Analys
“OPEC-put” gives floor to crude oil prices
Oil ministers in “OPEC+” met in Abu Dhabi this weekend. There were many grades of statements but the overall takeaway was clear: “There will be cuts if needed”. I.e. if there is a “persistent supply glut”. This has been our view all the time. The market has however traded lately as if Saudi Arabia now would sit back and watch an oil market surplus evolve and say: “Well, well, nothing we can do about it.” Saudi Arabia both can and will act. They can because they produced at the highest level ever in October at 10.68 m bl/d. I.e. it is easy for them to cut back a little. Donald Trump got what he wanted to mid-term elections: a lower or at least a dampened oil price which did not fly to the sky on Iran sanctions which fully kicked in on 4 November. Now it is Saudi Arabia’s turn to get what it wants: an oil price from which it can survive. Preferably USD 85/bl but absolutely not USD 60/bl. Saudi Arabia communicated very clearly over the weekend that it will reduce oil nominations by 0.5 m bl/d in December. And voila, there you go. OPEC production down from 33 m bl/d in October to 32.5 m bl/d in December (probably). Our projected call-on-OPEC for 2019 is 32.1 m bl/d thus a little more trimming is needed, but not much.
Bjarne Schieldrop, Chief analyst commodities
Several comments from weekend’ meeting portrayed a situation where Saudi Arabia and Russia are on opposite sides. We don’t think there is all that much of a difference. None of them really want to cut, but both of them probably will cut if needed.
Aleksander Novak, the Russian energy minister, stated that we don’t even know if there will be a surplus in 2019. We completely agree. Though we have an estimated call-on-OPEC of 32.1 m bl/d for 2019 the future is definitely uncertain and the global oil market has many moving parts with Libya and Venezuela being big wild cards for 2019 on the supply side just to name a few. Just last week the IEA stated that the global oil market is entering RED-ZONE with less and less spare capacity and that OPEC needs to produce more in 2019 rather than less in order to fend off upside price with reference to reduced supply from Iran and collapsing production in Venezuela.
Our call-on-OPEC for 2019 of 32.1 m bl/d is of course fairly muted but it totally disguises the internal dynamics where declines in Venezuela and Iran leads us to a projected call-on-Saudi for 2019 of 10.7 m bl/d though highly dependent on production from the other OPEC producers for example by Libya.
The ministerial meeting between the extended OPEC group this weekend clearly launched discussions about production cuts leading up to the official OPEC meeting on 6 December in Vienna. What they all want is to avoid a consistent surplus and stock building in 2019 developing into a contango crude oil market where the spot price trades at a significant discount to longer dated prices. That would undo all of their efforts through 2017 and 2018 to draw down inventories and drive the crude curve into backwardation.
It is of course impossible for OPEC+ to predict exactly how much to produce in 2019 in advance given the multitude of moving parts in the oil market on both supply and demand. We thus expect OPEC+ to hammer out a cooperative foundation under which it has the ability to act when needed. It also needs to continue to emphasize its willingness to act when needed.
This morning Brent crude has jumped 2% on confidence that OPEC+ will cut if needed but at the moment of writing Brent is only up 1.2% from Friday at USD 71/bl. A continued stronger USD with the dollar index today climbing 0.5% to 97.4 (highest since June 2017) is a clear headwind for crude oil price gains. November month is normally a very strong dollar month. We probably need the USD index to turn to a weakening trend to properly drive the Brent crude oil price higher. A price floor for the Brent crude front month price has however now probably been set at around the USD 70/bl mark.
Ch1: Crude oil price curves on Friday and five weeks earlier. From backwardation to contango. Contango is what crude oil producers hate more than anything: Selling at a discount.
Ch2: Speculators took further exit last week and are now down towards the lowest level since mid-2017 in terms of net long contracts
Ch4: Weekly inventories (US, EU, Sing, floating) increased a little last week. Except for a brief bump up in early October inventories have
mostly ticked lower. Inventories in the US have however increased since early October due to lack of pipelines to the US Gulf.
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.
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