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Prices pull back as market awaits OPEC+ and demand signals

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5 juni, 2020

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The Brent crude oil August contract traded briefly above the $40/bl line yesterday but has now pulled back again as the market is awaiting a decision by OPEC+ whether to roll current cuts of 9.7 m bl/d beyond June. We think that there is a better than even chance for this happening but a final decision is probably not available before mid-June as the group struggles with how to whip cheaters into line. Current demand signals from the US are also weak but will most definitely strengthen again at some point in time in the coming months. Crude oil prices are pulling back awaiting OPEC+ and demand signals. Use the opportunity to buy 2021.

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

The Brent crude August contract has had a great run from its lowest quote in late April of $22.45/bl to a close yesterday of $39.79/bl which is just below the 38.2% Fibonacci retracement level. The rally has been supported by both a revival in demand as well as a sharp reduction in supply. Both of these two forces are now being placed into question. US shale oil players are contemplating a reopening of shale oil wells which were closed when demand and prices crashed. OPEC+ is scheduled to bring back supply from July unless current discord can be overcome while recent demand indications in the US published this week were weakening for a third week in a row with total products delivered down 22.5% YoY. There is thus quite a bit of headwind right now to propel the Brent crude oil price above and beyond the $40/bl line for now.

All eyes are now naturally focused on OPEC+ and their deliberations over what to do in July. Reduce cuts from 9.7 m bl/d in May and June to 7.7 m bl/d in July and H2 overall as planned or roll current cuts of 9.7 m bl/d forward for an additional 1-3 months’ time. Saudi Arabia, Kuwait and UAE have also had an additional 1.2 m bl/d of above target cuts in June which might be cancelled in July.

Saudi Arabia and Russia indicatively seems to be willing to roll current cuts forward for another 1-3 months’ time but limited compliance to the agreement in April has become a significant stumbling block with Nigeria and Iraq the two biggest offenders. Unless these offenders can be reined in there is not going to be any forward rolling of current cuts of 9.7 m bl/d.

The proposed early OPEC meeting on the 4th of June has been ditched and now the originally planned meeting on June 9 to 10 is probably being shifted out in time to mid-June. This to review more data on compliance as Saudi Arabia is getting ready for hard-ball negotiations with OPEC-cheats. Without guarantees of full compliance Russia is unlikely to come along rolling cuts of 9.7 m bl/d forward into July. Not only are cheaters being pushed to fully comply with the deal going forward but they are also asked to make up for what they did not deliver in May and June by additional deeper cuts in July and August. That sounds like a very tall order. Our first instinctive reaction: this will never happen.

We don’t hold a strong view over whether current cuts of 9.7 m bl/d will be rolled forward for another 1-3 months or not. Maybe, maybe not. What we shouldn’t forget here is what happened on the 6th of March when Russia and Saudi Arabia fell apart as Saudi wanted to chase prices higher through further cuts while Russia was getting sick of cutting and just wanted to get back to business as usual. This underlying conflict is still there between the two parties in OPEC+ as it originates from the fact that Saudi Arabia has a presumed social break-even oil price of $80-85/bl while Russia’s is closer to $40/bl. As such they naturally get different goals and strategies with Russia favouring volume growth at an oil price in the range of $45-55/bl (if that is the oil price in a shale oil world) while Saudi Arabia unavoidably wants to chase prices to $60-70-80/bl through production cuts.

Saudi Arabia can and probably must at some point in time shift its social break-even oil price from current $80-85/bl and down towards $50/bl by increasing exports by 30-40% while cutting budget spending by 20-30%. This is also the messages that Muhammed bin Salman gave to Saudi Aramco and state departments following the break-down with Russia on the 6th of March this year. Though Covid-19, demand collapse and Donald Trump’s political pressure later forced Russia and Saudi to cooperate again.

Saudi Arabia and Russia’s interests are probably aligned as long as the oil price is below $40-45/bl, shale oil production is deteriorating while global oil demand is significantly below normal. But once we get to $50/bl, US shale oil wells are re-started, drilling rig count is ticking higher and global demand is moving closer to normal then we think that the dividing line between Russia and Saudi Arabia again is likely to re-emerge.

Russia is happy with an oil price around the $50/bl mark and wants to get its volumes back into the market again at such a price level rather than to see that US shale again starts to eat away at its market share.

It is very difficult for us to understand why OPEC+ agreed in late April to hold production cuts all to the end of April 2022. By doing so the group will give US shale oil producers all the time in the world to shape up, get bankruptcies out of the way and rebound production to the extent that oil prices allow it to do. This is the same recipe and the same mistake that OPEC+ did through 2017,18,19 when it held medium cuts for a long time. This gave US shale oil producers all the runway in the world to ramp up production. Getting its production cuts back into the market became forever impossible without crashing the oil price and Russia was caught in forever lasting cut agreement.

A much better solution would be to cut hard, deep and fast. As such we support a solution where current cuts of 9.7 m bl/d are rolled forward for another 3-6 months. But it should be coupled with the message that cuts will thereafter rapidly be placed back into the market through Q1/Q2 2021.

In this way US shale oil players will not have time to revive production other than to place closed wells back into operation. There won’t be a good reason to ramp up shale oil drilling and fracking either because OPEC+’ volumes will be placed back into the market again already in H1-2021.

As such we are inclined to believe that there is probably a better than even chance that OPEC+ will roll its current cuts of 9.7 m bl/d forward to July, August,.. rather than to reduce cuts down to the originally planned 7.7 m bl/d cuts.

For now oil prices are pulling back awaiting a decision by OPEC+. The Brent crude August contract could easily pull back towards the $35-36/bl level but would definitely rebound up and above the $40/bl line again if OPEC+ decides to roll the 9.7 m bl/d cuts forward beyond June. Stronger demand revival signals would also be welcome. They will come for sure. Peak oil demand? Not at all yet. We will move back up to 100 m bl/d again and above. Just a matter of time.

The Brent crude oil August contract closed just a fraction below the 38.2% Fibonacci retracement level yesterday. Now pulling back on weakness in US demand signals as well as awaiting a decision by OPEC+

Annons

Brent crude oil price — Source: Bloomberg, DOE

Total US products delivered has dissapointed now three weeks in a row. It all looked good in terms of demand revival until mid-May but since then it has been a sad story

It is deliveries of US mid-dist products which is the weakness here. That is typically diesel and jet fuel.

Deliveries of jet fuel in the US is still down 79% YoY. No solid signal of rebound yet there.

US crude oil continues to fall sharply in a combination of structural decline and deliberate shutting of wells. The underlying losses in US shale oil crude and NGL production in the US is in the range of 600 – 800 k bl/d per month. Currently there are only 222 active oil rigs in the US. These have an implied productive effect of about 165 k bl/d per month of new supply if all the wells they produce are placed into production (probably not done now). There is thus a significant ongoing structural decline in the US of up to 400 – 600 k bl/d per month today.

The Brent crude oil time spread of the 1 month minus the 6 month contract. The contango moved deeper than in 2009 but has come back faster. The front-month Brent contract has actually been in backwardation vs the second contract briefly in intraday trading lately. If cuts of 9.7 m bl/d are rolled forward beyond June then market is likely to move into deficit, inventories drawing down and poff we are back in backwardation.

The current set back in crude oil prices can provide yet another chance to purchase forward Brent crude for 2021 average delivery at very low, favorable price levels. We strongly advised our clients to purchase crude and oil products when the forward Brent 2021 contract traded in the range of $35-40/bl. We still view low-40ies as a very favorable level.

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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1 dag sedan

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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2 dagar sedan

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.