Analys

Searching for the US shale oil price floor

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8 år sedan

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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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Brent prices slip on USD surge despite tight inventory conditions

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2 veckor sedan

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19 december, 2024

Redaktionen

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

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Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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2 veckor sedan

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16 december, 2024

Redaktionen

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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2 veckor sedan

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13 december, 2024

Redaktionen

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

Bjarne Schieldrop, Chief analyst commodities, SEB

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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