Analys

Searching for the US shale oil price floor

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8 år sedan

den

10 juni, 2017

In hindsight the market was obviously not satisfied with OPEC just rolling their cuts over for another 9 months. The market’ judgement was clearly that that was far from enough. So if OPEC & Co’s production cuts were judged to be insufficient to balance the market then the price itself will have to do the job or a part of the job as well. If so, then the question is at what level do the oil price need to move to in order to shift US shale oil rig count from expansion to neutral or contraction.

The US shale oil space has now been in one loooong expansion phase continuously for one year. First in terms of rig additions). So our current empirical knowledge is actually one year old from when we experienced that US shale oil rig count started to expand when the US WTI 18 mth contract crossed above $46-47/b however with a 6 weeks lag. Has this inflection point shifted higher or lower over the last year? The market doesn’t really know and now it needs to know. Shale oil productivity and technology improvements and further spreading of “best practice” from the leading companies to the less advanced has probably shifted it lower. Cost inflation is however clearly evident and is working in the other direction. Fracking and completion of wells seems to be a bottleneck at the moment. This should make companies more caution in terms of adding more drilling rigs. No point in more rigs and more wells if you cannot complete them and move them into production.

The one and a half year forward WTI crude oil price (18thm contract) yesterday briefly traded down to $47.2/b before closing the day at $47.89/b. Thus right down to the empirical “shale oil floor” before bouncing up again. The 30 day average (6 weeks) for this contract is today $49.5/b. Thus we are at least starting to get close to the empirical inflection point from last year. We should thus soon see much softer growth in the US shale oil rig count and then it eventually should crawl to a halt if the WTI 18 mth contract continues to trade at current level of $47.5/b. Unless of course the inflection point has shifted yet lower today than where it was last year. This is clearly possible and it is also clearly what the market needs to know.

The US EIA this week released its monthly energy report. Its prognosis was that there was no deficit on the horizon for the global oil market within their outlook to 2018. Actually they project that the OECD stocks inches slightly higher y/y to end 2017 and then again a little higher y/y to end 2018. That was depressing for the bulls and it again strengthened the post OPEC view that what OPEC has decided to do is not going to be enough. The EIA actually agrees with this view.

Then on Wednesday, just one day after the EIA’s monthly report, data was released showing a big jump in oil inventories with crude stocks up 3.3 mb, gasoline up 3.3 mb and distillates up 4.4 mb with total for the three up 11 mb. That was kind of a nail in the coffin for the oil bulls and the oil price sold off sharply.

The whole debacle around Qatar has not been good for the oil price either with concerns that increasing disagreement between the OPEC countries could possibly undermine the current agreement for production cuts. Historically however OPEC has managed to sail through major political differences while still maintaining production cuts or strategies.

The price declines over the last week has primarily taken place at the front end of the forward curve where the front end has dipped 5.5% while the longer dated Brent December 2020 contract has only declined 0.5%. So no major sell-off along the curve. The sell-off in the front end of the curve is a signal of concerns for high inventories which won’t go away.

We do agree that it would be a good thing to get a refresh of where the current US shale oil rig inflection point is today as it is a full year since last time. However, we do disagree with the current view that OPEC & Co’s cuts won’t do the trick in 2017. We still strongly believe (baring Nigeria and Libya revival) that OECD’s commercial inventories will draw down strongly through H2-17 and stand close to normal by the end of the year in strong contrast to the latest monthly report from the US EIA. The inventories in weekly data have drawn down strongly since mid-March. Yes, this week they went up by some 10 mb for US, EU, Sing and floating combined, but last week it went down by 20 mb. In total they have drawn down 70 mb since mid-March and more is to come as we head into H2-17 with strong revival in global refining activity. We thus expect that the current view that there will be no draws in OECD stocks in 2017 displayed by the EIA this week will evaporate in not too long. We also think that OPEC’s production cuts will not fall apart due to the current debacle surrounding Qatar.

As such we don’t expect the current depression in oil prices to last through to the end of the year. We may have to hold out for a little while in order to figure out where the current US shale oil rig count inflection point is – where “the US shale oil price floor” currently is, but continued solid inventory draws should soon convince the market again that the market is surly running a deficit.

Today at 19.00 CET we have the Baker Hughes US rig count. Highly interesting to see whether the last six weeks with an average WTI 18 mth price of $49.5/b has started to slow down the US shale oil rig count growth.

Ch1 – Where is the “US shale oil price floor”? Still at $46-47/b (WTI 18 mth reference)?

Ch2: US inventories did counter the downward trend this week. But that should be noise
We still expect inventories to draw down across the board the coming half year

Kind regards

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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Analys

Brent crude ticks higher on tension, but market structure stays soft

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2 dagar sedan

den

16 september, 2025

Redaktionen

Brent crude has climbed roughly USD 1.5-2 per barrel since Friday, yet falling USD 0.3 per barrel this mornig and currently trading near USD 67.25/bbl after yesterday’s climb. While the rally reflects short-term geopolitical tension, price action has been choppy, and crude remains locked in a broader range – caught between supply-side pressure and spot resilience.

Ole R. Hvalbye, Analyst Commodities, SEB

Prices have been supported by renewed Ukrainian drone strikes targeting Russian infrastructure. Over the weekend, falling debris triggered a fire at the 20mtpa Kirishi refinery, following last week’s attack on the key Primorsk terminal.

Argus estimates that these attacks have halted ish 300 kbl/d of Russian refining capacity in August and September. While the market impact is limited for now, the action signals Kyiv’s growing willingness to disrupt oil flows – supporting a soft geopolitical floor under prices.

The political environment is shifting: the EU is reportedly considering sanctions on Indian and Chinese firms facilitating Russian crude flows, while the U.S. has so far held back – despite Bessent warning that any action from Washington depends on broader European participation. Senator Graham has also publicly criticized NATO members like Slovakia and Hungary for continuing Russian oil imports.

It’s worth noting that China and India remain the two largest buyers of Russian barrels since the invasion of Ukraine. While New Delhi has been hit with 50% secondary tariffs, Beijing has been spared so far.

Still, the broader supply/demand balance leans bearish. Futures markets reflect this: Brent’s prompt spread (gauge of near-term tightness) has narrowed to the current USD 0.42/bl, down from USD 0.96/bl two months ago, pointing to weakening backwardation.

This aligns with expectations for a record surplus in 2026, largely driven by the faster-than-anticipated return of OPEC+ barrels to market. OPEC+ is gathering in Vienna this week to begin revising member production capacity estimates – setting the stage for new output baselines from 2027. The group aims to agree on how to define “maximum sustainable capacity,” with a proposal expected by year-end.

While the IEA pegs OPEC+ capacity at 47.9 million barrels per day, actual output in August was only 42.4 million barrels per day. Disagreements over data and quota fairness (especially from Iraq and Nigeria) have already delayed this process. Angola even quit the group last year after being assigned a lower target than expected. It also remains unclear whether Russia and Iraq can regain earlier output levels due to infrastructure constraints.

Also, macro remains another key driver this week. A 25bp Fed rate cut is widely expected tomorrow (Wednesday), and commodities in general could benefit a potential cut.

Summing up: Brent crude continues to drift sideways, finding near-term support from geopolitics and refining strength. But with surplus building and market structure softening, the upside may remain capped.

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Volatile but going nowhere. Brent crude circles USD 66 as market weighs surplus vs risk

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6 dagar sedan

den

12 september, 2025

Redaktionen

Brent crude is essentially flat on the week, but after a volatile ride. Prices started Monday near USD 65.5/bl, climbed steadily to a mid-week high of USD 67.8/bl on Wednesday evening, before falling sharply – losing about USD 2/bl during Thursday’s session.

Brent is currently trading around USD 65.8/bl, right back where it began. The volatility reflects the market’s ongoing struggle to balance growing surplus risks against persistent geopolitical uncertainty and resilient refined product margins. Thursday’s slide snapped a three-day rally and came largely in response to a string of bearish signals, most notably from the IEA’s updated short-term outlook.

The IEA now projects record global oversupply in 2026, reinforcing concerns flagged earlier by the U.S. EIA, which already sees inventories building this quarter. The forecast comes just days after OPEC+ confirmed it will continue returning idle barrels to the market in October – albeit at a slower pace of +137,000 bl/d. While modest, the move underscores a steady push to reclaim market share and adds to supply-side pressure into year-end.

Thursday’s price drop also followed geopolitical incidences: Israeli airstrikes reportedly targeted Hamas leadership in Doha, while Russian drones crossed into Polish airspace – events that initially sent crude higher as traders covered short positions.

Yet, sentiment remains broadly cautious. Strong refining margins and low inventories at key pricing hubs like Europe continue to support the downside. Chinese stockpiling of discounted Russian barrels and tightness in refined product markets – especially diesel – are also lending support.

On the demand side, the IEA revised up its 2025 global demand growth forecast by 60,000 bl/d to 740,000 bl/d YoY, while leaving 2026 unchanged at 698,000 bl/d. Interestingly, the agency also signaled that its next long-term report could show global oil demand rising through 2050.

Meanwhile, OPEC offered a contrasting view in its latest Monthly Oil Market Report, maintaining expectations for a supply deficit both this year and next, even as its members raise output. The group kept its demand growth estimates for 2025 and 2026 unchanged at 1.29 million bl/d and 1.38 million bl/d, respectively.

We continue to watch whether the bearish supply outlook will outweigh geopolitical risk, and if Brent can continue to find support above USD 65/bl – a level increasingly seen as a soft floor for OPEC+ policy.

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Waiting for the surplus while we worry about Israel and Qatar

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1 vecka sedan

den

10 september, 2025

Redaktionen

Brent crude makes some gains as Israel’s attack on Hamas in Qatar rattles markets. Brent crude spiked to a high of USD 67.38/b yesterday as Israel made a strike on Hamas in Qatar. But it wasn’t able to hold on to that level and only closed up 0.6% in the end at USD 66.39/b. This morning it is starting on the up with a gain of 0.9% at USD 67/b. Still rattled by Israel’s attack on Hamas in Qatar yesterday. Brent is getting some help on the margin this morning with Asian equities higher and copper gaining half a percent. But the dark cloud of surplus ahead is nonetheless hanging over the market with Brent trading two dollar lower than last Tuesday.

Bjarne Schieldrop, Chief analyst commodities, SEB

Geopolitical risk premiums in oil rarely lasts long unless actual supply disruption kicks in. While Israel’s attack on Hamas in Qatar is shocking, the geopolitical risk lifting crude oil yesterday and this morning is unlikely to last very long as such geopolitical risk premiums usually do not last long unless real disruption kicks in.

US API data yesterday indicated a US crude and product stock build last week of 3.1 mb. The US API last evening released partial US oil inventory data indicating that US crude stocks rose 1.3 mb and middle distillates rose 1.5 mb while gasoline rose 0.3 mb. In total a bit more than 3 mb increase. US crude and product stocks usually rise around 1 mb per week this time of year. So US commercial crude and product stock rose 2 mb over the past week adjusted for the seasonal norm. Official and complete data are due today at 16:30.

A 2 mb/week seasonally adj. US stock build implies a 1 – 1.4 mb/d global surplus if it is persistent. Assume that if the global oil market is running a surplus then some 20% to 30% of that surplus ends up in US commercial inventories. A 2 mb seasonally adjusted inventory build equals 286 kb/d. Divide by 0.2 to 0.3 and we get an implied global surplus of 950 kb/d to 1430 kb/d. A 2 mb/week seasonally adjusted build in US oil inventories is close to noise unless it is a persistent pattern every week.

US IEA STEO oil report: Robust surplus ahead and Brent averaging USD 51/b in 2026. The US EIA yesterday released its monthly STEO oil report. It projected a large and persistent surplus ahead. It estimates a global surplus of 2.2 m/d from September to December this year. A 2.4 mb/d surplus in Q1-26 and an average surplus for 2026 of 1.6 mb/d resulting in an average Brent crude oil price of USD 51/b next year. And that includes an assumption where OPEC crude oil production only averages 27.8 mb/d in 2026 versus 27.0 mb/d in 2024 and 28.6 mb/d in August.

Brent will feel the bear-pressure once US/OECD stocks starts visible build. In the meanwhile the oil market sits waiting for this projected surplus to materialize in US and OECD inventories. Once they visibly starts to build on a consistent basis, then Brent crude will likely quickly lose altitude. And unless some unforeseen supply disruption kicks in, it is bound to happen.

US IEA STEO September report. In total not much different than it was in January