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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A deliberate measure to push oil price lower but it is not the opening of the floodgates

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52 minuter sedan

den

4 mars, 2025

Redaktionen

Hurt by US tariffs and more oil from OPEC+. Brent crude fell 2.1% yesterday to USD 71.62/b and is down an additional 0.9% this morning to USD 71/b. New tariff-announcements by Donald Trump and a decision by OPEC+ to lift production by 138 kb/d in April is driving the oil price lower.

Bjarne Schieldrop, Chief analyst commodities, SEB

The decision by OPEC+ to lift production is a deliberate decision to get a lower oil price. All the members in OPEC+ wants to produce more as a general rule. Their plan and hope for a long time has been that they could gradually revive production back to a more normal level without pushing the oil price lower. As such they have postponed the planned production increases time and time again. Opting for price over volume. Waiting for the opportunity to lift production without pushing the price lower. And now it has suddenly changed. They start to lift production by 138 kb/d in April even if they know that the oil market this year then will run a surplus. Donald Trump is the reason.

Putin, Muhammed bin Salman (MBS) and Trump all met in Riyadh recently to discuss the war in Ukraine. They naturally discussed politics and energy and what is most important for each and one of them. Putin wants a favorable deal in Ukraine, MBS may want harsher measures towards Iran while Trump amongst other things want a lower oil price. The latter is to appease US consumers to which he has promised a lower oil price. A lower oil price over the coming two years could be good for Trump and the Republicans in the mid-term elections if a lower oil price makes US consumers happy. And a powerful Trump for a full four years is also good for Putin and MBS.

This is not the opening of the floodgates. It is not the start of blindly lifting production each month. It is still highly measured and controlled. It is about lowering the oil price to a level that is acceptable for Putin, MBS, Trump, US oil companies and the US consumers. Such an imagined ”target price” or common denominator is clearly not USD 50-55/b. US production would in that case fall markedly and the finances of Saudi Arabia and Russia would hurt too badly. The price is probably somewhere in the USD 60ies/b.

Brent crude averaged USD 99.5/b, USD 82/b and USD 80/b in 2022, 2023 and 2024 respectively. An oil price of USD 65/b is markedly lower in the sense that it probably would be positively felt by US consumers. The five-year Brent crude oil contract is USD 67/b. In a laxed oil market with little strain and a gradual rise in oil inventories we would see a lowering of the front-end of the Brent crude curve so that the front-end comes down to the level of the longer dated prices. The longer-dated prices usually soften a little bit as well when this happens. The five-year Brent contract could easily slide a couple of dollars down to USD 65/b versus USD 67/b.

Brent crude 1 month contract in USD/b. USD 68.68/b is the level to watch out for. It was the lowpoint in September last year. Breaking below that will bring us to lowest level since December 2021.

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Brent whacked down yet again by negative Trump-fallout

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6 dagar sedan

den

26 februari, 2025

Redaktionen

Sharply lower yesterday with negative US consumer confidence. Brent crude fell like a rock to USD 73.02/b (-2.4%) yesterday following the publishing of US consumer confidence which fell to 98.3 in February from 105.3 in January (100 is neutral). Intraday Brent fell as low as USD 72.7/b. The closing yesterday was the lowest since late December and at a level where Brent frequently crossed over from September to the end of last year. Brent has now lost both the late December, early January Trump-optimism gains as well as the Biden-spike in mid-Jan and is back in the range from this Autumn. This morning it is staging a small rebound to USD 73.2/b but with little conviction it seems. The US sentiment readings since Friday last week is damaging evidence of the negative fallout Trump is creating.

Evidence growing that Trump-turmoil are having negative effects on the US economy. The US consumer confidence index has been in a seesaw pattern since mid-2022 and the reading yesterday was reached twice in 2024 and close to it also in 2023. But the reading yesterday needs to be seen in the context of Donald Trump being inaugurated as president again on 20 January. The reading must thus be interpreted as direct response by US consumers to what Trump has been doing since he became president and all the uncertainty it has created. The negative reading yesterday also falls into line with the negative readings on Friday, amplifying the message that Trump action will indeed have a negative fallout. At least the first-round effects of it. The market is staging a small rebound this morning to USD 73.3/b. But the genie is out of the bottle: Trump actions is having a negative effect on US consumers and businesses and thus the US economy. Likely effects will be reduced spending by consumers and reduced capex spending by businesses.

Brent crude falling lowest since late December and a level it frequently crossed during autumn.

White: US Conference Board Consumer Confidence (published yesterday). Blue: US Services PMI Business activity (published last Friday). Red: US University of Michigan Consumer Sentiment (published last Friday). All three falling sharply in February. Indexed 100 on Feb-2022.

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Crude oil comment: Price reaction driven by intensified sanctions on Iran

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7 dagar sedan

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25 februari, 2025

Redaktionen

Brent crude prices bottomed out at USD 74.20 per barrel at the close of trading on Friday, following a steep decline from USD 77.15 per barrel on Thursday evening (February 20th). During yesterday’s trading session, prices steadily climbed by roughly USD 1 per barrel (1.20%), reaching the current level of USD 75 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s price rebound, which has continued into today, is primarily driven by recent U.S. actions aimed at intensifying pressure on Iran. These moves were formalized in the second round of sanctions since the presidential shift, specifically targeting Iranian oil exports. Notably, the U.S. Treasury Department has sanctioned several Iran-related oil companies, added 13 new tankers to the OFAC (Office of Foreign Assets Control) sanctions list, and sanctioned individuals, oil brokers, and terminals connected to Iran’s oil trade.

The National Security Presidential Memorandum 2 now calls for the U.S. to ”drive Iran’s oil exports to zero,” further asserting that Iran ”can never be allowed to acquire or develop nuclear weapons.” This intensified focus on Iran’s oil exports is naturally fueling market expectations of tighter supply. Yet, OPEC+ spare capacity remains robust, standing at 5.3 million barrels per day, with Saudi Arabia holding 3.1 million, the UAE 1.1 million, Iraq 600k, and Kuwait 400k. As such, any significant price spirals are not expected, given the current OPEC+ supply buffer.

Further contributing to recent price movements, OPEC has yet to decide on its stance regarding production cuts for Q2 2025. The group remains in control of the market, evaluating global supply and demand dynamics on a monthly basis. Given the current state of the market, we believe there is limited capacity for additional OPEC production without risking further price declines.

On a more bullish note, Iraq reaffirmed its commitment to the OPEC+ agreement yesterday, signaling that it would present an updated plan to compensate for any overproduction, which supports ongoing market stability.

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