Analys
Still upside to crude oil spot prices into Q2-17 but softer again in H2-17
We expect front month Brent crude to head higher in Q2-17 to average $57.5/b but to toutch above $60/b at times.
Refineries will move back into operation consuming more oil. OPEC is delivering on cuts and inventories will decline.
US crude production is now growing (marginally, annualized) as fast as it did between 2012 and May 2015.
We expect OPEC to end cuts after H1-17 as mission is accomplished: Inventories are steady or declining and spot crude oil prices are equal to or higher than longer dated contracts. Not much more OPEC can do.
We expect the front month Brent crude oil price to fall back in H2-17 in the face of strongly rising US shale oil production and reviving OPEC production.
Brent crude front month price to average $52.5/b in Q4-17 toutching $50/b at times.
Higher than expected US shale oil rig additions since the start of the year has softening our projected deficit in 2019. However, we still see a substantial inventory draw below normal in 2019.
From the news flow:
Exxon will use 50% of its drilling budget for 2017 on US onshore drilling with its production there growing 20% pa to 2025
Libya’s crude oil production falls back again as clashes re-erupt
IEA: OPEC will increase its production capacity by 2 mb/d from 2016 to 2022 with Iraq lifting production to 5.4 mb/d in 2022
Ch1: Global refinery maintenance increased strongly in Q1-17 – Refineries soon to resume activity
A large increase in global refinery maintenance in Q1-17 left a comparble volume to be stored rather than processed
Ch2: Weekly inventories have rissen strongly in Q1-17 – Soon to decline.
OPEC also produced at record high level in Nov and Dec which has hit the market in Q1-17 along with several months of natural lag in the supply chain between production and consumption. Both helping to drive weekly inventory data up strongly in Q1-17
Ch3: OPEC delivers on cuts.
OPEC is delivering on its promises to cut. So when refineries move back on-line after maintenance and we also have the Nov and Dec OPEC production blob cleared out the the market we will see inventories starting to decline in Q2-17.
Ch4: Crude oil forward curve soon to move fully into backwardation
The forward crude curves will then move fully into backwardation with also the very front end of the curve (which is still in contango) moving into backwardation.
This is likely to lead front end Brent crude oil price up towards the $60/b mark with our expectation for an average Brent 1mth price of $57.5/b during Q2-17 touching $60/b at times.
Ch5: Speculators are bullish awaiting that last move into full backwardation
And speculators are bullish accordingly – close to record high net long speculative position in WTI
Ch6: US oil rig count moves higher and higher and higher
But US oil rigs are constantly added to the market and at a higher rate than we had expected.
Ch7: More US shale oil rigs have been activated versus what we had expected
More shale oil rigs have been added into activity in the US shale oil space versus what we had expected
Ch8: Helping to shift US crude oil production growth back into full pre-2015 growth level again
US crude oil production is now on rising trend again adding on average 30 kb/d w/w since the start of the year.
That is equal to a marginal, annualized growth rate of 30 kb/d/week * 52 week = 1560 kb/d/year (1.5 mb/d marginal, annualized growth rate).
That is back to the growth rate seen between 2012 to June 2015.
Ch9: More shale oil rigs than expected means higher forecasted US crude oil production than expected
This impacts our projected US crude oil production for 2017, 2018 and 2019 lifting it higher
Ch10: With US crude oil production now expected to lift to close to 13 mb/d at the end of 2019
Ch11: Global supply/demand balance still in deficit next three years but not much deficit in 2018 any more
Almost constantly weakening and softening our projected supply/demand balance for the nearest three years.
With our view now that there will be almost no deficit in 2018.
But still a solid deficit and inventory draw coming in 2019 as cuts in investments in conventional supply since 2014 starts to hit the market.
Little conventional legacy investments to add additional supply in 2019 and thus little to counter natural declines in existing conventional production in 2019.
Ch12: End of year OECD inventories to draw substantially below normal in 2019
End of year OECD stocks still to draw substantially below a normal of 2700 million barrels in 2019.
But stocks are likely to end the year above normal for both 2017 and 2018.
Thus few pressure points in the global supply/demand balance during 2017 and 2018 as current elevated oil inventories provides a nice cushion
Ch13: End of year OECD inventories to stand some 200 mb below normal in December 2019
The year 2019 still looks like the year when things could happen to the oil price on the upside.
As end of year OECD inventories could draw down some 200 million barrels below normal
Unless of course demand growth weakens, US shale oil production accelerates even more or oil companies accelerate in-field drilling thus countering conventional declines.
Ch14: Projected call on OPEC has declined since the start of February along with higher US crude oil production projections
As we steadily adjust our US crude oil production higher for 2017, 2018 and 2019 along with higher than expected additions of US shale oil rigs
The need for oil from OPEC declines comparably for the years to come
How far down is OPEC willing to let it slide? Probably not below 33 mb/d for 2018.
Ch15: Softer supply/demand balance naturally means softer prices
In a dynamic crude oil price forecasting frame the forecasted crude oil price declines along with with a softening forward looking supply/demand balance
(Prices in graph are mathematically extended from the $80/b forecasted at the start of February and are not new price forecast assessments)
Ch16: Longer dated market prices have deteriorated since the start of the year
Longer dated contracts like Brent crude December 2020 have deteriorated since the start of the year
Probably reflecting the acceleration in US shale oil rig additions in Q1-17
In late February the contract traded at its lowest level since April 2016.
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Analys
Brent prices slip on USD surge despite tight inventory conditions
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.
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.
Analys
Oil falling only marginally on weak China data as Iran oil exports starts to struggle
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.
Analys
Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025
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.
”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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