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Price action signals a rapidly balancing market (2021 oil is cheap)

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SEB - analysbrev på råvaror
SEB - Prognoser på råvaror - Commodity

It is a huge challenge to be an oil analyst these days because the changes are so fast, the magnitudes are so large and exact numbers are so hard to pinpoint. Early estimates/projections for declines in global oil demand in April has been in the range of minus 30 m bl/d to minus 17 m bl/d. The proof is in the pudding though: Inventories. Morgan Stanley’s latest estimate is that global oil inventories rose by 13.4 m bl/d in April. If that is the total inventory build for both crude and products, then early projections for a massive fall in global demand of up to 30 m bl/d is totally off the mark and the market could today be close to balanced.

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

Gunvor stated in mid-April that in their bottom-up analysis they could not find more than 70 m bl/d of demand versus a normal of 100 m bl/d. The US EIA in its April STEO report projected global demand down by 17 m bl/d vs its February report. The IEA estimated in its April report that global demand would be down by 23 m bl/d in Q2-20 vs Q2-19.

Actual data for supply and demand on a global scale are hard to aggregate and usually arrive several months after the fact. The estimates we have had so far are thus exactly that, estimates. Especially IEA’s April OMR forecast of a pull-back of 23 m bl/d YoY in Q2-20 as it is forward looking.

There is no doubt that the world to a large degree moved to an almost stand-still for a while and that oil demand has been hurt badly. How badly is the key question and how quickly it will recover.

The uncertainty over demand is huge, the range is wide and the magnitude of the demand shortfall for any of the estimates are all off the historical scale.

OPEC+ probably increased production by close to 2 m bl/d from March to April. Non-OPEC+ production may on the other hand have declined by up to 2 m bl/d. Production did over all at least not decline in April.

If we take the IEA’s projection of a pullback in demand of 23 m bl/d as the base assumption, then global inventories should have increased comparably in April. According to MS (via Bloomberg) the global build was more like 13 m bl/d in April based on satellite surveillance, onshore tank tracking, oil in transit and floating storage. If this reference is for both crude and oil products it means that even the very wide range of estimates we have been looking at so far are significantly off the mark.

If the IEA is correct in its assessment that global demand would stay 23 m bl/d below last year for all of Q2-20 then the historically large cut by OPEC+ of close to 11 m bl/d reduction from April to May and close to 9 m bl/d vs Jan/Feb would still leave the global oil market with a very large running surplus of oil of up to 12 m bl/d. If we factor in a 2-3 m bl/d decline in non-OPEC+ as well the surplus would still be close to 9 m bl/d in May which is enormous.

Such a surplus would imply further strong stock building, deepening contango in the crude curves and very bearish and declining spot crude oil prices. This is however not at all what we are seeing in the crude oil market these days. Spot prices are instead rising, and crude curves are flattening.

Price action these days would match much better with the reported stock building of 13.4 m bl/d in April estimated by MS (via Bloomberg). Assume that the demand short-fall in April was more like 13 m bl/d. Add in an oil demand recovery in May (due to economic opening) as well as a production cut of 9-11 m bl/d from OPEC+ (depending on base-line) and a non-OPEC+ production decline of 2-3 m bl/d then the global oil market in May would be close to balanced and could even be short.

Right now, the price action has been mostly focused on a flattening of crude oil curves. Bearish time-spreads are probably taken off rather than a full-fledged bullish buying spree. The reason for saying this is because the front-year Brent 2021 is trading at only $37.3/bl which is only $1.6/bl above its lowest closing price. The same goes for almost all the front-year 2021 oil product prices. They are all barely off their lows. They are at a bargain but maybe not for long.

Analys

Brent on a rollercoaster between bullish sanctions and bearish tariffs. Tariffs and demand side fears in focus today

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Brent crude rallied to a high of USD 75.29/b yesterday, but wasn’t able to hold on to it and closed the day at USD 74.49/b. Brent crude has now crossed above both the 50- and 100-day moving average with the 200dma currently at USD 76.1/b. This morning it is trading a touch lower at USD 74.3/b

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Brent riding a rollercoaster between bullish sanctions and bearish tariffs. Biden sanctions drove Brent to USD 82.63/b in mid-January. Trump tariffs then pulled it down to USD 68.33/b in early March with escalating concerns for oil demand growth and a sharp selloff in equities. New sanctions from Trump on Iran, Venezuela and threats of such also towards Russia then drove Brent crude back up to its recent high of USD 75.29/b. Brent is currently driving a rollercoaster between new demand damaging tariffs from Trump and new supply tightening sanctions towards oil producers (Iran, Venezuela, Russia) from Trump as well.

’Liberation day’ is today putting demand concerns in focus. Today we have ’Liberation day’ in the US with new, fresh tariffs to be released by Trump. We know it will be negative for trade, economic growth and thus oil demand growth. But we don’t know how bad it will be as the effects comes a little bit down the road. Especially bad if it turns into a global trade war escalating circus.

Focus today will naturally be on the negative side of demand. It will be hard for Brent to rally before we have the answer to what the extent these tariffs will be. Republicans lost the Supreme Court race in Wisconsin yesterday. So maybe the new Tariffs will be to the lighter side if Trump feels that he needs to tread a little bit more carefully.

OPEC+ controlling the oil market amid noise from tariffs and sanctions. In the background though sits OPEC+ with a huge surplus production capacity which it now will slice and dice out with gradual increases going forward. That is somehow drowning in the noise from sanctions and tariffs. But all in all, it is still OPEC+ who is setting the oil price these days.

US oil inventory data likely to show normal seasonal rise. Later today we’ll have US oil inventory data for last week. US API indicated last night that US crude and product stocks rose 4.4 mb last week. Close to the normal seasonal rise in week 13.

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Analys

Oil gains as sanctions bite harder than recession fears

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Higher last week and today as sanctions bite harder than recession fears. Brent crude gained 2% last week with a close on Friday of USD 73.63/b. It traded in a range of USD 71.8-74.17/b. It traded mostly higher through the week despite sharp, new selloffs in equities along with US consumer expectations falling to lowest level since 2013 (Consumer Conf. Board Expectations.) together with signals of new tariffs from the White House. Ahead this week looms the ”US Liberation Day” on April 2 when the White House will announce major changes in the country’s trade policy. Equity markets are down across the board this morning while Brent crude has traded higher and lower and is currently up 0.5% at USD 74.0/b at the moment.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

New US sanctions towards Iran and Venezuela and threats of new sanctions towards Russia. New sanctions on Venezuela and Iran are helping to keep the market tight. Oil production in Venezuela reached 980 kb/d in February following a steady rise from 310 kb/d in mid-2020 while it used to produce 2.3 mb/d up to 2016. Trump last week allowed Chevron to import oil from Venezuela until 27 May. But he also said that any country taking oil or gas from Venezuela after 2 April will face 25% tariffs on any goods exported into the US. Trump is also threatening to sanction Russian oil further if Putin doesn’t move towards a peace solution with Ukraine.

The OPEC+ to meet on Saturday 5 April to decide whether to lift production in May or not. The OPEC+ Joint Ministerial Monitoring Committee will meet on Saturday 5 April to review market conditions, compliance by the members versus their production targets and most importantly decide whether they shall increase production further in May following first production hike in April. We find it highly likely that they will continue to lift production also in May.

OPEC(+) crashed the oil price twice to curb US shale, but it kicked back quickly. OPEC(+) has twice crashed the oil price in an effort to hurt and disable booming US shale oil production. First in 2014/15/16 and then in the spring of 2020. The first later led to the creation of OPEC+ through the Declaration of Cooperation (DoC) in the autumn of 2016. The second was in part driven by Covid-19 as well as a quarrel between Russia and Saudi Arabia over market strategy. But the fundamental reason for that quarrel and the crash in the oil price was US shale oil producers taking more and more market share.

The experience by OPEC+ through both of these two events was that US shale oil quickly kicked back even bigger and better yielding very little for OPEC+ to cheer about.

OPEC+ has harvested an elevated oil price but is left with a large spare capacity. The group has held back large production volumes since Spring 2020. It yielded the group USD 100/b in 2022 (with some help from the war in Ukraine), USD 81/b on average in 2023/24 and USD 75/b so far this year. The group is however left with a large spare capacity with little room to place it back into the market without crashing the price. It needs non-OPEC+ in general and US shale oil especially to yield room for it to re-enter. 

A quick crash and painful blow to US shale oil is no longer the strategy. The strategy this time is clearly very different from the previous two times. It is no longer about trying to give US shale oil producers a quick, painful blow in the hope that the sector will stay down for an extended period. It is instead a lengthier process of finding the pain-point of US shale oil players (and other non-OPEC+ producers) through a gradual increase in production by OPEC+ and a gradual decline in the oil price down to the point where non-OPEC+ in general and US liquids production especially will gradually tick lower and yield room to the reentry of OPEC+ spare capacity. It does not look like a plan for a crash and a rush, but instead a tedious process where OPEC+ will gradually force its volumes back into the market.

Where is the price pain-point for US shale oil players? The Brent crude oil price dropped from USD 84/b over the year to September last year to USD 74/b on average since 1 September. The values for US WTI were USD 79/b and USD 71/b respectively. A drop of USD 9/b for both crudes. There has however been no visible reaction in the US drilling rig count following the USD 9/b fall. The US drilling rig count has stayed unchanged at around 480 rigs since mid-2024 with the latest count at 484 operating rigs. While US liquids production growth is slowing, it is still set to grow by 580 kb/d in 2025 and 445 kb/d in 2026 (US EIA).

US shale oil average cost-break-even at sub USD 50/b (BNEF). Industry says it is USD 65/b. BNEF last autumn estimated that all US shale oil production fields had a cost-break-even below USD 60/b with a volume weighted average just below USD 50/b while conventional US onshore oil had a break-even of USD 65/b. A recent US Dallas Fed report which surveyed US oil producers did however yield a response that the US oil industry on average needed USD 65/b to break even. That is more than USD 15/b higher than the volume weighted average of the BNEF estimates.

The WTI 13-to-24-month strip is at USD 64/b. Probably the part of the curve controlling activity. As such it needs to move lower to curb US shale oil activity. The WTI price is currently at USD 69.7/b. But the US shale oil industry today works on a ”12-month drilling first, then fracking after” production cycle. When it considers whether to drill more or less or not, it is typically on a deferred 12-month forward price basis. The average WTI price for months 13 to 24 is today USD 64/b. The price signal from this part of the curve is thus already down at the pain-point highlighted by the US shale oil industry. In order to yield zero growth and possibly contraction in US shale oil production, this part of the curve needs to move below that point.

The real pain-point is where we’ll see US drilling rig count starting to decline. We still don’t know whether the actual average pain-point is around USD 50/b as BNEF estimate it is or whether it is closer to USD 65/b which the US shale oil bosses say it is. The actual pain-point is where we’ll see further decline in US drilling rig count. And there has been no visible change in the rig count since mid-2024. The WTI 13-to-24-month prices need to fall further to reveal where the US shale oil industry’ actual pain-point is. And then a little bit more in order to slow production growth further and likely into some decline to make room for reactivation of OPEC+ spare capacity.

The WTI forward price curve. The average of 13 to 24 month is now USD 64.3/b.

The WTI forward price curve. The average of 13 to 24 month is now USD 64.3/b.
Source: SEB graph and highlights, Bloomberg data

The average 13-to-24-month prices on the WTI price curve going back to primo January 2022. Recently dropping below USD 65/b for some extended period.

The average 13-to-24-month prices on the WTI price curve going back to primo January 2022. Recently dropping below USD 65/b for some extended period.
Source: SEB graph and highlights, Bloomberg data
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Analys

Brent Edges Lower After Resisting Equity Slump – Sanctions, Saudi Pricing in Focus

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Brent has defied bearish equities for three days but is losing its stamina today. Brent gained 0.3% yesterday with a close of USD 74.03/b, the highest close since 27 February and almost at the high of the day. It traded as low as USD 73.23/b. Brent has now defied the equity selloff three days in a row by instead ticking steadily higher. A sign of current spot tightness. This morning however it is losing some of its stamina and is down 0.5% at USD 73.7/b along with negative equities and yet higher gold prices.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

The new US Iran sanctions is creating frictions in getting its oil to market and helps keeping oil market tight. Part of the current tightness is due to the new US sanctions on Iran which. Ships containing 17 mb of its oil now sits idle east of Malaysia waiting (Bloomberg) for ship-to-ship transfers with China teapot refineries the normal final destination. But the latest US sanctions has probably made these refineries much more cautious. More friction before Iranian oil is reaching its final destination if at all. Tighter market.

Lower Saudi OSPs for May is expected. A signal of a softer market ahead as OPEC+ lifts production. Saudi Aramco is expected to reduce it official selling price (OSPs) for Arab Light to Asia for May deliveries by USD 2/b. A measure to make its oil more competitive in relative to other crudes suppliers. It is also a sign of a softer market ahead. Naturally so since OPEC+ is set to lift production in April and also most likely in May. If Saudi Aramco reduces its OSPs to Asia for May across its segments of crudes, then it is a signal it is expecting softer oil market conditions. But news today is only discussing Arab Light while the main tightness int the market today is centered around medium sour crude segment. A lowering of the OSPs for the heavier and more sour grades will thus be a more forceful bearish signal.

Front-end backwardation may ease as the Brent May contract rolls off early next week. The Brent May future will roll off early next week. It will be interesting to see how that affects the front-end 1-3mth backwardation as it is shifted out into summer where a softer market is expected.

Brent is boring like crazy with 30dma annualized volatility of just 21%. Waiting for something to happen.

Brent is boring like crazy with 30dma annualized volatility of just 21%. Waiting for something to happen.
Source: SEB graph and calculations, Bloomberg data

Brent crude has defied three days of bearish equity markets and ticked higher instead. Caving in a bit this morning with yet another day of bearish equities and bullish gold.

Brent crude has defied three days of bearish equity markets and ticked higher instead. Caving in a bit this morning with yet another day of bearish equities and bullish gold.
Source: Bloomberg graph with SEB highlights.
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