Analys
Saudi Arabia cuts crude oil exports to 6.6 mb/d
Crude oil price action – Prices declined last week despite positive tailwinds from equities and dollar
Brent crude declined 1.7% last week despite the facto f positive tailwinds from a 0.6% gain in global equities and a 1.4% softer USD. Especially the latter should normally have given some support in nominal terms to oil prices. In perspective the other three commodity price sub-indices all made gains last week. Brent crude 1 mth contract closed last week at $48.06/b with its 1.7% decline. The longer dated Dec 2020 contract fell more actually with a decline of 2.8% w/w. This was especially bearish given the 1.4% softer USD. However, what we have said repeatedly is that the forward curve must move lower in order to stem the inflow of oil rigs. At least we got some delivery of that last week. However, so far it is about reversing gains since price trend shifted higher for this contract from June 26.
Following price swings this morning Brent crude is now up 1.2% to $48.6/b after Saudi stated they would cut exports to 6.6 mb/d
Crude oil comment –Saudi Arabia cuts crude oil exports to 6.6 mb/d
Latest: Saudi Arabia has decided to cut crude oil exports to 6.6 mb/d. Last week Saudi stated that they might cut exports by 1 mb/d. Saudi Arabia exported on average 7.2 mb/d from Jan to May. Thus cutting exports to 6.6 mb/d is a real tightening. This is a pure unilateral action. The rest of OPEC and non-OPEC members did not opt for any further cuts at the meeting (still ongoing) in St Petersburg this weekend and today. As such Saudi Arabia is saying that they want a faster re-balancing, faster inventory declines and also a higher oil price. Oil price shifts up 1% to $48.5/b following the statement. It is opportune for Saudi to do this now. Inventories will draw down in H2-17. Thus Said is playing into a positive trend and strengthening it. Net long speculative position by managed money has room to increase and as such prices have the potential to increase in response to a market re-positioning to an increasing long.
A faster inventory draw on the back of Saudi’s export cuts means more flattening of the forward crude oil curves during H2-17 for spot to 1mth contract and for 1mth to 18 month contract.
OPEC & Co’s Joint technical committee met in St Petersburg on July 22nd this weekend. The market may have hoped for a cap on Libya and Nigeria which have boosted production by half a million barrels from October last year (OPEC production reference for current cuts) to June this year. But hopes were probably not too high because there was little chance for this happening. Libya’s production averaged 840 kb/d in June according to Bloomberg which is slightly more than half of its prior production capacity of 1.6 mb/d. Thus there was no chance what so ever that Libya would accept capping production at current level of about 1 mb/d. Production in both Nigeria and Libya are however very fragile. Thus both may fall back again. But there is little OPEC & Co can do about it either way. That was also the outcome this weekend. No cap for Libya and Nigeria was even discussed.
Today OPEC & Co’s Joint ministerial monitoring committee is meeting in St Petersburg. The outcome is already pretty clear. “There will be no discussion of deeper cuts” said Saudi Arabia’s Minister of Energy Khalid Al-Falih. OPEC’s Secretary-General Mohammed Barkindo further stated that: “The re-balancing process may be going at a slower pace than earlier projected, but it is on course, and it’s bound to accelerate in the second half (of the year)”.
We concur with Barkindo. Inventories will draw down in H2-17. Point in case here is inventory draws in data from the last four weeks indicating draws of some 50 mb. During three weeks in June however these data instead showed a gain of close to 50 mb instead. That was part of the reason why oil prices fell in June and bottomed out on June 21st.
In perspective however the number of Drilled, but yet uncompleted wells (DUC’s) increased by 182 (4 main shale oil regions) wells during June. Looking at current well production levels and profiles for new US shale oil wells these 182 wells constitutes about 60 mb of producible oil within a three year time horizon. These must be considered as a type of oil inventory.
Since November last year when OPEC decided to cut the number of DUCs increased by 1188 wells to June (4 main regions). Again looking at current well and production profiles this equates to some 370 mb of producible oil over a three year period from these 1188 wells.
So OECD inventories are basically sideways from November last year to May this year with some 250 to 300 mb above normal. However, the three year producible inventory of US shale oil DUC’s has increased some 370 mb from November 2017 to June 2018. However, they are not sitting in the OECD inventories and are as such not felt directly in the crude oil spot market. They do however create a lot of surplus buffer inventory on top of the OECD inventories. This should help to keep oil prices in check and oil price volatility at bay over the nearest couple of years.
So while OPEC & Co in general and Saudi Arabia specifically are likely to be successful in drawing down inventories in H2-17 they may not be all that successful in total if we look at DUC’s + OECD in total.
Ch0: Managed money in WTI – some increase latest three weeks. More room to increase on the back of Saudi export cut
Table 1: US oil rigs down by 1 last week
Ch1: US shale oil rig versus WTI 18mth crude oil price probably slightly lower than $47/b
Ch2: Declining US WTI 18mth prices last six weeks calls for further slowing of rig additions next six weeks
However, WTI 18 mth price has still not yet moved to a level which will push rigs out of the market
Table2: Solid inventory draws in data last week
Ch3: Following a 3 week inventory rise in June, inventories have declined some 50 mb last 4 weeks
More to come in H2-17
Ch4: US crude, gasoline and mid-distillate inventories down y/y for the first time since 2014 in last week’s data
Ch5: US crude, gasoline and mid-distillate inventories down y/y for the first time since 2014 in last week’s data
Ch6: Brent dated price to 1mth contract still in negative territory
Ch7: Brent dated to 1mth contract spread should tighten during inventory draws in H2-17
Ch8: More tightening of Brent 1mth to 18mth contract should also materialize over H2-17
Ch9: Global refinery maintenance keeps falling back. Refineries keep coming back on line consuming more crude oil
This should help firming up the crude market.
Ch10: Refinery margins which have been high during refinery maintenance risks falling back however
Ch11: Forward crude curves as of Friday and the Friday before. Lower w/w
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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