Analys

OPEC must talk bearish on the curve

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8 år sedan

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24 mars, 2017

It was nothing wrong with OPEC’s decision on November 30th to cut production in H1-17 by 1.16 mb/d versus October levels. What they did wrong and why their decision ended up being close to a shot in their own foot rather than a solution was their communication. When they decided to cut they gave a shine that they actually were back as a price setting organisation. Not just for the short term but also for the medium to longer term. The feel from the organisation at the end of November last year was the communication, stated or not, that OPEC don’t want an oil price below $50/b and that OPEC is aiming for an oil price of $60/b and lastly that OPEC was ready to use its size and muscles to support and achieve that. OPEC gave the shine that it was not just about a short term operation of draining the inventories. OPEC was actually there to support the level of $50/b and aim for $60/b. They probably had some remote hope and dream as well that they could actually deliver on this over the medium to longer term. I.e. that OPEC would again become the factor in the market setting the oil price within reasonable ranges. Deep down however they know that this is not in their power. In the longer term they have no control over prices. If the oil price heads to $30/b or $70/b (+/- $20/b versus today’s spot price) over the longer term it will have nothing to do with OPEC’s decisions but instead have all to do with technology, economic growth, investment cycles, resource availability etc. OPEC’s primary goal is to draw down current elevated inventories in order to remove the spot price discount versus longer dated contracts (whatever they might be). Last year that discount was $12/b and that cost OPEC a lost income of $150-200 bn as the organisation is mostly selling crude oil at spot prices.

It is in OPEC’s power to cut production and draw down inventories in the short term and thus remove the discount in crude oil spot prices. That is what they want. When the job is done the plan is to move back into full production again. That is however difficult if non-OPEC production has risen since when OPEC started to cut. That is the problem with the rising US crude oil production. It might be problematic for OPEC to move back into full production again once inventories have drawn down. So OPEC can cut as long as non-OPEC doesn’t revive when they do it. And that is where OPEC failed when they gave the shine that they were there also for the medium to longer term to support and set prices. “OPEC is back” was the perception. The result of OPEC’s actions, production cut decision and communication was that the medium term WTI forward crude oil prices rose from $52/b to $55-56/b and thus accelerated US shale oil recovery even more. And now we are here with US crude oil production at 9.1 mb/d and possibly reaching 9.5 mb/d in the end of May (if we extrapolate US production trend since the start of the year) when OPEC meets in Vienna on the 25th of that month.

OPEC can extend and cut production successfully in H2-17 but only if they get the communication right. They need to make it entirely clear that they have no plan to support or steer oil prices in any direction or to support the oil price at any specific level in the medium to longer term other than what the market actually stets it at. Everybody knows this anyhow it is just that markets so easily mislead themselves and gets side-lined from reality for periods. If OPEC wants to cut and draw down inventories they need to talk bearish on the curve in order to prevent it from rising while they cut since a rise in the curve would lead to an acceleration in US shale oil production and thus make it difficult for OPEC to move back into full operation again following the cuts. OPEC should make it clear that they plan to increase production according to their current market share along with global oil demand growth. OPEC has an overall market share of about 40%. If global demand grows with 1.3 mb/d then OPEC should make it clear that they plan to increase their production by 0.5 mb/d every year going forward. OPEC’s market dream is a tight spot oil market with high spot prices holding a substantial premium to longer dated prices. That would hand them a nice cash flow from spot crude oil sales while the much lower medium to longer dated oil prices constantly works to temper non-OPEC investments. A medium term forward WTI curve at $45/b would do the trick. So OPEC needs to talk bearish on the curve if they want to be successful with the cuts. If OPEC follows this strattegy it does of course mean downside risk for the medium to longer dated contracts. That will of course be no prediciton of where spot crude oil prices will deliver in the end. The forward curve is a tool in order to control investments in new oil production. More so than ever before with agile shale invenstments reacting directly on where the level of the forward prices are.

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

Stronger inventory build than consensus, diesel demand notable

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3 dagar sedan

den

21 februari, 2025

Redaktionen

Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Analys

Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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5 dagar sedan

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19 februari, 2025

Redaktionen

Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Analys

Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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7 dagar sedan

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17 februari, 2025

Redaktionen

Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.