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The ”normal” oil price is USD 97/b

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The Dated Brent crude oil price ydy closed at USD 96/b. Wow, that’s a high price! This sensation however depends on what you think is ”normal”. And normal in the eyes of most market participants today is USD 60/b. But this perception is probably largely based on the recent experience of the market. The average Brent crude oil price from 2015-2019 was USD 58.5/b. But that was a period of booming non-OPEC supply, mostly shale oil. But booming shale oil supply is now increasingly coming towards an end. Looking more broadly at the last 20 years the nominal average price was USD 75/b. But in inflation adjusted terms it was actually USD 97/b.

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

Saudi Arabia’s oil minister, Abdulaziz bin Salman, yesterday stated that its production cuts was not about driving the price up but instead it was preemptive versus the highly uncertain global economic development. In that respect it has a very good point. The US 2yr government bond rate has rallied to 5.06% which is the highest since 2006 and just a fraction away of being the highest since December 2000. The Chinese property market is struggling and global PMIs have been downhill since mid-2021 with many countries now at contractive, sub-50 level. Thus a deep concern for the health of the global economy and thus oil demand going forward is absolutely warranted. And thus the preemptive production cuts by Saudi Arabia. But killing the global economy off while it is wobbling with an oil price of USD 110-120/b or higher is of course not a smart thing to do either.

At the same conference in Canada yesterday the CEO of Aramco, Amin H. Nasser, said that he expected global oil demand to reach 110 m b/d in 2030 and that talk about a near term peak in global oil demand was ”driven by policies, rather than the proven combination of markets, competitive economics and technology” (Reuters).

With a demand outlook of 110 m b/d in 2030 the responsible thing to do is of course to make sure that the oil price stays at a level where investments are sufficient to cover both decline in existing production as well as future demand growth.

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In terms of oil prices we tend to think about recent history and also in nominal terms. Most market participants are still mentally thinking of the oil prices we have experienced during the shale oil boom years from 2015-2019. The average nominal Brent crude price during that period was USD 58.5/b. This is today often perceived as ”the normal price”. But it was a very special period with booming non-OPEC supply whenever the WTI price moved above USD 45/b. But that period is increasingly behind us. While we could enjoy fairly low oil prices during this period it also left the world with a legacy: Subdued capex spending in upstream oil and gas all through these years. Then came the Covid-years which led to yet another trough in capex spending. We are soon talking close to 9 years of subdued capex spending.

If Amin H. Nasser is ballpark correct in his prediction that global oil demand will reach 110 m b/d in 2030 then the world should better get capex spending rolling. There is only one way to make that happen: a higher oil price. If the global economy now runs into an economic setback or recession and OPEC allows the oil price to drop to say USD 50/b, then we’d get yet another couple of years with subdued capex spending on top of the close to 9 years with subdued spending we already have behind us. So in the eyes of Saudi Arabia, Amin H. Nasser and Abdulaziz bin Salman, the responsible thing to do is to make sure that the oil price stays up at a sufficient level to ensure that capex spending stays up even during an economic downturn.

This brings us back to the question of what is a high oil price. We remember the shale oil boom years with an average nominal price of USD 58.5/b. We tend to think of it as the per definition ”normal” price. But we should instead think of it as the price depression period. A low-price period during which non-OPEC production boomed. Also, adjusting it for inflation, the real average price during this period was actually USD 72.2/b and not USD 58.5/b. If we however zoom out a little and look at the last 20 years then we get a nominal average of USD 75/b. The real, average inflation adjusted price over the past 20 years is however USD 97/b. The Dated Brent crude oil price yesterday closed at USD 96/b.

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Worth noting however is that for such inflation adjustment to make sense then the assumed cost of production should actually rise along with inflation and as such create a ”rising floor price” to oil based on rising real costs. If costs in real terms instead are falling due to productivity improvements, then such inflation adjusted prices will have limited bearing for future prices. What matters more specifically is the development of real production costs for non-OPEC producers and the possibility to ramp up such production. Environmental politics in OECD countries is of course a clear limiting factor for non-OPEC oil production growth and possibly a much more important factor than the production cost it self.  

But one last note on the fact that Saudi Arabia’s energy minister, Abdulaziz bin Salman, is emphasizing that the cuts are preemptive rather then an effort to drive the oil price to the sky while Amin H. Nasser is emphasizing that we need to be responsible. It means that if it turns out that the current cuts have indeed made the global oil market too tight with an oil price spiraling towards USD 110-120/b then we’ll highly likely see added supply from Saudi Arabia in November and December rather than Saudi sticking to 9.0 m b/d. This limits the risk for a continued unchecked price rally to such levels.

Oil price perspectives. We tend to think that the nominal average Brent crude oil price of USD 58.5/b during the shale oil boom years from 2015-19 is per definition the ”normal” price. But that period is now increasingly behind us. Zoom out a little to the real, average, inflation adjusted price of the past 20 years and we get USD 97/b. In mathematical terms it is much more ”normal” than the nominal price during the shale oil boom years 

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The new normal oil price
Source: SEB graph and calculations, Bloomberg data feed.

Is global oil demand about to peak 1: OECD and non-OECD share of global population

OECD and non-OECD share of global population
Source: SEB graph and calculations, UN population data

Is global oil demand about to peak 2: Oil demand per capita per year

Oil demand per capita per year
Source: SEB graph and calculations, BP oil data

Analys

Crude oil comment: Lack of clear direction

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This week, Brent crude prices have declined by USD 2.3 per barrel (2.8%) since Monday’s opening, driven by fundamental market factors. The current price is near its weekly low at USD 81.8 per barrel, down from Monday’s high of USD 84.5 per barrel.

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

The price has fallen by nearly USD 1 per barrel since yesterday afternoon. This week’s downward trend can be attributed to three main factors:

1. Upcoming OPEC+ Meeting:

OPEC+ is scheduled to meet on June 1st for the Joint Ministerial Monitoring Committee (JMMC). Initially planned as a physical meeting in Vienna, it will now be fully digital, suggesting no major discussions or changes. We anticipate that the meeting will result in the extension of current production cuts into Q3 2024. OPEC+ aims to signal a tight yet well-supplied market, maintaining the status quo and minimizing significant market reactions.

2. U.S. Inventory Report:

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Wednesday’s U.S. inventory report had a bearish impact on the market, showing a build in commercial crude inventories (excl. SPR) by 1.8 million barrels, contrary to the expected 1.9-million-barrel draw. This was slightly more bullish than the American Petroleum Institute (API) forecast of a 2.5-million-barrel increase released on Tuesday.

Commercial crude inventories now stand at 458.8 million barrels, about 3% below the five-year average for this time of year. This build is counter-seasonal, as we usually see a draw at this time of the year. Gasoline inventories decreased by 0.9 million barrels, less than the anticipated draw of 1.2 million barrels. Distillate (diesel) inventories increased by 0.4 million barrels, against a consensus expectation of a 0.3-million-barrel draw, further defying typical seasonal trends and adding a bearish tone to the market, even though they remain about 7% below the five-year average. Overall, total inventories (crude + gasoline + distillate) rose by 1.3 million barrels.

Additionally, U.S. crude oil refinery inputs averaged 16.5 million barrels per day last week, an increase of 227 thousand barrels per day from the previous week. Refineries operated at 91.7% of their operable capacity, the highest since mid-January, as they ramp up following maintenance. Gasoline production averaged 10 million barrels per day, while distillate fuel production averaged 5.1 million barrels per day. A marginal improvement in refinery margins indicates healthier demand prospects leading into the driving season.

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3. FOMC Minutes and Economic Concerns:

The continued decline in oil prices can also be attributed to bearish pressure from hawkish Federal Open Market Committee (FOMC) minutes, which raised concerns about persistent inflation. This could result in prolonged higher U.S. interest rates, potentially limiting future oil demand growth.

In summary, the combined effect of the upcoming OPEC+ meeting, the U.S. inventory report, and economic concerns highlighted in the FOMC minutes has contributed to the weakening of Brent crude prices this week.

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Analys

German solar power prices are collapsing as market hits solar saturation

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German solar power producers got a price haircut of 87% over the past 10 days. German solar power producers have over the past 10 days received a volume weighted power price of only EUR 9.1/MWh. The average power price during non-solar-power-hours was in comparison EUR 70.6/MWh. Solar power producers thus got an 87% cut in the power price they get when they produce vs. the power price during non-solar-power-hours. This is what happens to power prices when the volume of unregulated power becomes equally big or bigger than demand: Prices collapse when unregulated power produces the most.

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

Massive growth in solar power installations in Germany in 2023 is leading to destruction of solar hour prices and solar profitability. Germany installed a record 14,280 MW of solar power capacity According to ’PV Magazine International’. That is close to twice as much as in 2022. Total installed solar capacity reached 81.7 GW at the end of 2023 according to ’Renewables Now’. Average German demand load was in comparison 52.2 GW. So total solar capacity reached almost 30 GW above average demand. Solar power produces the most during summer when demand is lower. The overshoot is thus much larger than the 30 GW mentioned when it matters.

The collapse in solar-hour-power-prices implies a collapse in solar power producer earnings unless the earnings of the installations are secured with subsidies or by PPAs. It also means that there is a sharp reduction in the earnings potential for new solar power projects. The exponential growth in new installations of solar capacity we have seen to date is likely to come to an abrupt halt. There is however most likely still a large range of solar power projects under construction in Germany which will be finalized before growth in new capacity comes to a halt. The problem of solar power production curbs (you are not allowed to produce at all) and solar power price destruction is likely to escalate yet higher before new growth in supply comes to a halt. 

Focus will now shift from solar production capacity growth to grid improvements, batteries and adaptive demand. All consumers are of course happy for cheap power as long as they are able to consume it when it is cheap. At the moment they can’t. But the incentive to be inventive is now super high. The focus will now likely shift from solar power production growth to grids, batteries, adaptive demand and all possible ways to utilize ”free power”. This will over time exhaust the availability of ”free power” and drive solar-hour-power-prices back up. This again will then eventually open for renewed growth in solar power capacity growth.

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It is probably much worse down in the grid. What is worth noting is that these numbers are for all of Germany average. Solar power congestion is much worse in the local grids all around Germany along with local grid capacity constraints ect.

The problem of solar power is high concentration of production: 80% of German solar production was produced during 22.3% of the hours in the year in 2023. What is also worth mentioning is that solar power production is extremely concentrated in relatively few hours per year. It produces in the middle of the day and during summer. In 2023 German solar power produced 80% of its production in only 22.3% of the hours of the year. This basically implies that once solar power production reaches 22.3% of total power supply (without batteries), then solar-hour-power-prices will likely collapse. Solar power production reached 55 TWh in 2023. That’s a lot but it is still only 12% of total demand of 458 TWh in 2023. What it means is that the acute problem of solar-hour-power-price-destruction sets in much before the ”theoretical 22.3%” mentioned above.

On the 21 Feb 2024 we wrote the following note on this issue: ”The self-destructive force of unregulated solar power” where we highlighted these issues and warned that this will likely be a process of ”First gradually. Then suddenly”.

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German solar power capacity makes a big leap upwards in 2023 as the energy crisis hurt everybody. Demand went down. Now there is a large overcapacity in installed solar effect vs. demand load.

German solar power capacity makes a big leap upwards in 2023 as the energy crisis hurt everybody. Demand went down. Now there is a large overcapacity in installed solar effect vs. demand load.
Source: SEB calculations and graph, PV Magazine, Wikipedia, Blberg data on German power demand

German solar power producers got an 87% price haircut on average during last 10 days vs. those who produced during non-solar-power hours.

German solar power producers got an 87% price haircut on average during last 10 days vs. those who produced during non-solar-power hours.
Source: SEB calculations and graph, data by Blbrg

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.
Source:  SEB calculations and graph, data by Blbrg

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.
Source: SEB calculations and graph, data by Blbrg

Solar power production and German power prices over the past 10 days.

Solar power production and German power prices over the past 10 days.
Source: SEB calculations and graph, data by Blbrg

Solar power production and German power prices on 27 April 2024.

Solar power production and German power prices on 27 April 2024.
Source:  SEB calculations and graph, data by Blbrg
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Analys

Firm at $85

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This week, Brent Crude prices have strengthened by USD 1.2 per barrel since Monday’s opening. While macroeconomic concerns persist, market reactions have been subdued, with price fluctuations primarily driven by fundamental factors. Currently, the oil price stands at its weekly high of USD 84.4 per barrel, with Wednesday’s low recorded at USD 81.7 per barrel, indicating relatively normal price movements throughout the week.

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

The upward trajectory since Wednesday afternoon can be attributed to two main factors:

Firstly, Wednesday’s US inventory report, though mixed, conveyed a bullish sentiment to the market due to an overall decline in commercial inventories. The report from the US Department of Energy (DOE) revealed a draw in US crude inventories of 1.4 million barrels last week, surpassing consensus estimates of a 2.0-million-barrel draw –  the American Petroleum Institute’s (API) forecast of a 0.5-million-barrel build on Tuesday.

Additionally, a marginal improvement in refinery margins hints at healthier demand prospects leading up to the driving season. While commercial crude oil inventories (excluding Strategic Petroleum Reserve) decreased, standing approximately 3% below the five-year average for this period, total gasoline inventories saw a notable increase of 0.9 million barrels compared to the consensus forecast of a decrease of 1.1 million barrels. Distillate fuel inventories experienced a more moderate increase in line with expectations, rising by 0.6 million barrels but remaining approximately 7% below the five-year average. Overall, total inventories (crude + gasoline + distillate) showed a marginal increase of 0.1 million barrels, coupled with a 1% improvement in refinery utilization to 88.5% last week (see pages 11 and 18 attached).

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The substantial draw in commercial crude inventories, particularly compared to the typical seasonal build, has emerged as a key price driver (see page 12 attached).

Secondly, the third consecutive day of oil price gains can be attributed to renewed optimism regarding US rate cuts, supported by positive US jobs data suggesting potential Federal Reserve rate cuts this year. This optimism has boosted risk assets and weakened the dollar, rendering commodities more appealing to buyers.

In a broader context, crude oil prices have been moderating since early last month amidst easing tensions in the Middle East. Attention is also focused on OPEC+, with Russia, a key member, exceeding production targets ahead of the cartel’s upcoming meeting. Expectations are widespread for an extension of output cuts during the next meeting.

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Conversely, providing support to global crude prices is the Biden administration’s intention to increase the price ceiling for refilling US strategic petroleum reserves to as much as USD 79.99 per barrel.

With geopolitical tensions relatively subdued, but lingering, the market remains vigilant in analyzing data and fundamentals. Our outlook for oil prices at USD 85 per barrel for 2024 remains firm and attainable for the foreseeable future.

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