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OPEC calls for sub-$60/bl but market heads for $70/bl, while US oil production is steaming ahead

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SEB - Prognoser på råvaror - CommodityIran’s oil minister Zanganeh yesterday intervened verbally in the oil market by stating that OPEC’s members do not want Brent crude oil above $60/bl because of shale oil. The market could not care less and instead jumped 1.5% to $68.82/bl totally forgetting and disregarding that the current deficit and inventory draw down is artificially mastered by OPEC & Co. Later in the day the US EIA revised its US crude oil production 2018 forecast up by 250 k bl/d to 10.27 m bl/d. Still too low in our view. Later today we’ll have the US oil inventories for which the API yesterday predicted a huge crude oil draw of 11.2 m bl. Brent crude is trading bullishly at $69.2/bl (+0.6%) and ready to take the jump above the 2015 high of $69.63/b and potentially touch $70/bl. US crude oil production is growing and growing to the increasing concern of OPEC & Co and their verbal intervention has started. Producers should listen carefully and take good care of their downside risks.

Zanganeh’s statement should not be taken lightly by the market. The market seems to forget that a key reason for why we have had an 18% y/y (to 29 Dec 2017) bull-rally in the oil market was because OPEC & Co held back a significant amount of supply and still are. It has thus been an artificially mastered bull-market by the hands of OPEC & Co. The draw-down of global inventories has of course been real but it has been a mastered draw-down at the will of OPEC & Co and it still is.

If OPEC & Co deems the oil price too high and the US crude oil production growth too strong then they can and will do something about it. Yesterday we saw the first step of verbal intervention. Expect more of the same to come. And if the market refuses to listen then they will put more supply into the market.

The market is just happy that oil prices are rising. Global economic growth is accelerating, oil demand growth is very strong, inventories are drawing down and oil prices are naturally rising as a result. The oil market does of course have good reason to be positive about the current strong oil demand growth. It has definitely taken the oil market out of the woods so to speak with the Brent 1mth contract now trading at a premium of $9.6/bl over the three year contract. A part of that is strong global oil demand growth. A large part is however OPEC & Co.

The US EIA yesterday revised US crude oil production for 2018 up by 250 k bl/d to 10.27 m bl/d. That was the fourth revision higher in four months. We still think it is too low with more revisions higher to come and we think that everyone are probably able to see this with just a half eye open.

Last year US crude oil production from Lower 48 states (ex GoM) increased 105 k bl/d/mth on average with a total Dec-16 to Dec-17 increase of 1.26 m bl/d. The average monthly growth rate from July to December 2017 was 130 k bl/d/mth which is equal to a marginal annualized growth rate of 1.6 m bl/d.

In December 2017 the US EIA estimated that US shale oil production would likely growth by 94 k bl/d from Dec-17 to Jan-18 thus exiting 2017 at a solid 1.1 m bl/d marginal annualized pace. Last year’s shale oil activity was much about drilling with fracking and completion substantially trailing the drilling activity leading to a huge build-up in DUCs (uncompleted wells). For the year to come we’ll likely see a shift towards completions of these wells and less focus on the drilling of new oil wells. As such we will likely see that completions of wells actually increase some 20% y/y to 2018 while drilling activity falls back by 20%. All in all we are likely to see more well completions in 2018 than in 2017 and not less.

Despite of this the US EIA predicts that US L48 (ex GoM) will only growth at 0.5 m bl/d from Dec-17 to Dec-18 with a monthly pace of only 42 k bl/d/mth. However, if US L48 (ex GoM) grows like it did in 2017 (+105 k bl/d/mth) then total US crude oil production is will average 10.65 m bl/d in 2018. If L48 (ex GoM) instead continues to grow like it did in 2H17 (+130 k bl/d/mth), then total US crude oil production will average 10.8 m bl/d in 2018. All told the US EIA has more upwards revisions to do in the months to come for 2018 US crude oil production forecast.

Chart 1: US crude oil production for 2017 and 2018

US crude oil production for 2017 and 2018

Chart 2: US net hydro carbon liquids imports (EIA) and the implied trade balance impact in billion USD at an oil price of $60/bl (SEB)

US net hydro carbon liquids imports (EIA) and the implied trade balance impact in billion USD at an oil price of $60/bl (SEB)

Chart 3: US 6mths rolling marginal annualized growth in US L48 (ex GoM) in m bl/d (EIA)

Ending the year at a very strong marginal growth rate of 1.6 m b/d. Then very soft in 2018 in the face of higher prices, bullish market sentiment and increasing well completions. Why this soft outlook?

US 6mths rolling marginal annualized growth in US L48 (ex GoM) in m bl/d (EIA)

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Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

Lowest since Dec 2021. Kazakhstan likely reason for OPEC+ surprise hike in May

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Collapsing after Trump tariffs and large surprise production hike by OPEC+ in May. Brent crude collapsed yesterday following the shock of the Trump tariffs on April 2 and even more so due to the unexpected announcement from OPEC+ that they will lift production by 411 kb/d in May which is three times as much as expected. Brent fell 6.4% yesterday with a close of USD 70.14/b and traded to a low of USD 69.48/b within the day. This morning it is down another 2.7% to USD 68.2/b. That is below the recent low point in early March of USD 68.33/b. Thus, a new ”lowest since December 2021” today.

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

Kazakhstan seems to be the problem and the reason for the unexpected large hike by OPEC+ in May. Kazakhstan has consistently breached its production cap. In February it produced 1.83 mb/d crude and 2.12 mb/d including condensates. In March its production reached a new record of 2.17 mb/d. Its crude production cap however is 1.468 mb/d. In February it thus exceeded its production cap by 362 kb/d.

Those who comply are getting frustrated with those who don’t. Internal compliance is an important and difficult issue when OPEC+ is holding back production. The problem naturally grows the bigger the cuts are and the longer they last as impatience grows over time. The cuts have been large, and they have lasted for a long time. And now some cracks are appearing. But that does not mean they cannot be mended. And it does not imply either that the group is totally shifting strategy from Price to Volume. It is still a measured approach. Also, by lifting all caps across the voluntary cutters, Kazakhstan becomes less out of compliance. Thus, less cuts by Kazakhstan are needed in order to become compliant.

While not a shift from Price to Volume, the surprise hike in May is clearly a sign of weakness. The struggle over internal compliance has now led to a rupture in strategy and more production in May than what was previously planned and signaled to the market. It is thus natural to assign a higher production path from the group for 2025 than previously assumed. Do however remember how quickly the price war between Russia and Saudi Arabia ended in the spring of 2020.

Higher production by OPEC+ will be partially countered by lower production from Venezuela and Iran. The new sanctions towards Iran and Venezuela can to a large degree counter the production increase from OPEC+. But to what extent is still unclear.

Buy some oil calls. Bullish risks are never far away. Rising risks for US/Israeli attack on Iran? The US has increased its indirect attacks on Iran by fresh attacks on Syria and Yemen lately. The US has also escalated sanctions towards the country in an effort to force Iran into a new nuclear deal. The UK newspaper TheSun yesterday ran the following story: ON THE BRINK US & Iran war is ‘INEVITABLE’, France warns as Trump masses huge strike force with THIRD of America’s stealth bombers”. This is indeed a clear risk which would lead to significant losses of supply of oil in the Middle East and probably not just from Iran. So, buying some oil calls amid the current selloff is probably a prudent thing to do for oil consumers.

Brent crude is rejoining the US equity selloff by its recent collapse though for partially different reasons. New painful tariffs from Trump in combination with more oil from OPEC+ is not a great combination.

Brent crude is rejoining the US equity selloff by its recent collapse though for partially different reasons.
Source: SEB selection and highlights, Bloomberg graph and data
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Tariffs deepen economic concerns – significantly weighing on crude oil prices

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Brent crude prices initially maintained the gains from late March and traded sideways during the first two trading days in April. Yesterday evening, the price even reached its highest point since mid-February, touching USD 75.5 per barrel.

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

However, after the U.S. president addressed the public and unveiled his new package of individual tariffs, the market reacted accordingly. Overnight, Brent crude dropped by close to USD 4 per barrel, now trading at USD 71.6 per barrel.

Key takeaways from the speech include a baseline tariff rate of 10% for all countries. Additionally, individual reciprocal tariffs will be imposed on countries with which the U.S. has the largest trade deficits. Many Asian economies end up at the higher end of the scale, with China facing a significant 54% tariff. In contrast, many North and South American countries are at the lower end, with a 10% tariff rate. The EU stands at 20%, which, while not unexpected given earlier signals, is still disappointing, especially after Trump’s previous suggestion that there might be some easing.

Once again, Trump has followed through on his promise, making it clear that he is serious about rebalancing the U.S. trade position with the world. While some negotiation may still occur, the primary objective is to achieve a more balanced trade environment. A weaker U.S. dollar is likely to be an integral part of this solution.

Yet, as the flow of physical goods to the U.S. declines, the natural question arises: where will these goods go? The EU may be forced to raise tariffs on China, mirroring U.S. actions to protect its industries from an influx of discounted Chinese goods.

Initially, we will observe the effects in soft economic data, such as sentiment indices reflecting investor, industry, and consumer confidence, followed by drops in equity markets and, very likely, declining oil prices. This will eventually be followed by more tangible data showing reductions in employment, spending, investments, and overall economic activity.

Ref oil prices moving forward, we have recently adjusted our Brent crude price forecast. The widespread imposition of strict tariffs is expected to foster fears of an economic slowdown, potentially reducing oil demand. Macroeconomic uncertainty, particularly regarding tariffs, warrants caution regarding the pace of demand growth. Our updated forecast of USD 70 per barrel for 2025 and 2026, and USD 75 per barrel for 2027, reflects a more conservative outlook, influenced by stronger-than-expected U.S. supply, a more politically influenced OPEC+, and an increased focus on fragile demand.

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US DOE data:

Last week, U.S. crude oil refinery inputs averaged 15.6 million barrels per day, a decrease of 192 thousand barrels per day from the previous week. Refineries operated at 86.0% of their total operable capacity during this period. Gasoline production increased slightly, averaging 9.3 million barrels per day, while distillate (diesel) production also rose, averaging 4.7 million barrels per day.

U.S. crude oil imports averaged 6.5 million barrels per day, up by 271 thousand barrels per day from the prior week. Over the past four weeks, imports averaged 5.9 million barrels per day, reflecting a 6.3% year-on-year decline compared to the same period last year.

The focus remains on U.S. crude and product inventories, which continue to impact short-term price dynamics in both WTI and Brent crude. Total commercial petroleum inventories (excl. SPR) increased by 5.4 million barrels, a modest build, yet insufficient to trigger significant price movements.

Commercial crude oil inventories (excl. SPR) rose by 6.2 million barrels, in line with the 6-million-barrel build forecasted by the API. With this latest increase, U.S. crude oil inventories now stand at 439.8 million barrels, which is 4% below the five-year average for this time of year.

Gasoline inventories decreased by 1.6 million barrels, exactly matching the API’s reported decline of 1.6 million barrels. Diesel inventories rose by 0.3 million barrels, which is close to the API’s forecast of an 11-thousand-barrel decrease. Diesel inventories are currently 6% below the five-year average.

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Over the past four weeks, total products supplied, a proxy for U.S. demand, averaged 20.1 million barrels per day, a 1.2% decrease compared to the same period last year. Gasoline supplied averaged 8.8 million barrels per day, down 1.9% year-on-year. Diesel supplied averaged 3.8 million barrels per day, marking a 3.7% increase from the same period last year. Jet fuel demand also showed strength, rising 4.2% over the same four-week period.

USD DOE invetories
US crude inventories
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Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today

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Brent crude rallied to a high of USD 75.29/b yesterday, but wasn’t able to hold on to it and closed the day at USD 74.49/b. Brent crude has now crossed above both the 50- and 100-day moving average with the 200dma currently at USD 76.1/b. This morning it is trading a touch lower at USD 74.3/b

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

Brent riding a rollercoaster between bullish sanctions and bearish tariffs. Biden sanctions drove Brent to USD 82.63/b in mid-January. Trump tariffs then pulled it down to USD 68.33/b in early March with escalating concerns for oil demand growth and a sharp selloff in equities. New sanctions from Trump on Iran, Venezuela and threats of such also towards Russia then drove Brent crude back up to its recent high of USD 75.29/b. Brent is currently driving a rollercoaster between new demand damaging tariffs from Trump and new supply tightening sanctions towards oil producers (Iran, Venezuela, Russia) from Trump as well.

’Liberation day’ is today putting demand concerns in focus. Today we have ’Liberation day’ in the US with new, fresh tariffs to be released by Trump. We know it will be negative for trade, economic growth and thus oil demand growth. But we don’t know how bad it will be as the effects comes a little bit down the road. Especially bad if it turns into a global trade war escalating circus.

Focus today will naturally be on the negative side of demand. It will be hard for Brent to rally before we have the answer to what the extent these tariffs will be. Republicans lost the Supreme Court race in Wisconsin yesterday. So maybe the new Tariffs will be to the lighter side if Trump feels that he needs to tread a little bit more carefully.

OPEC+ controlling the oil market amid noise from tariffs and sanctions. In the background though sits OPEC+ with a huge surplus production capacity which it now will slice and dice out with gradual increases going forward. That is somehow drowning in the noise from sanctions and tariffs. But all in all, it is still OPEC+ who is setting the oil price these days.

US oil inventory data likely to show normal seasonal rise. Later today we’ll have US oil inventory data for last week. US API indicated last night that US crude and product stocks rose 4.4 mb last week. Close to the normal seasonal rise in week 13.

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