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Prices pull back as market awaits OPEC+ and demand signals

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SEB - Prognoser på råvaror - Commodity

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+

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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

Total US products delivered
Source: Bloomberg, DOE

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

US mid-dist products
Source: Bloomberg, DOE

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

Jet fuel in the US
Source: Bloomberg, DOE

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.

US crude oil continues to fall sharply
Source: Bloomberg, DOE

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 Brent crude oil time spread
Source: Bloomberg

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.

The current set back in crude oil prices

Analys

Crude inventories builds, diesel remain low

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U.S. commercial crude inventories posted a 3-million-barrel build last week, according to the DOE, bringing total stocks to 426.7 million barrels – now 6% below the five-year seasonal average. The official figure came in above Tuesday’s API estimate of a 1.5-million-barrel increase.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Gasoline inventories fell by 0.8 million barrels, bringing levels roughly in line with the five-year norm. The composition was mixed, with finished gasoline stocks rising, while blending components declined.

Diesel inventories rose by 0.7 million barrels, broadly in line with the API’s earlier reading of a 0.3-million-barrel increase. Despite the weekly build, distillate stocks remain 15% below the five-year average, highlighting continued tightness in diesel supply.

Total commercial petroleum inventories (crude and products combined, excluding SPR) rose by 7.5 million barrels on the week, bringing total stocks to 1,267 million barrels. While inventories are improving, they remain below historical norms – especially in distillates, where the market remains structurally tight.

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OPEC+ will have to make cuts before year end to stay credible

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Falling 8 out of the last 10 days with some rebound this morning. Brent crude fell 0.7% yesterday to USD 65.63/b and traded in an intraday range of USD 65.01 – 66.33/b. Brent has now declined eight out of the last ten days. It is now trading on par with USD 65/b where it on average traded from early April (after ’Liberation day’) to early June (before Israel-Iran hostilities). This morning it is rebounding a little to USD 66/b.

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

Russia lifting production a bit slower, but still faster than it should. News that Russia will not hike production by more than 85 kb/d per month from July to November in order to pay back its ’production debt’ due to previous production breaches is helping to stem the decline in Brent crude a little. While this kind of restraint from Russia (and also Iraq) has been widely expected, it carries more weight when Russia states it explicitly.  It still amounts to a total Russian increase of 425 kb/d which would bring Russian production from 9.1 mb/d in June to 9.5 mb/d in November. To pay back its production debt it shouldn’t increase its production at all before January next year. So some kind of in-between path which probably won’t please Saudi Arabia fully. It could stir some discontent in Saudi Arabia leading it to stay the course on elevated production through the autumn with acceptance for lower prices with ’Russia getting what it is asking for’ for not properly paying down its production debt.

OPEC(+) will have to make cuts before year end to stay credible if IEA’s massive surplus unfolds. In its latest oil market report the IEA estimated a need for oil from OPEC of 27 mb/d in Q3-25, falling to 25.7 mb/d in Q4-25 and averaging 25.7 mb/d in 2026. OPEC produced 28.3 mb/d in July. With its ongoing quota unwind it will likely hit 29 mb/d later this autumn. Staying on that level would imply a running surplus of 3 mb/d or more. A massive surplus which would crush the oil price totally. Saudi Arabia has repeatedly stated that OPEC+ it may cut production again. That this is not a one way street of higher production. If IEA’s projected surplus starts to unfold, then OPEC+ in general and Saudi Arabia specifically must make cuts in order to stay credible versus what it has now repeatedly stated. Credibility is the core currency of Saudi Arabia and OPEC(+). Without credibility it can no longer properly control the oil market as it whishes.

Reactive or proactive cuts? An important question is whether OPEC(+) will be reactive or proactive with respect to likely coming production cuts. If reactive, then the oil price will crash first and then the cuts will be announced.

H2 has a historical tendency for oil price weakness. Worth remembering is that the oil price has a historical tendency of weakening in the second half of the year with OPEC(+) announcing fresh cuts towards the end of the year in order to prevent too much surplus in the first quarter.

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What OPEC+ is doing, what it is saying and what we are hearing

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Down 4.4% last week with more from OPEC+, a possible truce in Ukraine and weak US data. Brent crude fell 4.4% last week with a close of the week of USD 66.59/b and a range of USD 65.53-69.98/b. Three bearish drivers were at work. One was the decision by OPEC+ V8 to lift its quotas by 547 kb/d in September and thus a full unwind of the 2.2 mb/d of voluntary cuts. The second was the announcement that Trump and Putin will meet on Friday 15 August to discuss the potential for cease fire in Ukraine (without Ukraine). I.e. no immediate new sanctions towards Russia and no secondary sanctions on buyers of Russian oil to any degree that matters for the oil price. The third was the latest disappointing US macro data which indicates that Trump’s tariffs are starting to bite. Brent is down another 1% this morning trading close to USD 66/b. Hopes for a truce on the horizon in Ukraine as Putin meets with Trump in Alaska in Friday 15, is inching oil lower this morning.

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

Trump – Putin meets in Alaska. The potential start of a process. No disruption of Russian oil in sight. Trump has invited Putin to Alaska on 15 August to discuss Ukraine. The first such invitation since 2007. Ukraine not being present is bad news for Ukraine. Trump has already suggested ”swapping of territory”. This is not a deal which will be closed on Friday. But rather a start of a process. But Trump is very, very unlikely to slap sanctions on Russian oil while this process is ongoing. I.e. no disruption of Russian oil in sight.

What OPEC+ is doing, what it is saying and what we are hearing. OPEC+ V8 is done unwinding its 2.2 mb/d in September. It doesn’t mean production will increase equally much. Since it started the unwind and up to July (to when we have production data), the increase in quotas has gone up by 1.4 mb/d, while actual production has gone up by less than 0.7 mb/d. Some in the V8 group are unable to increase while others, like Russia and Iraq are paying down previous excess production debt. Russia and Iraq shouldn’t increase production before Jan and Mar next year respectively.

We know that OPEC+ has spare capacity which it will deploy back into the market at some point in time. And with the accelerated time-line for the redeployment of the 2.2 mb/d voluntary cuts it looks like it is happening fast. Faster than we had expected and faster than OPEC+ V8 previously announced.

As bystanders and watchers of the oil market we naturally combine our knowledge of their surplus spare capacity with their accelerated quota unwind and the combination of that is naturally bearish. Amid this we are not really able to hear or believe OPEC+ when they say that they are ready to cut again if needed. Instead we are kind of drowning our selves out in a combo of ”surplus spare capacity” and ”rapid unwind” to conclude that we are now on a highway to a bear market where OPEC+ closes its eyes to price and blindly takes back market share whatever it costs. But that is not what the group is saying. Maybe we should listen a little.

That doesn’t mean we are bullish for oil in 2026. But we may not be on a ”highway to bear market” either where OPEC+ is blind to the price. 

Saudi OSPs to Asia in September at third highest since Feb 2024. Saudi Arabia lifted its official selling prices to Asia for September to the third highest since February 2024. That is not a sign that Saudi Arabia is pushing oil out the door at any cost.

Saudi Arabia OSPs to Asia in September at third highest since Feb 2024

Saudi Arabia OSPs to Asia in September at third highest since Feb 2024
Source: SEB calculations, graph and highlights, Bloomberg data
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