Analys

The show must go on in Vienna

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8 år sedan

den

27 november, 2017

Handelsbanken - Råvarubrevet - Nyhetsbrev om råvaror

Along with the market, we expect an extension of oil production cuts from OPEC and Russia at the upcoming OPEC meeting in Vienna on November 30. OPEC is sailing with a strong tailwind, as a draw on global stocks has started, and compliance reached more than 100% in both OPEC and non-OPEC in October for the first time. For H1 2018, we see compliance with proposed cuts as less of a problem; instead, market focus will move to global stocks, which will likely start to flatten as the seasonal tailwind has swept through and there is higher activity in US shale after oil traded above USD 60.

High expectations

According to a Bloomberg survey, oil traders and analysts unanimously expect OPEC and Russia to prolong their production cuts on Thursday. Behind the scenes, however, it seems as though Saudi Arabia and Russia are still debating what course to follow, particularly regarding the duration of the extension.

Russia’s economy minister said last week that the OPEC/non-OPEC production cuts hurt Russia’s economic growth on October, through lower oil production, and indirectly, through lower investment activity. That was the first negative comment about the pact from a high-ranking Russian official. Despite the signs that Russian policy makers may be having second thoughts, they will agree to an extension in the end, in our view. Anything but an extension supported by Russia would have a significant negative impact on prices.

Putin crowns himself OPEC king

OPEC gatherings still influence oil prices, but Saudi Arabia’s voice no longer matters most in the media. Since he engineered Russia’s pact with OPEC 12 month ago, President Vladimir Putin has emerged as the group’s most influential player, in our view. Putin is now calling all the shots.

Cuts implemented successfully

Over the past year, OPEC and several other key producers, including Russia, have agreed to cut production by 1.8 million bbl/d to reduce a global glut, formally defined as returning global stocks to normal levels, i.e. their five-year average. The group reached more than 100% compliance for the first time in October. That’s a striking and surprising fact, in our view, and the market has reacted to OPEC’s success by trading oil at higher prices.

Will not reach target

Given the impressive compliance, it is striking, in our view, that OPEC is so far from its target of draining global stocks. Inventories are lower, but we believe the strong seasonal effect of the US driving season this year is the key factor behind that. The target should have been reached in May, but will not be reached by the November meeting, and it would be surprising if normal stock levels were reached before OPEC’s spring meeting in May/June 2018.

Saudi Arabia supports an extension

It has become obvious that Crown Prince Mohammed bin Salman, who has emerged as Saudi Arabia’s leading economic force, was the architect of the Saudi policy U-turn in Doha in 2016, leading up to the cut at the meeting in Vienna in November 2016. In our view, this was confirmed by the replacement of Ali al-Naimi, after two decades as oil minister, with the more politically-oriented Khalid al-Falih.

Prince Mohammed has put the divestment of Aramco at the top of his agenda, and that is the basis of Saudi policy and its willingness to cut production in return for a short-term rise in the oil price. The Aramco IPO should top the board’s agenda and will take place during the second half of 2018, according to al-Falih during a state visit to Russia earlier this autumn.

Costly mistake

The savvy players recognise the danger of cutting production. History is repeating itself. Higher prices have triggered a reverse in the US production drop, extending the time it takes for the market to balance, and pushing the volume share away from OPEC and toward two non-cut participants, the US and recently also Libya.

US shale flattening

In our model, which has served us well since the cycle collapse in 2014, we see around an 80-day lag from peak to trough in prices, before a new activity direction in rig count, and we see around 80 more days before an impact on production. In other words, a 160-day lag in production from a new price direction. After the recent oil price rally, rig counts will start to increase in our model, and early data are already confirming this new trend, which will have a negative impact on oil prices.

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Analys

Breaking some eggs in US shale

Publicerat

5 dagar sedan

den

5 augusti, 2025

Redaktionen

Lower as OPEC+ keeps fast-tracking redeployment of previous cuts. Brent closed down 1.3% yesterday to USD 68.76/b on the back of the news over the weekend that OPEC+ (V8) lifted its quota by 547 kb/d for September. Intraday it traded to a low of USD 68.0/b but then pushed higher as Trump threatened to slap sanctions on India if it continues to buy loads of Russian oil. An effort by Donald Trump to force Putin to a truce in Ukraine. This morning it is trading down 0.6% at USD 68.3/b which is just USD 1.3/b below its July average.

Bjarne Schieldrop, Chief analyst commodities, SEB

Only US shale can hand back the market share which OPEC+ is after. The overall picture in the oil market today and the coming 18 months is that OPEC+ is in the process of taking back market share which it lost over the past years in exchange for higher prices. There is only one source of oil supply which has sufficient reactivity and that is US shale. Average liquids production in the US is set to average 23.1 mb/d in 2025 which is up a whooping 3.4 mb/d since 2021 while it is only up 280 kb/d versus 2024.

Taking back market share is usually a messy business involving a deep trough in prices and significant economic pain for the involved parties. The original plan of OPEC+ (V8) was to tip-toe the 2.2 mb/d cuts gradually back into the market over the course to December 2026. Hoping that robust demand growth and slower non-OPEC+ supply growth would make room for the re-deployment without pushing oil prices down too much.

From tip-toing to fast-tracking. Though still not full aggression. US trade war, weaker global growth outlook and Trump insisting on a lower oil price, and persistent robust non-OPEC+ supply growth changed their minds. Now it is much more fast-track with the re-deployment of the 2.2 mb/d done already by September this year. Though with some adjustments. Lifting quotas is not immediately the same as lifting production as Russia and Iraq first have to pay down their production debt. The OPEC+ organization is also holding the door open for production cuts if need be. And the group is not blasting the market with oil. So far it has all been very orderly with limited impact on prices. Despite the fast-tracking.

The overall process is nonetheless still to take back market share. And that won’t be without pain. The good news for OPEC+ is of course that US shale now is cooling down when WTI is south of USD 65/b rather than heating up when WTI is north of USD 45/b as was the case before.

OPEC+ will have to break some eggs in the US shale oil patches to take back lost market share. The process is already in play. Global oil inventories have been building and they will build more and the oil price will be pushed lower.

A Brent average of USD 60/b in 2026 implies a low of the year of USD 45-47.5/b. Assume that an average Brent crude oil price of USD 60/b and an average WTI price of USD 57.5/b in 2026 is sufficient to drive US oil rig count down by another 100 rigs and US crude production down by 1.5 mb/d from Dec-25 to Dec-26. A Brent crude average of USD 60/b sounds like a nice price. Do remember though that over the course of a year Brent crude fluctuates +/- USD 10-15/b around the average. So if USD 60/b is the average price, then the low of the year is in the mid to the high USD 40ies/b.

US shale oil producers are likely bracing themselves for what’s in store. US shale oil producers are aware of what is in store. They can see that inventories are rising and they have been cutting rigs and drilling activity since mid-April. But significantly more is needed over the coming 18 months or so. The faster they cut the better off they will be. Cutting 5 drilling rigs per week to the end of the year, an additional total of 100 rigs, will likely drive US crude oil production down by 1.5 mb/d from Dec-25 to Dec-26 and come a long way of handing back the market share OPEC+ is after.

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Analys

More from OPEC+ means US shale has to gradually back off further

Publicerat

6 dagar sedan

den

4 augusti, 2025

Redaktionen

The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly.

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

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Analys

Tightening fundamentals – bullish inventories from DOE

Publicerat

2 månader sedan

den

26 juni, 2025

Redaktionen

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Ole R. Hvalbye, Analyst Commodities, SEB

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.