Analys

OPEC+ is holding good cards and a steady course

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4 år sedan

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6 juni, 2021

Redaktionen

OPEC+ is to meet virtually in Vienna today for its official half-yearly meeting. The bull-recipe is still intact: ”Reviving demand, muted US shale oil response and controlled/restrained supply from OPEC+”. This will drive inventories yet lower and prices yet higher. There are no signs of division within the group and we expect it to hold on to a steady course with very good control of the market. We stick to our forecast of a Brent crude oil price averaging USD 75/bl in Q3-21 with Brent at times trading to USD 80 – 85/bl. Come Q4-21 however we think that the group increasingly will have to consider reviving US shale oil production.

Brent crude jumped above USD 70/bl for the first time since May 2019 on signals from OPEC+ of continued reviving demand and a tightening market with plenty of room for more oil from the group in H2-2021.

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

Today OPEC+ will meet virtually in Vienna for their official half yearly meeting to discuss and decide on production strategies for the second half of this year. Yesterday its Joint Technical Committee (JTC) presented its outlook for the supply/demand balance for the rest of the year. It depicted continued reviving demand and a tightening balance with an expected inventory draw of 2 – 2.5 m bl/d from August to December.

What it shows is that it is most likely plenty of room (and need) for a further increase of supply from the group beyond the planned increase of 2.1 m bl/d from May to July. It also makes it much easier for the group to accommodate the return of Iranian supplies to the market.

There are still very few signs of internal strife within the group. The group is thus likely to keep on going on a steady course. The bull-recipe for the oil market is still intact: “Reviving demand, muted US shale oil response together with controlled and restrictive supply from OPEC+” thus resulting in further declines in inventories and thus yet higher oil prices.

Given that the group now meets on a monthly basis it is less of a challenge to lay out a production strategy for H2-2021 since it can adjust and revise its plan on a monthly basis. I.e. it doesn’t need to have a full crystal ball view of how H2-2021 will play out.

The natural thing for the group to do now that global oil inventories are close to the 2015-19 average is to signal an additional increase of 2 m bl/d from August to December thus leading to an anticipated inventory draw of 0.5 m bl/d during that period if the JTC is correct in its projections on Monday.

The group signalled yesterday that the return of Iranian supplies will be gradual and managed and won’t create any supply shock into the market. Between 1-1.5 m bl/d of Iranian oil exports are probably already in the market. Thus a return of Iranian supplies probably implies an added supply of about 1 – 1.5 m bl/d of crude and condensates.

The likely continued strong oil demand revival in H2-2021 is handing OPEC+ with a good hand of cards to play from and there is no indication that they won’t play it wisely and for what it’s worth.

Looking into 2022 and beyond is however much more difficult. Supply is then likely to increase from Canada, Brazil, Russia, Kazakhstan, Iran, Iraq, Libya and of course also the US. Eventually also of course in Venezuela.

With respect to US shale oil. It is not so that nothing is happening. From January to April the number of completed shale oil wells increased by 8% on average every month and 10% in April. Losses in underlying production is currently running at 424 k bl/d per month. New production from the 754 completed wells in April however yielded close to 400 k bl/d that month. Another 10% increase in completed wells in May will leave US shale oil production at a steady state production level. Yet another 10% increase in completions in June would then place US shale oil production on an annualized production growth pace of 500 k bl/d without any further increase in the number of completed wells beyond June. Add in production growth of NGLs and you have a solid production growth rate in the US. And with respect to drilling rigs. That number is increasing as well even though not at the wild pace seen from June 2019 onwards it is still rising at a rate of about 15 – 20 rigs per month thus placing US shale oil into expanding territory as the number of drilling rigs surpasses the 450 mark needed for expansion sometime in July/August this year. Expansion for 2022 that is.

Thus OPEC+ will need to keep a close eye on US shale oil players. If it looks like they aim to eat into the market share of OPEC+ by expanding too much then they are bound to be taught yet another lesson of low prices.

Our standing forecast for quite some time now is for Brent crude to average USD 75/bl in Q3-2021. That means that Brent crude at times is likely to trade to USD 80/bl to USD 85/bl. This will help to drag 2022/23 forward prices up towards USD 70/bl. Producers should bid their time well and look closely at securing forward hedges at such levels.

As the autumn progresses we expect US shale oil producers to show more vigour with reviving activity and rising production leading to a more cautious oil market and likely softer oil prices in Q4-21.

Current crude oil forward prices curves versus the 50 year real average crude oil price in 2019 USD according to BP. One should not expect oil prices to deliver at USD 70-80-90/bl in the years to come.

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The Mid-East anchor dragging crude oil lower

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23 timmar sedan

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14 oktober, 2025

Redaktionen

When it starts to move lower it moves rather quickly. Gaza, China, IEA. Brent crude is down 2.1% today to $62/b after having traded as high as $66.58/b last Thursday and above $70/b in late September. The sell-off follows the truce/peace in Gaze, a flareup in US-China trade and yet another bearish oil outlook from the IEA.

Bjarne Schieldrop, Chief analyst commodities, SEB

A lasting peace in Gaze could drive crude oil at sea to onshore stocks. A lasting peace in Gaza would probably calm down the Houthis and thus allow more normal shipments of crude oil to sail through the Suez Canal, the Red Sea and out through the Bab-el-Mandeb Strait. Crude oil at sea has risen from 48 mb in April to now 91 mb versus a pre-Covid normal of about 50-60 mb. The rise to 91 mb is probably the result of crude sailing around Africa to be shot to pieces by the Houthis. If sailings were to normalize through the Suez Canal, then it could free up some 40 mb in transit at sea moving onshore into stocks.

The US-China trade conflict is of course bearish for demand if it continues.

Bearish IEA yet again. Getting closer to 2026. Credibility rises. We expect OPEC to cut end of 2025. The bearish monthly report from the IEA is what it is, but the closer we get to 2026, the more likely the IEA is of being ball-park right in its outlook. In its monthly report today the IEA estimates that the need for crude oil from OPEC in 2026 will be 25.4 mb/d versus production by the group in September of 29.1 mb/d. The group thus needs to do some serious cutting at the end of 2025 if it wants to keep the market balanced and avoid inventories from skyrocketing. Given that IEA is correct that is. We do however expect OPEC to implement cuts to avoid a large increase in inventories in Q1-26. The group will probably revert to cuts either at its early December meeting when they discuss production for January or in early January when they discuss production for February. The oil price will likely head yet lower until the group reverts to cuts.

Dubai: The Mid-East anchor dragging crude oil lower. Surplus emerging in Mid-East pricing. Crude oil prices held surprisingly strong all through the summer. A sign and a key source of that strength came from the strength in the front-end backwardation of the Dubai crude oil curve. It held out strong from mid-June and all until late September with an average 1-3mth time-spread premium of $1.8/b from mid-June to end of September. The 1-3mth time-spreads for Brent and WTI however were in steady deterioration from late June while their flat prices probably were held up by the strength coming from the Persian Gulf. Then in late September the strength in the Dubai curve suddenly collapsed. Since the start of October it has been weaker than both the Brent and the WTI curves. The Dubai 1-3mth time-spread now only stands at $0.25/b. The Middle East is now exporting more as it is producing more and also consuming less following elevated summer crude burn for power (Aircon) etc.

The only bear-element missing is a sudden and solid rise in OECD stocks. The only thing that is missing for the bear-case everyone have been waiting for is a solid, visible rise in OECD stocks in general and US oil stocks specifically. So watch out for US API indications tomorrow and official US oil inventories on Thursday.

No sign of any kind of fire-sale of oil from Saudi Arabia yet. To what we can see, Saudi Arabia is not at all struggling to sell its oil. It only lowered its Official Selling Prices (OSPs) to Asia marginally for November. A surplus market + Saudi determination to sell its oil to the market would normally lead to a sharp lowering of Saudi OSPs to Asia. Not yet at least and not for November.

The 5yr contract close to fixed at $68/b. Of importance with respect to how far down oil can/will go. When the oil market moves into a surplus then the spot price starts to trade in a large discount to the 5yr contract. Typically $10-15/b below the 5yr contract on average in bear-years (2009, 2015, 2016, 2020). But the 5yr contract is usually pulled lower as well thus making this approach a moving target. But the 5yr contract price has now been rock solidly been pegged to $68/b since 2022. And in the 2022 bull-year (Brent spot average $99/b), the 5yr contract only went to $72/b on average. If we assume that the same goes for the downside and that 2026 is a bear-year then the 5yr goes to $64/b while the spot is trading at a $10-15/b discount to that. That would imply an average spot price next year of $49-54/b. But that is if OPEC doesn’t revert to cuts and instead keeps production flowing. We think OPEC(+) will trim/cut production as needed into 2026 to prevent a huge build-up in global oil stocks and a crash in prices. But for now we are still heading lower. Into the $50ies/b.

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More weakness and lower price levels ahead, but the world won’t drown in oil in 2026

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1 vecka sedan

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7 oktober, 2025

Redaktionen

Some rebound but not much. Brent crude rebounded 1.5% yesterday to $65.47/b. This morning it is inching 0.2% up to $65.6/b. The lowest close last week was on Thursday at $64.11/b.

The curve structure is almost as week as it was before the weekend. The rebound we now have gotten post the message from OPEC+ over the weekend is to a large degree a rebound along the curve rather than much strengthening at the front-end of the curve. That part of the curve structure is almost as weak as it was last Thursday.

We are still on a weakening path. The message from OPEC+ over the weekend was we are still on a weakening path with rising supply from the group. It is just not as rapidly weakening as was feared ahead of the weekend when a quota hike of 500 kb/d/mth for November was discussed.

The Brent curve is on its way to full contango with Brent dipping into the $50ies/b. Thus the ongoing weakening we have had in the crude curve since the start of the year, and especially since early June, will continue until the Brent crude oil forward curve is in full contango along with visibly rising US and OECD oil inventories. The front-month Brent contract will then flip down towards the $60/b-line and below into the $50ies/b.

At what point will OPEC+ turn to cuts? The big question then becomes: When will OPEC+ turn around to make some cuts? At what (price) point will they choose to stabilize the market? Because for sure they will. Higher oil inventories, some more shedding of drilling rigs in US shale and Brent into the 50ies somewhere is probably where the group will step in.

There is nothing we have seen from the group so far which indicates that they will close their eyes, let the world drown in oil and the oil price crash to $40/b or below.

The message from OPEC+ is also about balance and stability. The world won’t drown in oil in 2026. The message from the group as far as we manage to interpret it is twofold: 1) Taking back market share which requires a lower price for non-OPEC+ to back off a bit, and 2) Oil market stability and balance. It is not just about 1. Thus fretting about how we are all going to drown in oil in 2026 is totally off the mark by just focusing on point 1.

When to buy cal 2026? Before Christmas when Brent hits $55/b and before OPEC+ holds its last meeting of the year which is likely to be in early December.

Brent crude oil prices have rebounded a bit along the forward curve. Not much strengthening in the structure of the curve. The front-end backwardation is not much stronger today than on its weakest level so far this year which was on Thursday last week.

The front-end backwardation fell to its weakest level so far this year on Thursday last week. A slight pickup yesterday and today, but still very close to the weakest year to date. More oil from OPEC+ in the coming months and softer demand and rising inventories. We are heading for yet softer levels.

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A sharp weakening at the core of the oil market: The Dubai curve

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2 veckor sedan

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3 oktober, 2025

Redaktionen

Down to the lowest since early May. Brent crude has fallen sharply the latest four days. It closed at USD 64.11/b yesterday which is the lowest since early May. It is staging a 1.3% rebound this morning along with gains in both equities and industrial metals with an added touch of support from a softer USD on top.

What stands out the most to us this week is the collapse in the Dubai one to three months time-spread.

Dubai is medium sour crude. OPEC+ is in general medium sour crude production. Asian refineries are predominantly designed to process medium sour crude. So Dubai is the real measure of the balance between OPEC+ holding back or not versus Asian oil demand for consumption and stock building.

A sharp weakening of the front-end of the Dubai curve. The front-end of the Dubai crude curve has been holding out very solidly throughout this summer while the front-end of the Brent and WTI curves have been steadily softening. But the strength in the Dubai curve in our view was carrying the crude oil market in general. A source of strength in the crude oil market. The core of the strength.

The now finally sharp decline of the front-end of the Dubai crude curve is thus a strong shift. Weakness in the Dubai crude marker is weakness in the core of the oil market. The core which has helped to hold the oil market elevated.

Facts supports the weakening. Add in facts of Iraq lifting production from Kurdistan through Turkey. Saudi Arabia lifting production to 10 mb/d in September (normal production level) and lifting exports as well as domestic demand for oil for power for air con is fading along with summer heat. Add also in counter seasonal rise in US crude and product stocks last week. US oil stocks usually decline by 1.3 mb/week this time of year. Last week they instead rose 6.4 mb/week (+7.2 mb if including SPR). Total US commercial oil stocks are now only 2.1 mb below the 2015-19 seasonal average. US oil stocks normally decline from now to Christmas. If they instead continue to rise, then it will be strongly counter seasonal rise and will create a very strong bearish pressure on oil prices.

Will OPEC+ lift its voluntary quotas by zero, 137 kb/d, 500 kb/d or 1.5 mb/d? On Sunday of course OPEC+ will decide on how much to unwind of the remaining 1.5 mb/d of voluntary quotas for November. Will it be 137 kb/d yet again as for October? Will it be 500 kb/d as was talked about earlier this week? Or will it be a full unwind in one go of 1.5 mb/d? We think most likely now it will be at least 500 kb/d and possibly a full unwind. We discussed this in a not earlier this week: ”500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d”

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily. That core strength helped to keep flat crude oil prices elevated close to the 70-line. Now also the Dubai curve has given in.