d. And Russia was sick of holding back production forever while seeing US taking more and more market share. The only reason for why this could go on as long as it did was because there was an almost comparable large decline in supply from the key OPEC producers being Venezuela, Iran and Libya which lost 4.5 m bl/d from mid-2017 to mid-2020. Thus yielding room for the incredible US production growth.
It was like the business strategy of US shale oil players was: ”Let’s steel market share from the lowest cost producers in the world being OPEC/OPEC+. Fundamentally that is a no-go strategy to start. Though it can go on for a little while before it falls apart. And it did go on for a little while but largely because of the very large decline from Venezuela, Libya and Iran. But looking back it is obvious that it had to end.
OPEC knows very well that the oil price is all about controlling supply. There is an infinite amount of oil under ground. Make sure it is not too much above ground and you’ll get rich. I.e. control your capex spending. US shale oil players obviously have been nowhere near thinking along such lines.
Looking forward is not all such a great picture if we base it on 1) The ongoing return of production from Iran and Libya. I.e. the reversal of the losses within OPEC from mid-2017 which enabled the US shale oil boom to go on as long as it did and 2) The projected non-OPEC production growth from the US EIA in its March STEO pointing to a very strong rebound in both US shale oil and total non-OPEC production towards the end of 2022.
The key message from 20 April 2020 is: Do not steal from the King. Do not try to steal market shares from the worlds lowest cost producers (it is stupid). If you do you will get punished again. In a world where oil demand is growing at around 1% over the coming years you should not lay plans for growing your production at 2% or 5% or 10% per year. Because if you do it fundamentally means that you must steel market share from someone. It for sure won’t be the lowest cost producers.
The end-game though could be that there is only one way to tame the production from non-OPEC and that is a lower price.
Brent and WTI crude prices and the crazy WTI crash to USD -37.63/bl. The recovery since then is all due to deep cuts in production by OPEC+ and still is. If OPEC+ hadn’t still been holding back significant volumes then we would have had no more than USD 30-40/bl today.
Crazy US hydrocarbon liquids growth. From a low in Sep-2016 it grew by 6.6 m bl/d before the collapse in Q1-2020. According to the EIA’s STEO from March it is set to revive and reach the same gain at the end of 2022 though the EIA STEO from April has modified that a bit lower again.
The same chart for changes in total non-OPEC production since Sep-2016 gives much the same picture. What we see is that it is not only US production which increased but also other non-OPEC producers lifted increased production in this period. But mostly it is US.
And the maga-growth in non-OPEC production did of course take their market share from OPEC. Massive decline in production by three OPEC members Iran, Venezuela and Iran. Libya has now kicked back with more to come and Iran is just about to move into the market again as signals from the ongoing Vienna talks on the revival of JCPOA (Iran nuclear deal) are positive with all sides at the table wanting the same thing. Saudi Arabia, Israel and the Iranian Revolutionary Guard may not want success but they are not sitting at the negotiation table in Vienna. A strong rebound in non-OPEC production as envisioned by the EIA March STEO forecast will be outright impossible with a production revival from these three countries.
Analys
Brent needs to fall to USD 58/b to make cheating unprofitable for Kazakhstan

Brent jumping 2.4% as OPEC+ lifts quota by ”only” 411 kb/d in July. Brent crude is jumping 2.4% this morning to USD 64.3/b following the decision by OPEC+ this weekend to lift the production cap of ”Voluntary 8” (V8) by 411 kb/d in July and not more as was feared going into the weekend. The motivation for the triple hikes of 411 kb/d in May and June and now also in July has been a bit unclear: 1) Cheating by Kazakhstan and Iraq, 2) Muhammed bin Salman listening to Donald Trump for more oil and a lower oil price in exchange for weapons deals and political alignments in the Middle East and lastly 3) Higher supply to meet higher demand for oil this summer. The argument that they are taking back market share was already decided in the original plan of unwinding the 2.2 mb/d of V8 voluntary cuts by the end of 2026. The surprise has been the unexpected speed with monthly increases of 3×137 kb/d/mth rather than just 137 kb/d monthly steps.

No surplus yet. Time-spreads tightened last week. US inventories fell the week before last. In support of point 3) above it is worth noting that the Brent crude oil front-end backwardation strengthened last week (sign of tightness) even when the market was fearing for a production hike of more than 411 kb/d for July. US crude, diesel and gasoline stocks fell the week before last with overall commercial stocks falling 0.7 mb versus a normal rise this time of year of 3-6 mb per week. So surplus is not here yet. And more oil from OPEC+ is welcomed by consumers.
Saudi Arabia calling the shots with Russia objecting. This weekend however we got to know a little bit more. Saudi Arabia was predominantly calling the shots and decided the outcome. Russia together with Oman and Algeria opposed the hike in July and instead argued for zero increase. What this alures to in our view is that it is probably the cheating by Kazakhstan and Iraq which is at the heart of the unexpectedly fast monthly increases. Saudi Arabia cannot allow it to be profitable for the individual members to cheat. And especially so when Kazakhstan explicitly and blatantly rejects its quota obligation stating that they have no plans of cutting production from 1.77 mb/d to 1.47 mb/d. And when not even Russia is able to whip Kazakhstan into line, then the whole V8 project is kind of over.
Is it simply a decision by Saudi Arabia to unwind faster altogether? What is still puzzling though is that despite the three monthly hikes of 411 kb/d, the revival of the 2.2 mb/d of voluntary production cuts is still kind of orderly. Saudi Arabia could have just abandoned the whole V8 project from one month to the next. But we have seen no explicit communication that the plan of reviving the cuts by the end of 2026 has been abandoned. It may be that it is simply a general change of mind by Saudi Arabia where the new view is that production cuts altogether needs to be unwinded sooner rather than later. For Saudi Arabia it means getting its production back up to 10 mb/d. That implies first unwinding the 2.2 mb/d and then the next 1.6 mb/d.
Brent would likely crash with a fast unwind of 2.2 + 1.6 mb/d by year end. If Saudi Arabia has decided on a fast unwind it would meant that the group would lift the quotas by 411 kb/d both in August and in September. It would then basically be done with the 2.2 mb/d revival. Thereafter directly embark on reviving the remaining 1.6 mb/d. That would imply a very sad end of the year for the oil price. It would then probably crash in Q4-25. But it is far from clear that this is where we are heading.
Brent needs to fall to USD 58/b or lower to make it unprofitable for Kazakhstan to cheat. To make it unprofitable for Kazakhstan to cheat. Kazakhstan is currently producing 1.77 mb/d versus its quota which before the hikes stood at 1.47 kb/d. If they had cut back to the quota level they might have gotten USD 70/b or USD 103/day. Instead they choose to keep production at 1.77 mb/d. For Saudi Arabia to make it a loss-making business for Kazakhstan to cheat the oil price needs to fall below USD 58/b ( 103/1.77).
Analys
All eyes on OPEC V8 and their July quota decision on Saturday

Tariffs or no tariffs played ping pong with Brent crude yesterday. Brent crude traded to a joyous high of USD 66.13/b yesterday as a US court rejected Trump’s tariffs. Though that ruling was later overturned again with Brent closing down 1.2% on the day to USD 64.15/b.

US commercial oil inventories fell 0.7 mb last week versus a seasonal normal rise of 3-6 mb. US commercial crude and product stocks fell 0.7 mb last week which is fairly bullish since the seasonal normal is for a rise of 4.3 mb. US crude stocks fell 2.8 mb, Distillates fell 0.7 mb and Gasoline stocks fell 2.4 mb.
All eyes are now on OPEC V8 (Saudi Arabia, Iraq, Kuwait, UAE, Algeria, Russia, Oman, Kazakhstan) which will make a decision tomorrow on what to do with production for July. Overall they are in a process of placing 2.2 mb/d of cuts back into the market over a period stretching out to December 2026. Following an expected hike of 137 kb/d in April they surprised the market by lifting production targets by 411 kb/d for May and then an additional 411 kb/d again for June. It is widely expected that the group will decide to lift production targets by another 411 kb/d also for July. That is probably mostly priced in the market. As such it will probably not have all that much of a bearish bearish price impact on Monday if they do.
It is still a bit unclear what is going on and why they are lifting production so rapidly rather than at a very gradual pace towards the end of 2026. One argument is that the oil is needed in the market as Middle East demand rises sharply in summertime. Another is that the group is partially listening to Donald Trump which has called for more oil and a lower price. The last is that Saudi Arabia is angry with Kazakhstan which has produced 300 kb/d more than its quota with no indications that they will adhere to their quota.
So far we have heard no explicit signal from the group that they have abandoned the plan of measured increases with monthly assessments so that the 2.2 mb/d is fully back in the market by the end of 2026. If the V8 group continues to lift quotas by 411 kb/d every month they will have revived the production by the full 2.2 mb/d already in September this year. There are clearly some expectations in the market that this is indeed what they actually will do. But this is far from given. Thus any verbal wrapping around the decision for July quotas on Saturday will be very important and can have a significant impact on the oil price. So far they have been tightlipped beyond what they will do beyond the month in question and have said nothing about abandoning the ”gradually towards the end of 2026” plan. It is thus a good chance that they will ease back on the hikes come August, maybe do no changes for a couple of months or even cut the quotas back a little if needed.
Significant OPEC+ spare capacity will be placed back into the market over the coming 1-2 years. What we do know though is that OPEC+ as a whole as well as the V8 subgroup specifically have significant spare capacity at hand which will be placed back into the market over the coming year or two or three. Probably an increase of around 3.0 – 3.5 mb/d. There is only two ways to get it back into the market. The oil price must be sufficiently low so that 1) Demand growth is stronger and 2) US shale oil backs off. In combo allowing the spare capacity back into the market.
Low global inventories stands ready to soak up 200-300 mb of oil. What will cushion the downside for the oil price for a while over the coming year is that current, global oil inventories are low and stand ready to soak up surplus production to the tune of 200-300 mb.
Analys
Brent steady at $65 ahead of OPEC+ and Iran outcomes

Following the rebound on Wednesday last week – when Brent reached an intra-week high of USD 66.6 per barrel – crude oil prices have since trended lower. Since opening at USD 65.4 per barrel on Monday this week, prices have softened slightly and are currently trading around USD 64.7 per barrel.

This morning, oil prices are trading sideways to slightly positive, supported by signs of easing trade tensions between the U.S. and the EU. European equities climbed while long-term government bond yields declined after President Trump announced a pause in new tariffs yesterday, encouraging hopes of a transatlantic trade agreement.
The optimisms were further supported by reports indicating that the EU has agreed to fast-track trade negotiations with the U.S.
More significantly, crude prices appear to be consolidating around the USD 65 level as markets await the upcoming OPEC+ meeting. We expect the group to finalize its July output plans – driven by the eight key producers known as the “Voluntary Eight” – on May 31st, one day ahead of the original schedule.
We assign a high probability to another sizeable output increase of 411,000 barrels per day. However, this potential hike seems largely priced in already. While a minor price dip may occur on opening next week (Monday morning), we expect market reactions to remain relatively muted.
Meanwhile, the U.S. president expressed optimism following the latest round of nuclear talks with Iran in Rome, describing them as “very good.” Although such statements should be taken with caution, a positive outcome now appears more plausible. A successful agreement could eventually lead to the return of more Iranian barrels to the global market.
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