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Risk for OPEC dissapointment and a short term sell-off as all bets are on the long side

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityMarked has placed all chips on the long side betting on an extension of OPEC/non-OPEC production cuts which officially ends in Q1-18. In general we do think that OPEC/non-OPEC will manage the market and hold back production if needed through 2018 in order to secure further gradual draw down of OECD inventories. However we also think that it would be better for OPEC/non-OPEC to make hard decissions on this in Feb/Mar getting as much data as possible before making that decission. That is also what the group has mostly consistengly communicated through the autumn. The market seems to expect and demand a firm decission right now this week. As such the market is rigged for dissapointment with a possible short term sell-off as all chips are on the long side.

On Thursday 30th OPEC and some non-OPEC producers will meet in Vienna to discuss whether to extend current production cuts or not.

The communication all through the autumn has been that they want to make this decission in February/March 2018 in order to have as much data on the table as possible before making the decission.

That makes a lot of sense since there is substantial dissagreement with respect to how much oil is needed from OPEC in 2018.

Somehow the market has geared it self up to an expectation that OPEC/non-OPEC needs to make a firm decission on this right now on Thursday. And further that the decission will be an extension of current cuts maintained all to the end of 2018.

As such it seems to us that there is a substantial risk that the market is setting it self up for a dissapointment this week. For us it makes much more sense for the group to make this call in Feb/Mar which is also what they mostly have been communicating all through the autumn.

The challenge for the group this is week may thus be all about managing the market’s expectations. How not to let the market down when it communicates that the decission will be taken in Feb/March.

And if there is a decission this week it is likely going to be a sign of intention: “If needed we’ll maintain cuts to the end of 2018”, or “We’ll maintain cuts to June 2018 and then make a new assessment”, or “We are all in agreement that we’ll extend cuts as long as needed in order to drive OECD inventories down to the 5 year average”.

That is indeed a trickey reference. This is because for every month we move forward the 5 year average reference is rising. Since March 2017 the OECD inventories have declined some 0.7 mb/d when adjusting for seasonal trends (given by the 2010-2014 seasonal average profile). If we extend this decline rate on top of the seasonal trend (2010-2014) we actually almost get all the way down the 2013-2017 average profile.

As such one can say that in February when we get the OECD inventory data for December 2017 the goal of getting inventories down to the 5 year average (2013-2017) will have been achieved. The goal of getting OECD inventories down to the 5 year average is thus a trickey goal and a moving target.

The big question though is what is really needed in order to secure a balanced oil market in 2018? There is a significant dissagreement on this. The IEA says that call-on-OPEC will be 32.4 mb/d in 2018. SEB’s estimate is 32.7 mb/d, the US EIA’s is 32.7 mb/d while OPEC’s own estimate is 33.4 mb/d. Variations on this comes down to projections for demand, US shale oil production and the level of OPEC’s NGL production in 2018.

The OECD draw down since March this year of 0.7 mb/d (adjusted for seasonallity) indicates an implied oil market deficit of 0.7 mb/d thrugh Q2 and Q3 this year during which OPEC produced 32.55 mb/d. However, if we assume that the OECD inventories only cover half or a third of global inventories then what we see of deficit implied by the draw down in the OECD inventories could actually be two or three times as much if there have been comparable draw downs in non-OECD inventories.

Thus beeing carefule about committing to further cuts now on Thursday seems kind of sensible with the aim of instead making that decission in Feb/Mar.

Market participants are seemingly all expecting OPEC/non-OPEC to make a firm and clear decission this Thursday for extending current cuts to Dec-2018. Net long speculative positions for Brent and WTI together are now very close to all time high. US oil rig count has started to rise again (+9 rigs last week). The decission to add these 9 rigs was probably taken some 6-8 weeks ago when the WTI forward price only stood at $51-52/b. Now that reference WTI price stands at $55/bl with a clear risk for a rise in rig count in the weeks to come. The outage of the 590 kbl/d Keystone pipeline due to an oil spill has reduced supply into Cushing Oklahoma by some 4 mbl/week. It has helped to reduce Chushing inventories and to drive also the WTI crude curve into backwardation. However, the Keystone pipline is likely to back in operation within a week or so.

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Thus overall there is a fair chance that the market will be dissapointed on Thursday. That there will be no firm decission even though there will be firm support for further cuts if needed. And if OPEC/non-OPEC actually do make a firm decission to maintain cuts all to the end of 2018 then there may not be much upside price action since that decission is already so highly priced in already.

Thus buying a put option on the front month WTI contract with short time to expiry may be a good strattegy in the run-up to this week’s digital OPEC/non-OPEC decission risk on Thursday.

Our general stand on OPEC/non-OPEC cuts for 2018 is that further cuts are likely needed but also that if needed we expect OPEC/non-OPEC to manage the market in order to prevent inventories from rising back up.
Needed cuts will likely be of a magnitude which are perfectly manageable for the group. Why through away all they have acchieved in 2017 with inventory draw downs when they can hold back a little supply.

Ch1: OECD inventories with extrapolation to end of 2017 of the 0.7 mb/d draw down in Q2 and Q3 2017
Getting closer to the 2010-2014 average in December 2017

OECD inventories with extrapolation to end of 2017 of the 0.7 mb/d draw down in Q2 and Q3 2017

Ch2: OECD inventories. Which 5 year normal should you use? The 2013-2017?
If the latter then mission acomplished in December 2017, but we won’t know before February

OECD inventories. Which 5 year normal should you use? The 2013-2017?

Ch3: Call-on-OPEC 2018? – Big dissagreement!
Who knows OPEC NGL the best? Account for 0.6 mb/d difference to the IEA!

Call-on-OPEC 2018? – Big dissagreement!

Oil

Ch4: Close to record USD allocation in net long speculative Brent crude oil positions
Makes it vulnerable to downside corrections and OPEC/non-OPEC dissapointments
Net long Brent crude oil speculative positions are now at the 3rd highest over the past 52 weeks

Close to record USD allocation in net long speculative Brent crude oil positions

Ch5: US oil rig count has started to rise again

US oil rig count has started to rise againOil

Ch6 The increas in rig count we see now came from price signals some 6-8 weeks ago
Since then the WTI curve price has moved from $51/bl to $55/bl.
The effect of the price rise over the past 6-8 weeks will be visible in terms of rig count over the coming 6-8 weeks

The increas in rig count we see now came from price signals some 6-8 weeks ago

Ch7: Risk of rising rig count in the weeks to come
Could weight bearishly on the WTI crude oil price

Risk of rising rig count in the weeks to come

Ch8: While US crude oil production continues to rise
Will it rise 0.7 mb/d or 1.5 mb/d next year?

While US crude oil production continues to rise

Ch9: WTI crude oil curve shifted into backwardation following the outage of the Keystone pipeline which feeds 590 kbl/d of Canadian oil into Chushing Oklahoma
The Keystone pipeline is likely going to be back on line within a week or so which could push the WTI curve back into contango again

WTI crude oil curve shifted into backwardation following the outage of the Keystone pipeline

Kind regards

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Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

Analys

OPEC+ in a process of retaking market share

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SEB - analysbrev på råvaror

Oil prices are likely to fall for a fourth straight year as OPEC+ unwinds cuts and retakes market share. We expect Brent crude to average USD 55/b in Q4/25 before OPEC+ steps in to stabilise the market into 2026. Surplus, stock building, oil prices are under pressure with OPEC+ calling the shots as to how rough it wants to play it. We see natural gas prices following parity with oil (except for seasonality) until LNG surplus arrives in late 2026/early 2027.

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

Oil market: Q4/25 and 2026 will be all about how OPEC+ chooses to play it
OPEC+ is in a process of unwinding voluntary cuts by a sub-group of the members and taking back market share. But the process looks set to be different from 2014-16, as the group doesn’t look likely to blindly lift production to take back market share. The group has stated very explicitly that it can just as well cut production as increase it ahead. While the oil price is unlikely to drop as violently and lasting as in 2014-16, it will likely fall further before the group steps in with fresh cuts to stabilise the price. We expect Brent to fall to USD 55/b in Q4/25 before the group steps in with fresh cuts at the end of the year.

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

Natural gas market: Winter risk ahead, yet LNG balance to loosen from 2026
The global gas market entered 2025 in a fragile state of balance. European reliance on LNG remains high, with Russian pipeline flows limited to Turkey and Russian LNG constrained by sanctions. Planned NCS maintenance in late summer could trim exports by up to 1.3 TWh/day, pressuring EU storage ahead of winter. Meanwhile, NE Asia accounts for more than 50% of global LNG demand, with China alone nearing a 20% share (~80 mt in 2024). US shale gas production has likely peaked after reaching 104.8 bcf/d, even as LNG export capacity expands rapidly, tightening the US balance. Global supply additions are limited until late 2026, when major US, Qatari and Canadian projects are due to start up. Until then, we expect TTF to average EUR 38/MWh through 2025, before easing as the new supply wave likely arrives in late 2026 and then in 2027.

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Analys

Manufacturing PMIs ticking higher lends support to both copper and oil

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SEB - analysbrev på råvaror

Price action contained withing USD 2/b last week. Likely muted today as well with US closed. The Brent November contract is the new front-month contract as of today. It traded in a range of USD 66.37-68.49/b and closed the week up a mere 0.4% at USD 67.48/b. US oil inventory data didn’t make much of an impact on the Brent price last week as it is totally normal for US crude stocks to decline 2.4 mb/d this time of year as data showed. This morning Brent is up a meager 0.5% to USD 67.8/b. It is US Labor day today with US markets closed. Today’s price action is likely going to be muted due to that.

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

Improving manufacturing readings. China’s manufacturing PMI for August came in at 49.4 versus 49.3 for July. A marginal improvement. The total PMI index ticked up to 50.5 from 50.2 with non-manufacturing also helping it higher. The HCOB Eurozone manufacturing PMI was a disastrous 45.1 last December, but has since then been on a one-way street upwards to its current 50.5 for August. The S&P US manufacturing index jumped to 53.3 in August which was the highest since 2022 (US ISM manufacturing tomorrow). India manufacturing PMI rose further and to 59.3 for August which is the highest since at least 2022.

Are we in for global manufacturing expansion? Would help to explain copper at 10k and resilient oil. JPMorgan global manufacturing index for August is due tomorrow. It was 49.7 in July and has been below the 50-line since February. Looking at the above it looks like a good chance for moving into positive territory for global manufacturing. A copper price of USD 9935/ton, sniffing at the 10k line could be a reflection of that. An oil price holding up fairly well at close to USD 68/b despite the fact that oil balances for Q4-25 and 2026 looks bloated could be another reflection that global manufacturing may be accelerating.

US manufacturing PMI by S&P rose to 53.3 in August. It was published on 21 August, so not at all newly released. But the US ISM manufacturing PMI is due tomorrow and has the potential to follow suite with a strong manufacturing reading.

US manufacturing PMI by S&P
Source: Bloomberg
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Analys

Crude stocks fall again – diesel tightness persists

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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
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