Analys

OPEC+ tightens the front. Producers lean on the back

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6 år sedan

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12 december, 2018

We are quite confident that OPEC+ will be successful in tightening up the front end of the oil market thus keeping the Brent crude oil 1mth contract in $60+/bl territory over the next 6 mths.

Investors and producers however fear a tsunami of additional US shale oil supply in late 2019 and 2020 as new pipelines are installed from the Permian to the US Gulf.

Bjarne Schieldrop, Chief analyst commodities

As a consequence Brent crude oil prices are likely to be supported at the front by OPEC+ while investors and producers will be active sellers of oil for late 2019 and 2020. This will likely push the Brent crude curve into proper backwardation again with the front a little higher but with bearish pressure on the medium term contracts. Backwardation will attract more speculators, again adding upwards push in the front.

US shale production continues to grow in the Permian basin, but pipeline capacity is full and new pipelines will not be there until late 2019. As such we expect the local Permian crude price to sink yet lower in order to tame production growth and match it to current installed pipeline capacity. Local Permian crude is already down at $43/bl.

As a consequence the Brent crude to WTI Cushing and to local Permian crude price spreads should continue to widen for a while yet. These spreads could however be pushed tighter for late 2019 and 2020 durations. This will add to the picture above: Support for front end Brent but weakness for medium term 2020/2021 Brent prices.

Conclusion:

Stay long front month Brent versus short June 2020 Brent crude.
Stay short the Brent versus long WTI for June 2020

It is important to remember that the sharp decline in oil prices during October and November to a very large degree was driven by a strong increase in production by OPEC/OPEC+. Partially as a tactically lead-up to the recent OPEC+ meeting. As such we believe they are fully capable of tightening up the front end of the oil market again as well. Saudi Arabia produced 11.1 m bl/d in November and delivered an additional 0.2 m bl/d from inventory. In January they’ll produce 10.2 m bl/d. That’s a strong physical tightening. Yes production was (and still is) also growing strongly in the US, but that was really not a surprise at all. The following is the likely mix sinking the oil price dramatically since early October:

Softer global growth outlook (and thus softer oil demand growth outlook for 2019)
A sharp sell-off in the S&P 500 index
A strong rise in production by OPEC+
Unexpected US Iran-waivers which enabled continued significant volumes of exports from Iran.
A huge exodus of net long speculative positions in Brent crude and WTI crude

Of course booming US shale oil production was an important factor, but it was not a surprise this autumn. Strong US shale oil production growth has not been a problem over the past two years because: 1) Global oil demand has been strong adding 3 m bl/d in two years and 2) Losses in other supply of more than 2 m bl/d in two years has made additional room for growing US production. Strongly growing US shale oil production became a problem this autumn because demand growth was expected to slow with slower global economic growth while further steep losses from Iran were avoided due to allowance for waivers.

Brent is jumping 1.9% today to $61.4/bl as API expects US crude stocks to show a 10.2 m bl/d draw in today’s numbers at 16:30 CET. Lost supply in Libya this week also adds to the bullish sentiment.

Ch1: Market has moved from a situation where the oil price needed to slow down global demand to balance the market with global benchmark Brent crude at $86.3/bl in early October to instead a market state where the oil price needs to do the job of slowing down US shale oil production growth. I.e. the local US crude benchmarks have moved to low $40-50/bl.

Ch2: US shale oil well completions per month is what matters for US shale oil supply growth. The local Permian crude oil price is now working hard to slow down well completions per month in order to balance local Permian supply to pipeline capacity

Ch3: OPEC+ will tighten up the front Brent market while producers will sell 2020 Brent contracts fearing a wave of additional US shale oil supply in 2020 as new pipelines from Permian to US Gulf comes online. June 2020 Brent – JuneWTI 2020 likely erode going forward in expectation that oil flows to the US Gulf will be uncloged with new pipelines. Green graph to move higher. Lilac to move lower

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Stronger inventory build than consensus, diesel demand notable

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

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

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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.