Analys

Price action Rebounding from $50/b but running into headwind from stronger USD

Publicerat

8 år sedan

den

31 mars, 2017

Redaktionen

SEB Brent crude front month price forecast:
Q2-17: $57.5/b
Q3-17: $55.0/b
Q4-17: $52.5/b

Price action – Rebounding from $50/b but running into headwind from stronger USD
After having touched a low of $49.71/b last Wednesday Brent crude front month contract revived to touch a high of $53.1/b yesterday. This morning it is trading down 0.4% at $52.7/b. Prices found good support at the $50/b level with a solid influx of natural oil consumers jumping in securing forward hedges at lower levels. The oil price recovery over the last week is however facing headwinds from a 1.3% stronger USD and might thus run out of steam.

Crude oil comment – No reason for OPEC to roll cuts into H2
There seems to be an almost unanimous view that OPEC will roll their H1-17 cuts into H2-17. We cannot really understand why they should do that. OECD inventories declined all through the second half of 2016 and ended down y/y in December for the first time in quite a few years. And that was without the help of OPEC! The market has been confused by the fact that inventories in weekly data rose some 100 mb through the first two and a half months of the year. The market was also disappointed when it heard that OECD inventories rose 48 mb month/month in January. Do note however that the normal seasonal pattern is for OECD inventories to rise by 30 mb in January. Thus they only rose by 18 mb more than normal. Total crude and product stocks in the US have declined 4 weeks out of the last 6 weeks and we strongly believe that inventories will declined steadily from here onwards. When OPEC meets in Vienna on May 25th the perspective will be

1) Declining inventories (i.e. market is in balance to deficit)
2) A flat to backwardated crude oil curve. I.e. no spot price discount to longer dated contracts
3) US crude production standing close to previous peak and rising rapidly
4) Demand will jump some 1.9 mb/d from H1-17 og H2-17 seasonally with little risk for surplus

Thus the natural communication from OPEC following their forthcoming May 25th meeting in Vienna would be that the market is in balance. Actually it is in deficit and inventories are drawing down. There is no longer a spot price discount to longer dated contracts. I.e. there is very little stress in the market due to surplus oil and OPEC receives no discounted cash flow versus longer dated prices. I.e. there is little economic reason for OPEC to cut as they then are receiving a fair price for their oil (equal to longer dated prices). A further cut would only endanger OPEC’s market share through unnecessary stimulus of US shale oil production. That last dimension will be highly accentuated at the meeting on the 25th of May since if we just extrapolate US crude oil production so far this year it may stand at 9.5 mb/d at their May meeting. US crude oil production is now growing just as fast (marginal annualized pace of 1.5 mb/d) as it did from 2011 to 2015. The hypothesis from OPEC’s November meeting in 2016 that US shale oil production will only recover gradually as long as the oil price stays below $60/b has been totally busted. The empirical evidence is that when the mid-term WTI curve (one to two year horizon forward prices) averaged $52/b in H2 then US shale oil rigs rose by 7 rigs/week. When those forward prices instead rose to $55-56/b following OPEC’s decision to cut the weekly rig additions rose to about 10 rigs/week.

OPEC is likely to conclude that all looks good. Market is in balance to deficit. Inventories are drawing down. There is no longer any spot price rebate in the market and little stress from surplus oil to be seen. Demand will rise strongly into H2-17. Thus OPEC is likely to move back into operation putting their 1.16 mb/d H1-17 cut aside and revisit the question of cuts at their next meeting in Vienna at the end of 2017. They will like to look like they are in control and an extension of cuts into H2-17 will stimulate US shale oil production to an extent that will make it look like they are out of control.

We expect crude oil prices to get a brief set-back when OPEC announces such a decision. But we do expect it to be brief and with limited consequences. We expect Brent crude oil prices to end the year with an average of $52.5/b in Q4-17. We expect the curve to be some $3/b in backwardation at that time which implies that the one to two year forward prices at that time will trade around $50/b. Since the WTI curve is trading at some $2/b below the Brent crude curve it will mean that the mid-term (1 to 2 year forward) WTI crude oil curve will then trade at around $48/b. We expect that to dampen the current very strong weekly rig additions which we see currently.

Ch1: US shale oil rigs continues to rise strongly
Last week the number of US shale oil rigs rose by 16 rigs or 9 rigs more than our projection
So far the average weekly US shale oil rig additions stands at 9.75 rigs/week

Ch2: SEB US crude oil production projection lifted by 12 kb/d in 2017, by 49 kb/d in 2018 and by 68 kb/d in 2019
Total additional cumulative US crude oil production over the next three years rose by 47 million barrels as a result of 16 rigs being added last week versus our expected 7 rigs
We expect the US EIA to lift its US crude oil production projection again in its forthcoming April report reflecting the fact that 51 shale oil rigs were added to the market in March.

Ch3: SEB US crude oil production projection graph

Ch4: SEB global crude oil supply demand balance

Ch5: SEB projected OECD end of year inventories

Ch6: Time development of SEB’s projected 2019 end of year OECD oil inventories versus a normal of 2700 million barrels
A deep draw in OECD inventories at the end of 2019 has become much less pronounced as rig count is rising much faster than expected thus lifting our US crude oil production projection

Ch6: Time development of SEB’s dynamic Brent crude oil price forecast
Much less price squeeze risk in 2019 as the balance has softened with higher US production projection

Annons

Ch7: US crude oil production increasing in a stright line
Potentially closing in at 9.5 mb/d when OPEC meets in Vienna on May 25th

Ch8: Volatility is trending lower with yet more downside to come we expect

Ch9: Weekly inventory data are starting to show a draw

Ch10: And this is what we expect OECD inventories will do in 2017 (We assume OPEC will not cut in H2-17)
But due to US shale oil revival there won’t be much draws in 2018
Thus all through 2017 and 2018 the OECD inventories will stay above normal with few pressure points in the global oil market

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Relaterade ämnen:seb analys

Nästa

OPEC öppnar för en förlängning av avtalet

Missa inte

SEB Råvarubrev 28 mars 2017

Fortsätt läsa

Analys

Breaking some eggs in US shale

Publicerat

6 dagar sedan

den

5 augusti, 2025

Redaktionen

Lower as OPEC+ keeps fast-tracking redeployment of previous cuts. Brent closed down 1.3% yesterday to USD 68.76/b on the back of the news over the weekend that OPEC+ (V8) lifted its quota by 547 kb/d for September. Intraday it traded to a low of USD 68.0/b but then pushed higher as Trump threatened to slap sanctions on India if it continues to buy loads of Russian oil. An effort by Donald Trump to force Putin to a truce in Ukraine. This morning it is trading down 0.6% at USD 68.3/b which is just USD 1.3/b below its July average.

Bjarne Schieldrop, Chief analyst commodities, SEB

Only US shale can hand back the market share which OPEC+ is after. The overall picture in the oil market today and the coming 18 months is that OPEC+ is in the process of taking back market share which it lost over the past years in exchange for higher prices. There is only one source of oil supply which has sufficient reactivity and that is US shale. Average liquids production in the US is set to average 23.1 mb/d in 2025 which is up a whooping 3.4 mb/d since 2021 while it is only up 280 kb/d versus 2024.

Taking back market share is usually a messy business involving a deep trough in prices and significant economic pain for the involved parties. The original plan of OPEC+ (V8) was to tip-toe the 2.2 mb/d cuts gradually back into the market over the course to December 2026. Hoping that robust demand growth and slower non-OPEC+ supply growth would make room for the re-deployment without pushing oil prices down too much.

From tip-toing to fast-tracking. Though still not full aggression. US trade war, weaker global growth outlook and Trump insisting on a lower oil price, and persistent robust non-OPEC+ supply growth changed their minds. Now it is much more fast-track with the re-deployment of the 2.2 mb/d done already by September this year. Though with some adjustments. Lifting quotas is not immediately the same as lifting production as Russia and Iraq first have to pay down their production debt. The OPEC+ organization is also holding the door open for production cuts if need be. And the group is not blasting the market with oil. So far it has all been very orderly with limited impact on prices. Despite the fast-tracking.

The overall process is nonetheless still to take back market share. And that won’t be without pain. The good news for OPEC+ is of course that US shale now is cooling down when WTI is south of USD 65/b rather than heating up when WTI is north of USD 45/b as was the case before.

OPEC+ will have to break some eggs in the US shale oil patches to take back lost market share. The process is already in play. Global oil inventories have been building and they will build more and the oil price will be pushed lower.

A Brent average of USD 60/b in 2026 implies a low of the year of USD 45-47.5/b. Assume that an average Brent crude oil price of USD 60/b and an average WTI price of USD 57.5/b in 2026 is sufficient to drive US oil rig count down by another 100 rigs and US crude production down by 1.5 mb/d from Dec-25 to Dec-26. A Brent crude average of USD 60/b sounds like a nice price. Do remember though that over the course of a year Brent crude fluctuates +/- USD 10-15/b around the average. So if USD 60/b is the average price, then the low of the year is in the mid to the high USD 40ies/b.

US shale oil producers are likely bracing themselves for what’s in store. US shale oil producers are aware of what is in store. They can see that inventories are rising and they have been cutting rigs and drilling activity since mid-April. But significantly more is needed over the coming 18 months or so. The faster they cut the better off they will be. Cutting 5 drilling rigs per week to the end of the year, an additional total of 100 rigs, will likely drive US crude oil production down by 1.5 mb/d from Dec-25 to Dec-26 and come a long way of handing back the market share OPEC+ is after.

Fortsätt läsa

Analys

More from OPEC+ means US shale has to gradually back off further

Publicerat

7 dagar sedan

den

4 augusti, 2025

Redaktionen

The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly.

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

Fortsätt läsa

Analys

Tightening fundamentals – bullish inventories from DOE

Publicerat

2 månader sedan

den

26 juni, 2025

Redaktionen

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Ole R. Hvalbye, Analyst Commodities, SEB

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.