Följ oss

Analys

QT is good for OPEC

Publicerat

den

SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityIt is quite clear that the strong rebound in US shale oil production since early 2016 has been fuelled by access to cheap and easy money derived from the world’s central banks QE programs. It is not to say that US shale oil is not viable at the right price. US shale oil business has however been running at negative cash flow year after year with growth being bankrolled by investors. Not even in Q3-18 this year when Brent averaged $75.8/bl and WTI averaged $69.5/bl did they in total have positive cash flow. Since the start of 2017 the three main US shale oil producers (EOG, Continental Resources and Pioneer Natural Resources) have had an average negative equity return of -13% while Equinor has yielded +21% and S&P 500 has yielded +16% to end of Friday last week.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

Quantitative tightening is now blowing out credit spreads. US high yield junk rated credit spreads have jumped to 5.5% over investment grade in Q4-18. Not a single company in the US has been able to borrow money in the $1.2trn high yield market so far in December which is the worst since November 2008 according to FT today. So easy money is rapidly drying up for US shale oil players which means that they will likely have to run disciplined according to cash flow. That implies much softer US shale oil production growth in a market where the high yield US junk bond energy credit market is closed and Brent and WTI prices are $60/bl and $51/bl respectively.

What matters for US shale oil production growth is US shale oil well completions per month and how much new production they bring that month versus losses in existing production that month. As production has moved higher and higher the running losses in existing production has moved comparably higher as well. At the moment losses are running at a rate of 530 k bl/d/mth. So US shale oil production is losing half a million barrels per day each month. So more and more wells needs to be completed each month to counter this. The net of new production from well completions and losses in existing production is what brings either growth or decline in US shale oil production.

In October US shale oil producers completed 1308 wells. In real, productivity adjusted terms this is the highest level ever and it is 57% higher than the real, average level in the peak year of 2014. But losses in existing production have increased strongly as well.

We have calculated the “steady state US shale oil well completion rate (SSCR)” meaning the number of well completions needed in order for US shale oil production to move sideways. US shale oil production is growing when the monthly completion rate is above the SSCR and it is contracting when it is below the SSCR. In October completions were running at 231 wells (18%) above the SSCR. Completions were however running at a rate of 35% above the SSCR level in September 2017. As a result the marginal, annualized production growth in the US was much stronger in late 2017 than what it is right now. In late 2017 the 6mth average, marginal annualized US shale oil production growth was running at a stunning 1.9 m bl/d/yr. It is still running at a very strong 1.5 m bl/d/yr rate, but the last monthly data point for October (marginal, annualized) was down to 1.3 m bl/d. And that was despite the fact that real well completions were at an all-time-high of 1308 wells.

So more and more wells needs to be completed in order to keep growth going. At current crude oil price levels the US shale oil business is running a negative cash flow and equity owners have lost money since the start of 2017 and the US high yield energy market now seems to have closed. US shale oil well completions are in our calculations running at an 18% completion rate above the SSCR level. So US shale oil players only need to reduce completions by 231 wells ( or 18%) per month to bring the marginal US shale oil production growth rate to zero.

If crude oil prices continue at these levels this is probably exactly what we’ll see: well completions will be brought down to the SSCR level and we’ll have zero marginal production growth in US shale oil production. So far OPEC+ has put a floor under crude oil prices with Brent crude at $60/bl. If we stay at this price the well completion rate will probably be brought down towards the SSCR level and US shale oil production will stop growing for a while. Lower oil prices and lack of credit (due to QT) will now most likely give OPEC+ a helping hand in the market balancing.

Today we’ll have the latest US EIA Drilling Productivity report showing the well completions in November. It will be extremely interesting to see if prices already have started to bite so and the completion rate has started to tick lower from October to November. Losses in existing production have definitely ticked one notch higher since October and the marginal, annualized production growth has probably ticked lower.

Analys

Crude stocks fall again – diesel tightness persists

Publicerat

den

SEB - analysbrev på råvaror

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

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

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.

Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.

Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).

Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.

On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.

US DOE Inventories
US Crude inventories
Fortsätt läsa

Analys

Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

Publicerat

den

SEB - analysbrev på råvaror

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

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

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.

OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.

Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent  crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.

This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.

The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Dubai medium sour crude oil marker
Source: SEB graph, calculations and highlights. Bloomberg data

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

The Brent crude oil forward curve (latest in white)
Source: Bloomberg
Fortsätt läsa

Analys

Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

Publicerat

den

SEB - analysbrev på råvaror

Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

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

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.

Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.

For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.

Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.

Fortsätt läsa

Guldcentralen

Aktier

Annons

Gratis uppdateringar om råvarumarknaden

*

Populära