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Rebounding on expectations for a tightening Q3-17 while US shale oil rigs continues to rise

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityBrent crude front month contract lost 3.9% last week closing the week at $45.54/b. Even the longer dated December 2020 contract lost 1.7% with a close of $51.86/b. WTI crude prices lost a comparable amount with the WTI 1 mth contract closing at $43.01/b.

Oil prices staged a 1.6% rebound during the last two days of the week following a more or less continuous sell-off since late May. There were no obvious bull-drivers lifting prices higher. Technical indicators however pointed to solid oversold territory. Headlines started to air views that “when all headlines are bearish, that’s the time to buy” etc.

Crude oil prices are gaining another 1% this morning with Brent 1mth contract trading at $46.0/b. Again there is no obvious bull-driving headline. The price recovery of 2.7% since the bottom last week cannot really be said to be explosive and there is currently no headline bullish driver pushing it higher.

We do have a strong, seasonal increase in oil demand ahead of us for Q3 and Q4 with a substantial amount of refineries heading back into operation. Thus the current weakness in the physical crude oil market could be the final bear-point before a tightening crude oil market and significant inventory draw downs in Q3 and Q4. We do believe that inventories will draw down significantly during the coming two quarters. The price effect could however be a firming of the 1 to 18 mth contract where the 1 mth contract gains versus the 18 mth contract rather than a lifting of the whole forward crude price curve.

The strong rise in floating storage was also suddenly look upon as a sign that physical crude traders are taking long position in physical cargoes awaiting better prices. The reason being that it is not economical to store oil at sea since the contango isn’t really deep enough. Thus the only explanation would thus be that physical traders are proactively taking on floating cargoes in order to position for an oil price rebound. We are however not all that convinced about this argument. The 2 mn bl Sea Lynx VLCC has now been circling in the North Sea for several weeks with oil from the vessel being offered repeatedly to the market. The same goes for the 2 mn bl Desimi with has been circling in the North Sea since late April, early May.

The production revival in Libya and Nigeria is creating concerns for the effect of OPEC’s cuts. Exports from Nigeria now look set to reach 2 mn bl in August while Libya’s NOC last week stated that they reached 0.9 mb/d with a target of 1 mb/d in July. This adds up to 3 mb/d for the two versus a production of 2.2 mb/d in November when OPEC & Co agreed on its production cut.

Last week 11 oil rigs were added in the US. Implied shale oil rigs rose by 13 which is the highest weekly addition since mid-April. Looking 6 weeks back the WTI 18 mth price contract traded at $49-50/b which obviously was not low enough to deter drillers from adding more oil rigs. On average there has been added 6.7 shale oil rigs each week the last 6 weeks. The average weekly additions since June last year are 6.8 rigs/week. The high of rig additions was from mid-Jan to mid-March when 11.6 rigs/week were added. Thus seen from the US shale oil drilling side of things the oil price has not yet become low enough for long enough in order to stem a further rise in active shale oil rigs.

Table1: 11 additional oil rigs last week in the US

11 additional oil rigs last week in the US

Ch1: Changes in US shale oil rig count versus WTI 18 mth contract price some 6 weeks ago.

Changes in US shale oil rig count versus WTI 18 mth contract price some 6 weeks ago.

Ch2: The 1-6 mth contango has not deepened
This part of the curve should tighten in Q3 and Q4

The 1-6 mth contango has not deepene

Ch3: Hedgefund speculative positioning – Net-long close to previous lows

Hedgefund speculative positioning – Net-long close to previous lows

Ch4: Total net long speculative WTI positioning – Into neutral territory but still some way to go to previous lows

Total net long speculative WTI positioning – Into neutral territory but still some way to go to previous lows

Ch5: Production revival in Libya and Nigeria partially countering the effect of OPEC cuts

Production revival in Libya and Nigeria partially countering the effect of OPEC cuts

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Bjarne Schieldrop
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SEB Markets
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Analys

Crude stocks fall again – diesel tightness persists

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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
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Analys

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

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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
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Analys

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

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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.

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