Analys
The show must go on in Vienna
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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Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
Analys
Crude oil comment: Deferred contracts still at very favorable levels as latest rally concentrated at front-end
Bouncing up again after hitting the 200dma. Bitter cold winter storm in Texas adding to it. Brent crude continued its pullback yesterday with a decline of 1.1% to USD 79.29/b trading as low as USD 78.45/b during the day dipping below the 200dma line while closing above. This morning it has been testing the downside but is now a little higher at USD 79.6/b. A bitter cold winter storm is hitting Texas to Floriday. It is going to disrupt US nat gas exports and possibly also US oil production and exports. This may be part of the drive higher for oil today. But maybe also just a bounce up after it tested the 200dma yesterday.
Some of the oomph from the Biden-sanctions on Russia has started to defuse with arguments running that these sanctions will only delay exports of Russian crude and products rather than disrupt them. The effects of sanctions historically tend to dissipate over time as the affected party finds ways around them.
Donald criticizing Putin. Biden-sanctions may not be removed so easily. In a surprising comment, Donald Trump has criticized Putin saying that he is ”destroying Russia” and that ”this is no way to run a country”. Thus, Donald Trump coming Putin to the rescue, removing the recent Biden-sanctions and handing him a favorable peace deal with Ukraine, no longer seems so obvious.
Deeper and wider oil sanctions from Trump may lift deferred contracts. Trump may see that he has the stronger position while Putin is caught in a quagmire of a war in Ukraine. Putin in response seems to seek closer relationship with Iran. That may not be the smart move as the US administration is working on a new set of sanctions towards Iranian oil industry. We expect Donald Trump to initiate new sanctions towards Iran and Venezuela in order to make room for higher US oil production and exports. That however will also require a higher oil price to be realized. On the back of the latest comments from Donald Trump one might wonder whether also Russia will end up with harder sanctions from the US and lower Russian exports as a result and not just Iran and Venezuela. Such sanctions could lift deferred prices.
Deferred crude oil prices are close to the 70-line and are still good buys for oil consumers as uplift in prices have mostly taken place at the front-end of the curves. Same for oil products including middle distillates like ICE Gas oil. But deeper and lasting sanctions towards Iran, Venezuela and potentially also Russia could lift deferred prices higher.
The recent rally in the Dubai 1-3 mth time-spread has pulled back a little. But it has not collapsed and is still very, very strong in response to previous buyers of Russian crude turning to the Middle East.
The backwardation in crude is very sharp and front-loaded. The deferred contracts can still be bought at close to the 70-line for Brent crude. The rolling Brent 24mth contract didn’t get all that much lower over the past years except for some brief dips just below USD 70/b
ICE Gasoil rolling forward 12mths and 24mths came as low as USD 640/ton in 2024. Current price is not much higher at USD 662/ton and the year 2027 can be bought at USD 658/ton. Even after the latest rally in the front end of crude and mid-dist curves. Deeper sanctions towards Iran, Russia and Venezuela could potentially lift these higher.
Forward curves for Brent crude swaps and ICE gasoil swaps.
Nat gas front-month getting costlier than Brent crude and fuel oil. Likely shifting some demand away from nat gas to instead oil substitutes.
Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.
Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.
Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.
Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.
Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.
New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.
Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.
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