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Saudi Arabia cuts crude oil exports to 6.6 mb/d

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SEB - Prognoser på råvaror - CommodityCrude 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

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

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

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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

Declining US WTI 18mth prices last six weeks calls for further slowing of rig additions next six weeks

Table2: Solid inventory draws in data last week

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

Following a 3 week inventory rise in June, inventories have declined some 50 mb last 4 weeks

Ch4: US crude, gasoline and mid-distillate inventories down y/y for the first time since 2014 in last week’s data

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

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

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

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

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.

Global refinery maintenance keeps falling back. Refineries keep coming back on line consuming more crude oil

Ch10: Refinery margins which have been high during refinery maintenance risks falling back however

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

Forward crude curves as of Friday and the Friday before. Lower w/w

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

More weakness and lower price levels ahead, but the world won’t drown in oil in 2026

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Some rebound but not much. Brent crude rebounded 1.5% yesterday to $65.47/b. This morning it is inching 0.2% up to $65.6/b. The lowest close last week was on Thursday at $64.11/b.

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

The curve structure is almost as week as it was before the weekend. The rebound we now have gotten post the message from OPEC+ over the weekend is to a large degree a rebound along the curve rather than much strengthening at the front-end of the curve. That part of the curve structure is almost as weak as it was last Thursday.

We are still on a weakening path. The message from OPEC+ over the weekend was we are still on a weakening path with rising supply from the group. It is just not as rapidly weakening as was feared ahead of the weekend when a quota hike of 500 kb/d/mth for November was discussed.

The Brent curve is on its way to full contango with Brent dipping into the $50ies/b. Thus the ongoing weakening we have had in the crude curve since the start of the year, and especially since early June, will continue until the Brent crude oil forward curve is in full contango along with visibly rising US and OECD oil inventories. The front-month Brent contract will then flip down towards the $60/b-line and below into the $50ies/b.

At what point will OPEC+ turn to cuts? The big question then becomes: When will OPEC+ turn around to make some cuts? At what (price) point will they choose to stabilize the market? Because for sure they will. Higher oil inventories, some more shedding of drilling rigs in US shale and Brent into the 50ies somewhere is probably where the group will step in.

There is nothing we have seen from the group so far which indicates that they will close their eyes, let the world drown in oil and the oil price crash to $40/b or below.

The message from OPEC+ is also about balance and stability. The world won’t drown in oil in 2026. The message from the group as far as we manage to interpret it is twofold: 1) Taking back market share which requires a lower price for non-OPEC+ to back off a bit, and 2) Oil market stability and balance. It is not just about 1. Thus fretting about how we are all going to drown in oil in 2026 is totally off the mark by just focusing on point 1.

When to buy cal 2026? Before Christmas when Brent hits $55/b and before OPEC+ holds its last meeting of the year which is likely to be in early December.

Brent crude oil prices have rebounded a bit along the forward curve. Not much strengthening in the structure of the curve. The front-end backwardation is not much stronger today than on its weakest level so far this year which was on Thursday last week.

Brent crude oil prices have rebounded a bit along the forward curve.
Source: Bloomberg

The front-end backwardation fell to its weakest level so far this year on Thursday last week. A slight pickup yesterday and today, but still very close to the weakest year to date. More oil from OPEC+ in the coming months and softer demand and rising inventories. We are heading for yet softer levels.

The front-end backwardation fell to its weakest level so far this year on Thursday last week.
Source: SEB calculations and graph. Bloomberg data
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Analys

A sharp weakening at the core of the oil market: The Dubai curve

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Down to the lowest since early May. Brent crude has fallen sharply the latest four days. It closed at USD 64.11/b yesterday which is the lowest since early May. It is staging a 1.3% rebound this morning along with gains in both equities and industrial metals with an added touch of support from a softer USD on top.

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

What stands out the most to us this week is the collapse in the Dubai one to three months time-spread.

Dubai is medium sour crude. OPEC+ is in general medium sour crude production. Asian refineries are predominantly designed to process medium sour crude. So Dubai is the real measure of the balance between OPEC+ holding back or not versus Asian oil demand for consumption and stock building.

A sharp weakening of the front-end of the Dubai curve. The front-end of the Dubai crude curve has been holding out very solidly throughout this summer while the front-end of the Brent and WTI curves have been steadily softening. But the strength in the Dubai curve in our view was carrying the crude oil market in general. A source of strength in the crude oil market. The core of the strength.

The now finally sharp decline of the front-end of the Dubai crude curve is thus a strong shift. Weakness in the Dubai crude marker is weakness in the core of the oil market. The core which has helped to hold the oil market elevated.

Facts supports the weakening. Add in facts of Iraq lifting production from Kurdistan through Turkey. Saudi Arabia lifting production to 10 mb/d in September (normal production level) and lifting exports as well as domestic demand for oil for power for air con is fading along with summer heat. Add also in counter seasonal rise in US crude and product stocks last week. US oil stocks usually decline by 1.3 mb/week this time of year. Last week they instead rose 6.4 mb/week (+7.2 mb if including SPR). Total US commercial oil stocks are now only 2.1 mb below the 2015-19 seasonal average. US oil stocks normally decline from now to Christmas. If they instead continue to rise, then it will be strongly counter seasonal rise and will create a very strong bearish pressure on oil prices.

Will OPEC+ lift its voluntary quotas by zero, 137 kb/d, 500 kb/d or 1.5 mb/d? On Sunday of course OPEC+ will decide on how much to unwind of the remaining 1.5 mb/d of voluntary quotas for November. Will it be 137 kb/d yet again as for October? Will it be 500 kb/d as was talked about earlier this week? Or will it be a full unwind in one go of 1.5 mb/d? We think most likely now it will be at least 500 kb/d and possibly a full unwind. We discussed this in a not earlier this week: ”500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d”

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily. That core strength helped to keep flat crude oil prices elevated close to the 70-line. Now also the Dubai curve has given in.

The strength in the front-end of the Dubai curve held out through summer while Brent and WTI curve structures weakened steadily.
Source: SEB calculations and graph, Bloomberg data

Brent crude oil forward curves

Brent crude oil forward curves
Source: Bloomberg

Total US commercial stocks now close to normal. Counter seasonal rise last week. Rest of year?

Total US commercial stocks now close to normal.
Source: SEB calculations and graph, Bloomberg data

Total US crude and product stocks on a steady trend higher.

Total US crude and product stocks on a steady trend higher.
Source: SEB calculations and graph, Bloomberg data
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Analys

OPEC+ will likely unwind 500 kb/d of voluntary quotas in October. But a full unwind of 1.5 mb/d in one go could be in the cards

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Down to mid-60ies as Iraq lifts production while Saudi may be tired of voluntary cut frugality. The Brent December contract dropped 1.6% yesterday to USD 66.03/b. This morning it is down another 0.3% to USD 65.8/b. The drop in the price came on the back of the combined news that Iraq has resumed 190 kb/d of production in Kurdistan with exports through Turkey while OPEC+ delegates send signals that the group will unwind the remaining 1.65 mb/d (less the 137 kb/d in October) of voluntary cuts at a pace of 500 kb/d per month pace.

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

Signals of accelerated unwind and Iraqi increase may be connected. Russia, Kazakhstan and Iraq were main offenders versus the voluntary quotas they had agreed to follow. Russia had a production ’debt’ (cumulative overproduction versus quota) of close to 90 mb in March this year while Kazakhstan had a ’debt’ of about 60 mb and the same for Iraq. This apparently made Saudi Arabia angry this spring. Why should Saudi Arabia hold back if the other voluntary cutters were just freeriding? Thus the sudden rapid unwinding of voluntary cuts. That is at least one angle of explanations for the accelerated unwinding.

If the offenders with production debts then refrained from lifting production as the voluntary cuts were rapidly unwinded, then they could ’pay back’ their ’debts’ as they would under-produce versus the new and steadily higher quotas.

Forget about Kazakhstan. Its production was just too far above the quotas with no hope that the country would hold back production due to cross-ownership of oil assets by international oil companies. But Russia and Iraq should be able to do it.

Iraqi cumulative overproduction versus quotas could reach 85-90 mb in October. Iraq has however steadily continued to overproduce by 3-5 mb per month. In July its new and gradually higher quota came close to equal with a cumulative overproduction of only 0.6 mb that month. In August again however its production had an overshoot of 100 kb/d or 3.1 mb for the month. Its cumulative production debt had then risen to close to 80 mb. We don’t know for September yet. But looking at October we now know that its production will likely average close to 4.5 mb/d due to the revival of 190 kb/d of production in Kurdistan. Its quota however will only be 4.24 mb/d. Its overproduction in October will thus likely be around 250 kb/d above its quota  with its production debt rising another 7-8 mb to a total of close to 90 mb.

Again, why should Saudi Arabia be frugal while Iraq is freeriding. Better to get rid of the voluntary quotas as quickly as possible and then start all over with clean sheets.

Unwinding the remaining 1.513 mb/d in one go in October? If OPEC+ unwinds the remaining 1.513 mb/d of voluntary cuts in one big go in October, then Iraq’s quota will be around 4.4 mb/d for October versus its likely production of close to 4.5 mb/d for the coming month..

OPEC+ should thus unwind the remaining 1.513 mb/d (1.65 – 0.137 mb/d) in one go for October in order for the quota of Iraq to be able to keep track with Iraq’s actual production increase.

October 5 will show how it plays out. But a quota unwind of at least 500 kb/d for Oct seems likely. An overall increase of at least 500 kb/d in the voluntary quota for October looks likely. But it could be the whole 1.513 mb/d in one go. If the increase in the quota is ’only’ 500 kb/d then Iraqi cumulative production will still rise by 5.7 mb to a total of 85 mb in October.

Iraqi production debt versus quotas will likely rise by 5.7 mb in October if OPEC+ only lifts the overall quota by 500 kb/d in October. Here assuming historical production debt did not rise in September. That Iraq lifts its production by 190 kb/d in October to 4.47 mb/d (August level + 190 kb/d) and that OPEC+ unwinds 500 kb/d of the remining quotas in October when they decide on this on 5 October.

Iraqi production debt versus quotas
Source: SEB calculations, assumptions and graph, Bloomberg actual production data to August
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