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Analys

One year after USD -37.63/bl

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SEB - Prognoser på råvaror - Commodity

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.

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

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.

Brent and WTI crude prices

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.

Massive decline in production by three OPEC members Iran, Venezuela and Iran.

Analys

Crude stocks fall again – diesel tightness persists

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U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

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

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.

Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.

Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).

Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.

On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.

US DOE Inventories
US Crude inventories
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Analys

Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

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Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

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

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.

OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.

Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent  crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.

This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.

The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Dubai medium sour crude oil marker
Source: SEB graph, calculations and highlights. Bloomberg data

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

The Brent crude oil forward curve (latest in white)
Source: Bloomberg
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Analys

Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

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Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

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

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.

Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.

For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.

Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.

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