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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The Mid-East anchor dragging crude oil lower

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4 timmar sedan

den

14 oktober, 2025

Redaktionen

When it starts to move lower it moves rather quickly. Gaza, China, IEA. Brent crude is down 2.1% today to $62/b after having traded as high as $66.58/b last Thursday and above $70/b in late September. The sell-off follows the truce/peace in Gaze, a flareup in US-China trade and yet another bearish oil outlook from the IEA.

Bjarne Schieldrop, Chief analyst commodities, SEB

A lasting peace in Gaze could drive crude oil at sea to onshore stocks. A lasting peace in Gaza would probably calm down the Houthis and thus allow more normal shipments of crude oil to sail through the Suez Canal, the Red Sea and out through the Bab-el-Mandeb Strait. Crude oil at sea has risen from 48 mb in April to now 91 mb versus a pre-Covid normal of about 50-60 mb. The rise to 91 mb is probably the result of crude sailing around Africa to be shot to pieces by the Houthis. If sailings were to normalize through the Suez Canal, then it could free up some 40 mb in transit at sea moving onshore into stocks.

The US-China trade conflict is of course bearish for demand if it continues.

Bearish IEA yet again. Getting closer to 2026. Credibility rises. We expect OPEC to cut end of 2025. The bearish monthly report from the IEA is what it is, but the closer we get to 2026, the more likely the IEA is of being ball-park right in its outlook. In its monthly report today the IEA estimates that the need for crude oil from OPEC in 2026 will be 25.4 mb/d versus production by the group in September of 29.1 mb/d. The group thus needs to do some serious cutting at the end of 2025 if it wants to keep the market balanced and avoid inventories from skyrocketing. Given that IEA is correct that is. We do however expect OPEC to implement cuts to avoid a large increase in inventories in Q1-26. The group will probably revert to cuts either at its early December meeting when they discuss production for January or in early January when they discuss production for February. The oil price will likely head yet lower until the group reverts to cuts.

Dubai: The Mid-East anchor dragging crude oil lower. Surplus emerging in Mid-East pricing. Crude oil prices held surprisingly strong all through the summer. A sign and a key source of that strength came from the strength in the front-end backwardation of the Dubai crude oil curve. It held out strong from mid-June and all until late September with an average 1-3mth time-spread premium of $1.8/b from mid-June to end of September. The 1-3mth time-spreads for Brent and WTI however were in steady deterioration from late June while their flat prices probably were held up by the strength coming from the Persian Gulf. Then in late September the strength in the Dubai curve suddenly collapsed. Since the start of October it has been weaker than both the Brent and the WTI curves. The Dubai 1-3mth time-spread now only stands at $0.25/b. The Middle East is now exporting more as it is producing more and also consuming less following elevated summer crude burn for power (Aircon) etc.

The only bear-element missing is a sudden and solid rise in OECD stocks. The only thing that is missing for the bear-case everyone have been waiting for is a solid, visible rise in OECD stocks in general and US oil stocks specifically. So watch out for US API indications tomorrow and official US oil inventories on Thursday.

No sign of any kind of fire-sale of oil from Saudi Arabia yet. To what we can see, Saudi Arabia is not at all struggling to sell its oil. It only lowered its Official Selling Prices (OSPs) to Asia marginally for November. A surplus market + Saudi determination to sell its oil to the market would normally lead to a sharp lowering of Saudi OSPs to Asia. Not yet at least and not for November.

The 5yr contract close to fixed at $68/b. Of importance with respect to how far down oil can/will go. When the oil market moves into a surplus then the spot price starts to trade in a large discount to the 5yr contract. Typically $10-15/b below the 5yr contract on average in bear-years (2009, 2015, 2016, 2020). But the 5yr contract is usually pulled lower as well thus making this approach a moving target. But the 5yr contract price has now been rock solidly been pegged to $68/b since 2022. And in the 2022 bull-year (Brent spot average $99/b), the 5yr contract only went to $72/b on average. If we assume that the same goes for the downside and that 2026 is a bear-year then the 5yr goes to $64/b while the spot is trading at a $10-15/b discount to that. That would imply an average spot price next year of $49-54/b. But that is if OPEC doesn’t revert to cuts and instead keeps production flowing. We think OPEC(+) will trim/cut production as needed into 2026 to prevent a huge build-up in global oil stocks and a crash in prices. But for now we are still heading lower. Into the $50ies/b.

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

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1 vecka sedan

den

7 oktober, 2025

Redaktionen

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.

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.

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.

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

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2 veckor sedan

den

3 oktober, 2025

Redaktionen

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.

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.