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The Damocles Sword of OPEC+ hanging over US shale oil producers

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Lower as OPEC+ sticks to plan of production hike while Trump-Tariff-Turmoil creates growth concerns. Brent crude traded up at the start of the day yesterday along with Trump-tariffs hitting Mexico and Canada. These were later called off and Brent ended down 1% at USD 75.96/b. OPEC+ standing firm on its planned 120 kb/d production hike in April also drove it lower. Brent is losing another 1% this morning down to USD 75.2/b. The Trump-Tariff-Turmoil is no good for economic growth. China now hitting back by restricting exports of critical metals. Fear for economic slowdown as a consequence of Trump-Tariffs is the biggest drag on oil today.

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

The Damocles Sword of OPEC+. OPEC+ decided yesterday to stick with its plan: to lift production by 120 kb/d every month for 18 months starting April. Again and again, it has pushed the start of the production increase further into the future. It could do it yet again. That will depend on circumstances of 1) Global oil demand growth and 2) Non-OPEC+ supply growth. All oil producers in the world knows that OPEC+ has a 5-6 mb/d of reserve capacity at hand. It wants to return 2-3 mb/d of this reserve to the market to get back to a more normal reserve level. The now increasingly standing threat of OPEC+ to increase production in ”just a couple of months” is hanging over the world’s oil producers like a Damocles Sward. OPEC+ is essentially saying: ”Produce much more and we will do too, and you will get a much lower price”.  

If US shale oil producers embarked on a strong supply growth path heeding calls from Donald Trump for more production and a lower oil price, then OPEC+ would have no other choice than to lift production and let the oil price fall. Trump would get a lower oil price as he wishes for, but he would not get higher US oil production. US shale oil producers would get a lower oil price, lower income and no higher production. US oil production might even fall in the face of a lower oil price with lower price and volume hurting US trade balance as well as producers.

Lower taxes on US oil producers could lead to higher oil production. But no growth = lots of profits. Trump could reduce taxes on US oil production to lower their marginal cost by up to USD 10/b. It could be seen as a 4-year time-limited option to produce more oil at a lower cost as such tax-measures could be reversed by the next president in 4 years. It would be very tempting for them to produce more.

Trump’s energy ambition is boe/d and not b/d and will likely be focused on nat gas and LNG exports. Strong US energy production growth will likely instead be focused on increased natural gas production and a strong rise in US LNG exports. Donald Trump has actually said ”3 m boe/d” growth and not ”3 m b/d” (boe: barrels of oil equivalents). So, some growth in oil and a lot of growth in natural gas production and exports will easily fulfill his target.

Brent crude historical average prices for the 1mth contract and the 60mth contract (5yr) in USD/b and the spread between them. When the market is tight there is a spot premium (orange) on top of the longer dated price. When the market is in surplus there is a discount in the spot price versus the 5yr. We have now had 5 consecutive years with backwardation and spot premiums between USD 11/b and USD 28/b (2022). Now the spot premium to 5yr is at USD 8/b. If market turns to surplus in mid-2025 and inventories starts to rise, then this USD 7/b premium will fall to zero or maybe even turn negative if the surplus is significant. This will depend on global oil demand growth, US shale oil discipline and decisions by OPEC+ in response to that.

Brent crude historical average prices for the 1mth contract and the 60mth contract (5yr) in USD/b and the spread between them.
Source: SEB calculations and graph, Bloomberg data

US production in November averaged 13.3 mb/d and was only 0.33 mb/d above its pre-Covid high in December 2019. Growth over the past 12mths has definitely slowed down.

US production in November averaged 13.3 mb/d and was only 0.33 mb/d above its pre-Covid high in December 2019.
Source: SEB graph, Bloomberg data

Analys

Crude stocks fall again – diesel tightness persists

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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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Analys

Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

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SEB - analysbrev på råvaror

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

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

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.

OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.

Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent  crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.

This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.

The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Dubai medium sour crude oil marker
Source: SEB graph, calculations and highlights. Bloomberg data

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

The Brent crude oil forward curve (latest in white)
Source: Bloomberg
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Analys

Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

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Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

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

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.

Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.

For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.

Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.

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