Analys
OPEC+ in comfortable position as U.S. shale oil slows down
This week is the week of monthly oil market reports from the three main energy organisations IEA, EIA and OPEC. The US EIA is first out with its monthly update today at 18:00 CET. Then OPEC on Wednesday and the IEA on Thursday at 10:00 CET.
We expect to see a further downward revision today of U.S. shale oil production growth for 2020 today by the U.S. EIA. In its data tables it does not specify shale oil production specifically but its projection for “Lower 48 States (excl. GOM)” is pretty much shale oil production. In its December report it projected U.S. shale oil production to grow by only 0.3 m bl/d from Dec-19 to Dec-20. That’s a far cry from the booming production growth of 1.74 m bl/d from Dec-17 to Dec-18. It also projected basically flat U.S. shale oil production in H2-20 with a contraction at the very end of the year. We expect these projections to be reduced further in its report today.
Schlumberger yesterday commented that most U.S. production projections are probably too high with peak production now reached in both Bakken and Eagle Ford. Further that at a WTI price of $55/bl there would be no production growth in the years to come and that at a WTI price of $70/bl U.S. production will probably grow at a yearly rate of 0.5 m bl/d per year. The WTI forward 5-year price strip is currently trading at $53/bl ($50.5/bl real-term).
We fully agree with Schlumberger’s comment yesterday. We have frequently seen statements from Rystad Energy about the waste reserves of U.S. shale oil deposits. We agree with that too and that U.S. shale oil production can grow robustly and even at a stunning pace also in the years to come. The big question is at what price will/can this happen while at the same time keeping investors satisfied with their returns on investments. Schlumberger’s comment yesterday is basically that there will be no further growth at the current forward WTI price level and that the forward WTI price needs to be lifted to $70/bl in order to get a 0.5 m bl/d US shale oil production growth in the years to come.
Add to this that non-OPEC, non-US crude oil production is increasingly projected to be in contraction from 2021 onwards as a result of the deep slump in off-shore investments since the oil price took a dive in 2014. Investments were booming in the five years running up to 2014. That led to a stream of new supply coming online during the following five years of 2015/16/17/18/19. Over the past five years the world has been feeding off legacy off-shore investments from 2014 and before as well as a hugely debt-driven U.S. shale oil production growth.
The year 2020 is probably going to be the last year of new non-OPEC, non-US production coming online in a magnitude that offsets production declines. I.e. non-OPEC, non-US production is likely to be in sideways to lower from 2021 onwards due to the slump in investments in this sector since 2014.
This should leave OPEC(+) in a very good position already by the middle of this year and for quite a few years after that. Why on earth should OPEC(+) throw in the towel on its “price over volume” strategy when the forward horizon looks like this? We don’t think they will. And that is of course hugely important for the oil price outlook for 2020. By and large the more significant oil price moves since mid-2014 (when Saudi Arabia stopped defending the oil price) has plain and simply been decided by shifts in OPEC(+)’s strategy between “price over volume” and “volume over price”. So if OPEC(+) sticks to “price over volume” as we think they will (we see increasing compliance to pledges) then Brent is unlikely to average sub-$60/bl in 2020.
Our Brent crude oil 2020 price forecast of $70/bl was largely viewed as close to outrageously high just a few months ago. Now we see that forecasts are gradually lifted higher and calls for $65-75/bl Brent crude oil price range in 2020 are starting to emerge as US shale oil production growth continues to slow and OPEC(+) sticks to its “price over volume” strategy. Add some improvements in global manufacturing and this will likely be the view of many.
Ch1: Strategy by OPEC(+). “Price over volume” or “Volume over price”.
Saudi Arabia did not increase production from mid-2014 but it started to lower its official selling prices and stopped defending the oil price. It could have lowered its production and defended the price, but it didn’t. So basically, it shifted to “volume over price” already in mid-2014 even if it did not become official before the OPEC meeting at the end of 2014.
The strategy shifted to “price over volume” at the OPEC meeting on November 30 in 2016 with additional help from 10 non-OPEC countries. The strategy then shifted back to “volume over price” for a brief period from June 2018 to Dec 2018 before cuts were implemented again. The strategy is currently “price over volume” and we think OPEC(+) will stick comfortably with this strategy in 2020.
Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.
Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.
US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.
The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.
Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.
US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.
Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
På lördag inför USA tariff på 25 procent för import från Kanada, olja kan dock undantas
Tre bra cannabis-aktier som rekommenderas av analytiker
Ett samtal om kärnkraft och blykylda reaktorer med VD för Blykalla
Fondförvaltare köper aktier i kanadensiska guldproducenter när valutan faller
Det helt unika fusionskraftsföretaget Helion får ytterligare 5 miljarder kronor i finansiering
Priset på nötkreatur det högsta någonsin i USA
The rally continues with good help from Russian crude exports at 16mths low
Christian Kopfer om olja, koppar, guld och silver
Crude oil comment: Pulling back after technical exhaustion and disappointing US inventory data. Low Cushing stocks lifting eyebrows
Brent crude marches on with accelerating strength coming from Mid-East time-spreads
-
Nyheter4 veckor sedan
Priset på nötkreatur det högsta någonsin i USA
-
Analys3 veckor sedan
The rally continues with good help from Russian crude exports at 16mths low
-
Nyheter3 veckor sedanChristian Kopfer om olja, koppar, guld och silver
-
Analys3 veckor sedan
Crude oil comment: Pulling back after technical exhaustion and disappointing US inventory data. Low Cushing stocks lifting eyebrows
-
Analys3 veckor sedan
Brent crude marches on with accelerating strength coming from Mid-East time-spreads
-
Nyheter3 veckor sedanDarwei Kung på DWS ger sin syn på råvaror inför 2025 – mest positiv till guld
-
Nyheter2 veckor sedanNy upptäckt av sällsynta jordartsmetaller i Småland
-
Nyheter2 veckor sedanTre bra aktier inom koppar med fokus på stabila lågkostnadsprojekt