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Successful production cuts but exit is not so easy

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SEB - analysbrev på råvaror

SEB - Prognoser på råvaror - CommodityBrent crude oil is trading up 0.2% this morning to $71.5/bl supported by Kuwait’s statement that OPEC will discuss extending production cuts to 2019 at its June meeting in Vienna. Extending cuts to 2019 is not about driving inventories yet lower and the oil price yet higher. It is about avoiding inventories from rising back up again. OPEC+ has cut production, drawn down OECD inventories to just 24 million barrels above the rolling five year average in February with target in sight in May. Thus victory as such, but the group cannot place its deliberate cuts back into the market neither this year nor in 2019. The group is to a larger or lesser degree stuck with its cuts for the time being and in 2019. We estimate that deliberate cuts amounted to 2 m bl/d in February versus seasonally adjusted OECD inventory draw down of 0.2 m bl/d through Jan and Feb this year. This does not mean that US shale has OPEC+ up against the wall quite yet. Saudi Arabia for one still has plenty of ammunition left if needed. The group just cannot yet place its cuts back into the market. The main vulnerability is the OPEC+ cooperation. If that fell apart we would see rising inventories and falling oil prices. The rising tension in Syria is bullish if it leads to sanctions towards Russian oil exports but it would be bearish if it sows the seeds of division within the OPEC+ group. For now and in 2019 our view is that OPEC+ is in control of the oil market and it is not out of bullets even though it cannot exit cuts.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities

Brent crude oil is trading slightly lower morning at $71.3/bl after having been supported by Kuwait’s statement that OPEC will discuss extending production cuts to 2019 at its June meeting in Vienna. It is clear that the production cuts by OPEC+ has been successful in terms of drawing down global oil inventories and lifting prices in consequence. On average OECD inventories drew down about 0.75 m bl/d during the last 7 months of 2017 while they have only been drawing down 0.2 m bl/d through Jan and Feb this year. Both adjusted for seasonal trends. OPEC+ has delivered hard on its pledged cuts but with significant internal variations with respect to deliberate cuts, involuntary cuts and production increases. In comparison to the OECD drawdowns mentioned above the average deliberate cuts from Jan-2017 to Feb-2018 was 1.77 m bl/d and in February the deliberate cuts were 2.1 m bl/d (not counting individual gains and involuntary cuts). What is clear is that deliberate production cuts have been much larger than the draw downs in OECD inventories. So if it had not been for the cuts by OPEC+ then the global oil market would clearly still be subdued with a significant running surplus through 2017 and very, very high inventories today.

What OPEC+ would like would of course be to cut production, draw down inventories and then put production cuts back into the market. OECD commercial inventories in February only stood 24 million barrels above the 2013 to 2017 five year average. So victory as such.

However, OPEC+ is not in a position to place its deliberate production cuts back into the market. The group is for the time being more or less stuck with its cuts. It cannot get out. At least not yet and this is why the group needs to discuss extending production cuts to 2019 at its Vienna meeting in June 20/21/22. If it wants to avoid inventories from rising back up again in 2019 it will need to maintain cuts.

But OPEC does not have its back up against the wall yet. It still has more bullets left. Just look at Saudi Arabia. Yes, it has cut production by 0.7 m bl/d versus its October 2016 production of 10.6 m bl/d. But that means that it is still producing 9.9 m bl/d at the moment. In comparison its average production from 2005 to 2016 was 9.3 m bl/d with a low of 7.86 m bl/d at the start of the crisis year 2009. In other words it can easily deepen cuts if needed even though it is not obvious if it would do so alone without cooperating cuts by the rest of OPEC+. Thus vulnerability is along the lines of further OPEC+ cooperation and cohesion.

As long as the internal cooperation within OPEC and the wider OPEC+ is not falling apart the group still has the capacity and ability to hold the oil market, to hold the oil price both this year and next year. Total OPEC+ production in Feb-2018 stood at 49.5 m bl/d plus NGL thus accounting for more than 50% of global supply. OPEC+ is not home free to place its cuts back into the market again neither now or in 2019. Extending cuts to 2019 is not about driving inventories yet lower and the oil price yet higher. It is about avoiding inventories from rising back up again. If Venezuela declines more than expected or if US sanctions are revived towards Iran it may allow some return of deliberate cuts.

OPEC chartsRussia and Saudi oil

OPEC+ cuts and gains versus October 2016

Call-on-OPEC scenarios and projections for 2018 and 2019

Analys

OPEC+ in a process of retaking market share

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SEB - analysbrev på råvaror

Oil prices are likely to fall for a fourth straight year as OPEC+ unwinds cuts and retakes market share. We expect Brent crude to average USD 55/b in Q4/25 before OPEC+ steps in to stabilise the market into 2026. Surplus, stock building, oil prices are under pressure with OPEC+ calling the shots as to how rough it wants to play it. We see natural gas prices following parity with oil (except for seasonality) until LNG surplus arrives in late 2026/early 2027.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Oil market: Q4/25 and 2026 will be all about how OPEC+ chooses to play it
OPEC+ is in a process of unwinding voluntary cuts by a sub-group of the members and taking back market share. But the process looks set to be different from 2014-16, as the group doesn’t look likely to blindly lift production to take back market share. The group has stated very explicitly that it can just as well cut production as increase it ahead. While the oil price is unlikely to drop as violently and lasting as in 2014-16, it will likely fall further before the group steps in with fresh cuts to stabilise the price. We expect Brent to fall to USD 55/b in Q4/25 before the group steps in with fresh cuts at the end of the year.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Natural gas market: Winter risk ahead, yet LNG balance to loosen from 2026
The global gas market entered 2025 in a fragile state of balance. European reliance on LNG remains high, with Russian pipeline flows limited to Turkey and Russian LNG constrained by sanctions. Planned NCS maintenance in late summer could trim exports by up to 1.3 TWh/day, pressuring EU storage ahead of winter. Meanwhile, NE Asia accounts for more than 50% of global LNG demand, with China alone nearing a 20% share (~80 mt in 2024). US shale gas production has likely peaked after reaching 104.8 bcf/d, even as LNG export capacity expands rapidly, tightening the US balance. Global supply additions are limited until late 2026, when major US, Qatari and Canadian projects are due to start up. Until then, we expect TTF to average EUR 38/MWh through 2025, before easing as the new supply wave likely arrives in late 2026 and then in 2027.

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Analys

Manufacturing PMIs ticking higher lends support to both copper and oil

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Price action contained withing USD 2/b last week. Likely muted today as well with US closed. The Brent November contract is the new front-month contract as of today. It traded in a range of USD 66.37-68.49/b and closed the week up a mere 0.4% at USD 67.48/b. US oil inventory data didn’t make much of an impact on the Brent price last week as it is totally normal for US crude stocks to decline 2.4 mb/d this time of year as data showed. This morning Brent is up a meager 0.5% to USD 67.8/b. It is US Labor day today with US markets closed. Today’s price action is likely going to be muted due to that.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Improving manufacturing readings. China’s manufacturing PMI for August came in at 49.4 versus 49.3 for July. A marginal improvement. The total PMI index ticked up to 50.5 from 50.2 with non-manufacturing also helping it higher. The HCOB Eurozone manufacturing PMI was a disastrous 45.1 last December, but has since then been on a one-way street upwards to its current 50.5 for August. The S&P US manufacturing index jumped to 53.3 in August which was the highest since 2022 (US ISM manufacturing tomorrow). India manufacturing PMI rose further and to 59.3 for August which is the highest since at least 2022.

Are we in for global manufacturing expansion? Would help to explain copper at 10k and resilient oil. JPMorgan global manufacturing index for August is due tomorrow. It was 49.7 in July and has been below the 50-line since February. Looking at the above it looks like a good chance for moving into positive territory for global manufacturing. A copper price of USD 9935/ton, sniffing at the 10k line could be a reflection of that. An oil price holding up fairly well at close to USD 68/b despite the fact that oil balances for Q4-25 and 2026 looks bloated could be another reflection that global manufacturing may be accelerating.

US manufacturing PMI by S&P rose to 53.3 in August. It was published on 21 August, so not at all newly released. But the US ISM manufacturing PMI is due tomorrow and has the potential to follow suite with a strong manufacturing reading.

US manufacturing PMI by S&P
Source: Bloomberg
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Analys

Crude stocks fall again – diesel tightness persists

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SEB - analysbrev på råvaror

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.

Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.

Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).

Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.

On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.

US DOE Inventories
US Crude inventories
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